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TMI Blog1989 (12) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the managing director of the assessee-company should be treated as dividend under section 2(22) of the Income-tax Act, 1961 (in short "the Act"). If that amount is taken as a dividend distributed, then there will hardly be a balance of Rs. 2,800 to be distributed and that is too small an amount compared to the paid-up capital of the assessee company and, as such, the provisions of section 104 of the Act are inapplicable. The assessee is a trading company in which the public are not substantially interested. For the assessment year 1975-76, the company was assessed to tax on a total income of Rs. 6,27,430. The assessee not having distributed any dividends to its shareholders, the Income-tax Officer initiated proceedings under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act. The loan given to the managing director in the sum of Rs. 1,23,053 could not be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. The Income-tax Officer took the view that though giving of a loan comes under section 2(22)(e) of the Act, the same cannot be held as distributed dividend as per section 109 of the Act and, therefore, attracts the levy of additional tax under section 104 of the Act. Before this court, it was submitted that the view of the Tribunal that section 205(2A) of the Companies Act is no bar to attract section 104 of the Act was plainly wrong. When once the company is covered by section 104 of the Act, the loans advanced to shareholders covered by section 2(22)(e) of the Act should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the company possesses accumulated profits, excluding an advance or loan made to such shareholder by a company in the ordinary course of its business where money-lending is a substantial part of its business, and any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e) to the extent to which it is so set off, has to be treated as dividend in the hands of a shareholder for the purpose of tax. The expression "accumulated profits" has been elaborated in Explanations 1 and 2 to the said subsection. Section 104 provides for levy of additional income-tax on undistributed profits. In a case where, in any previous ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaration of dividend, in fact not by reason of the fiction, goes out of the category of the concept of dividend as provided in section 2(22)(e) then, in a given year, when the loan advanced to a shareholder was covered by section 2(22)(e), it does riot become a dividend for purposes of section 104 of the Act by reason of strict construction adopted by the Gujarat High Court, but subsequently when a dividend is actually declared and is set off against that loan, that ceases to be a dividend by reason of the exclusionary clause contained in section 2(22) of the Act. Therefore, in either event, it goes out of the category of a dividend for purposes of section 104 of the Act. Could it be said that, in such an event also, the deeming provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t distributed in fact as opposed to distributed in a hypothetical or theoretical sense. The other reasoning on which the Gujarat High Court relied for its conclusion is that, in case where an assessment has been made under section 104 or a company to which section 104 is applicable has distributed profits coming within the limits prescribed under section 104, it is not liable to taxation thereof, but nevertheless makes a loan out of the remaining distributable profits to any shareholder, then both sections 104 and 2(22)(e) could stand together though they operated in different fields. And, in such a case, the loan made, though a deemed dividend for purposes of section 2(22)(e), will not be dividend for purposes of section 104 of the Act. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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