1972 (4) TMI 18 - HC - Income Tax

Assessee is admittedly a registered shareholder of the company with 500 partly paid up shares and any loan taken by her from the company has to be deemed to be a dividend from the company so as to attract section 2(6A)(e) - It is also not in dispute that only if the amount of Rs. 12, 500 being the call-monies due by the assessee is taken as a loan from the company section 2(6A)(e) will stand attracted. But the question is whether the debit and credit entries made in relation to the assessee s liability for Rs. 12, 500 towards the arrears of call-monies due by her could be treated as a loan without the actual flow of money from the company to the shareholder held that mere adjustment of book entries could not be treated as payment by way of loan by the company to its shareholders

Summary

Issues Involved:
1. Whether the amounts set apart as initial and development rebate reserves in the account of M/s. Chandra Textiles (P.) Ltd. could be held as part of the accumulated profits of the company.
2. Whether the sum of Rs. 1,65,000 debited in the account of the assessee in the books of the company for the year ended on December 31, 1958, towards first and second call monies due in January and March 1959, are cash advances within the meaning of section 2(6A)(e).

Issue-Wise Detailed Analysis:

Issue 1: Initial and Development Rebate Reserves as Accumulated Profits
The court had to determine if the amounts set apart as initial and development rebate reserves could be considered part of the accumulated profits under section 2(6A)(e) of the Income-tax Act, 1922. The assessee contended that these reserves were special provisions for specific purposes and should not be considered accumulated profits. However, the Income-tax Officer and the Tribunal held that these reserves, being created out of profits, should be treated as accumulated profits. The court referred to its earlier decision in T.C. No. 271 of 1966, which held that the "development rebate reserve" is not a tied-up reserve and should be considered as accumulated profits. The court distinguished between "depreciation" and "development rebate," noting that depreciation is a charge on profits meant to replace the value lost by wear and tear, while development rebate is a saving out of current profits intended for capital formation. The court concluded that initial depreciation reserve should not be treated as accumulated profits, but the development rebate reserve should be. Since the development rebate reserve itself exceeded Rs. 1,65,000, the court held that there were sufficient accumulated profits to attract section 2(6A)(e). Therefore, the first question was answered in favor of the revenue.

Issue 2: Sum of Rs. 1,65,000 as Cash Advances
The second issue was whether the sum of Rs. 1,65,000 debited in the assessee's account for call monies could be treated as cash advances under section 2(6A)(e). The assessee argued that there was no actual cash payment, only a book entry, and thus it should not be considered an advance or loan. The court agreed, stating that the term "payment" in section 2(6A)(e) implies an actual flow of money, not merely a book adjustment. The court referred to the decision in Paton v. Inland Revenue Commissioners, which emphasized that payment must be real, not notional. The court also considered the decision in T. Sundaram Chettiar v. Commissioner of Income-tax but distinguished it on the grounds that there was no initial cash payment in the present case. Therefore, the court concluded that the sum of Rs. 1,65,000 could not be treated as a loan or advance, and section 2(6A)(e) could not be invoked. The second question was answered in favor of the assessee.

Additional Consideration:
The assessee-family also raised the contention that the family, not being a registered shareholder, could not attract section 2(6A). The court referred to the Supreme Court's decision in Commissioner of Income-tax v. C. P. Sarathy Mudaliar, which held that the term "shareholder" refers to the registered shareholder, not the beneficial owner. The court agreed that the Hindu undivided family could not be considered a shareholder under section 2(6A)(e), and thus the section could not be invoked against the assessee-family. This point was entertained despite not being raised before the Tribunal, as it was within the ambit of the question referred.

Conclusion:
In T.C. No. 298 of 1966, the assessee was a registered shareholder, and the only issue was whether the debit and credit entries for call monies could be treated as a loan. Following the reasoning in T.C. No. 297 of 1966, the court held that mere book entries could not be treated as a loan. Therefore, the second question was answered in favor of the assessee, and the first question in favor of the revenue. No order as to costs was made in both cases.