COMMISSIONER OF INCOME TAX Vs. SAVITHIRI SAM SMT

JUDGEMENT

(1.) THE assessee is a shareholder in a private limited company called Sujani Textiles Ltd. Her husband late Shri G. N. Sam was also a shareholder in that company. Her husband withdrew large sums of money on different dates from the said company. On December 31, 1961, there was a total sum of Rs. 3,68,345 on reserves made up of the following amounts : <FRM>JUDGEMENT_1003_ITR236_1999Html1.htm</FRM>

(2.) FOR the assessment year 1962-63, a sum of Rs. 1,95,550 was assessed in the hands of her husband as deemed dividend by invoking the provisions of section 2(22)(e) of the Income-tax Act. Deducting this amount of Rs. 1,95,550 from the reserves of Rs. 3,68,345 the balance of Rs. 1,72,795 was treated as deemed dividend and brought to tax in the hands of the assessee for the assessment year 1962-63. The relevant previous year for the assessment year 1962-63 is the year ended on March 31, 1962. As on December 31, 1961, there was a debit balance of Rs. 4,73,241 in the estate of late G. N. Sam. This amount was transferred to the account of the assessee in the books of the said company. By such a transfer, the said amount in the hands of the assessee was shown as debit balance in the assessee's account. The question in this case is whether the said amount so transferred could be treated as payment made to her by the company in order that the amount would attract the provisions of section 2(22)(e) of the Income-tax Act. According to the Income-tax Officer, it was constructive payment because the transfer resulted in extinguishment of the liability of her husband to the company and the acceptance on the part of the assessee of that liability. The Commissioner (Appeals) overruling the order of the Income-tax Officer reduced the amount as deemed dividend to only Rs. 43,550. The Tribunal determined the loan amount taken by the assessee at only Rs. 15,542 and directed that the said amount alone should be treated as deemed dividend under section 2(22)(e). On the above facts and circumstances, the following question of law has been referred for consideration by this court, at the instance of the Revenue.

(3.) G. R. Govindarajulu Naidu v. CIT , is a case where the assessee family held 3,300 partly paid up shares in a private limited company. In the year ended on December 31, 1956, a sum of Rs.,1,50,202 was debited to the profit and loss account and credited to the development rebate reserve account. Similarly, for the year ended on December 31, 1957, also a similar exercise was undertaken. In the assessment years 1957-58 and 1958-59, the development rebate reserve amounted to Rs. 3,58,212. After eliminating the opening debit balance and the interest amount, the advances received by the assessee-family during the year amounted to Rs. 7,111.52. The Income-tax Officer considered this amount as dividend under section 2(6A)(e), as according to him, the company had accumulated profits of over Rs. 1,50,000 in the shape of development rebate reserve. Similarly, for the year ending March 31, 1959, a sum of Rs. 1,46,728 was assessed as dividend under section 2(6A)(e) for the same reason. The sum of Rs. 1,46,728 was arrived at by adding up the withdrawals during the year and the amount of first and second calls of the share monies payable on 3,300 shares held by the company. It is needless to point out that section 2(6A)(e)is the predecessor to section 2(22)(e). The Division Bench had taken note of the earlier judgment reported in T. Sundaram Chettiar v. CIT [1963] 49 ITR 287 (Mad) and also certain other decisions relating to the word "payment" and came to the conclusion that the observations in T. Sundaram Chettiar v. CIT [1963] 49 ITR 287 (Mad), were clearly distinguishable. The later Division Bench held that in the earlier case, there was a factual payment of loan by the company to the shareholder at the first instance. It was felt that there was no need for actual payment because the assessee himself had agreed to the continuation of the jural relationship of debtor and creditor between the assessee and the company. In the latter case, the Division Bench observed as follows (page 24) :