1992 (2) TMI 35 - HC - Income Tax

Advance from company to managing director deemed taxable income under Income-tax Act

The High Court held that the sum of Rs. 1 lakh received by the assessee, a managing director, as an advance from the company constituted taxable deemed ... Deemed Dividend, Dividends Issues:Whether the sum of Rs. 1 lakh was taxable as deemed income under section 2(22)(e) of the Income-tax Act, 1961.Analysis:The judgment pertains to a reference made by the Income-tax Appellate Tribunal regarding the taxability of Rs. 1 lakh as deemed income under section 2(22)(e) of the Income-tax Act, 1961. The assessee, who was the managing director of a company, received the amount as an advance or temporary loan from the company. The Income-tax Officer added this amount to the assessee's income, leading to appeals and eventually the matter reaching the High Court.The counsel for the assessee argued that the Tribunal did not consider the liabilities while determining if the company had sufficient accumulated profits to advance the loan. The definition of dividend under section 2(22)(e) includes payments made by a company to a shareholder out of accumulated profits. The argument was that liabilities should also be taken into account when computing accumulated profits.The Tribunal had found that even after considering liabilities, there was sufficient surplus for the company to advance the loan. However, the High Court noted that this specific finding of fact was not challenged by the assessee through a specific question under section 256(1) of the Income-tax Act. It was emphasized that findings of fact can only be challenged in a reference by raising specific questions. Since the assessee failed to challenge this finding, the High Court accepted the Tribunal's conclusion that there was enough surplus to justify the loan.As no other points were argued in the reference, the High Court answered the question in favor of the Revenue, determining that the sum of Rs. 1 lakh was indeed taxable as deemed income under section 2(22)(e) of the Income-tax Act, 1961. The Revenue was awarded costs amounting to Rs. 250.This judgment underscores the importance of challenging specific findings of fact through appropriate questions in legal proceedings, particularly in tax matters. It also clarifies the considerations involved in determining deemed income under the relevant provisions of the Income-tax Act.