P. SARADAversusCOMMISSIONER OF INCOME TAX (CENTRAL)

                              P. SARADA                                      A
                                    v.
         COMMISSIONER OF INCOME TAX (CENTRAL)
                       MADRAS

                          DECEMBER 9, 1997
                                                                             B
          [SUHAS C. SEN AND K. VENKATASWAMI, JJ.]

      Income Tax Act, 1961: Section 2(22)(e).

      Income Ta~Deemed Divide11d-AY 1973-74-Assessee was                     C
shareholder in a p1ivate limited company and had a rn1111i11g account with
it-Assessee overdrew from this account-Held: Such overdrawal amounted
to deemed divide11d-Subseque11t repayment or adjustme11t, immate1ia/.

       The appellant-assessee was a shareholder in a private limited com-
pany and had a running account with it. During the accounting year D
relevant to the assessment year 1973-74 between the period 3.7.1972 and
223.1973 the assessee had withdrawn a total sum of Rs. 93,027. At the
material time the assessee did not have any credit balance in her account
with the company. M, who owed some money to the assessee, wrote a letter
to the company directing it to make available to the assessee a sum of Rs. E
1 lakh from out of his account. However, M's account was not debited till
the very last day of the accounting year. The Income Tax Otlicer (ITO)
treated the aforesaid excess withdrawal as deemed dividend under Section
2(22)(e) of fhe Income Tax Act, 1961. The appellant-assessee contended
that the excess withdrawal had not been made from the company's account
but from the amount standing to the credit of M in the books of the F
company and, therefore, the said excess withdrawal could not be treated
as deemed dividend. The assessee's appeal to the Appellate Assistant
Commissioner was dismissed. However, on further appeal, the Tribunal
upheld the case of the assessee. The High Court answered the reference in
the negative and in favour of the Revenue. Hence this appeal.              G
     Dismissing the appeal, this Court

      HELD : I.I. The withdrawals made by the appellant from the com-
pany amounted to grant of loan or advance by the company to the
shareholder. The legal fiction under Section 2(22)(e) of the Income Tax H
                                  325
    326                  SUPREME COURT REP6RTS (1997) SUPP. 6 S.C.R.

A Act, 1961 came into play as soon as the company paid the monies to the
    appellant. The assessee must be deemed to have received dividends on the
    dates on which she withdrew the aforesaid amounts of money from the
    company. The loan or advance taken from the company may have been
    ultimately repaid or adjusted byt that will not alter the fact that the
    assessee, in the eye of law, had received dividend from the company during
B   the relevant accounting year. [329-E-F]

          Smt. Tmulata Shyam v. CIT, 1118 ITR 345, relied on.

        1.2. In the instant case, the assessee made excess withdrawals on
C various dates between 3-7-1972 and 22-3-1973 when the account of M had
  not been debited. The assessee's account was consequently overdrawn. On
  the very last day of the accounting year some adjustment was made but
  that will not alter the position that the assessee had drawn a total amount
  of Rs. 93,027 between 3-7-1972 and 22.3.1973 from the company when her
  account with the company did not have any credit balance at all. That           .,,.
D means these advances made by the company to the assessee will have to
  be treated as deemed dividends paid on the dates when the withdrawals
  were allowed to be made. Subse11uent adjustment of the account made on
  the very last day of the accounting year will not alter the position that the
  assessee had received notional dividends on the various dates when she
E withdrew the aforesaid amounts from the company. [330-A-C]
          CIVIL APPELLATE JURISDICTION: Civil Appeal No. 649 (NT)
    of 1987.

         From the Judgment and Order dated 3.7.84 of the Madras High
F   Court in T.C. No. 1258 of 1979.

           T.A. Ramachandran and Ms. Janaki Ramachandran, for the Appel-
    lant in C.A. No. 649/87 and C.A. No. 3894-95/84.

