1970 (2) TMI 34 - HC - Income Tax

Whether the sums were rightly treated as dividends paid to the two shareholders by the assessee-company within the meaning of section 2(6A)(e) - section 2(6A)(e) of Indian Income-tax Act, 1922 indicates that loans advanced to shareholders can decide to be dividends only if an assessee-company is found to be in possession of accumulated profit at the relevant dates - commercial profits accumulated by the company cannot be ascertained without considering all and singular the disbursements made and expenditure actually incurred

Summary

Issues:
Interpretation of section 2(6A)(e) of the Indian Income-tax Act, 1922 regarding treatment of loans advanced to shareholders as dividends based on accumulated profits.

Detailed Analysis:

The judgment by the High Court of BOMBAY involved a reference under section 66(1) of the Indian Income-tax Act, 1922, arising from a single judgment by the Income-tax Appellate Tribunal regarding two appeals for assessment years 1957-58 and 1958-59. The central question was whether loans advanced by the assessee-company to two shareholders should be treated as dividends under section 2(6A)(e) of the Act. The provision states that loans can be considered dividends if the company possesses accumulated profits. The crux of the matter was the interpretation of "accumulated profits" in this context.

The Income-tax Officer calculated the accumulated profits of the assessee-company from 1948-49 to 1956-57 at Rs. 57,995, based on assessed income in previous years. The assessee argued that this calculation did not reflect the true commercial profits as it did not consider actual disbursements and expenditures. The Appellate Tribunal, however, held that assessed income from previous years was the correct basis for determining accumulated profits, leading to the conclusion that the loans were indeed dividends.

The High Court analyzed the meaning of "accumulated profits" and emphasized that commercial profits cannot be ascertained without considering all actual disbursements and expenditures. The court noted that fraudulent entries or bogus accounts should not be included in accumulated profits, but genuine expenses incurred by the company should be accounted for. The judgment concluded that the findings by the tax authorities and the Appellate Tribunal were not legally justified as they did not consider the actual commercial profits of the assessee-company.

In light of the above analysis, the High Court ruled in favor of the assessee-company, holding that the loans advanced to shareholders should not be treated as dividends. The court also awarded costs to the assessee-company, except for the preparation of the paper book, due to non-compliance with rules.