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Issues: Whether an advance or loan made by a closely held company to a shareholder in an earlier year could be treated, for the relevant assessment year, as dividend under section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922, to the full extent of the accumulated profits of that year or only to the extent of the shareholder's proportionate interest in those profits.
Analysis: The provision deems as dividend any payment by way of loan or advance made by a company in which the public are not substantially interested, subject to the limit of the accumulated profits available with the company. The statutory language does not require apportionment of the deemed dividend according to the shareholder's percentage holding. Where the loan or advance is less than the accumulated profits, the whole of that payment is treated as dividend to the extent of those profits. Only where the loan exceeds the accumulated profits is the deemed dividend confined to the amount of accumulated profits.
Conclusion: The advance made to the assessee in the accounting year 1952-53 was taxable as dividend to the extent of the accumulated profits of that year and not merely to the extent of 25 per cent of those profits; the answer was therefore in the negative and in favour of the Revenue.
Ratio Decidendi: For the purpose of deemed dividend under section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922, the entire loan or advance is treated as dividend up to the limit of the company's accumulated profits, without reduction by the shareholder's proportionate shareholding.
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