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TMI Blog1984 (8) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... eted on 11-2-1966. This was set aside by the AAC with regard to the matter relating to the inclusion of deemed dividend under section 2(6A)(e), with a direction to the ITO to make a fresh assessment. Accordingly, a fresh assessment was made on 30-4-1981. Section 2(6A)(e) of the 1922 Act, which corresponds to section 2(22)(e) of the Income-tax Act, 1961, provides, so far as it is relevant for the present case, that any payment by a company in which the public are not substantially interested by way of advance or loan to a shareholder will be ' dividend ' to the extent to which the company possesses accumulated profits. The assessee is a HUF. It is a shareholder in the company known as Bharat Plywood Timber Products (P.) Ltd. The company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he withdrawals by the assessee during the earlier years were much more than the accumulated profits in those years. A sum of Rs. 74,470 was found to be the profit for the accounting year ending on 30-6-1959. Out of this, Rs. 45,000 was declared as dividend leaving only a balance of Rs. 29,470. This was the only accumulated profit available during the year. The Commissioner (Appeals) held that only Rs. 29,470 out of the advances made to the assessee, could be treated as deemed dividend under section 2(6A)(e). The ITO, who was present before the Commissioner (Appeals) at the time of the hearing of the appeal, had contended that in earlier assessment years, no amounts had, in fact, been assessed as deemed dividend and that the advances made du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions in Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC), CIT v. Roshan Lal [1975] 98 ITR 349 (All.), CIT v. G. Narasimhan [1979] 118 ITR 60 (Mad.) and CIT v. P.K. Badiani [1970] 76 ITR 369 (Bom.). 6. On the other hand, it was contended by the learned representative for the assessee that advances made to a shareholder, which satisfied the requirements of section 2(6A)(e), will become dividend by the operation of the Act irrespective of whether the department treats the same as dividend or not, that by the operation of the fiction contained in the section the advances became dividend, that the same cannot, subsequently, be brought back to inflate the accumulated profits and that the omission to assess the advances as deemed dividends in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be dividend and that to avoid the happening of any such eventuality, the accumulated profits must be notionally reduced by way of all loans, etc., which are to be deemed to be dividends under the section. To illustrate the point, the High Court said that if the accumulated profits were Rs. 5,000 and a loan of Rs. 5,000 was advanced to one shareholder and he repays it and if this amount of Rs. 5,000 is credited to the accumulated profits and another loan of Rs. 5,000 is advanced to another shareholder, the second advance cannot be treated as a deemed dividend as the accumulated profits had disappeared by the first advance. Similarly, it was pointed out that if Rs. 2,000 is advanced to a shareholder out of an accumulated profit of Rs. 5,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lata Shyam's case, it was held by the Supreme Court that the statutory fiction created by section 2(6A)(e) would come into operation at the time of payment of advance or loan to a shareholder and tax is attracted to the loan or advance to the extent to which the company possesses accumulated profits the moment the loan or advance is received, and even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed to be ' dividend ' if the conditions of the section are satisfied. It was also observed that the language of the section is clear and unambiguous and that there is no scope of importing into the statute words which are not there and that once it is shown that the case of the assessee comes w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The decisions referred to above indicate that the deemed dividend has to be worked out on the basis of the conditions obtaining at the time when the loans or advances are made. In the case of Smt. Tarulata Shyam, the Supreme Court observed that the statutory fiction created by the section would come into operation at the time of the payment of advance or loan. Similarly, the observations in the case of P.K Badiani would indicate that the accumulated profits should be reduced by the amount of loan or advance, immediately on making such loan or advance. Only if this is done, the subsequent loans or advances can be tested by verifying the accumulated profits on the dates on which they are made. As pointed out in the decisions referred to abo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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