Deemed dividend treatment did not amount to distribution to shareholders for corporation tax rebate withdrawal.

A loan or advance by a closely held company to a shareholder may fall within the extended dividend definition in section 2(6A)(e) of the Indian Income-tax Act, 1922 because it is treated as dividend out of accumulated profits. However, for the corporation tax rebate under the Finance Act, 1956, the statutory expression was "distributed to its shareholders", and the court treated "distribution" and "payment" as distinct. The deemed-dividend fiction in the Income-tax Act was not extended beyond the language used in the Finance Act, so the loan was not dividend distributed to shareholders for rebate withdrawal.

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Issues: Whether a loan advanced by a closely held company to one of its shareholders could be treated as a distribution of dividend to shareholders for the purpose of reducing the corporation tax rebate under the Finance Act, 1956.

Analysis: The payment to the shareholder was dividend within the extended definition in section 2(6A)(e) of the Indian Income-tax Act, 1922, because it was an advance or loan to a shareholder out of accumulated profits. However, clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956, used the expression "distributed to its shareholders", and Explanation (ii) only deemed dividend to include distributions covered by section 2(6A). The terms "distribution" and "payment" were treated as distinct, and the statutory fiction was not extended beyond the language used by the Finance Act.

Conclusion: The loan was not a dividend "distributed" to shareholders for the purpose of withdrawing the rebate, so the reduction of corporation tax rebate was not justified.

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