Deemed dividend does not retain agricultural character and is taxable; the deeming provision is within parliamentary income tax power.

Section 2(6A)(e) is validly within Parliament's competence as a tax measure to counter evasion, applying the pith-and-substance principle and statutory-fiction reasoning; outcome: provision is intra vires. The provision deems certain payments by a controlled company to a shareholder as dividend up to accumulated profits and treats the receipt as dividend in the hands of the recipient; outcome: such deemed dividend does not retain the character of agricultural income and is taxable under the deeming provision.

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Issues: (i) Whether section 2(6A)(e) of the Income-tax Act is within the legislative competence of Parliament; (ii) Whether sums received by the petitioner as advances or loans from a company whose profits were agricultural income retain the character of agricultural income and thus fall outside the scope of section 2(6A)(e).

Issue (i): Whether section 2(6A)(e) of the Income-tax Act is intra vires Parliament.

Analysis: The court applied the precedent in Lakshmana Aiyar v. Additional Income-tax Officer which held that Entry 82 in List I of Schedule VII confers competence on Parliament to legislate on taxes on income and to enact measures to check evasion, including irrebuttable presumptions or statutory fictions treating certain payments by controlled companies as income. The decision establishes that provisions like section 2(6A)(e), enacted to counteract tax evasion by treatment of advances or loans as dividend, fall within the pith and substance of income-tax legislation.

Conclusion: Section 2(6A)(e) is within the legislative competence of Parliament and is not ultra vires.

Issue (ii): Whether monies advanced or lent by a company (whose profits are agricultural) to a shareholder retain the character of agricultural income when received by the shareholder and thereby fall outside section 2(6A)(e).

Analysis: Section 2(6A)(e) deems certain payments by companies within section 23A to be dividend in the hands of the recipient, subject to the limit of accumulated profits. The provision does not treat such payments as remaining part of the company's accumulated profits; rather it treats the receipt by the shareholder as dividend (deemed dividend). The court distinguished earlier observations in Spencer v. Income-tax Officer as being referable to the pre-1955 position of section 23A. Having regard to the amended section 23A (post-1955) and the contemporaneous enactment of section 2(6A)(e), the court held there is a clear distinction between income taxable in the company and receipts by a shareholder under the deeming provision. Consequently, a deemed dividend or dividend paid out of agricultural profits does not itself retain the character of agricultural income in the hands of the shareholder.

Conclusion: Amounts received by the petitioner as advances or loans from the company, insofar as brought to tax under section 2(6A)(e), do not retain the character of agricultural income and are not excluded from the operation of section 2(6A)(e).

Final Conclusion: The constitutional challenge to section 2(6A)(e) is rejected and the petitioner's claim that loans from the company retained agricultural character fails; the petitions are consequently liable to be dismissed.

Ratio Decidendi: A statutory deeming provision treating sums paid by a controlled company to a shareholder as dividend falls within Parliament's power under Entry 82, List I, Schedule VII to legislate on income-tax and such sums, when so deemed, do not retain the character of agricultural income in the hands of the shareholder.

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