1971 (8) TMI 54 - HC - Income Tax

Loan to shareholder exceeds the accumulated profits - Whether only 1/300th being the proportion of the number of shares of the company held by the assessee to the total number of shares of the company, of the accumulated profits of the company can be treated as dividend under section 2(6A)(e) on a proper interpretation of section 2(6A)(e), the question is answered in the negative - whole of the sum would be liable to be taxed as dividend in the hands of the assessee u/s 2(6A)(e)

Issues Involved:
1. Interpretation of section 2(6A)(e) of the Indian Income-tax Act, 1922.
2. Computation of accumulated profits.
3. Taxability of payments made by a company to a shareholder as dividend.

Detailed Analysis:

1. Interpretation of Section 2(6A)(e):
The primary issue in this case revolves around the interpretation of section 2(6A)(e) of the Indian Income-tax Act, 1922. This provision includes any payment by a company, not being a company in which the public are substantially interested, by way of advance or loan to a shareholder, to the extent to which the company possesses accumulated profits. The court emphasized that the meaning of a statutory provision must be gathered from a plain natural construction of the words used by the legislature. Section 2(6A)(e) seeks to bring to tax as dividend in the hands of a shareholder three types of payments made by a company: (1) any payment by way of advance or loan to a shareholder; (2) any payment on behalf of a shareholder; and (3) any payment for the individual benefit of a shareholder. Two conditions must be fulfilled: the company should not be one in which the public are substantially interested, and the company should possess accumulated profits at the time it makes the payment.

2. Computation of Accumulated Profits:
The Income-tax Officer initially computed the accumulated profits to be Rs. 93,746, which included a sum of Rs. 32,996 representing deemed profits under section 10(2)(vii). The Tribunal, however, held that the sum of Rs. 32,996 could not be regarded as part of accumulated profits within the meaning of section 2(6A)(e), thus reducing the accumulated profits to Rs. 60,750. The Tribunal's decision was based on the interpretation that the deemed profits should not be included in the accumulated profits for the purposes of section 2(6A)(e).

3. Taxability of Payments as Dividend:
The Tribunal initially accepted the alternative contention of the assessee that only 1/300th part of the accumulated profits should be taxed as dividend, representing the proportionate share which the assessee would have received if the accumulated profits had been distributed to the shareholders. However, the court disagreed with this interpretation. The court held that section 2(6A)(e) does not indicate that only a proportionate part of the payment should be taxed. The section refers to "any payment" and not to any proportionate part of it, and the only limitation is that it should be to the extent to which the company possesses accumulated profits. The court concluded that the whole of the payment made by the company to the shareholder should be regarded as dividend subject to the limitation that it does not exceed the accumulated profits available with the company at the time of payment.

The court supported its interpretation by referring to decisions from the Madras High Court and the Bombay High Court, which held similar views regarding the scope of section 2(6A)(e). The court also referenced the Supreme Court's observations in Navnit Lal C. Javeri v. K. K. Sen, which supported the view that the entire payment should be treated as dividend.

Conclusion:
The court answered the question referred to it in the negative, holding that the whole of the sum of Rs. 60,750 would be liable to be taxed as dividend in the hands of the assessee under section 2(6A)(e). The court emphasized that the intention of the legislature, as gathered from the language used, was to prevent tax evasion by treating the entire payment made by the company to the shareholder as dividend, subject to the limitation of accumulated profits. The assessee was ordered to pay the costs of the reference to the Commissioner.

← Previous Next →