TMI Blog1972 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... uch profits as disclosed by the company's balance-sheet or such disclosed profits subject to adjustments as required by the Income-tax Act ? " The facts which require to be noticed are as follows: The questions relate to the assessment year 1955-56. The relevant previous year is the year ending 31st March, 1955. The assessee was the shareholder and director of Purshottam Mathuradas and Co. Ltd. (hereinafter referred to as " the company "). There is no dispute about the fact that in connection with the questions which arose between the parties the provisions of section 23A of the Act were applicable to the company. The assessee carried on business in the firm name and style of Messrs. Khimji Nagji and Co. and also in the name of " Shri Jamnadas Khimji " (his own name). The assessee had dealings with the company in both the above names from prior to 1st October, 1952. The ledger accounts of these dealings between 1st October, 1952, to 31st March, 1954, are in annexure " A " to the statement of the case. Having regard to the position of the assessee in these accounts with the company in connection with the assessment year 1955-56, the Income-tax Officer was of the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her contention before us is that in the relevant assessment year even the auditors pointed out that adequate provision for depreciation on fixed assets had not been made in the balance-sheet. The submission was that the lesser depreciation shown to the extent of Rs. 2,89,525 would have to be adjusted against the reserve fund mentioned in the balance-sheet. If this was done there would be no reserve fund as shown in the balance-sheet, but there would be a deficit. Even if the above debit balance was considered " loan " the same could not be under the circumstances considered as having been made from accumulated profits as necessary under section 12(1B). The Appellate Assistant Commissioner accepted the submission of the assessee in respect of the above sum of Rs. 1,35,330 but not in respect of the other arguments. The Income-tax Tribunal by its order dated 11th January, 1963, upheld the contention of the assessee that the dealings of the assessee with the company were in a current account and could not be treated as " loans " for the purposes of section 12(1B) of the Act. In regard to the questions raised in respect of the calculation of accumulated profits the Tribunal held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Messrs. Khimji Nagji and Co. Even so he had credit balance of Rs. 1,49,561 in this account as on 31st March, 1954. This account is also an account of cash dealings and is separate from the account maintained in the firm name of Messrs. Khimji Nagji and Co. After giving credit for the above credit balance of Rs. 1,49,561, as against the debit balance of Rs. 3,96,900 and odd in the account of the firm of Messrs. Khimji Nagji and Co., the assessee had remained liable to pay Rs. 2,55,135 to the company. It is difficult to accept the submission made on behalf of the assessee that this sum does not represent the balance of loans advanced by the company to the assessee in the account of Messrs. Khimji Nagji and Co. This finding made by the Income-tax Tribunal is that the nature of the two accounts is mutual, open and current account. Such an account cannot be described as a loan account. In that connection reliance is placed on the case of Potts' Executors v. Commissioners of Inland Revenue. That was relied upon by the Income-tax Tribunal in support of its findings. Now it appears to us that the observations in that case can have no bearing on our finding as regards the true nature of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the settlor has an interest to make. . . . " It is not necessary to refer to the observations of the other law Lords. It is sufficient to state that the findings made in the case of Potts' Executors have no bearing at all on the question that arose and has arisen in this case. The relevant provisions of section 12(1B) and section 2(6A)(e) read as follows : " 12. (1B) Any payment by a company to a shareholder by way of advance or loan which would have been treated as a dividend within the meaning of clause (e) of sub-section (6A) of section 2. . . . shall be treated as a dividend received by him in the previous year. . . " " 2. (6A) 'dividend' includes-. . . . (e) any payment by a company.... 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. " In this connection it was extremely relevant of the revenue to ascertain the true nature of the transaction in the dealings between the company and the assessee-shareholder. The only fact that the entries in the two ledger accounts evidenced continuing withdrawals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans advanced by the company to the assessee-shareholder as if on a running overdraft loan account. The finding of the Tribunal that this net balance of Rs. 2,55,135 as on 1st April, 1954, was not loan was not justified. Having regard to the language in sections 12(1B) and 2(6A)(e), this balance was liable to be treated as a dividend paid by the company to the assessee-shareholder provided, however, the last condition in section 2(6A)(e), namely, that the extent of the amount was covered by the accumulated profits of the company was satisfied. The question is whether the company had accumulated profits to the extent of the above amount of Rs. 2,55,135. In that connection the main contention on behalf of the assessee was that the reserve fund mentioned at Rs. 5,94,730 in the balance-sheet did not represent the correct amount of accumulated profits. This submission was accepted to the extent of Rs. 1,35,330 which was the compensation received from the Government on account of the damage resulting from the dock explosion of 1944 and carried to reserve fund. The further submission of the assessee was that the left-over balance of Rs. 3,55,000 and odd also did not represent the true a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(6A)(e), an allowance for depreciation should be made by way of a deduction at the rates provided for by the Income-tax Act itself. The contrary contention made to the effect that the accumulated profits were liable to be ascertained on the basis of the depreciation calculated in the balance-sheets of the assessee-company was rejected by the court. The observation of the court in that connection at page 587 was as follows : " Unless such depreciation is set apart, the gross profits will contain an element within them which is really of a capital nature .... In short a provision for depreciation is of a capital nature and is intended to replace the capital which is lost by wear and tear. " In the case of P. K. Badiani, the finding of the court was : " ....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. " We are bound to follow the findings made by this court in the above two decisions as regards the true ..... X X X X Extracts X X X X X X X X Extracts X X X X
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