TaxTMI 
TaxTMI 
1980 (11) TMI 93
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....ssessed in the hands of late Shri G.N. Sam, the assessee's husband, as deemed dividend under s. 2(22)(e) of the IT Act. According to the Revenue, the amount withdrawn by the husband of the assessee late Shri G.N. Sam and the assessee put together came to Rs. 8,88,508. We will narrate how this sum of Rs. 8,88,508 has arrived at a little later. Since the amount taken by the shareholders was much more than the balance of accumulated profits, to the extent of the balances of accumulated profits which worked out to Rs. 1,72,795 (Rs. 3,68,345 minus deemed dividends already assessed of Rs. 1,95,550=Rs. 1,72,795) should be treated as deemed dividend under s. 2(22)(e) of the IT Act. The ITO for the reasons given in his assessment order brought this sum of Rs. 1,72,795 to tax in the hands of the assessee as deemed dividend within the meaning of s. 2(22)(e) of the IT Act. 3. Aggrieved, the assessee appealed to the AAC who held that the deemed dividend to be assessed in the hands of the assessee was only Rs. 18,753 and not Rs. 1,72,795. He gave the calculation in his order. The Department felt aggrieved by the order of the AAC and it filed an appeal before the Tribunal. The Tribunal held that....
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....in terms gave authority to the AAC to determine the deemed dividend under s. 2(22)(e) de novo. This means that the CIT (A) is free to go into the question all over again from this scratch. He is entitled to approach the problem as if no figure had at all been arrived at provided the directions given by the Tribunal are kept in view. If we read s. 2(22)(e) and analyse it, two basic ingredients emerge. The first is the determination of the loan taken from the company by a shareholder having a substantial interest in the company. The second is the accumulated profits. The loan taken to the extent of the accumulated profits is then to be treated as the deemed dividend. Without ascertaining first the loan taken, the determination of accumulated profit would be irrelevant or meaningless. So also the determination of the accumulated profits would become meaningful only if the loan taken by the shareholder is first ascertained. Therefore, the first step for the application of s. 2(22)(e) is ascertaining the loans taken by the shareholders and the second step is to ascertain the accumulated profits. Both have to be done in quick succession in order that the requirements of s. 2(22)(e) are s....
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.... company. Now there is an account in the name of her husband late Shri G.N. Sam in the books of the said company which showed debit balance of Rs. 4,73,241 as on 31st Dec., 1961. This amount was transferred to the account of the assessee in the books of the said company. There was also a payment of interest of Rs. 38,578 on the debit balance which was also debited in the account of the assessee. It was by transferring this sum to the account of the assessee from the account of her husband there arose a debit balance in the assessee's account. The question now is whether the said transfer of debit balance of Rs. 4,73,241 to her account amounted to a payment made to her by the company in order that amount could be treated as advance or loan taken by the assessee for the purpose of application of the provisions of s. 2(22)(e) of the IT Act. The view that the ITO took was that since the transfer of debit balance from the account of her husband to the account of the assessee resulted in extinguishment of the liability of her husband to the company and acceptance on the part of the assessee the liability will amount to a constructive payment made by the company to the assessee. He referr....
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....rtaining the amount of the deemed dividends assessible in the appellant's hands and that finding has not been reversed by the Tribunal, even the inclusion confirmed by the AAC has to be reduced by Rs. 3,210." This was the contention raised before him which he accepted. 6. Now we have to determine whether the view taken by the AAC at the first stage and the CIT (A) at the second stage is correct or wrong. We have no hesitation in upholding the view taken by the CIT (A). First of all, the sum of Rs. 4,73,241 standing to the debit of the assessee's husband's account in the books of the company can by no stretch of imagination be said to be a payment made by the company to the assessee. The only link that connects the said sum of Rs. 4,73,241 to the assessee is the transfer entry. The transfer entry was made because the assessee agreed to discharge the liability that her husband owed to the company. That does not mean, in our opinion, that amount represented the payment made by the company to the assessee. 7. In this connection, it is relevant to note what s.2(22)(e)has provided for. The section reads as under: "2(22)" dividend includes-- (e) any payment by a company, not being a ....
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.... must be a payment by the company to the shareholder in the relevant accounting year and that payment must be by way of advance or loan so that to the extent the payment does not exceed the accumulated profits, it could be deemed as dividend accumulated over a period of years but not the payments. The payments must be considered from year to year against the accumulated profits in the respective years. There is no suggestion in the section that payments could be accumulated for consideration against accumulated profits at a future date. 8. In G.R. Govindarajulu Naidu and Another vs. CIT (1973) 90 ITR 13 (Mad) s. 2(6A)(e) of the IT Act, 1922, which was the predecessor of the present s. 2(22)(e), came up for consideration. The High Court there was called upon to explain the meaning of the expression "payment whether by way of loan or advance", which is exactly the position now before us. The High Court held having regard to the words "payment by way of loan or advance", that there should be an outgoing or flow of money from the company to the shareholder so as to attract the said provision. A notional payment by way of book entries will not be included. The High Court held that the ....