1970 (3) TMI 33 - HC - Income Tax

Accumulated profit - assessee making two balance sheet one under Electric Supply Act and another under IT Act - IT return showing loss but other return allowing depreciation and showing profit - for calculating profits u/s 2(6A)(e) depreciation should be allowed as per Income-tax Act itself - since IT return showing loss, company did not possess any accumulated profits - section 2(6A)(e) not applicable

Summary

Issues Involved:
1. Constitutionality of Section 2(6A)(e) of the Indian Income-tax Act, 1922.
2. Inclusion of loan as dividend in the assessee's total income under Section 2(6A)(e).
3. Deduction of the value of fully paid-up shares issued to promoters in determining accumulated profits.
4. Deduction of the company's disputed income-tax liability in determining accumulated profits.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 2(6A)(e):
The first issue questioned whether Section 2(6A)(e) of the Indian Income-tax Act, 1922, is ultra vires the Constitution of India. The court referenced the Supreme Court judgment in Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax, which had already determined that Section 2(6A)(e) is not ultra vires the Constitution of India. Consequently, this question did not require further determination and was not answered by the court.

2. Inclusion of Loan as Dividend:
The second issue examined if the loan given by the Malegaon Electricity Company to the assessee should be included in the assessee's total income as a dividend under Section 2(6A)(e). The Tribunal had initially held that the loan would attract the provisions of Section 2(6A)(e) due to the company's accumulated profits. However, the court noted that the correct determination of "accumulated profits" required considering depreciation as per the Income-tax Act, not the Electricity Supply Act. The court found that after allowing for depreciation under the Income-tax Act, the Malegaon Electricity Company had no accumulated profits at the relevant time. Therefore, the loan could not be deemed a dividend under Section 2(6A)(e), and the court answered this question in the negative.

3. Deduction of Value of Fully Paid-up Shares:
The third issue, contingent on an affirmative answer to the second question, was whether the value of fully paid-up shares issued to promoters without consideration in 1934 could be deducted in determining accumulated profits. Since the court answered the second question in the negative, this issue did not arise or survive for consideration.

4. Deduction of Disputed Income-tax Liability:
The fourth issue, also contingent on an affirmative answer to the second question, was whether the company's disputed income-tax liability, which was not provided for in the books, should be deducted in determining accumulated profits. Again, due to the negative answer to the second question, this issue did not arise or survive for consideration.

Conclusion:
The court concluded that the Malegaon Electricity Company did not have accumulated profits at the relevant time, and thus, the loan to the assessee could not be treated as a dividend under Section 2(6A)(e). The questions regarding the deduction of the value of fully paid-up shares and the disputed income-tax liability were not addressed, as they were contingent on an affirmative answer to the second question. The department was ordered to pay the assessee's costs.