http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 4  

PETITIONER: MISS P. SARADA

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX (CENTRAL), MADRAS

DATE OF JUDGMENT:       09/12/1997

BENCH: SUHAS C. SEN, K. VENKATASWAMI

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T SEN,J.      The appellant,  Miss P.  Sarada, is a major shareholder of  Messers   Universal  Radiators  Pvt.  Ltd.  (hereinafter referred to  as "the  Company"). It  is a  company in  which public were  not substantially  interested. While completing the assessment  of the  appellant for  the  assessment  year 1973-74, the Income Tax officer found that during the period 3.7.1972 to  22.3.1973 she  had withdrawn a total sum of Rs. 93,027 from the company. The appellant had a running account with the  company. At the material time she did not have any credit balance  in her account with the company. This excess withdrawal was  treated by  the Income Tax officer as deemed dividend under  Section 2(22)  (e) of  the Income Tax Act on two grounds  : (1) The assessee had no credit balance in her accounts with the said company at the material time; and (2) that there was sufficient accumulated profits of the company from which  the excess  withdrawal was made by the assessee. The Income Tax officer included this amount of Rs. 93,027 in the computation  of the  appellant’s income.  The assessee’s appeal  to   the  Appellate   Assistant   Commissioner   was dismissed. However,  on further  appeal, the Tribunal upheld the case of the assessee.      The Tribunal  held that  t he  withdrawals made  by the appellant will  have to  be taken  as paid  out of the money lying to  the credit of another shareholder Shri A.C. Mahesh and not  out of  the accumulated  profits of  the company. A letter dated  3.4.1972 written  by Shri  A.P. Madhavan,  the father of the minor Mahesh, was relied upon by the Tribunal. In that  letter madhavan  had directed  the company  to make available to the assessee Miss p. Sarada a sum of Rs. 1 lakh from out of his account. The Tribunal found that mahesh owed some money  to the  assessee  and  as  Mahesh  had  directed repayments of the amount due to the assessee from out of his credit balance  in the  company, the withdrawals made by the assessee had  to the  company, the  withdrawals made  by the assessee had  to be  treated as withdrawals from the account of Mahesh  and not  from  the  accumulated  profits  of  the company.      At the  instance of the Commissioner of Income Tax, the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 4  

following question  of law  was referred  to the  High Court under Section 256(1) of the Income Tax Act.      "Whether, on  the facts  and in the      circumstances  of   the  case,  the      Appellate Tribunal  is  correct  in      law in holding that the withdrawals      made by  the assessee  from messers      Universal Radiators Private Limited      Totalling  Rs.   93,027  cannot  be      assessed under Section 2(22) (e) of      the Income-Tax  Act, 1961  for  the      year 1973-74."      The High  Court answered  the question  in the negative and in favour of to Revenue.      The  High   Court  took  note  of  the  fact  that  the accounting period  for the  relevant assessment year 1973-74 was 1.4.1972  to 31.3.1973.  The assessee  was a substantial shareholder of  the company  and was  drawing funds from the company till  22.3.1973.  The  assessee  was  a  substantial shareholder of  the company  and was  drawing funds from the company till  22.3.1973. As  a result of various withdrawals made by  the assessee,  her credit balance had been entirely wiped out  and in  fact her  account with the company showed excess withdrawal  of a sum of Rs. 1,831.14 as on 22.3.1973. In spite  of debit  balance the assessee between 3.7.1972 to 22.3.1973 on  fourteen different  dates withdrew  a total  a sum of Rs. 93,027. The particulars of the withdrawals are as under:           "3.7.72         Rs. 1,831.14 (Excess withdrawal)           3.8.72          Rs. 5,000.00           2.9.72          Rs. 5,000.00           12.9.72         Rs. 7,998.00           3.10.72         Rs. 5,000.00           3.11.97         Rs. 5,000.00           1.12.72         Rs. 5,000.00           11.12.72        Rs. 7,998.00           18.12.72        Rs. 4,749.00           18.12.72        Rs. 8, 522.00             2.1.73        Rs. 5,000.00             3.2.73        Rs. 5,000.00             5.3.73        Rs. 5,000.00             9.3.73        Rs. 7,999.00            17.3.73        Rs. 10,000.00            22.3.73        Rs. 3,930.                        -------------------                           Rs. 93,027.00      According to the assessee, the withdrawals had not been made from the company’s account but from the amount standing to the  credit of  Mahesh in  the books  of the company. The High  Court  pointed  out  that  the  alleged  letter  dated 3.4.1972  was  given  effect  to  by  the  company  only  on 31.3.1973 by  debiting a  sum of Rs. 1 lakh from the account of Mahesh  and crediting  it to  the account o the assessee. But the assessee had steadily and regularly withdrawn monies form the  company between    3.7.1972  to  22.3.1973.  These withdrawals were  not made by debiting the credit balance of Mahesh which  remained intact till 31.3.1973. The High Court concluded that  the various withdrawals made by the assessee were from the company’s  accumulated profits.      We do not find any fault with the reasoning of the High Court.      Section 2(22)  (e) as  it stood  at the  material  time defined dividend  to include  "any payment by a company, not being a  company  in  which  the  public  are  substantially interested, of  any sum  by way  of advance  or  loan  to  a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 4  

