P. K. BADIANI vs. THE COMMISSIONER OF INCOME TAX, BOMBAY

CIVIL APPEAL No. 1695/1971Supreme Court[1977] 1 S.C.R. 63821 September 1976Bench: 3 JudgesAuthor: HANS RAJ KHANNA, N.L. UNTWALIA, JASWANT SINGH B11 pages
AI SummaryDismissed

What were the facts?

The appellant-assessee, a shareholder in a private company, withdrew amounts from the company's account. The company had been allowed development rebate under Section 10(2)(vi-b) of the Income Tax Act, 1922, which was debited to its profit and loss account. The Appellate Assistant Commissioner (AAC) treated the development rebate and the remaining balance in the profit and loss account as accumulated profits. Finding the highest advance to the assessee within these accumulated profits, the AAC directed its addition to the assessee's income as dividend under Section 2(6A)(e). The Income Tax Tribunal held that development rebate was not accumulated profit, but the High Court, on reference, substantially confirmed the AAC's order. The assessee appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the development rebate reserve created by the company, although deductible for tax purposes, forms part of the commercial profits and therefore constitutes accumulated profits within the meaning of Section 2(6A)(e). The Court reasoned that 'accumulated profits' in Section 2(6A) means profits in the commercial sense, not just assessable profits. While initial depreciation and development rebate are incentives, they are not deductible costs for arriving at commercial profits. The Court distinguished development rebate from normal depreciation, which may not form part of accumulated profits. Furthermore, merely transferring the sum to a development reserve account by debiting the profit and loss account does not amount to capitalisation of profits; the nature of the assets remains profits. The Court affirmed that accumulated profits include general reserves unless capitalised, and the development rebate reserve was not capitalised. Consequently, the advances to the shareholder could be treated as dividend.

What were the issues?

1. Whether development rebate, when credited to a reserve account by debiting the profit and loss account, constitutes 'accumulated profits' within the meaning of Section 2(6A)(e) of the Income Tax Act, 1922, for the purpose of treating advances to a shareholder as dividend. Assessee's contention: The development rebate is akin to initial depreciation, representing an outgoing or expenditure deductible from commercial profits. Therefore, it should not be treated as accumulated profits. Revenue's contention: The development rebate, even if not forming part of assessable profits, constitutes commercial profits and hence accumulated profits available for distribution as deemed dividend under Section 2(6A)(e).

Which sections of the Income-tax Act were involved?

Section 2(6A)(e),Section 10(2)(vi-b),Section 23A,Section 66A(2),Section 66(1)

AI-generated summary — verify with the full judgment below

A B c D E F G H 638 P. K. BADIANI v. THE COMMISSIONER OF INCOME TAX, BOMBAY September 21, 1976 [H. R. KHANNA, N. L. UNTWALIA AND JASWANT SINGH, JJ.] Income tax Act (11 of 1922), ss. 2(6A)(e) and 10(2)(vi-b)-Devclopment rebate treated as accumulated profits-Withdrawal of amo1111t by shareholder from Company's account-If withdrawal can be treated as dividmd since amount withdrawn is within accumulated profits. '

Under s. 2(6A)(e), Income Tax Act, 1922, dividend includes any payment by a company, not being a company in which the public are substantially interested within the meaning of s. 23A, of any sum by way of advance to a shareholder to the extent to which the company possesses accumulated profits.

The appellant-assessee was a shareholder in a company in which the public were not substantially interested within the meaning of s. 23A.

He had with- drawn some amounts from the company's account.

The company had been allowed development rebate under s. 10(2)(vi-b) and that amount was debited in the profit and loss account of the company for the accounting year leaving a small balance of profit in the profit and loss account. The Appellate Assistant Commi

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 23A

All 45 judgments and leading authorities on Section 23A →

Recent GST High Court judgments

Search GST case law →