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TMI Blog1994 (12) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,45,000 15-01-90 By cheque 75,000 23-01-90 By cheque 25,000 15-03-90 By cheque 1,15,000 22-03-90 To cheque 50,000 22-03-90 To cheque 50,000 28-03-90 By cheque 1,94,000 ---------------- ---------------- 7,69,000 7,69,000 ---------------- ---------------- The general reserves of the company as at the beginning of the year was in an extent of Rs. 8,94,592.85 and as at the end of the year it was in a figure of Rs. 13,94,592.85. The increase in the general reserve was due to the transfer of net profit from the profit and loss account appropriation account in a sum of Rs. 5 lakhs. The Assessing Officer on a scrutiny of the account of the assessee with the company held that the assessee had taken advances through the current account in a sum of Rs. 6,70,000 in all. This figure he arrived at on a consideration of the total of the advances of Rs. 7,69,000 --- the opening balance of Rs. 99,000. There is no dispute about this computation. He also noticed that the assessee had repaid the above sum in the course of the year but then it would not make any difference to invoke the provisions of section 2(22)(e) of the Income-tax Act, 1961. In other words notwithstanding the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strict do hereby solemnly and sincerely affirm and state as follows : 1. I am the managing director of the Victory Press Private Limited, a company, registered under the Companies Act. During the year 1989-90, the company had advanced two sums of Rs. 1 lakh each by cheque to Mr. K.P. Davis, on the 3rd of April, 1989. There was an opening balance of Rs. 99,000. This amount of Rs. 2,99,000 was kept outstanding with Mr. K.P. Davis and since there were certain pending transactions with Hotel Victory International, this account was not settled. 2. Subsequently, the company required funds urgently and the company approached Mr. K.P. Davis, to give them a sum of Rs. 1 lakh on 22-04-1989. This was a separate advance by Hotel Victory International to the company unconnected with the earlier transactions inter-se. The company refunded the amount in June 1989. Thereafter on various occasions the company approached Hotel Victory International for temporary accommodation as and when they wanted funds. The amount received by the company was also refunded by the company to Hotel Victory International. 3. On 5-1-1990, when a sum of Rs. 1,45,000 was returned to Hotel Victory International, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertained. Therefore, the ratio laid down in Metha Parekh's case which was heavily relied on by Sri Ramachandran cannot be applied to the facts of the case. In the circumstances, we reject the affidavit and proceed to deal with the issue on the basis of the available material. 6. The copy of the account extracted above is one account dealing with advances made to the assessee and the advances returned by the assessee all during the previous year. Merely because the advances have been returned during the course of the previous year and that there was no balance left as at the end of the year, it cannot be held that the provisions of section 2(22)(e) of the Act are not attracted. The Supreme Court in the, case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 held, as per head notes, as follows : " The statutory fiction created by section 2(6A)(e) of the Indian Income-Tax Act, 1922, would come into operation at the time of the payment of advance or loan to a shareholder by a company in which the public are not substantially interested 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 receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be unpaid as at the end of the year in the form of creditors and in the form of expenses payable. These amounts have to be considered in apposition to the current assets because both current assets and current liabilities go together and come under the group of working capital. By no stretch of imagination, such current liabilities can be set off against the reserve. We accept the contention of Sri Balakrishnan. In the balance-sheet of commercial or manufacturing establishments there are two classes of capital (1) fixed capital and (2) circulating capital. The fixed capital is represented by fixed assets and investments and circulating capital is represented by trading assets. Similarly the liabilities can be classified into two. Long-term liabilities secured or unsecured and Short-term liabilities known as current liabilities. In an analysis of the balance-sheet, it is the usual accepted practice to match the current liabilities against current assets and for purpose of ascertaining the working capital of any concern, the current liabilities are set off only against the current assets. Such a practice is accepted in all the Text Books on accounting and Management accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Officer state what the accounting year of the company was. From the assessment order for the assessment year 1958-59, it is not clear on what day the Income-tax Officer computed the position of its accumulated profits. Whereas in the earlier portion of the order he said that he had done so in respect of both the company as well as Steel Industries as on October 3, 1957, but later, in dealing with the Steel Industries, he said that he had done so as on December 31, 1957. " Such ambiguity regarding the date of accounting year or the position of the reserve as on the date of the advance are not present in the case before us. The accounting year is admittedly the financial year ending on 31-3-1990. There is no dispute about this. The position of the general reserve as at the beginning of the accounting year as evidenced by the balance-sheet filed before us is in a sum of Rs. 8,94,592.85 and this is not in dispute before us nor can it be disputed. In order to compute the accumulated profits of the company as at the date of the each of the advances or loans, it is not necessary to take into account the profit accrued during the year. There is always a distinction between accumulate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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