TMI Blog1972 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... td." The share capital of the said company was 5,000 ordinary shares of Rs. 100 each and its accounting year was the calendar year. As on December 31, 1956, 50 per cent. of the value of the shares had been paid up by way of application and allotment money. The trading results of the company for the years ending on December 31, 1956, and December 31, 1957, did not result in any profit or loss. But a loss of Rs. 1,90,202 and Rs. 4,370, respectively, was determined under the Income-tax Act for those two years. In the year ended on December 31, 1956, a sum of Rs. 1,50,242 was debited to the profit and loss account and credited to the "development rebate reserve" account. Similarly, for the year ended on December 31, 1957, a sum of Rs. 1,20,875 was debited to the profit and loss account and credited to the "development rebate reserve" account. For the year ended on December 31, 1958, also a further sum of Rs. 84,088 was debited to the profit and loss account of the year and transferred to "development rebate reserve" account. Thus, as on December 31, 1958, a sum of Rs. 3,55,204 stood to the credit of "development rebate reserve" and was shown in the balance-sheet under the head "reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a specified purpose, that no advance could be given out of the said reserve, that the object of section 2(6A)(e) is to prevent companies accumulating profits and not declaring dividends and dividends reaching the hands of the shareholders by way of loans and that, therefore, the amounts in question cannot be treated as "dividends" under section 2(6A)(e). The revenue filed appeals to the Appellate Tribunal questioning the deletion of these two items. The Tribunal, however, held that the amounts standing to the credit of "initial and development rebate reserve" in the balance-sheet of the company as on December 31, 1958, under the heading "reserves and surplus" except to the extent of Rs. 66,653 were free reserves and formed part of the accumulated profits of the company, and that the sums of Rs. 7,111 and Rs. 1,46,728 to the debit of the assessee in the books of the company were taxable under section 2(6A)(e). It is seen from the order of the Tribunal in appeal that it accepted the case of the assessee that as regards the assessment year 1958-59, the Income-tax Officer wrongly took into account the withdrawals from and payments to the company from 31st March, 1957, up to 31st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitial, that these amounts were charges on the profits, and that the net profits could be ascertained only after allowing for these depreciations. He refers to the decision in Commissioner of Income-tax v. P. K. Badiani where the difference between "depreciation" and "development rebate" was pointed out. In that case the Bombay High Court, while dealing with the scope of the words "accumulated profits" in section 2(6A)(e) pointed out that an allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes its place, and that, when arriving at the profits for that period the amount of depreciation has to be deducted, because the amount of the value lost by depreciation is a capital loss which must be replaced first, as otherwise, the initial capital would, to that extent, incorrectly and falsely be converted into and treated as profits. According to the learned judges in that case, development rebate, on the other hand, is not intended to replace any capital loss by wear and tear or in any such other way and it, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted the method of not showing the depreciated value of the assets in the balance-sheet, cannot escape from the position that the separate reserve shown as depreciation was part of the profits of the company. The learned judges in that case referred to the following passage at page 637 in Palmer's Company Law, twentieth edition, Chapter 64, as explaining the true scope of the words "divisible profits": "It is evident from the preceding observations that it is legally permissible for the company to distribute dividend out of assets which do not represent profits made as the result of its trading or business. 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, e.g,, reserves accumulated from past profits, from realised capital profits, indeed, before the requirement of a share premium account by the 1947-48 legislation, from premiums obtained on issue of new shares, whereas none of these items is regarded and rightly so by the businessman or accountant as trading profits." The view taken by the learned judges in that case was that a loss or depreciation of fixed capital does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... building which is newly erected or for the first five years of the use of the plant or machinery. The initial depreciation is an allowable deduction from and out of the profits in addition to the normal and additional depreciation. But the sum of depreciation allowance granted annually under the said two heads, normal and additional, will not be diminished or affected by this initial depreciation allowance. However, all the three depreciation allowances are intended to enable buildings, plant or machinery to be depreciated in a shorter period than otherwise they would have been. The grant of all these three depreciation allowances is, however, subject to the condition that the total depreciation under all the three heads, in any event, cannot exceed the original cost. This indicates that even the initial depreciation, which may not go to reduce the written down value, is intended to meet a capital loss. This is also clear from the fact that it is taken into account in the calculation of the balancing charge under section 10(2)(vii). We hold, therefore, that an initial depreciation reserve will not be accumulated profits for the purposes of section 2(6A)(e). As the revenue has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow of that money from one to the other and that a mere book entry by which the assessee became a debtor to the company cannot attract section 2(6A)(e). According to the learned counsel, there should be an actual cash advance or loan from the company to the assessee so as to attract the said section and the word "payment" occurring in section 2(6A)(e) is quite significant. He refers to sub-clauses (ii) and (iii) of section 2(6A)(e) as indicating the idea of flow of money so as to amount to "payment". Reference also is made to sections 12(1) and 12(1B) where also the same words "payment" by a company to a shareholder by way of "advance or loan" have been used. The learned counsel suggests that the payment by way of loan or advance so