INCOME TAX OFFICER v. GORDHANDAS KHIMJI
[Citation -1984-LL-0817]

Citation 1984-LL-0817
Appellant Name INCOME TAX OFFICER
Respondent Name GORDHANDAS KHIMJI
Court ITAT
Relevant Act Income-tax
Date of Order 17/08/1984
Assessment Year 1961-62
Judgment View Judgment
Keyword Tags accumulated profit • development rebate • fresh assessment • cross-objection • deemed dividend
Bot Summary: On the other hand, it was contended by the learned representative for t h e assessee that advances made to a shareholder, which satisfied the requirements of section 2(6A)(e), will become dividend by the operation of the Act irrespective of whether the department treats the same as dividend or not, that by the operation of the fiction contained in the section the advances became dividend, that the same cannot, subsequently, be brought back to inflate the accumulated profits and that the omission to assess the advances as deemed dividends in the earlier assessment years cannot be taken advantage of by the department to inflate the accumulated profits in a subsequent assessment year. The only point of controversy was whether in arriving at the accumulated profits for the purpose of section 2(6A)(e), the advances in earlier years, which could have been brought to tax as deemed dividends and which were not actually brought to tax as deemed dividends, could be taken into consideration. The amount must be reduced by all disbursements legitimately attributable to it by way of expenses, development rebate, dividends and deemed dividends, if any. In Smt. Tarulata Shyam's case, it was held by the Supreme Court that the statutory fiction created by section 2(6A)(e) would come into operation at the time of payment of advance or loan to a shareholder 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 received, and even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed to be ' dividend ' if the conditions of the section are satisfied. We are unable to hold that loans and advances will become deemed dividends only when the department chooses to treat the same as such a n d brings the same to tax as dividend. The moment an advance or loan satisfying the conditions of the section is made, it would become a dividend and it is immaterial whether the department has assessed the same as dividend or not. If the contention of the department is accepted, then if the ITO ignores the advances in earlier years and then goes down on the assessee in an assessment year in which he has drawn substantial advances, it will amount to allowing the department to take advantage of its omissions to assess the earlier loans and advances as deemed dividends and to allow such omissions to bloat the accumulated profits, so that the whole of the large advances taken in the last assessment year are converted into deemed dividends.


appeal by department and cross-objection by assessee relate to assessment year 1961-62, for which previous year ended on 25- 6-1960. 2. only ground taken by department in appeal is that Commissioner (Appeals) erred in reducing dividend income of assessee within meaning of section 2(6A)(e) of Indian Income-tax Act, 1922 ( ' Act '), from Rs. 4,54,290 to Rs. 29,470. 3. original assessment in case was completed on 11-2-1966. This was set aside by AAC with regard to matter relating to inclusion of deemed dividend under section 2(6A)(e), with direction to ITO to make fresh assessment. Accordingly, fresh assessment was made on 30-4-1981. Section 2(6A)(e) of 1922 Act, which corresponds to section 2(22)(e) of Income-tax Act, 1961, provides, so far as it is relevant for present case, that any payment by company in which public are not substantially interested by way of advance or loan to shareholder will be ' dividend ' to extent to which company possesses accumulated profits. assessee is HUF. It is shareholder in company known as Bharat Plywood & Timber Products (P.) Ltd. company is not one in which public are substantially interested. As on 15-12-1959, there were debits in accounts of assessee with company to extent of Rs. 4,61,038. But accumulated profits of company amounted to only Rs. 4,54,290. ITO, therefore, treated debits in name of assessee to extent of Rs. 4,54,290 as deemed dividend under section 2(6A)(e). 4. Commissioner (Appeals) confirmed finding of ITO that amounts advanced to assessee will come to more than Rs. 4,54,290 and that same will constitute deemed dividend subject to provisions of section 2(6A)(e). He, however, held that accumulated profits for purpose of section will only be Rs. 29,470 and that only advances to extent of this amount will constitute deemed dividend. In doing so, he accepted contention of assessee that amount of advances taken by assessee in earlier assessment years and which constituted deemed dividend under section 2(6A)(e), should be reduced from accumulated profits for those years and that only balance amount could be treated as accumulated profits for working out deemed dividend for assessment year under appeal. As per computation furnished by assessee and which has been appended to order of Commissioner (Appeals), it was found that accumulated profits of preceding years, not adjusted against earlier withdrawals by assessee, were nil. In other words, withdrawals by assessee during earlier years were much more