1972 (10) TMI 24 - HC - Income Tax

1. Whether, on the facts of the case, there was a loan or advance of Rs. 2,55,135 within the meaning of section 12(1B) read with section 2(6A)(e) by the company to the shareholder ? 2. If the answer to question No. 1 is in the affirmative, whether the phrase accumulated profits , as used in section 2(6A)(e) means such profits as disclosed by the company s balance-sheet or such disclosed profits subject to adjustments as required by the Income-tax Act ?

Summary

Issues Involved:
1. Whether there was a 'loan or advance' of Rs. 2,55,135 within the meaning of section 12(1B) read with section 2(6A)(e) by the company to the shareholder.
2. Whether the phrase 'accumulated profits' in section 2(6A)(e) means profits as disclosed by the company's balance-sheet or profits subject to adjustments required by the Income-tax Act.

Issue-wise Detailed Analysis:

Issue 1: Loan or Advance
The first question examined was whether the sum of Rs. 2,55,135 constituted a 'loan or advance' under section 12(1B) read with section 2(6A)(e). The facts revealed that the assessee, a shareholder and director of the company, had dealings with the company through two accounts: one in the name of his firm and another in his own name. The Income-tax Officer found a debit balance of Rs. 2,55,135 in the firm's account as of April 1, 1954, which was considered a loan. The Tribunal initially held that these transactions were in a mutual, open, and current account and not loans. However, upon review, the Court found that the continuous debit balance in the firm's account represented cash dealings and loans advanced by the company to the assessee. Therefore, the sum of Rs. 2,55,135 was indeed a loan.

Issue 2: Accumulated Profits
The second question dealt with the interpretation of 'accumulated profits' under section 2(6A)(e). The assessee argued that the reserve fund in the balance-sheet included compensation received for dock explosion damage, which should not be considered accumulated profits. Furthermore, the depreciation calculated in the balance-sheet was lower than that allowed under the Income-tax Act, and thus, the reserve fund was overstated. The Tribunal rejected the assessee's contention, but the Court referred to previous judgments (Navnitlal C. Jhaveri v. Commissioner of Income-tax and Commissioner of Income-tax v. P. K. Badiani) which held that accumulated profits should be calculated after deducting depreciation as per the Income-tax Act. Consequently, the Court found that after adjusting for depreciation, there were no accumulated profits, and hence, the loan could not be treated as a dividend.

Conclusion:
1. The sum of Rs. 2,55,135 was a loan but could not be treated as dividend and income because it was not paid out of accumulated profits.
2. The phrase 'accumulated profits' means profits subject to adjustments required by the Income-tax Act, including depreciation as granted in accordance with the rates prescribed by the Act.

The revenue was directed to pay the costs of the assessee.