Decided on October 03,1972



K.K.DESAI,C.J. - (1.) IN this reference under S. 66(1) of the Indian INCOME TAX ACT, 1922, the two questions of law referred to us read as under : "1. Whether, on the facts of the case, there was a 'loan or advance of Rs. 2,55,135 within the meaning of S. 12(1B) r/w S. 2(6A)(e) by the company to the shareholder ? 2. If the answer to question No. 1 is in the affirmative, whether the phrase 'accumulated profits', as used in S. 2(6A)(e) means such profits as disclosed by the company's balance -sheet or such disclosed profits subject to adjustments as required by the IT Act ?"
(2.) THE facts which require to be noticed are as follows : The questions relate to the asst. year 1955 -56. The relevant previous year is the year ending 31st March, 1955. The assessee was the shareholder and director of Purshottam Mathuradas and Co. Ltd. (hereinafter referred to as "the company"). There is no dispute about the fact that in connection with the questions which arose between the parties the provisions of S. 23A of the Act were applicable to the company. The assessee carried on business in the firm name and style of M/s Khimji Nagji and Co. and also in the name of "Shri Jamnadas Khimji" (his own name). The assessee had dealings with the company in both the above names from prior to 1st October, 1952. The ledger accounts of these dealings between 1st October, 1952, to 31st March, 1954, are in Annexure "A" to the statement of the case. Having regard to the position of the assessee in these accounts with the company in connection with the asst. year 1955 -56, the ITO was of the view that the provisions in S. 12(1B) r/w s. 2(6A)(e) of the IT Act were applicable. He found that at the foot of the account of the firm of M/s Khimji, Nagji & Co., there was a debit balance of Rs. 2,55,135 as on 1st April, 1954. He also found that there was a large credit balance in favour of the assessee in the account maintained in his own name (Shri Jamnadas Khimji). Upon making appropriate deductions he found that the sum of Rs. 2,55,135 was the net debt and debit balance due by the assessee to the company as on 1st April, 1954. In connection with his view that this debit balance was "loan" advanced by the company to the assessee and accordingly the same was dividend income of the assessee, the question was, if the loan was advanced from out of the accumulated profits. For ascertaining the accumulated profits he held by referring to the reserve fund and the depreciation fund mentioned in the balance -sheet of the company that the loan was from out of the accumulated profits. He, therefore, held that the above sum of Rs. 2,55,135 was dividend income of the assessee and proceeded to assess the assessee to income -tax on that footing.
(3.) THE case of the assessee before the AAC and the Tribunal was that the above sum was not "loan" or "advance" within the meaning of S. 12(1B). The reason was that the debit balance was the result of transaction in a mutual, open and current account. On the question of accumulated profits his submission was that a sum of Rs. 1,35,330, which was received as compensation for the damage resulting from the dock explosion of 1944, was carried to reserve fund. This part of the reserve fund was capital asset and could never be included in the accumulated profits. His further submission was that the depreciation as mentioned in the balance -sheet was not calculated at the rates admissible under the IT Act. In arriving at the accumulated profits as mentioned in S. 12(1B) the depreciation as calculated and mentioned in the balance sheet was not binding. The depreciation that was allowed to the assessee under the income -tax assessment orders came to Rs. 4,36,456. The depreciation mentioned in the balance sheet was much low and short by Rs. 2,89,525. This amount of depreciation was also liable to be deducted from the reserve fund. In this very connection his further contention before us is that in the relevant assessment year even the auditors pointed out that adequate provision for depreciation on fixed assets had not been made in the balance sheet. The submission was that the lesser depreciation shown to the extent of Rs. 2,89,525 would have to be adjusted against the reserve fund mentioned in the balance sheet. If this was done, there would be no reserve fund as shown in the balance sheet, but there would be a deficit. Even if the above debit balance was considered "loan" the same could not be under the circumstances considered as having been made from accumulated profits as necessary under S. 12 (1B). The AAC accepted the submission of the assessee in respect of the above sum of Rs. 1,35,330 but not in respect of the other arguments. The Tribunal by its order dated 11th January, 1963, upheld the contention of the assessee that the dealings of the assessee with the company were in a current account and could not be treated as "loans" for the purposes of S. 12(1B) of the Act. In regard to the questions raised in respect of the calculation of accumulated profits the Tribunal held that the claim for calculation of depreciation on the basis of the rates prescribed by the IT Act was not justified and was not admissible. Having regard to these findings the above two questions are referred for decision to this Court.;

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