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Issues Involved
1. Interpretation of section 12(1B) of the Indian Income-tax Act. 2. Determination of accumulated profits for tax purposes. 3. Applicability of section 12(1B) to loans inherited from a deceased shareholder. Detailed Analysis 1. Interpretation of Section 12(1B) of the Indian Income-tax Act The primary issue in both reference applications is the interpretation of section 12(1B) of the Indian Income-tax Act. The court noted that section 12(1B) was introduced to tax loans advanced by companies to shareholders as dividends, provided these loans remained outstanding on the first day of the previous year relevant to the assessment year ending on March 31, 1956. The court explained that the section applies retrospectively and is designed to prevent companies from distributing dividends under the guise of loans. The section stipulates that such loans should be treated as dividends only to the extent of the company's accumulated profits at the time the loan was advanced. 2. Determination of Accumulated Profits for Tax Purposes The court emphasized that the relevant date for determining the accumulated profits of the company is the date of payment by the company to the shareholder. This date is crucial for ascertaining the extent to which the loan can be treated as dividend income. The court clarified that if the loan amount exceeds the accumulated profits, only the portion equivalent to the accumulated profits can be taxed as dividends. In both cases, the Income-tax Officer had incorrectly considered the commencement of the previous year relating to the assessment year 1955-56 as the relevant date for determining accumulated profits. 3. Applicability of Section 12(1B) to Loans Inherited from a Deceased Shareholder The court addressed the contention that the loans were originally advanced to Visalakshi Achi and not to the assessees, who inherited the liability. The court held that the crucial factor is the existence of a debtor-creditor relationship between the shareholder and the company. The court noted that the assessees had undertaken to discharge the loans due by their mother, thereby establishing a jural relationship of debtor and creditor with the company. Therefore, the loans could be treated as dividends under section 12(1B). The court also discussed the difficulty in determining the exact date of payment for the purpose of ascertaining accumulated profits. Since the assessees undertook the liability after their mother's demise, the court decided that the relevant date should be when each assessee made himself personally liable to the company. Conclusion The court concluded that the department is entitled to treat the outstanding loans as dividends within the meaning of section 2(6A)(e) read with section 12(1B) of the Income-tax Act, but only to the extent of the accumulated profits of the company as of the date when each assessee undertook to discharge the loan. The questions were answered accordingly, and there was no order as to costs.
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