TMI Blog1970 (2) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... rve provided in earlier years ? (3) Whether the debit balance in the mutual, open and current account of the assessee with the company at any point of time could be taken to represent an advance or loan by the company to the assessee within the meaning of section 2(6A)(e) of the Act ? (4) Whether, on the facts and in the circumstances of the case, the amount outstanding at the end of the accounting year, if any, was alone to be taken or any payment at any point of time during the accounting year as hit by the provisions of section 2(6A)(e) of the Act? " The first question has been referred at the instance of the revenue department and questions Nos. 2, 3 and 4 have been referred at the instance of the assessee. The order of the Income-tax Tribunal out of which this reference arises relates to the two assessment years 1958-59 and 1959-60. This reference, however, concerns only the former assessment year and reference to the latter year will, therefore, be omitted except when relevant to the former year. The assessee is an individual. The accounting year relevant to the assessment year 1958-59 was 1st April, 1957, to 31st March, 1958. The assessee is a major shareholder in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence, been referred at the instance of the assessee. The assessee's account in the books of the company for the assessee's accounting year 1st April, 1957, to 31st March, 1958, has been annexed to the statement of the case and forms part of it. It shows that it opens with a debit balance of Rs. 67,842.95 carried forward from the previous year, that there are both credits and debits in that year, that it continued to be to the debit of the assessee till 31st January, 1958, but that as from 1st February, 1958, it turned to be to the credit of the assessee and ended on 31st March, 1958, with a credit to the assessee of a balance of Rs. 1,38,240.60. The assessee contended that only the amount, if any, outstanding at the end of his accounting year and not any payment at any point of time during the accounting year can be taken into consideration for ascertaining, for the purposes of section 2(6A)(e), whether the assessee had taken any loan or advance from the company. The Tribunal negatived that contention. Hence, questions Nos. 3 and 4 have been referred at the instance of the assessee. Section 10(2)(vi) provides for depreciation as therein provided being granted as an allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause of the continuous rise in prices in our country and the consequent necessity of a larger fund to replace the machinery or the other asset when it loses its usefulness by normal wear and tear. The Tribunal is clearly wrong in reaching this conclusion. That conclusion is negatived by two reasons. The first is that it ignores the very meaning of the word "development ". The second reason is that development rebate is provided by creating the new item (vib) in section 10(2) and not by merely increasing the rate of depreciation provided in item (vi) which already existed when item (vib) was introduced by an amendment. If that which is provided by way of development rebate was intended to be only an additional depreciation to counter rising prices, it would have been secured by calling it additional depreciation and amending, if necessary, from time to time item (vi) itself providing a surcharge on or an increase in the rates of depreciation or in the value of the asset on which it is to be allowed. Allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting relevant to the assessment year and as the value has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the amount of the latter. To illustrate, if the amount of " accumulated profits " is Rs. 10,000 and a loan is given to a shareholder of Rs. 7,500 and later but in the same accounting year to another shareholder of Rs. 5,000, each such loan being less than the amount of Rs. 10,000 of the " accumulated profits " may mistakenly be treated as a deemed dividend, although the aggregate of the two loans amounting to Rs. 12,500 exceeds Rs. 10,000 of the " accumulated profits ". Section 2(6A)(e) provides : " 2. In this Act, unless there is anything repugnant in the subject or context,- (6A) ' dividend ' includes-... (e) any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits;... " This provision legislates in respect of "any payment ". This case concerns payments by the company by way of loans or advances to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result would be that the amount which ought in the hands of the shareholder to have been taxable as his income would escape being taxed. It is to avoid that evil that section 2(6A)(e) created the fiction but limited it to the extent of the " accumulated profits ", because the company would have paid the dividends only out of its " accumulated profits ". It is, therefore, clear that section 2(6A)(e) must be so interpreted that once an amount goes out of the " accumulated profits " as a loan and the loan is to be deemed to be dividend, the same amount when repaid cannot again be capable of attracting the fiction and be deemed to be dividend. To avoid the happening of any such eventuality, the " accumulated profits " must be notionally reduced by the amount of all loans, etc., which are to be deemed to be dividends under the fiction under section 2(6A)(e). Arguments in this case reveal the necessity of another point being clarified. The point relates to the actual operation of section 2(6A)(e) and can best be brought out by an, illustration : Suppose the " accumulated profits " to be Rs. 5,000 and a loan is advanced to a shareholder of Rs. 2,000. The shareholder then repays it and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its and not assessed profits. It is not necessary to consider these decided cases, because we have already reached the conclusion that the allowances for development rebate are to be included in " accumulated profits " for the purposes of section 12(6A)(e) independently of these decided cases. Mr. Rajgopal, the learned counsel for the respondent, contended that " accumulated profits " must mean actual profits and not deemed profits and that " actual profits " means what is earned in business, that development rebate is allowed by statute and stands on the same footing as the allowance for depreciation and that like the allowance for depreciation the allowance of development rebate should be omitted from the calculation of " accumulated profits ". For reasons we have already pointed out, Mr. Rajgopal's contentions that there is no difference between the allowance for depreciation under section 10(2)(vi) and the allowance for development rebate under section 10(2)(vib), and that the latter like the former must not be included in " accumulated profits " under section 2(6A)(e), and that " profits " in " accumulated profits " means, profits as assessed, cannot be accepted. So also, hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of taxable profits and are, therefore, brought to tax in the later year in which it is so found when the sale takes place. It is because of that reason, that what really gets taxed is the earlier profit or income, although the statute purports to provide for taxing the said excess of the sale proceeds. The amount of the allowance under section 10(2)(vib), however, though not to be taxed, was initially and factually a part of profit and though deductible from taxable income, continues even after such deduction to be profits. Section 10(2)(vib) only intends that it should thereafter be used as capital, but, nonetheless, it continues to retain its original character of profits till it is actually used for development and, thereupon gets transformed into capital. Look at the amount allowed for development rebate from an ordinary or commercial point of view ; the amount is profit and the person who makes the profits can use it up for any purpose he likes, like even his personal-expenses, but if the owner actually uses the profits as capital, say for buying machinery, the profits which were income get transformed into capital but only if and when the owner does so. Mr. Rajgopal conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainment of the company's "accumulated profits " at the time of each such loan. The company's accounting year, however, is the calendar year. The assessee's account in the company which forms part of the statement of the case shows that the assessee has taken loans from the company in his said accounting year before 1st January, 1958, as well as after 31st December, 1957. It would, therefore, necessitate ascertaining whether the company had " accumulated profits " in respect of its year 1957, so far as its loan to the assessee during the first nine months April to December, 1957, of the assessee's accounting year 1957-58 is concerned, and of the company's accounting year 1958, in so far as the last three months January to March, 1958, of the assessee's said accounting year are concerned. For the company's accounting year 1957, its " accumulated profits " would be those as at the end of 31st December, 1956, and, as stated earlier, the Tribunal had found, and the assessee does not dispute, that they were in the amount of Rs. 2,36, 470. It is only this amount which the Tribunal has taken into consideration as " accumulated profits " for ascertaining whether the loans to the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o basic principles are, that only a loan, which would include the other payments mentioned in section 2(6A)(e), can be deemed to be dividend and that too only to the extent that the company has at the date of the payment " accumulated profits " after deducting therefrom all items legitimately deductible therefrom. The assessee's said account opens with a debit of Rs. 67,842.95. It is, however, only a carry-forward of the debit balance of the previous year and not being a payment by the company during this year, it has to be excluded. Then, there is a credit entry under date 29th June, 1957, of Rs. 7,500 being for the assessee's remuneration payable by the company for three months. There, are three debit entries of Rs. 2,500 each under dates 6th April, 4th May and 6th June, 1957. The total amount of these three debit entries and the amount of this credit entry are equal and they are really contra-entries. Though the dates of the debit entries are earlier than that of the credit entry, the credit entry shows that it is merely a transfer entry and the remuneration was payable to the assessee at the respective dates of the said three debit entries. These three debit entries are in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciples of law other than those covered by the subject-matter of the four questions herein. For example, Mr. Rajgopal contended that the amounts of dividends actually declared and paid by the company have been credited into this account of the assessee and that, therefore, necessary adjustments will have to be made, e.g., under section 2(6A)(e)(iii), as contended by him. The question of construing section 2(6A)(e)(iii) does not arise before us and we, therefore, express no opinion as to its application. The Tribunal and the revenue authorities, as the case may be, will act according to law and will be free to consider and give effect, when ascertaining the amount of deemed dividends, to all other provisions of law, i.e., other than those covered by the questions herein and the principles we have laid down. As regards questions Nos. 3 and 4, Mr. Rajgopal contended that the debit balance, if any, at the last date of the assessee's accounting year 1st April, 1957, to 31st March, 1958, should be taken as the amount to be treated as dividend and the assessee's account is on the last day to his credit, no amount can be deemed to be dividend. As already pointed out the position has to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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