Deemed dividend treatment depends on accumulated profits when liability is assumed, not when the original loan was advanced.

Loans or advances by a closely held company may be treated as deemed dividend where the shareholder stands in the position of debtor to the company, and a cash receipt is not essential if payment in law has occurred through assumption of liability. The provision operates retrospectively, but taxability is limited to the company's accumulated profits at the time the relevant liability is undertaken. On the stated facts, the heirs became personally liable for the deceased shareholder's debt, so the decisive date for computing accumulated profits was when each heir assumed that liability, not when the original loan was advanced.

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Issues: Whether loans originally advanced by a company to a shareholder, and later treated by the shareholder's heirs as their own liability, could be brought to tax as deemed dividends under section 2(6A)(e) read with section 12(1B), and whether the relevant date for computing accumulated profits was the date of the original advance or the date on which the heirs undertook the liability.

Analysis: Section 2(6A)(e) creates an artificial definition of dividend so as to include loans or advances by certain closely-held companies to shareholders, and section 12(1B) fastens tax liability on such outstanding loans in the relevant previous year. The provision is retrospective in operation, but only to the extent of the company's accumulated profits at the time of payment. A cash transfer is not essential; payment in law is sufficient where the shareholder stands in the position of debtor to the company. On the facts, the heirs undertook the liability after the shareholder's death and made themselves personally liable to the companies. The relevant date for determining accumulated profits was therefore the date on which each heir assumed that liability, not the date on which the deceased shareholder first obtained the loan.

Conclusion: The loans were liable to be treated as dividend under section 2(6A)(e) read with section 12(1B) to the extent of the accumulated profits of the company on the date when each assessee undertook to discharge the debt.

Final Conclusion: The reference was answered by holding that the taxability of the loan depended on the company's accumulated profits on the date the assessee assumed personal liability, and the department could assess the amount as deemed dividend only within that limit.

Ratio Decidendi: For the purposes of section 12(1B), a loan or advance may be treated as deemed dividend even without cash receipt by the shareholder, and the relevant point for calculating accumulated profits is the date of payment or assumption of liability that creates the debtor-creditor relationship with the company.

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