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TMI Blog1962 (9) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) K. Srinivasan Managing Editor 50 (2) K. Gopalan Printer and Publisher 85 (3) G. Kasturi Assistant Editor 540 (4) G. Narasimhan General Manager 625 (5) S. Parthasarathy Joint Manager 600 3. All the above have current accounts in the books of the aforesaid company, copies whereof are annexed hereunto as annexures "A-1 to A-5" and form part of the case, into which were paid their private cash from all and sundry sources like sale of cattle, etc., and from which also they drew for their personal expenses, insurance premia, income-tax, etc., from time to time. The following are the debit balances in their accounts for excess withdrawals on March 31, 1956, the end of the previous year aforesaid. Assessee Dr. Balance (1) (2) Rs. (1) K. Srinivasan 9,911 (2) K. Gopalan 15,063 (3) G. Kasturi 11,708 (4) G. Narasimhan 23,524 (5) S. Parthasarathy 10,598 70,804 The above balances are included in the "Advances due by Directors" in the balance-sheet of the aforesaid company on 30th June, 1956. 4. The aforesaid company is not one in which the public is substantially interested within the meaning of section 23A. According to the company' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , copy whereof in the case of one of the assessees is annexed hereunto as annexure "C" as a specimen and forms part of the case. 8. Appeals to the Tribunal followed, raising various contentions in the grounds of appeals, copy whereof in the case of one of the assessees is annexed hereunto as annexure "D" as a specimen and forms part of the case. The substance of these contentions was (a) "accumulated profits" for purposes of section 2(6A)(e) did not include "reserves" and (b) the overdrawings in question did not amount to "loans" and "advances" referred to in the section. The Tribunal held, for reasons stated in the following extracts from paragraphs Nos. 3 and 4 of its order, that the company had adequate "accumulated profits" to cover the dividends sought to be assessed, but that the overdrawings did not amount to "loans" or "advances" within the meaning of section 2(6A)(e). Paragraph 3.--...The expression "accumulated profits" is nowhere defined in the Income-tax Act. Therefore, its natural meaning should be taken. Mere transfer to profit from the profit account to reserve accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e withdrawals made by the assessee are, in this particular instance, neither advance nor loan. In fact, the picture should be taken as a whole. Soon after the year closed credits come in. Artificially drawing a line at the end of the year of account is not, in our opinion, envisaged in this. We are, therefore, of the view that these debits are not covered by the word "advance" or "loan" in the particular circumstances of this case for this year. We are unable to accept the departmental representative's contention that the words cover every advance whatever its nature may be. The meaning should be taken in the context it is used. Therefore, they cannot be treated as deemed dividend within the meaning of that section for the year under consideration. The Tribunal accordingly allowed all the above appeals. 9. From out of the aforesaid facts the questions of law that arise are as follows: (a) Whether "accumulated profits" for purposes of applying section 2(6A)(e) include general reserve? (b) Whether the net overdrawings of the assessees during the previous year ended March 31, 1956, for the assessment year amount to dividends within the meaning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact has been omitted herein. The departmental representative, however, objects to question (b) above inasmuch as the assessees had not filed any application on the decision of the Tribunal which was against them. In our opinion, this objection cannot be sustained. It is after all a question of law arising from out of the Tribunal's order. S. Ranganathan for the Commissioner. S. Padmanabhan for respondents Nos. 2 to 4. The judgment of the court was delivered by SRINIVASAN J.--This is a consolidated reference and a common statement of the case has been submitted by the Tribunal under section 66(1) of the Act. The five assessees whose cases have given rise to the question are directors and shareholders in Kasturi and Sons Private Ltd. During the account year ended on 31st of March, 1956, relevant to the assessment year 1956-57, the assessees were employed in various capacities in the company for which they were paid salaries and allowances. These assessees had each what is called a current account in the books of the company. It is common ground that they used to draw from the funds of the company various amounts for their private purposes and also pay into this current acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying section 2(6A)(e) would include general reserves?" The reference of this question was objected to by the department as the assessees did not file any separate application in that regard. But the Tribunal held that it was a question of law arising from out of the Tribunal's order and referred that question as well. We shall deal with the question of accumulated profits in the first instance. It is common ground that the major portion of the profits of the concern has been transferred to the general reserve year after year. What is claimed on behalf of the assessees is that where a reserve has been created, it can no longer be regarded as representing accumulated profits. The expression "accumulated profits" has not been defined anywhere. The Tribunal took the view that adopting the natural meaning of that expression, the mere transfer of the profit from the profit account to the reserve account does not alter the character of the amount as a profit. It is open to the company to utilise the amount in the reserve account for any purposes, including the payment of dividend. It is open to the general body of shareholders to withdraw any sum from any reserve to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve within the meaning of Schedule II, rule 2(1) of the Business Profits Rules. In the case before the Supreme Court, the question that arose was what was the capital of the company on the relevant date and according to the mode of computation of capital set out in the rules in the Schedule to the Business Profits Tax Act of 1947. The rule relevant to the computation specified that the capital shall be the sum of the amounts of the paid up share capital and its reserves. Their Lordships held that where the profits of the company remained unappropriated under any head of reserve, general or specific, the mass of such unappropriated profits could not be reserves within the meaning of the Schedule. It seems to us that this decision cannot help the determination of the question, which is whether where the profits are placed under the head of "General Reserves", they cease to be accumulated profits. The view taken by the Tribunal in this regard that a sum transferred to the credit of general reserve is no less available to the company for distribution of dividend as a sum kept under the head "profits" seems to us to be supported by general principles of company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge power of the company would be that before ascertaining the divisible profits, loss or depreciation of circulating capital has to be deducted. It is possible, therefore, to say that any special reserves created for the purpose of meeting this charge may be regarded as profits taken out of the category of divisible profits or accumulated profits. The result of this discussion seems to us to be that unless the profit is capitalised in some form or other, the mere transfer of the profits to any reserve account will not take away from the profits the character of accumulated profits. It follows that question No. 1 has to be answered in the affirmative. The more important question is question No. 2. The Tribunal reached the conclusion that the debit against the shareholder-director did not amount to either a loan or advance and for that reason it took the view that section 2(6A)(e) did not apply. The Tribunal however did not consider the other aspects of the definition of "dividend" occurring in that provision. This provision states: "'Dividend' includes--...(e) any payment by a company, not being a company, in which the public are substantially interested w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It seems to us, therefore, that these payments may be regarded as coming under one or other of the heads referred to in the provision. On behalf of the assessee, his learned counsel, Mr. Padmanabhan, contends that the payments cannot be regarded as loans, as the company was not acting as a banker as popularly understood. Nor, according to him, can they be regarded as advances, for that very expression must mean something which is due to the assessee but which is paid to him ahead of the time when it is due to be paid. It is true that in so far as the expression "advance" is concerned, it does have such a meaning. The accounts do not show that these amounts were paid by the company as advances against the salary, allowances or dividends which the shareholder might be entitled to. At any rate, the accounts do not so describe them. But there can be no doubt that in so far as the company purported to discharge any commitments of the assessees, the payment was undoubtedly made on behalf of the shareholder. That expression as it finds place in the provision does not involve any idea that the payment was to be gratuitous. On the meaning of the expression "loan", the l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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