P. SARADA vs. COMMISSIONER OF INCOME TAX (CENTRAL)

CIVIL APPEAL No. 649/1987Supreme Court1997 INSC 80009 December 1997Bench: 2 JudgesAuthor: S.C. SEN, K. VENKATASWAMI SARADA6 pages
AI SummaryDismissed

What were the facts?

The assessee, P. Sarada, a shareholder in a private limited company, had a running account with it. For the assessment year 1973-74, she withdrew Rs. 93,027 between July 3, 1972, and March 22, 1973. At the time of these withdrawals, she had no credit balance in her account with the company. The Income Tax Officer treated these excess withdrawals as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961. The assessee contended that the withdrawals were from the account of another shareholder, M, who had directed the company to make funds available to her, not from the company's accumulated profits. The Appellate Assistant Commissioner dismissed the assessee's appeal, but the Income Tax Appellate Tribunal upheld her case. The High Court, however, ruled in favour of the Revenue, leading to this appeal.

What did the Supreme Court hold?

The Supreme Court dismissed the appeal, upholding the High Court's decision. The Court held that the withdrawals made by the assessee from the company constituted a loan or advance by the company to a shareholder. The legal fiction under Section 2(22)(e) of the Income Tax Act, 1961, came into play as soon as the company paid the monies to the appellant. The assessee must be deemed to have received dividends on the dates she withdrew the amounts. The Court reasoned that subsequent repayment or adjustment of the loan or advance would not alter the fact that the assessee had received dividend in the eyes of the law during the relevant accounting period. The Court relied on its earlier decision in Smt. Tmulata Shyam v. CIT. The Court found no fault with the High Court's reasoning that the withdrawals were from the company's accumulated profits, as Mahesh's account was not debited until the last day of the accounting year, and the assessee had made regular withdrawals when her own account was overdrawn. The Court clarified that the High Court had proceeded on the basis of facts found by the Tribunal, concluding that the withdrawals could not be attributed to Mahesh's funds based on the timing of the transactions.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was 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? Assessee's contentions: The excess withdrawal was not made from the company's account but from the amount standing to the credit of another shareholder, M, in the company's books. Therefore, it could not be treated as deemed dividend under Section 2(22)(e). Revenue's contentions: The excess withdrawals constituted a loan or advance by the company to a shareholder, and given the company's accumulated profits, it was taxable as deemed dividend under Section 2(22)(e). The High Court supported this view.

Which sections of the Income-tax Act were involved?

Section 2(22)(e),Section 256(1)

AI-generated summary — verify with the full judgment below

P. SARADA v. COMMISSIONER OF INCOME TAX (CENTRAL) MADRAS DECEMBER 9, 1997 [SUHAS C. SEN AND K. VENKATASWAMI, JJ.] Income Tax Act, 1961: Section 2(22)(e). A B Income Ta~Deemed Divide11d-AY 1973-74-Assessee was C shareholder in a p1ivate limited company and had a rn1111i11g account with it-Assessee overdrew from this account-Held: Such overdrawal amounted to deemed divide11d-Subseque11t repayment or adjustme11t, immate1ia/.

The appellant-assessee was a shareholder in a private limited com- pany and had a running account with it. During the accounting year D relevant to the assessment year 1973-74 between the period 3.7.1972 and 223.1973 the assessee had withdrawn a total sum of Rs. 93,027. At the material time the assessee did not have any credit balance in her account with the company. M, who owed some money to the assessee, wrote a letter to the company directing it to make available to the assessee a sum of Rs. E 1 lakh from out of his account. However, M's account was not debited till the very last day of the accounting year. The Income Tax Otlicer (ITO) treated the aforesaid excess withdrawal as deemed dividend under Section 2(22)(e) of fhe Income Tax Act,

The order continues below.

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