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TMI Blog1972 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... ,20,875 was debited to the profit and loss account and credited to the "development rebate reserve" account. For the year ended on December 31, 1958, also a further sum of Rs. 84,088 was debited to the profit and loss account of the year and transferred to "development rebate reserve" account. Thus, as on December 31, 1958, a sum of Rs. 3,55,204 stood to the credit of "development rebate reserve" and was shown in the balance-sheet under the head "reserve and surplus". In the assessment years 1957-58 and 1958-59 the development rebate allowed by the department amounts to Rs. 3,58,212. In the previous year ended on December 31, 1957, the assessee-family was due to the company Rs. 16,418 inclusive of interest. After eliminating the opening debit balance and the interest amount, the advances received by the assessee-family during the year amounts to Rs. 7,111.52. The Income-tax Officer considered the said sum of Rs. 7,111.52 as dividend under section 2(6A)(e) as, according to him, the company had accumulated profits of over Rs. 1,50,000 in the shape of development rebate reserve to the credit of "reserve and surplus". Similarly, in the year ending March 31, 1959, a sum of Rs. 1,46,728 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the accumulated profits of the company, and that the sums of Rs. 7,111 and Rs. 1,46,728 to the debit of the assessee in the books of the company were taxable under section 2(6A)(e). It is seen from the order of the Tribunal in appeal that it accepted the case of the assessee that as regards the assessment year 1958-59, the Income-tax Officer wrongly took into account the withdrawals from and payments to the company from 31st March, 1957, up to 31st December, 1958 and excluded such amounts for the period up to March 31, 1958, even though the assessee's accounting year ended only on March 31, 1958, and that in fact as on March 31, 1958, the assessee stood at a credit of Rs. 7,855. The Tribunal, therefore, directed the Income-tax Officer to verify the position as to whether the assessee was in fact a creditor of the company as on March 31, 1958, and that if so, no amount was assessable as dividend under section 2(6A)(e) for the assessment year 1958-59. At the instance of the assessee the following two questions had been referred to this court under section 66(1) of the Income-tax Act, 1922. "(1) Whether, on the facts and circumstances of the case, the Tribunal is right in holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of depreciation has to be deducted, because the amount of the value lost by depreciation is a capital loss which must be replaced first, as otherwise, the initial capital would, to that extent, incorrectly and falsely be converted into and treated as profits. According to the learned judges in that case, development rebate, on the other hand, is not intended to replace any capital loss by wear and tear or in any such other way and it, therefore, forms part of the real profits, and even after it is allowed as a deduction under section 10(2)(vib), it continues to retain its original character of profits. The reason behind that decision appears to be that the allowance for depreciation is to provide a fund which equals the value of the asset which has depreciated by normal wear and tear and to offset the loss of value in a capital asset, while the development reserve is intended for the extension of industry by adding something to its existing machinery or other assets and to encourage the capital formation through the medium of savings out of current profits, and that the depreciation is a charge on the profits while development reserve is a saving out of the current profits. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmer term includes, e.g,, reserves accumulated from past profits, from realised capital profits, indeed, before the requirement of a share premium account by the 1947-48 legislation, from premiums obtained on issue of new shares, whereas none of these items is regarded and rightly so by the businessman or accountant as trading profits." The view taken by the learned judges in that case was that a loss or depreciation of fixed capital does not affect the divisible profits or render it necessary to make good the same out of income. But, with due respect, we are not in a position to accept the position of law enunciated in that case that the method adopted by the assessee in treating the amount of depreciation will make any difference on the question whether it is part of accumulated profits or not. With respect, we agree with the view expressed in Commissioner of Income-tax v. P. K. Badiani that the amount of depreciation, which is allowed as a deduction being the value lost by depreciation, is a capital loss which must be replaced first to give a correct and true picture of the profits, as otherwise, there is bound to be a distorted picture in the profit and loss account. In our op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t exceed the original cost. This indicates that even the initial depreciation, which may not go to reduce the written down value, is intended to meet a capital loss. This is also clear from the fact that it is taken into account in the calculation of the balancing charge under section 10(2)(vii). We hold, therefore, that an initial depreciation reserve will not be accumulated profits for the purposes of section 2(6A)(e). As the revenue has all along proceeded on the basis that the entire sum of Rs. 3,58,212 being the initial depreciation and development rebate reserve was accumulated profits, it has not ascertained the separate figures for initial depreciation and development rebate reserve. The learned counsel for the assessee, however, after verifying the figures from the account books of the company represents that the amount of development rebate reserve itself far exceeded Rs. 1,65,000 so as to attract section 2(6A)(e). In view of that fact our decision in T. C. No. 271 of 1966 directly governs this case as well. Therefore, we must hold that there were sufficient accumulated profits in the company so as to enable the revenue to invoke section 2(6A)(e). We, therefore, answer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as an income from other sources under section 12 should be an actual income, and that the mere creation of a debtor and creditor relationship between the company and the assessee cannot amount to an income from other sources coming within the scope of section 12(1) and 12(1B). The learned counsel refers in support of his stand to the decision in Commissioner of Income-tax v. Jamnadas Sriniwas Private Ltd. In that case the scope of section 2(6A)(e) came up for consideration. The court expressed the view that by introducing clause (e) to section 2(6A) the legislature