TMI Blog1985 (10) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... of a shareholder, to the extent to which the company in either case possesses accumulated profits .... .." We are here concerned with the assessment years 1958-59 and 1959-60. The relevant accounting years are the Samvat years 2013 and 2014. Samvat year 2013 commenced on November 3, 1956, and ended on October 23, 1957. Samvat year 2014 commenced on October 24, 1957, and ended on November 12, 1958. The assessee was a shareholder of Krishna Steel Industries Pvt. Ltd. (hereinafter referred to as " the company ") and of Steel Industries of Hindustan Pvt. Ltd. (hereinafter referred to as Steel Industries "). It is not in dispute that the public were not substantially interested in the company or in Steel Industries. The questions posed refer only to transactions between the assessee and the company. For the assessment year 1958-59, according to the statement of the case, the Income-tax Officer noticed that the assessee was a debtor of the company K and that "the net amount of the debit of the assessee by taking each item of loans and advances by itself, after setting off the credit amount on the same day on which the debit occurred, came to Rs. 12,71,289". The reserves and surp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a substantial credit balance had been maintained until October 5, 1956, when, for the first time in the calendar year 1956, the account showed a debit of about Rs. 1,00,000. This indebtedness continued up to 1956 and, on December 31, 1956, the debit balance against the assessee was Rs. 6,23,541. A similar situation existed in the assessee's account in Steel Industries. The Tribunal held that the Income-tax Officer had been in error in taking, for the purposes of deemed dividends under section 2(6A)(e), an accounting year other than the assessee's ordinary accounting year. The Tribunal scrutinised the copies of the current accounts of the 'assessee with the company and the Steel Industries and found that they were more often than not indebted to the assessee. In the Tribunal's view, section 2(6A)(e) did not apply to cases of this kind. The transactions had been purely by way of temporary mutual accommodations and the overdrawn amounts did not represent loans or advances to a shareholder. A reference was made of the following question arising out of the Tribunal's said order: " Whether, on the facts and in the circumstances of the case, a, sum of Rs. 2,74,716 or lesser amount wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the net amount to the debit of the shareholder by taking each item of loan and advance after setting off the credit amount on the same day on which the debit occurs comes to Rs. 12,71,289. However, the reserves and surpluses of the company are only Rs. 5,90,050. Therefore, only Rs. 5,90,050 is treated as 'deemed dividends'. " For the assessment year 1959-60, the Income-tax Officer noted the position of the reserves and surpluses and debit balance of the assessee in the company as on December 31, 1958, thus: Rs. Reserves and surpluses 9,82,375 Debit balance 92,912 In regard to transactions between the assessee and the company, the Income-tax Officer said thus: " The net amount to the debit of the shareholder by taking each item of loan and advance by itself, after setting off the credit amount on the same day on which the debit occurs, comes to Rs. 8,70,891. The reserves and surpluses of the company, as on December 31, 1958, amount to Rs. 9,82,375. The entire amount of loans and advances is, therefore, treated as `deemed dividends'. " It will be seen that in neither of the assessment orders did the Income-tax Officer state what the accounting year of the company was. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company as on the last day of the company's accounting year. In Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198, the Supreme Court was concerned with a challenge to the vires of section 2(6A)(e). Before discussing the merits of that challenge, the Supreme Court analysed section 2(6A)(e) and found that a loan advanced to a shareholder by a company could be deemed to be a dividend only to the extent to which it was shown that the company possessed accumulated profits at the date of the loan. This court in CIT v. P. K. Badiani [1970] 76 ITR 369, took the same view in a reference. The assessee in that case was the major shareholder of a private limited company. He had a mutual, open and current account in the books of the company and had withdrawn through that account a certain sum in an accounting year. The court analysed the provisions of section 2(6A)(e) and found that the position of loans and advances which were to be deemed to be dividends by reason of section. 2(6A)(e) was similar to that of declared dividends. Care had to be taken to debit every payment legitimately made out of the fund of accumulated profits as and when such payment was made because, by rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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