SRINIVASAN J. - (1.) THIS is a consolidated reference and a common statement of the case has been submitted by the Tribunal under section 66(1) of the Act. The five assessees whose cases have given rise to the question are directors and shareholders in Kasturi and Sons Private Ltd. During the account year ended on 31st of March, 1956, relevant to the assessment year 1956-57, the assessees were employed in various capacities in the company for which they were paid salaries and allowances. These assessees had each what is called a current account in the books of the company. It is common ground that they used to draw from the funds of the company various amounts for their private purposes and also pay into this current account amounts by way of cash. During the year, the balance was fluctuating either in favour of or against the assessees. The company is not one in which the public is substantially interested within the meaning of section 23A. In the orders of assessment, the Income-tax Officer proceeded to assess the assessees on the amounts debited against the assessees as at the end of the year, purporting to do so by reason of the definition of " dividend " as it occurs in section 2(6A)(e).
(2.) THIS was objected to by the assessees on the ground that that provision did not apply that the amounts to the debit of the assessees in the books of the company did not constitute either loans or advances, that the assessee's dealings with the company were not in their capacity of shareholders but as 'special customers " and that in any event there were no accumulated profits of sufficient volume to justify the inclusion of the whole of these debits as dividends within the meaning of section 2(6A)(e). These contentions were overruled and assessments were made treating the net overdrawings on the current account as payments made by the company which would be dividend within the meaning of the section. Appeals to the Appellate Assistant Commissioner failed. In the further appeals to the Tribunal while the Tribunal accepted the view that the expression " accumulated profits " would include the general reserves and that the mere creation of a general reserve, to which the major part of the profits stood transferred, would not affect the character of the sum as accumulated profits, it nevertheless held that the payments could not be regarded either as loans or advances and taking the picture as a whole, so the Tribunal said, the payments could not be treated as " deemed dividend " within the meaning of the section. Accordingly, the assessments were set aside The department moved for a reference under section 66(1) of the Act and the question it sought to be referred to this court: " Whether the net overdrawings of the assessees during the previous year ended March 31, 1956, for the assessment year amount to dividends within the meaning of section 2(6A)(e) of the Act " " was referred by the Tribunal. At the same time the assessees made a request to the Tribunal to refer a further question : " Whether accumulated profits for the purpose of applying section 2(6A)(e) would include general reserves " "The reference of this question was objected to by the department as the assessees did not file any separate application in that regard. But the Tribunal held that it was a question of law arising from out of the Tribunal's order and referred that question as well We shall deal with the question of accumulated profits in the first instance. It is common ground that the major portion of the profits of the concern has been transferred to the general reserve year after year. What is claimed on behalf of the assessees is that where a reserve has been created, it can no longer be regarded as representing accumulated profits. The expression " accumulated profits " has not been defined anywhere. The Tribunal took the view that adopting the natural meaning of that expression, the mere transfer of the profit from the profit account to the reserve account does not alter the character of the amount as a profit. It is open to the company to utilise the amount in the reserve account for any purposes, including the payment of dividend.
(3.) IT is open to the general body of shareholders to withdraw any sum from any reserve to the profit account and enable the distribution of dividend. IT would accordingly follow, so held the Tribunal, that the sum transferred to the reserve account did not cease to possess the character of accumulated profit We are satisfied that this view is correct. In a case decided by us in T. C. No. 88 of 1959, the converse question arose. IT was whether a credit balance in the profit and loss account of the company would represent a reserve within the meaning of section 23A of the Income Tax Act, 1961. That was a case where the first proviso to section 23A, as it stood before the amendment, came to be considered. That proviso read thus "Provided that when the reserves representing accumulations of past profits which have not been the subject of an order under this sub-section exceed the paid up capital of the company .... this section shall apply as if instead of the words 'sixty per cent.' the words 'one hundred per cent.' were substituted." * Section 23A, it is well known, was intended to deal with cases of evasion of tax by the device of non-distribution of a reasonable portion of the profits of the company and accumulating such profits in the shape of reserves. While the main part of the section laid down that where less than 60% of the assessable income of the company, as reduced in the manner specified, has been distributed as dividends, it was open to the Income-tax Officer to make an order of deemed distribution of a further amount by way of dividend and to bring to tax such deemed distribution in the hands of the shareholder.;