than accumulated profits in those years. sum of Rs. 74,470 was found to be profit for accounting year ending on 30-6-1959. Out of this, Rs. 45,000 was declared as dividend leaving only balance of Rs. 29,470. This was only accumulated profit available during year. Commissioner (Appeals) held that only Rs. 29,470 out of advances made to assessee, could be treated as deemed dividend under section 2(6A)(e). ITO, who was present before Commissioner (Appeals) at time of hearing of appeal, had contended that in earlier assessment years, no amounts had, in fact, been assessed as deemed dividend and that advances made during earlier years should not, therefore, go in reduction of accumulated profits. This contention was rejected by Commissioner (Appeals). He held that if there had been failure to apply section in earlier assessment years and deemed dividend had, therefore, escaped assessment in those assessment years, remedy was not to subject whole of amount to tax during year under appeal. department questions correctness of this finding. 5. contention advanced by learned departmental representative was that accumulated profits for purpose of section 2(6A)(e) is not amount as reduced by what could have been treated as deemed dividend in earlier assessment years, that only amounts treated as deemed dividend can b e reduced from accumulated profits, that till department treats any advance as deemed dividend, amount cannot be deducted from accumulated profits, that section 2(6A)(e) creates legal fiction which is available only for purpose of assessment, that if fiction had not been actually employed by department, accumulated profits will not be reduced by amount which could have been treated as deemed dividend and that till advance is appropriated as dividend either by parties or by department, they will continue to be advances and will not go in reduction of accumulated profits. In support of this contention, learned departmental representative relied upon decisions in Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC), CIT v. Roshan Lal [1975] 98 ITR 349 (All.), CIT v. G. Narasimhan [1979] 118 ITR 60 (Mad.) and CIT v. P.K. Badiani [1970] 76 ITR 369 (Bom.). 6. On other hand, it was contended by learned representative for t h e assessee that advances made to shareholder, which satisfied requirements of section 2(6A)(e), will become dividend by operation of Act irrespective of whether department treats same as dividend or not, that by operation of fiction contained in section advances became dividend, that same cannot, subsequently, be brought back to inflate accumulated profits and that omission to assess advances as deemed dividends in earlier assessment years cannot be taken advantage of by department to inflate accumulated profits in subsequent assessment year. learned representative also relied upon decisions in P.K. Badiani's case and G. Narasimhan's case. 7. In reply it was contended by learned departmental representative that section 2(6A)(e) refers to accumulated profits which company ' possesses ', that what is, therefore, important is accumulated profits actually in hands of company, which will be balance as per profits and loss accounts, and that contention of assessee will involve extension of legal fiction created by section 2(6A)(e) beyond its legitimate field. 8. figures involved in computation are not in dispute before us. only point of controversy was whether in arriving at accumulated profits for purpose of section 2(6A)(e), advances in earlier years, which could have been brought to tax as deemed dividends and which were not actually brought to tax as deemed dividends, could be taken into consideration. 9. We way now refer to decisions cited. It was held by Bombay High Court in P.K. Badiani's case that section 2(6A)(e), hereinafter referred to as section, must be so interpreted that once amount goes out of accumulated profits as loan and loan is to be deemed to be dividend, same amount, when repaid, cannot again be capable of attracting fiction and be deemed to be dividend and that to avoid happening of any such eventuality, accumulated profits must be notionally reduced by way of all loans, etc., which are to be deemed to be dividends under section. To illustrate point, High Court said that if accumulated profits were Rs. 5,000 and loan of Rs. 5,000 was advanced to one shareholder and he repays it and if this amount of Rs. 5,000 is credited to accumulated profits and another loan of Rs. 5,000 is advanced to another shareholder, second advance cannot be treated as deemed dividend as accumulated profits had disappeared by first advance. Similarly, it was pointed out that if Rs. 2,000 is advanced to shareholder out of accumulated profit of Rs. 5,000 and shareholder repays it and again borrows Rs. 1,000, accumulated profits were reduced to Rs. 3,000 after first advance and that second advance will also be dividend because there was enough accumulated profits to support same. Finally, it was observed that " position which emerges is t h t section 2(6A)(e) requires that when every loan is advanced to shareholder, amount of ' accumulated profits must be ascertained. amount must be reduced by all disbursements legitimately attributable to it by way of expenses, development rebate, dividends and deemed dividends, if any. amount cannot be augmented by repayments of loan and amount of loan must be deemed to be dividend to extent of balance remaining out of ' accumulated profits '. 