has created a fiction and has made the payments referred to in clause (e) as dividend for the purpose of the Act, and that the definition of the word "dividend" is an all inclusive definition taking in five different categories of sums, four of which are distributions by a company and the fifth one is a payment by the company. As to the scope of the word "payment", the court felt that it connoted different meanings one of which is a receipt by a single person. We are not in a position to say that the above decision throws any light on the scope of the word "payment". That decision merely makes a distinction between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest in respect of which he claims repayment of tax. In my opinion this means that the taxpayer must really, and not merely notionally, have paid the interest. There must be payment such as to discharge the debt. The payment must be a fact, not a fiction.... As I have already said, what the Income Tax Act requires as the condition of repayment of tax on interest is that the sum due as interest shall have been actually discharged, not merely constructively paid. To warrant repayment of tax, there must have been a real payment of the tax and a real payment of interest without deduction of tax." The learned counsel for the revenue, however, contends that the assessee-family was under a legal obligation to pay the call monies as and when demanded and that in making a credit entry in favour of the company and a debit entry against the assessee-family there is a notional payment by the company to the assessee and a notional repayment by the assessee-family to the company towards the call arrears and that the creation of the debtor and creditor relationship as a result of the book entries made by the company is quite sufficient to treat the company as the lender and the assessee-f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specie by the assessees from the companies, there can be no payment within the meaning of section 12(1B) of the Act. The substantial requirement to attract the applicability of section 12(1B) is that there should be the jural relationship of debtor and creditor between the shareholder and the company." Though the above observations appear on the first blush to support the stand taken by the revenue on the facts of that case, there cannot be any controversy that originally a sum of Rs. 70,000 was paid by the company to the assessee's mother in her capacity as a shareholder, and the shares along with the liability for repayment of the loan was inherited by the assessee. As there was a factual payment of the loan by the company to the shareholder at the first instance, the learned judges felt that there need not be actual payment to the assessee himself and that continuation of the jural relationship of debtor and creditor between the assessee and the company was sufficient to attract section 2(6A)(e). But, in the case on hand, there is no payment of loan as such and the call amounts due by the assessee were treated as having been paid up by making a credit entry in favour of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which prevents any trust, express, implied or constructive being recognised as members of a company and of section 206 which provides that no dividend shall be paid by a company in respect of any share except to the registered shareholder of the company, and of the decision of the Supreme Court just now referred to, it is clear that the sum of Rs. 1,65,000 even if treated as a loan by the company to the joint family, cannot be said to be a loan to the registered shareholder as to deem it as a dividend under section 2(6A)(e). On the other hand, the revenue contends that this point does not arise out of the Tribunal's order as the same was not urged before the Tribunal, that the Tribunal had no opportunity to express its opinion thereon and that, therefore, the assessee cannot raise this question. He relies on the decisions in Kusumben D. Mahadevia v. Commissioner of Income-tax, Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., B. B. Iranee v. Commissioner of Income-tax and Commissioner of Income-tax v. Kirkend Coal Co., in support of his submission that this new point should not be entertained. It is true that in the above decisions it has been observed that when a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of the business, that because before the Tribunal stress was not pointedly laid by the revenue upon the ingredients which enable an expenditure to be claimed and allowed, it could not be said that the question did not arise out of that order and that the High Court was wrong in refusing to allow the Commissioner to raise the argument that the requirements of section 10(2)(xv) were not satisfied. According to their Lordships of the Supreme Court the expression "question of law arising out of such order" in section 66(1) is not restricted only to those questions which have been expressly argued and decided by the Tribunal, and if a question of law had been raised before the Tribunal, even if an aspect of that question is not raised, that aspect may be urged before the High Court. In this case the question is whether the sum of Rs. 1,65,000 alleged to have been taken as loan from the company by the assessee-family will attract section 2(6A)(e) of the Act. It was argued before the Tribunal that the said sum cannot be treated as a loan by the company to the assessee-family so as to attract section 2(6A)(e). But it was not argued that, in any event, the loan is not to a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a different note from the one in Commissioner of Income-tax v. C. P. Sarathy Mudaliar, we are of the view that the decision in Commissioner of Income-tax v. C. P. Sarathy Mudaliar being the later in point of time and being a decision which has considered the legal relationship between a company and its shareholder, represents the correct legal position, if we may say so with respect. The significance of the prohibition of a trust being a shareholder of a company contained in section 153 of the Companies Act and of the dividend being paid only to a registered shareholder as enjoined in section 206 of the Companies Act has not been noted in the earlier decision. Section 2(6A) deems a loan taken by a shareholder from a company as a dividend received by him. For invoking this deeming provision, the loan must be by a company to the registered shareholder, as, otherwise the said section will create a deemed dividend even when there is a loan by a company to a person other than a shareholder, which the company cannot do under section 206 of the Companies Act. It is not as if section 2(6A) empowers the company to pay dividends to persons other than its registered shareholders. The mere f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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