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Issues involved: Interpretation of section 2(6A)(e) of the Indian Income-tax Act, 1922 regarding the treatment of a loan advanced to a shareholder by a company as dividend.
Summary: The case involved a reference u/s 66(1) of the Indian Income-tax Act, 1922, concerning the assessment year 1958-59. The issue was whether a loan advanced to the assessee by a company should be treated as dividend under section 2(6A)(e) of the Act. The Income-tax Officer calculated accumulated profits and included a sum in the assessment. The Appellate Assistant Commissioner and Tribunal made determinations on the calculation of accumulated profits and the portion to be taxed. The main question referred was about the extent to which the loan should be considered as dividend. The Supreme Court discussed the purpose of section 2(6A)(e) to prevent tax evasion by private companies making advances to shareholders. The section deems any payment by a company to a shareholder as dividend to the extent of accumulated profits. The section creates a comprehensive fiction where any payment made to a shareholder as a loan is treated as dividend if the company has accumulated profits at the time of payment. The Court held that if the loan amount is less than the accumulated profit, the entirety of the loan up to the accumulated profit should be treated as dividend. Reliance was placed on decisions from various High Courts to support this interpretation. In this case, the accumulated profit was Rs. 18,067.57, and the loan was Rs. 13,385, so the entire loan amount was deemed as dividend assessable under section 2(6A)(e) in the hands of the assessee. The Court answered that in this case, the sum of Rs. 13,385 would be assessable as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922, in the hands of the assessee. No costs were awarded in this case. Judge R. N. Pyne agreed with the judgment.
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