1997 (12) TMI 1 - SC - Income Tax

There is no dispute that the assessee had withdrawn various sums of money when she did not have any credit balance with the company. In order to pay her these sums of money the account of Mahesh was not debited at all. The entire credit balance of Mahesh stood as it was till the very last day of the accounting year - withdrawals made by the assessee from Universal Radiators Private Limited totaling Rs. 93, 027 should be assessed in the hands of the assessee u/s 2(22)(e)

Summary

Issues:
1. Interpretation of section 2(22)(e) of the Income-tax Act regarding deemed dividend.
2. Determination of whether withdrawals made by the appellant constitute deemed dividends.
3. Assessment of withdrawals made by the appellant from the company.
4. Consideration of the High Court's analysis of the facts and its decision.

Interpretation of Section 2(22)(e) of the Income-tax Act:
The case involved the interpretation of section 2(22)(e) of the Income-tax Act, which defines dividend to include any payment by a company to a shareholder, not being a company in which the public are substantially interested, to the extent of accumulated profits. The appellant, a major shareholder of the company, made withdrawals from the company without having a credit balance, leading to the Income-tax Officer treating the excess withdrawals as deemed dividends under this provision.

Assessment of Deemed Dividends:
The Tribunal initially held that the withdrawals made by the appellant were to be considered as paid out of another shareholder's account, not the accumulated profits of the company. This decision was based on a letter directing the company to make funds available to the appellant from the account of the other shareholder. However, the High Court disagreed, noting that the withdrawals were made from the company's accumulated profits, as the appellant steadily withdrew funds between specific dates, even though the other shareholder's account remained intact.

High Court's Analysis and Decision:
The High Court considered the appellant's withdrawals and the timing of the alleged transfer from the other shareholder's account. Despite the Tribunal's acceptance of the letter directing the transfer, the High Court found that the withdrawals were indeed from the company's profits. The Court emphasized that the statutory fiction of deemed dividends applies at the time of payment, regardless of subsequent adjustments, as held in previous case law. The High Court concluded that the appellant had received notional dividends on the dates of withdrawal, based on the facts found by the Tribunal.

Conclusion:
The Supreme Court upheld the High Court's decision, dismissing the appeal. It was determined that the withdrawals made by the appellant constituted deemed dividends under section 2(22)(e) of the Income-tax Act. The Court rejected arguments challenging the High Court's analysis, stating that the decision was based on the facts found by the Tribunal. Therefore, the appellant was deemed to have received dividends from the company during the relevant accounting period, leading to the dismissal of the appeal with no order as to costs.