P. Sarada Vs. Commissioner of Income Tax (Central), Madras  INSC 910 (9 December 1997)
C. SEN, K. VENKATASWAMI
appellant, Miss P. Sarada, is a major shareholder of Messers Universal
Radiators Pvt. Ltd. (hereinafter referred to as "the Company"). It is
a company in which public were not substantially interested. While completing
the assessment of the appellant for the assessment year 1973-74, the Income Tax
officer found that during the period 3.7.1972 to 22.3.1973 she had withdrawn a
total sum of Rs.
from the company. The appellant had a running account with the company. At the
material time she did not have any credit balance in her account with the
company. This excess withdrawal was treated by the Income Tax officer as deemed
dividend under Section 2(22) (e) of the Income Tax Act on two grounds : (1) The
assessee had no credit balance in her accounts with the said company at the
material time; and (2) that there was sufficient accumulated profits of the company
from which the excess withdrawal was made by the assessee.
Income Tax officer included this amount of Rs. 93,027 in the computation of the
appellant's income. The assessee's appeal to the Appellate Assistant
Commissioner was dismissed. However, on further appeal, the Tribunal upheld the
case of the assessee.
Tribunal held that t he withdrawals made by the appellant will have to be taken
as paid out of the money lying to the credit of another shareholder Shri A.C.
Mahesh and not out of the accumulated profits of the company. A letter dated
3.4.1972 written by Shri A.P. Madhavan, the father of the minor Mahesh, was
relied upon by the Tribunal.
that letter madhavan had directed the company to make available to the assessee
Miss p. Sarada a sum of Rs. 1 lakh from out of his account. The Tribunal found
that mahesh owed some money to the assessee and as Mahesh had directed
repayments of the amount due to the assessee from out of his credit balance in
the company, the withdrawals made by the assessee had to the company, the
withdrawals made by the assessee had to be treated as withdrawals from the
account of Mahesh and not from the accumulated profits of the company.
instance of the Commissioner of Income Tax, the following question of law was
referred to the High Court under Section 256(1) of the Income Tax Act.
on the facts and in the circumstances of the case, the Appellate Tribunal is
correct in law in holding that the withdrawals made by the assessee from messers
Universal Radiators Private Limited Totalling Rs. 93,027 cannot be assessed
under Section 2(22) (e) of the Income-Tax Act, 1961 for the year 1973-74."
The High Court answered the question in the negative and in favour of to
High Court took note of the fact that the accounting period for the relevant
assessment year 1973-74 was 1.4.1972 to 31.3.1973. The assessee was a
substantial shareholder of the company and was drawing funds from the company
till 22.3.1973. The assessee was a substantial shareholder of the company and
was drawing funds from the company till 22.3.1973. As a result of various
withdrawals made by the assessee, her credit balance had been entirely wiped
out and in fact her account with the company showed excess withdrawal of a sum
of Rs. 1,831.14 as on 22.3.1973.
spite of debit balance the assessee between 3.7.1972 to 22.3.1973 on fourteen
different dates withdrew a total a sum of Rs. 93,027. The particulars of the
withdrawals are as under:
Rs. 1,831.14 (Excess withdrawal) 3.8.72 Rs. 5,000.00 2.9.72 Rs. 5,000.00
12.9.72 Rs. 7,998.00 3.10.72 Rs. 5,000.00 3.11.97 Rs. 5,000.00 1.12.72 Rs.
5,000.00 11.12.72 Rs. 7,998.00 18.12.72 Rs. 4,749.00 18.12.72 Rs. 8, 522.00
2.1.73 Rs. 5,000.00 3.2.73 Rs. 5,000.00 5.3.73 Rs. 5,000.00 9.3.73 Rs. 7,999.00
17.3.73 Rs. 10,000.00 22.3.73 Rs. 3,930. ------------------- Rs. 93,027.00
According to the assessee, the withdrawals had not been made from the company's
account but from the amount standing to the credit of Mahesh in the books of
the company. The High Court pointed out that the alleged letter dated 3.4.1972
was given effect to by the company only on 31.3.1973 by debiting a sum of Rs. 1
lakh from the account of Mahesh and crediting it to the account o the assessee.
the assessee had steadily and regularly withdrawn monies form the company
between 3.7.1972 to 22.3.1973. These withdrawals were not made by debiting the
credit balance of Mahesh which remained intact till 31.3.1973. The High Court
concluded that the various withdrawals made by the assessee were from the
company's accumulated profits.
not find any fault with the reasoning of the High Court.
2(22) (e) as it stood at the material time defined dividend to include
"any payment by a company, not being a company in which the public are
substantially interested, of any sum by way of advance or loan to a
shareholder, being a person who has a substantially interested, of any sum by
way of advance or loan to a shareholder, being a person who has a substantial
interest in the company..... to the extent to which the company.....
accumulated profits." In the instant case there is no dispute that the
appellant had a substantial interest in the company. The nature of the company
is also not in any dispute.
the facts as stated here in above, it appears that the withdrawals made by the
appellant from the company amounted to grant of loan or advance by the company
to the shareholder. The legal fiction came into play as soon as the monies were
paid by the company to the appellant. The assessee must be deemed to the
revived dividends on the dates on which she withdrew the aforesaid amounts of
money from the company. The loan or advance taken from the company may have
been ultimately repaid or adjusted but that will not alter the fact that the assessee,
in the eye of law, had received dividend from the company during the relevant
held by this Court in the case of Smt. Tarulata Shyam & Ors. vs.
Commissioner of Income Tax, West Bengal,
108 ITR 345 that the statutory fiction created by Section 2(6A)(e) of the
Indian Income Tax Act, 1922 would come into operation at the time of the
payment of advance or loan to a shareholder by the company. The legislature had
deliberately not made the subsistence of the loan or advance, or its remaining outstanding,
on the last date of the previous year relevant to the assessment year a
prerequisite for raising the statutory fiction.
instant case, excess withdrawals were made by the assessee on various dates
between 3.7.1972 to 22.3.1973 when the account of Mahesh has not been debited.
The assessee's account was consequently overdrawn. On the very last day of
accounting year some adjustment was made but that will not alter the position
that the assessee had drawn a total amount of Rs. 93,027 between 3.7.1972 to
22.3.1973 from the company when her account with the company did not have any
credit balance at all. That means these advances made by the company to the assessee
will have to be treated as deemed dividends paid on the dates when the
withdrawals were allowed to be mad. Subsequent adjustment of the account made
on the very last day of the accounting year will not alter the position that
the assessee had received notional dividends on the various dates when she
withdrew the aforesaid amounts from the company.
point was taken that the High Court has reappraised the fact and has
disbelieved the letter dated 3.4.1972 which was accepted as genuine by the
Tribunal. It was contended that it was not open to the High court to doubt this
argument is misconceived . The High Court has proceeded on the basis of the
facts found by the Tribunal.
is no dispute that the assessee had withdrawn various sums of money between
3.7.1972 and 22.3.1973 when she did not have any credit balance with the
company. In order to pay her these sums of money the account of Mahesh was not
debited at all. The entire credit balance of Mahesh stood as it was till the
very last day of the accounting year. On these facts found by the tribunal, the
High Court concluded that it was not possible to hold that the assessee was
paid money out of the funds lying to the credit of Mahesh. The High Court
decided the case entirely on the basis of the facts found by the tribunal.
find no merit in this appeal. The appeal is dismissed with no order as to