TaxTMI 
TaxTMI 
1961 (2) TMI 69
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....ssessments. The relevant facts were as follows: The petitioner was the managing director of Palkulam Estates (Private) Ltd. This company was in receipt of income, which was claimed to be wholly agricultural. In the year of account corresponding to the assessment year 1957-58 the petitioner borrowed sums from Palkulam Estates (Private) Ltd. He also borrowed monies from two other firms, Pioneer Works (Private) Ltd., of which also he was a managing director, and from Pioneer Motor (Private) Ltd., of which he was only a shareholder. All these were companies in which the public had no substantial interest, and they came within the scope of section 23A of the Income-tax Act. The amounts on which the petitioner was assessed to tax repr....
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....ill be one relating to income-tax, though it may be that it operates harshly in certain cases. It may also be that in the operation of such a presumption or of a statutory fiction like the one contained in section 2(6A)(e) certain loans are taxed as income. But that is only incidental in the operation of the statute whose pith and substance is taxation of income [1960] 40 I.T.R. 469, 478 (Mad.)." In view of this decision, which is authority binding on us, we have to reject the contention of the petitioner, that section 2(6A)(e) was ultra vires the Parliament and beyond its legislative competence. The attack on the constitutional validity of the deeming provision in section 2(6A)(e) therefore fails. With reference to the loans taken fr....
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.... 2(5A)(e) should be so interpreted to be consistent with its constitutional validity and exclude agricultural income from its scope. The short question then is whether on the distribution of profits being effected by a company to its shareholders--whether the distribution is actual or whether it is fictional--the money in the hands of the shareholder still continues to partake of the character of the income as it was in the hands of the company. Under section 2(6A)(e) dividend includes: "any payment by a company, not being a company, in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise by way of advance or loan ....
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....as accumulated profits of the company itself. This necessarily leads to the conclusion that, even if the accumulated profits in the hands of the company were derived from agriculture and as agricultural income these profits were exempt from tax, the money received by the shareholder would not retain the same character. In other words, neither a dividend nor a deemed dividend paid out of agriucultural income is itself agricultural income. Even on general consideration it seems to us that the petitioner's argument, that there is identity of character of the amounts in the hands of the company and the shareholder, must fail. The learned counsel for the petitioner could not deny that, if the company in this case had actually distribut....
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....te a legal fiction." The further observations at page 119 were: "What was it that was taxed: undisbursed profits. Undisbursed profits were undoubtedly income, a part thereof. True it was the Income of the company and it remained as part of the assets of the company even after the taxing authorities had passed an order under section 23A. Except notionally, and then only for the purposes of the incidence of the tax, undisbursed profits did not become the income of the shareholders. None the less, the position remains that what was taxed, undisbursed profits, was income. The net profits of the company were subject to tax........So, what section 23A did was, in essence, to tax income, the income of the company. Only, the incidence o....
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....ances. There appears accordingly to be a clear distinction between the income in the hands of the company, which is now made directly taxable under section 23A, and a receipt by a shareholder of the kind specified in section 2(6A)(e). Even if the observations in Spencer v. Income-tax Officer, Madras, [1957] 31 I.T.R. 107 (Mad.) which we have extracted above, went to the extent of laying down that notwithstanding that the tax was recoverable from the shareholder on the undistributed profits of the company deemed to have been distributed they continued nevertheless to be the income of the company for all purposes, that should be referable to the state of the law as it was then, that is, before section 23A was amended in 1955. We are, there....