TMI Blog1962 (9) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (2) (3) (1) K. Srinivasan Managing Editor 50 (2) K. Gopalan Printer and Publisher 85 (3) G. Kasturi Assistant Editor 540 (4) G. Narasimhan General Manager 625 (5) S. Parthasarathy Joint Manager 600 3. All the above have current accounts in the books of the aforesaid company, copies whereof are annexed hereunto as annexures A-1 to A-5 and form part of the case, into which were paid their private cash from all and sundry sources like sale of cattle, etc., and from which also they drew for their personal expenses, insurance premia, income-tax, etc., from time to time. The following are the debit balances in their accounts for excess withdrawals on March 31, 1956, the end of the previous year aforesaid. Assessee Dr. Balance (1) (2) Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty as the shareholder but as a special customer; (iv) the sum total of the debits should not in any case be taxed ignoring the intermediate credits, and lastly; (v) subject to the company's satisfying the requirements of section 23A of the Act, the company is entitled to accumulate the balance and the proposal to tax all advances and loans irrespective of the funds out of which such advances are made, is opposed to statutorily recognised principles. 6. The Income-tax Officer negatived all the above objections, except (iv) supra, in paragraphs (3) to (6) of his order under section 2(6A)(e), copy whereof in the case of one of the assessee's in this batch is annexed hereunto as annexure B as a specimen and forms part of the case and assessed on each assessee the various net overdrawings as set out in paragraph 3 supra as dividend. 7. All the assessees thereupon appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed these appeals for reasons stated in paragraphs 6 to 12 of his order, copy whereof in the case of one of the assessees is annexed hereunto as annexure C as a specimen and forms part of the case. 8. Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion are by way of advance or loan. Advance in this context is a sort of permanent advance which on the face of it was not intended to be repaid. Loan , in its simple meaning, means fixed sum of money lent at interest. The word advance does not connote payment of interest. It seems to us that the words advance and loan are used in a synonymous sense, the only difference being that the one (Advance) does not stipulate interest, whereas the loan normally stipulates interest. In this particular case interest is charged or paid by the company on the debit or credit balance standing to the assessee's account. The payment of interest on credit balance standing in the name of the shareholder unmistakably shows that it was current account. There is no fixed sum of loan made by the company to the assessee nor is it a fixed advance without interest. In either view of the matter, in our opinion, the withdrawals made by the assessee are, in this particular instance, neither advance nor loan. In fact, the picture should be taken as a whole. Soon after the year closed credits come in. Artificially drawing a line at the end of the year of account is not, in our opinion, envisaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case for this year. We are unable to accept the departmental representative's contention that the words cover every advance whatever its nature may be. The meaning should be taken in the context it is used. Therefore, they cannot be treated as deemed dividend within the meaning of that section for the year under consideration. The Tribunal accordingly allowed all the above appeals. 9. From out of the aforesaid facts the questions of law that arise are as follows: (a) Whether accumulated profits for purposes of applying section 2(6A)(e) include general reserve? (b) Whether the net overdrawings of the assessees during the previous year ended March 31, 1956, for the assessment year amount to dividends within the meaning of section 2(6A)(e)? 10. Both the parties agree that all the facts have been correctly set out in this statement and that no material fact has been omitted herein. The departmental representative, however, objects to question (b) above inasmuch as the assessees had not filed any application on the decision of the Tribunal which was against them. In our opinion, this objection cannot be sustained. It is after all a question of law arising from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, would not affect the character of the sum as accumulated profits, it nevertheless held that the payments could not be regarded either as loans or advances; and taking the picture as a whole, so the Tribunal said, the payments could not be treated as deemed dividend within the meaning of the section. Accordingly, the assessments were set aside. The department moved for a reference under section 66(1) of the Act and the question it sought to be referred to this court: Whether the net overdrawings of the assessees during the previous year ended March 31, 1956, for the assessment year amount to dividends within the meaning of section 2(6A)(e) of the Act? was referred by the Tribunal. At the same time the assessees made a request to the Tribunal to refer a further question: Whether accumulated profits for the purpose of applying section 2(6A)(e) would include general reserves? The reference of this question was objected to by the department as the assessees did not file any separate application in that regard. But the Tribunal held that it was a question of law arising from out of the Tribunal's order and referred that question as well. We shall deal with the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the hands of the shareholder. The proviso enhanced the limit of this deemed distribution in a case where the company had reserves representing accumulations of past profits which exceeded the paid-up capital together with any loan capital. The question that arose in Rukmani Co. Ltd. v. Commissioner of Income-tax (Rukmani and Co. (Private) Ltd. v. Commissioner of Income-tax [1962] 46 I.T.R. 808) was whether when no reserve had been created but the amounts were merely accumulated in the profit and loss account, the proviso would apply. It was held, following the decision of the Supreme Court in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. ([1953] 24 I.T.R. 499; [1954] S.C.R. 219), that a mass of undistributed profits which was available for distribution and not earmarked as reserve did not amount to reserve within the meaning of Schedule II, rule 2(1) of the Business Profits Rules. In the case before the Supreme Court, the question that arose was what was the capital of the company on the relevant date and according to the mode of computation of capital set out in the rules in the Schedule to the Business Profits Tax Act of 1947. The rule relevant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company is that it should not be a dividend paid out of its capital, and there is no proposition of law that solely for the reason that the profits have been transferred to the head of a reserve, they cease to be accumulated profits. The principle that the company might pay the dividend out of divisible profits has been understood to mean that they may not be profits in the business sense. At page 637 it is noticed: The connotation of divisible profits or profits in the legal sense is much wider than that of profits in the business sense. The former term includes, for example, reserves accumulated from past profits, from realised capital profits........ Though these items may not be regarded by the businessman or accountant as trading profits, the only restriction on the large power of the company would be that before ascertaining the divisible profits, loss or depreciation of circulating capital has to be deducted. It is possible, therefore, to say that any special reserves created for the purpose of meeting this charge may be regarded as profits taken out of the category of divisible profits or accumulated profits. The result of this discussion seems to us to be that unles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shareholder in so far as income-tax demands upon the assessee or the life insurance premia payable by him are concerned. To a certain extent, at any rate, that part of the definition appears to be attracted. Even otherwise, taking note of the implied understanding between the parties, that the shareholder had to pay interest upon the amounts and that he was bound to refund the drawals in some manner or other, one can very well say that these amounts were given to the shareholder by way of loans or advances. The two expressions have not been used, as far as we can see, as any terms of art and are intended only to cover cases where the company's funds are utilised on behalf of or for the benefit of the shareholder with the right in the company to be reimbursed such amounts. It seems to us, therefore, that these payments may be regarded as coming under one or other of the heads referred to in the provision. On behalf of the assessee, his learned counsel, Mr. Padmanabhan, contends that the payments cannot be regarded as loans, as the company was not acting as a banker as popularly understood. Nor, according to him, can they be regarded as advances, for that very expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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