COMMISSIONER OF INCOME TAX Vs. BHAGWAT TEWARI

JUDGEMENT

(1.) This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. This reference relates to the assessment year 1958-5, the relevant previous year of which ended on 31st May, 1958. The assessee is the managing director of S. B. Electric Mart Pvt. Ltd. in which he held at the relevant time 950 ordinary shares out of 2,000 ordinary shares of Rs. 100 each being issued and subscribed capita] of the company. In the balance-sheet as on 31st December, 1957, there was an entry indicating as follows : <FRM>JUDGEMENT_62_ITR105_1976Html1.htm</FRM>

(2.) Out of the above figures the amount outstanding from the assessee was rupees 13,385. The Income-tax Officer considered the applicability of Section 2(6A)(e) of the Indian Income-tax Act, 1922, under which any payment by a company in which the public were not substantially interested within the meaning of suction 23A of any sum by way of advance or loan to a shareholder to the extent to which the company possessed accumulated profits would be deemed to be dividend. The Income-tax Officer calculated the accumulated profits to be Rs. 30,175. As the maximum amount drawn exceeded this amount, he restricted the application of Section 2(6A)(e) to Rs. 30,175 and included the said sum in the assessment. The assessee appealed to the Appellate Assistant Commissioner contending that the liability should be restricted to the loan of Rs. 13,385 outstanding on the 31st December, 1957, or in the alternative the assessee could be taxed to the extent of his interest proportionate to his shareholding. The calculation of the accumulated profit was also challenged before him. The Appellate Assistant Commissioner confirmed the calculation of accumulated profits but reduced the amount taken to be dividend to 19/40 of the accumulated profits as the assessee held 19/40 out of the total issued capital of the company. Against this order both the assessee and the department appealed to the Tribunal. The assessee's appeal related to the calculation of accumulated profits. The Tribunal modified the Income-tax Officer's calculation thereof by taking Rs. 18,067.57 as the accumulated profit. There was no dispute thereafter on this aspect and we are not concerned in this reference with that question. So far as the appeal of the revenue was concerned, the challenge was to the direction of the Appellate Assistant Commissioner that only 19/40 of the accumulated profits would be taxed in the hands of the assessee. The Tribunal held that the view taken by the Appellate Assistant Commissioner was more equitable and as such confirmed the order of the Appellate Assistant Commissioner on this aspect. In the aforesaid circumstances of the case under Section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred:

(3.) In this reference we are concerned with the construction of Section 2(6A)(e) of the Indian Income-tax Act, 1922. The history and purpose of introduction of the said provision have been discussed by the Supreme Court in the case of Navnit Lal C. Javeri v. K. K. Sen, where the Supreme Court was concerned with the vires of the Section. In deciding the vires of the section the Supreme Court analysed the history and the need for intro duction of the section and at pages 205 and 206 of the report dealt with the purpose intended to be fulfilled by the section. The Supreme Court observed that the legislature had realised that private controlled companies generally adopted the device of making advances or giving loans to their shareholders with the object of evading payment of tax, and it was to meet this mischief that a fiction was created by which the amount ostensibly and clearly advanced to shareholders as loan could be treated in reality for tax purposes as the payment of dividend to him.