1984 (7) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Whether the withdrawals made by the assessee from M/s. Universal Radiators Private Limited totaling Rs. 93,027 can be assessed in the hands of the assessee u/s 2(22)(e) of the Income-tax Act, 1961, for the year 1973-74.

Summary:

1. Assessability of Withdrawals u/s 2(22)(e):
The Income-tax Officer (ITO) found that the assessee, a substantial shareholder in M/s. Universal Radiators P. Ltd., had withdrawn Rs. 93,027 over and above her credit balance, which was treated as dividends u/s 2(22)(e) of the Income-tax Act. The ITO's assessment was based on two grounds: the absence of a credit balance in the assessee's account and the presence of sufficient accumulated profits in the company.

2. Appellate Authority's Decision:
The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, agreeing that the excess withdrawals should be assessed as dividends within the meaning of s. 2(22)(e) of the Act. However, the Income-tax Appellate Tribunal (ITAT) allowed the assessee's appeal, holding that the withdrawals were made from the credit of one Mahesh, based on a letter dated April 3, 1972, from Mahesh's father, directing the company to make available Rs. 1 lakh to the assessee from Mahesh's account.

3. Tribunal's Findings:
The Tribunal found that Mahesh owed money to the assessee and had directed repayment from his credit balance with the company. Thus, the withdrawals were considered from Mahesh's account, not from the company's accumulated profits, negating the applicability of s. 2(22)(e).

4. High Court's Analysis:
The High Court disagreed with the Tribunal's view. It noted that the credit and debit entries in the company's books were made only on March 31, 1973, and not at the time of the withdrawals. The Court emphasized that the statutory fiction u/s 2(22)(e) applies at the time of the loan or advance, and the presence of accumulated profits at that time attracts the section's provisions.

5. Conclusion:
The High Court concluded that the withdrawals were from the company's funds, not from Mahesh's credit, as the relevant entries were made only at the end of the accounting year. The Court held that the Tribunal's finding was unreasonable and perverse, and the excess withdrawals should be treated as loans or advances attracting s. 2(22)(e). The question referred was answered in the negative and against the assessee, with costs awarded to the Revenue.