1981 (1) TMI 49 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amounts transferred from the general reserves of the two companies for writing off a part of their respective goodwills continued to be accumulated profits in the hands of those companies.
2. Whether the amounts of Rs. 1,75,810 and Rs. 19,675, being loans advanced to the assessee by M/s. Jaipur Mineral Development Syndicate Pvt. Ltd. and M/s. Udaipur Mineral Development Syndicate Pvt. Ltd., were liable to be assessed in the hands of the assessee as dividends under section 2(6A)(e) of the Indian Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Accumulated Profits and Goodwill Write-off
The Tribunal held that the amounts transferred from the general reserves of the two companies for writing off a part of their respective goodwills continued to be accumulated profits. The assessee argued that these amounts were no longer available as accumulated profits for distribution after being transferred to write off goodwill. The Appellate Assistant Commissioner (AAC) accepted the assessee's plea, stating that the companies were justified in reducing the value of their goodwill by transferring amounts from their reserves, and thus, the surpluses were not available for distribution. However, the Tribunal reversed this decision, holding that the companies possessed sufficient accumulated profits far exceeding the loans advanced, and the amounts were rightly treated as income under section 2(6A)(e).

Issue 2: Loans as Deemed Dividends under Section 2(6A)(e)
The Tribunal held that the loans advanced to the assessee by JMDS and UMDS were liable to be assessed as dividends under section 2(6A)(e) of the Indian Income-tax Act, 1922. The assessee contended that the HUF was not a registered shareholder, and thus, section 2(6A)(e) could not be invoked. The Tribunal dismissed this contention, stating that the loans were advanced to the HUF, which was not a registered shareholder, and thus, the loans could not be deemed as dividends under section 2(6A)(e).

The High Court considered the argument that the HUF could not be a registered shareholder under section 153 of the Companies Act, 1956, and thus, the loan given to the HUF could not be considered a loan to a shareholder of the company. The Court referred to the Supreme Court's decision in Rameshwarlal Sanwarmal v. CIT, which held that a loan advanced to a beneficial owner of shares, who is not a registered shareholder, cannot be regarded as 'deemed dividend' under section 2(6A)(e). The Court concluded that the loans advanced to the HUF did not attract section 2(6A)(e) and answered the second question in the negative, in favor of the assessee.

Conclusion:
The High Court held that the loans advanced to the HUF by JMDS and UMDS could not be assessed as dividends under section 2(6A)(e) of the Indian Income-tax Act, 1922, as the HUF was not a registered shareholder. Consequently, the first question regarding accumulated profits became academic and was not addressed. The judgment clarified that only loans to registered shareholders could be deemed dividends under section 2(6A)(e).