shareholder,  being   a  person   who  has  a  substantially interested, of  any sum  by way  of advance  or  loan  to  a shareholder, being  a person  who has a substantial interest in the  company..... to the extent to which the company..... possesses accumulated profits." In the instant case there is no dispute  that the appellant had a substantial interest in the company.  The nature  of the  company is also not in any dispute.      From the facts as stated here in above, it appears that the withdrawals  made by  the  appellant  from  the  company amounted to  grant of loan or advance by the  company to the shareholder. The legal fiction came into play as soon as the monies were  paid by  the  company  to  the  appellant.  The assessee must  be deemed  to the  revived dividends  on  the dates on  which she  withdrew the aforesaid amounts of money from the company. The loan or advance taken from the company may have  been ultimately  repaid or  adjusted but that will not alter the fact that the assessee, in the eye of law, had received dividend  from  the  company  during  the  relevant accounting period.      It was  held by this Court in the case of Smt. Tarulata Shyam &  Ors. vs.  Commissioner of  Income Tax, West Bengal, 108 ITR  345 that  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 the company. The legislature had deliberately not made  the subsistence  of the  loan or  advance, or  its remaining outstanding, on the last date of the previous year relevant to  the assessment  year a prerequisite for raising the statutory fiction.      In the  instant case,  excess withdrawals  were made by the assessee  on various dates between 3.7.1972 to 22.3.1973 when the  account  of  Mahesh  has  not  been  debited.  The assessee’s account  was consequently  overdrawn. On the very last day  of accounting  year some  adjustment was  made but that will not alter the position that the assessee had drawn a total  amount of  Rs. 93,027 between 3.7.1972 to 22.3.1973 from the  company when  her account with the company did not have any  credit balance  at all.  That means these advances made by  the company to the assessee will have to be treated as deemed  dividends paid  on the dates when the withdrawals were allowed to be mad. Subsequent adjustment of the account made on  the very  last day  of the accounting year will not alter the  position that  the assessee had received notional dividends  on  the  various  dates  when  she  withdrew  the aforesaid amounts from the company.      A point  was taken  that the High Court has reappraised the fact and has disbelieved the letter dated 3.4.1972 which was accepted  as genuine  by the  Tribunal. It was contended that it was not open to the High court to doubt this letter.      This argument  is misconceived  . The  High  Court  has proceeded on  the basis  of the facts found by the Tribunal. There is  no dispute that the assessee had withdrawn various sums of  money between  3.7.1972 and  22.3.1973 when she did not have  any credit  balance with  the company. In order to pay her  these sums  of money  the account of Mahesh was not debited at all. The entire credit balance of Mahesh stood as it was  till the  very last  day of  the accounting year. On these facts  found by the tribunal, the High Court concluded that it  was not possible to hold that the assessee was paid money out  of the  funds lying  to the credit of Mahesh. The High Court  decided the  case entirely  on the  basis of the facts found by the tribunal.      We  find  no  merit  in  this  appeal.  The  appeal  is dismissed with no order as to costs.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 4