1976 (4) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 3,21,173 could be treated as dividend u/s 2(6A)(e) of the Indian Income-tax Act, 1922.
2. Whether the provisions of section 2(6C)(iii) of the Indian Income-tax Act, 1922, were applicable in respect of the sums of Rs. 45,000 and Rs. 63,000 for the assessments for 1960-61 and 1961-62, respectively.

Summary:

Issue 1: Treatment of Rs. 3,21,173 as Dividend u/s 2(6A)(e)
The court addressed whether the sum of Rs. 3,21,173 could be treated as a dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922. The Income-tax Officer initially assessed this amount as a dividend, considering it an advance or loan paid to a shareholder. However, the Appellate Assistant Commissioner and the Tribunal found that the amount was embezzled by the late G. Rudrappan without the company's knowledge, thus not qualifying as a loan or advance. The court referred to its previous decision in Commissioner of Income-tax v. G. Venkataraman [1975] 101 ITR 673 (Mad), which held that the amount was criminally misappropriated and did not represent any payment by way of loan or advance. Consequently, the court answered the first question in the affirmative and in favor of the assessee.

Issue 2: Applicability of Section 2(6C)(iii)
The second issue involved the applicability of section 2(6C)(iii) of the Indian Income-tax Act, 1922, to sums of Rs. 45,000 and Rs. 63,000. The Income-tax Officer had reopened the assessments and brought these sums to tax, reasoning that the amounts disallowed in the hands of the company as interest paid on borrowed funds were income under section 2(6C)(iii) in the hands of the assessee. The Appellate Assistant Commissioner and the Tribunal found that the amount was embezzled by the late Rudrappan and not obtained as a benefit or perquisite from the company. The court referred to its decision in Commissioner of Income-tax v. A. R. Adaikappa Chettiar [1973] 91 ITR 90 (Mad), which clarified that "benefit or perquisite" under section 2(6C)(iii) should be obtained by some arrangement with the company and not through unauthorized means. Since the amount was embezzled, it could not be considered a benefit or perquisite obtained from the company. The court affirmed the Tribunal's conclusion and answered the second question in the affirmative and in favor of the assessee.

Conclusion:
The court concluded that the sum of Rs. 3,21,173 could not be treated as a dividend under section 2(6A)(e) and that section 2(6C)(iii) did not apply to the sums of Rs. 45,000 and Rs. 63,000. The assessee was entitled to costs of the reference, with counsel's fee fixed at Rs. 250.