COMMISSIONER OF INCOME TAX Vs. MAYUR MADHUKANT MEHTA

JUDGEMENT

(1.) THIS reference raises an interesting question of law relating to the interpretation of S. 2(6A) of the Indian IT Act, 1922. It arises out of an assessment to income tax made on the assessee for the asst. year 1956 57, the relevant account year being Samvat year 2011, that is, 27th October, 1954, to 14th November, 1955. The assessee, who is now deceased, held five shares in the limited company called Ahmedabad Silk Factory Ltd. The share capital of the company consisted of 1,500 shares and it was not a company in which the public were substantially interested within the meaning of S. 23A. The assessee had a current account with the company in which the assessee borrowed diverse sums of money from the company from time to time and repaid the same to the company at intervals. The account of the company in the books of the assessee for Samvat year 2011 disclosed the following transactions between the assessee and the company :

(2.) THERE was an aggregate sum of Rs. 1,25,000 due and owing by the assessee to the company at the close of Samvat year 2011. This consisted of three payments made by the company to the assessee by way of advance or loan, namely, Rs. 50,000 on 18th January, 1955, Rs. 50,000 on 3rd March, 1955, and Rs. 25,000 on 20th May, 1955. Now the company maintained its accounts according to the calendar year and there were admittedly certain accumulated profits with the company as on 31st December, 1954. The ITO assessing the assessee to income tax for the asst. yr. 1956 57 found that the accumulated profits were Rs. 93,746 and he held, applying the provision enacted in S. 2(6A)(e), that the three payments aggregating to Rs. 1,25,000 made by the company to the assessee were, therefore, liable to be taxed in the hands of the assessee as dividend to the extent of the accumulated profits, namely, Rs.93,746. The ITO accordingly included a sum of Rs. 93,746 in the assessable income of the assessee. The assessee preferred an appeal to the AAC but the appeal was unsuccessful. The assessee thereupon carried the matter in further appeal to the Tribunal. The Tribunal felt that in order to arrive at a proper determination of some of the points raised in the appeal, it was necessary to have further facts and it, therefore, called for a remand report from the ITO on certain specific points. After the remand report was received, the Tribunal proceeded further with the hearing of the appeal. One of the contentions raised by the assessee was that the company was one in which the public were substantially interested within the meaning of s.23A but in view of the facts set out in the remand report, this contention was not pressed and it was conceded by the assessee that the company was, what may, for the sake of convenience and brevity, be described as S. 23A company. The assessee disputed the computation of the accumulated profits at Rs. 93,746 and contended that a sum of Rs. 32,996 representing deemed profits under S. 10(2)(vii) was wrongly included in it. The Tribunal was impressed by this contention and it held that the sum of Rs. 32,996 could not be regarded as part of accumulated profits within the meaning of S. 2(6A)(e) and the accumulated profits must, therefore, be taken to be Rs. 60,750 and not Rs. 93,746. The Tribunal rejected the extreme contention of the assessee that S. 2(6A)(e) had no application to the facts of the present case but accepted the alternative contention urged on behalf of the assessee, namely, that on a proper interpretation of S. 2(6A)(e), not the whole of the sum of Rs. 60,750 but only 1/300th part of it, representing the proportionate share which the assessee would have received if the accumulated profits had been distributed to the shareholders, was taxable in the hands of the assessee as dividend. The Tribunal accordingly modified the assessment and directed the ITO to include only 1/300th part of the accumulated profits of Rs. 60,750 as dividend in the assessable income of the assessee. The CIT was dissatisfied with this decision of the Tribunal in so far as it held that only 1/300th part and not the whole of the sum of Rs. 60,750 was assessable in the hands of the assessee as dividend and he accordingly applied for a reference. Since a question of law involving interpretation of s.2(6A)(e) admittedly arose out of the order of the Tribunal, the Tribunal made a reference to this Court submitting the following question for the opinion of the Court :

(3.) THE determination of this question turns entirely on the true interpretation of S. 2(6A)(e) and it would, therefore, be convenient to reproduce that provision in extenso : . 2,02,769 . 2,02,769