as to be taken as an income from other sources under section 12 should be an actual income, and that the mere creation of a debtor and creditor relationship between the company and the assessee cannot amount to an income from other sources coming within the scope of section 12(1) and 12(1B). The learned counsel refers in support of his stand to the decision in Commissioner of Income-tax v. Jamnadas Sriniwas Private Ltd. In that case the scope of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower sought the benefit of section 36(1) of the English Income Tax Act, 1918, which provided that: "Where interest payable in the United Kingdom on an advance from a bank carrying on a bona fide banking business in the United Kingdom is paid to the bank without deduction of tax out of profits or gains brought into charge to tax, the person by whom the interest is paid shall be entitled, on proof of the facts to the satisfaction of the special commissioners, to repayment of tax on the amount of the interest." In determining the scope of the word "paid" in that section, Macmillan L. J. expressed: "It is a condition of a claim for repayment of tax on bank interest under section 36, sub-section (1) that the taxpayer shall have 'paid ' to his bank the interest in respect of which he claims repayment of tax. In my opinion this means that the taxpayer must really, and not merely notionally, have paid the interest. There must be payment such as to discharge the debt. The payment must be a fact, not a fiction.... As I have already said, what the Income Tax Act requires as the condition of repayment of tax on interest is that the sum due as interest shall have been actually discharged, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned judges in that case, dealing with the crucial question as to whether there was a "payment" of a loan to the assessee, expressed: "As stated already, the assessees themselves undertook to discharge the loans due by their mother to the two companies. It is not necessary that payment should have been made by the company to the shareholder in the current coins of the realm. Earl Jowitt points out in his Dictionary of English Law under the caption 'payment' as follows, at page 1318: 'Payment in fact is an actual payment from the payer to the payee; payment in law is a transaction equivalent to actual payment. We are unable to agree with the contention urged on behalf of the assessees that inasmuch as no sum of money was received in cash or in specie by the assessees from the companies, there can be no payment within the meaning of section 12(1B) of the Act. The substantial requirement to attract the applicability of section 12(1B) is that there should be the jural relationship of debtor and creditor between the shareholder and the company." Though the above observations appear on the first blush to support the stand taken by the revenue on the facts of that case, there c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end'. Hence, section 2(6A)(e) must necessarily receive a strict construction. When section 2(6A)(e) speaks of 'shareholder', it refers to the registered shareholder and not to the beneficial owner. The Hindu undivided family cannot be considered as a shareholder either under section 2(6A)(e) or under section 23A or under section 16(2) read with section 18(5) of the Act. Hence, a loan given to a Hindu undivided family cannot be considered as a loan advanced to 'a shareholder' of a company." Even assuming that the assessee-family had acquired shares of the company with the joint family funds, the shareholding is in the individual name of Govindarajulu Naidu and he is a registered shareholder of the company. In view of section 153 of the Companies Act, 1956, which prevents any trust, express, implied or constructive being recognised as members of a company and of section 206 which provides that no dividend shall be paid by a company in respect of any share except to the registered shareholder of the company, and of the decision of the Supreme Court just now referred to, it is clear that the sum of Rs. 1,65,000 even if treated as a loan by the company to the joint family, cannot be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal, however, did not consider the question whether the expenditure was laid out or expended wholly or exclusively for the purpose of the business, and the question referred to the High Court was whether the amount represented revenue expenditure. The High Court, while considering that reference, did not allow the Commissioner to raise the point that even assuming that the expenditure was revenue in nature, the requirements of section 10(2)(xv) were not satisfied, on the ground that the question was not expressly raised before the Tribunal. On these facts the Supreme Court expressed the view that the question as to whether the amount represented revenue expenditure did not exclude the enquiry whether the expenditure was wholly or exclusively laid out for the purpose of the business, that because before the Tribunal stress was not pointedly laid by the revenue upon the ingredients which enable an expenditure to be claimed and allowed, it could not be said that the question did not arise out of that order and that the High Court was wrong in refusing to allow the Commissioner to raise the argument that the requirements of section 10(2)(xv) were not satisfied. According to their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years in question certain loans were advanced by the company to the Hindu undivided family. The question arose as to whether those loans could be deemed as dividends as defined in section 2(6A) of the Income-tax Act. The Supreme Court, after referring to the view taken in an earlier decision in Kishanchand Lunidasingh Bajaj v. Commissioner of Income-tax holding that where the shares acquired with the funds of the Hindu undivided family were held in the name of the karta, the Hindu undivided family could be assessed to tax on the dividend from those shares, took the view that the loan taken by the Hindu undivided family from the company could be treated as a loan to the shareholder. Though as contended by the revenue this decision some what strikes a different note from the one in Commissioner of Income-tax v. C. P. Sarathy Mudaliar, we are of the view that the decision in Commissioner of Income-tax v. C. P. Sarathy Mudaliar being the later in point of time and being a decision which has considered the legal relationship between a company and its shareholder, represents the correct legal position, if we may say so with respect. The significance of the prohibition of a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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