COMMISSIONER OF INCOME TAX Vs. K SRINIVASAN

JUDGEMENT

(1.) THIS is a consolidated reference and a common statement of the case has been submitted by the Tribunal under section 66(1) of the Act. The five assessees whose cases have given rise to the question are directors and shareholders in Kasturi and Sons Private Ltd. During the account year ended on 31st of March, 1956, relevant to the assessment year 1956-57, the assessees were employed in various capacities in the company for which they were paid salaries and allowances. These assessees had each what is called a current account in the books of the company. It is common ground that they used to draw from the funds of the company various amounts for their private purposes and also pay into this current account amounts by way of cash. During the year, the balance was fluctuating either in favour of or against the assessees. The company is not one in which the public is substantially interested within the meaning of section 23A. In the orders of assessment, the Income-tax Officer proceeded to assess the assessees on the amounts debited against the assessees as at the end of the year, purporting to do so by reason of the definition of " dividend " as it occurs in section 2(6A)(e).

(2.) THIS was objected to by the assessees on the ground that that provision did not apply that the amounts to the debit of the assessees in the books of the company did not constitute either loans or advances, that the assessee's dealings with the company were not in their capacity of shareholders but as 'special customers " and that in any event there were no accumulated profits of sufficient volume to justify the inclusion of the whole of these debits as dividends within the meaning of section 2(6A)(e). These contentions were overruled and assessments were made treating the net overdrawings on the current account as payments made by the company which would be dividend within the meaning of the section. Appeals to the Appellate Assistant Commissioner failed.

(3.) IT is open to the general body of shareholders to withdraw any sum from any reserve to the profit account and enable the distribution of dividend. IT would accordingly follow, so held the Tribunal, that the sum transferred to the reserve account did not cease to possess the character of accumulated profit We are satisfied that this view is correct. In a case decided by us in T. C. No. 88 of 1959, the converse question arose. IT was whether a credit balance in the profit and loss account of the company would represent a reserve within the meaning of section 23A of the Income Tax Act, 1961. That was a case where the first proviso to section 23A, as it stood before the amendment, came to be considered. That proviso read thus