10. In Roshan Lal's case, it was held that accumulated profits will necessarily be comprised of amount available for being distributed as profits, that profits can accumulate even within single year, that ' accumulated ' means earned bit by bit and accumulated, and that entire amount which is available for distribution as profits on particular date would be accumulated profits and any amount paid as advance or loan to shareholder to extent of this amount of accumulated profits will be dividend within meaning of section 2(6A)(e). It is also held that accumulated profits cannot be reduced by amount of dividend subsequently declared. 11. In Smt. Tarulata Shyam's case, it was held by Supreme Court that 11. In Smt. Tarulata Shyam's case, it was held by Supreme Court that statutory fiction created by section 2(6A)(e) would come into operation at time of payment of advance or loan to shareholder and tax is attracted to loan or advance to extent to which company possesses accumulated profits moment loan or advance is received, and even if loan or advance ceases to be outstanding at end of previous year, it can still be deemed to be ' dividend ' if conditions of section are satisfied. It was also observed that language of section is clear and unambiguous and that there is no scope of importing into statute words which are not there and that once it is shown that case of assessee comes within letter of law, he must be taxed, however great hardship may appear to judicial mind to be. 12. G. Narasimhan's case was case relating to capital gains. It was held that while computing accumulated profits in hands of company, amounts of deemed dividend assessed in hands of various shareholders in earlier assessment years should be deducted. This decision does not seem to be relevant as it relates to adjustment of assessed deemed dividends, while we are concerned in present case with adjustment of unassessed deemed dividends. 13. None of decisions referred to above are directly on point. But line of discussion in those decisions gives some indication with regard to correct position. We are unable to hold that loans and advances will become deemed dividends only when department chooses to treat same as such n d brings same to tax as dividend. section is not worded as enabling section by which department can treat loans and advances as deemed dividends. section does not say that amount will become deemed dividend only if it has been assessed as such. On other hand, provision is clause in inclusive definition, by which advances and loans are constituted as dividends. moment advance or loan satisfying conditions of section is made, it would become dividend and it is immaterial whether department has assessed same as dividend or not. decisions referred to above indicate that deemed dividend has to be worked out on basis of conditions obtaining at time when loans or advances are made. In case of Smt. Tarulata Shyam, Supreme Court observed that statutory fiction created by section would come into operation at time of payment of advance or loan. Similarly, observations in case of P.K Badiani would indicate that accumulated profits should be reduced by amount of loan or advance, immediately on making such loan or advance. Only if this is done, subsequent loans or advances can be tested by verifying accumulated profits on dates on which they are made. As pointed out in decisions referred to above, repayments of advances or loans will have no effect either on advance or loan treated as dividend or on accumulated profits as reduced by such advance or loan. As such, it does not seem to be neither practicable nor proper to postpone whole process of ascertaining accumulated profits till department chooses to treat particular advance as deemed dividend. If contention of department is accepted, then if ITO ignores advances in earlier years and then goes down on assessee in assessment year in which he has drawn substantial advances, it will amount to allowing department to take advantage of its omissions to assess earlier loans and advances as deemed dividends and to allow such omissions to bloat accumulated profits, so that whole of large advances taken in last assessment year are converted into deemed dividends. As rightly pointed out by Commissioner (Appeals), advances or loans in earlier assessment years should be treated as dividend which department omitted to assess. If so, it follows that accumulated profits should be reduced by earlier loans or advances in spite of fact that they were not assessed to tax as deemed dividends by department. Commissioner (Appeals) was, therefore, fully justified in holding that during assessment year under appeal only advances or loans to extent to which they are backed up by accumulated profits as reduced by earlier advances or loans, can be treated as deemed dividends. appeal by department has, therefore, to fail. 14 to 20. [These paras are not reproduced here as they involve minor issues.] 21. In result, appeal and cross-objection are both dismissed. *** INCOME TAX OFFICER v. GORDHANDAS KHIMJI
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