TMI Blog1971 (2) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... om the earlier year. Between the 11th January and the 12th November the cash withdrawals by the assessee from the company amounted to Rs. 4,97,442. Deducting therefrom the opening credit balance of Rs. 65,246 and outstanding dividends of Rs. 1,40,000 declared on the 31st December, 1955, in favour of the assessee's major sons transferred to his account and a further dividend of Rs. 19,493 credited to the assessee's account from Kathoni Tea Estate, the total loan or advance taken by the assessee from the company as on the 12th November, 1956, came to Rs. 2,72,703. On the 29th December, 1956, the assessee repaid the company a total sum of Rs. 1,90,000 and on the 31st December, 1956, the last day of the previous year the assessee's account was credited with another sum of Rs. 80,000 in respect of the dividend due to him and his wife and a further sum of Rs. 29,326 was credited for hypothecation. Thus, before the previous year ended, the assessee's account was credited with an aggregate sum of Rs. 2,99,326 which exceeded the debit balance of Rs. 2,72,703 as on the 12th November, 1956. In effect, the position was that there was no advance or loan due by the assessee to the company at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 2(6A)(e) ?" The reference was heard by the President himself, who, on a review of the case law, and particularly the decision of the Supreme Court in Javeri's case, held that an advance or loan received by a shareholder of a private company forthwith assumed the character of a dividend and became his income by virtue of the fiction created by section 2(6A)(e) and it ceased to be a liability for the purpose of taxation, although the assessee might, in fact or in law, remain liable to the company for its repayment. If the assessee repaid the loan subsequently, such payment would not liquidate or reduce the quantum of the income which had already accrued as such repayment would not be allowed as a permissible deduction under section 12(2). Agreeing, therefore, with the view taken by the Accountant Member he answered the question referred in the affirmative. In view of the majority decision the Tribunal dismissed the assessee's appeal, but at his instance referred the following question of law for the opinion of this court : " Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,72,703 net (Rs. 3,19,245 gross) is to be treated as dividend incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year relevant to the assessment year ending on the 31st day of March, 1956, if such loan or advance remained outstanding on the first day of such previous year. It is to be observed that the provisions of both sections 2(6A)(e) and 12(1B) were introduced in the Act by the Finance Act, 1955, with effect from the 1st April, 1955. In the relevant assessment year section 16(2) of the Act was operative and provided as follows : " For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him and shall be increased to such amount as would, if income-tax...at the rate applicable to the total income of the company .... for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed, were deducted therefrom, be equal to the amount of the dividend." This sub-section was repealed by the Finance Act, 1959, which also introduced section 12(1A) in the Act under which profit from other sources shall include dividend and any dividend declared by a company or dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y event the amount of the loan repaid should have been allowed as a deduction under section 12(2), Mr. Choudhury cited the authority of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax. But in that case what was allowed as deduction was the interest paid on a debenture loan taken for the purpose of maintaining the assessee's dividend income and the case is not an authority for the proposition that even the repayment of the principal amount of a loan is allowable under section 12(2). As in our opinion the answer to the question referred is more or less concluded by the decision of the Supreme Court in Navnit Lal C. Javeri v. K. K. Sen, it is not necessary to refer to the argument of Mr. Pal for the department or to discuss the other authorities cited by learned counsel in this case. The validity of section 2(6A)(e) and section 12(1B) was challenged before the Bombay High Court in a writ petition. The High Court rejected the application and an appeal was preferred to the Supreme Court. After setting out the provisions of section 2(6A)(e) and section 12(1B) the court observed as follows at page 202 of the report : " It is thus clear that the combined ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame interest. In the case of such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. When the legislature realised that though money was reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the share holders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits with out distributing them o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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