          K.N. Shukla, K.N. Nagpal and B. K. Prasad for the Respondent.
G
          The Judgment of the Court was delivered by

           SEN, J. The appellant, Miss P. Sarada, is a major shareholder of
     Mcssers Universal Radiators Pvt. Ltd. (hereinafter referred to as "the
     company"). It is a company in which public were not substantially inter-
H    csted. While completing the assessment of the appellant for the assessment
                      P. SARADAv. C.I.T. [SEN, J.]                      327

year 1973-74, the Income Tax Officer found that during the period 3.7.1972 A
to 22.3.1973 she had withdrawn a total sum of Rs. 93,027 from the company.
The appellant had a running account with the company. At the material
time she did not have any credit balance in her account with the company.
This excess withdrawal was treated by the Income Tax Officer as deemed
dividend under Section 2(22)( e) of the Income Tax Act on two grounds :
                                                                            B
( 1) The assessee had no credit balance in her accounts with the said
company at the material time; and (2) that there was sufficient accumulated
profits of the company from which the excess withdrawal was made by the
assessee. The Income tax Officer included this amount of Rs. 93,027 tn the
computation of the appellant's income. The assessee's appeal to the Ap-
pellate Assistant Commissioner was dismissed. However, on further ap- C
peal, the Tribunal upheld the case of the assessee.

      The Tribunal held that the withdrawals made by the appellant will
have to be taken as paid out of the money lying to the credit of another
shareholder Shri A.C. Mahesh and not out of the accumulated profits of D
the company. A letter dated 3.4.1972 written by Shri A.P. Madhavan, the
father of the minor Mahesh, was relied upon by the Tribunal. In that letter
Madhavan had directed the company to make available to the assessee
Miss P. Sarada a sum <Jf Rs. l lakh from out of his account. The Tribunal
found that Mahesh owed some money to the assessee and as Mahesh had
directed repayments of the amount due to the assessee from out of his E
credit balance in the company, the withdrawals made by the assessee had
to be treated as withdrawals from the account of Mahesh and not from the
accumulated profits of the company.

      Ai the instance of the Commissioner of Income Tax, the following         F
question of law was referred to the High Court under Section 256(1) of
the Income Tax Act.

        "Whether, on the facts and in the circumstances of the case, the
        Appellate Tribunal is correct in law in holding that the withdrawals
        made by the asses see from Messers Universal Radiators Private         G
        Limited totalling Rs. 93,027 cannot be assessed under Section
        2(22)(e) of the Income-Tax Act, 1961 for th~ year 1973-74."

        The High Court answered the question in the negative and in
        favour of the Revenue.                                                 H
     328                   SUPREME COURT REPORTS (1997] SUPP. 6 S.C.R.

.A         The High Court took note of the fact that the accounting period for
     the relevant assessment year 1973-74 was 1.4.1972 to 31.3.1973. The asses-
     sce was a substantial shareholder of the company and was drawing funds
     from the company till 22.3.1973. As a result of various withdrawals made
     by the assessee, her credit balance had been entirely wiped out and in fact
B    her account with the company showed excess withdrawal of a sum of Rs.
     1,831.14 as on 22.3.1973. In spite of this debit balance the assessee between
     3.7.1972 to 22.3.1973 on fourteen different dates withdrew a total a sum of
     Rs. 93,027. The particu]ars of the withdrawals are as under :

             "3.7.72           Rs. 1,831.14 (Excess withdrawal)
 c            3.8.72           Rs. 5,000.00

              2.9.72           Rs. 5,000.00

              12.9.72          Rs. 7,998.00
 D            3.10.72          Rs. 5,000.00

              3.11.72          Rs. 5,000.00

              1.12.72          Rs. 5,000.00

 E            ll.12.72         Rs. 7,998.00

              18.12.72         Rs. 4,749.00

              18.12.72         Rs. 8,522.00

 F            2.1.73           Rs. 5,000.00

              3.2.73           Rs. 5,000.00
                                         -
              5.3.73           Rs. 5,000.00

 G            9.3.73           Rs. 7,999.00

              17.3.73          Rs. 10,000.00

              22.3.73          Rs. 3,930.00

                               Rs. 93,027.00"
                       P. SARADA v. CIT [SEN, J.]                         329

       According to the assessee, the withdrawals had not been made from         A
the company's acconnt but from the amount standing to the credit of
Mahesh in the books of the company. The High Court pointed out that the
alleged letter dated 3.4.1972 was given effect to by the company only on
31.3.1973 by debiting a sum of Rs. 1 lakh from the account of Mahesh and
crediting it to the account of the assessee. But the assessee had steadily       B
and regularly withdrawn monies from the company between 3.7.1972 to
22.3.1973. These withdrawals were not made by debiting the credit balance
of Mahesh which remained intact till 31.3.1973. The High Court concluded
that the various withdrawals made by the assessee were from the company's
accumulated profits.
                                                                                 c
      We do not find any fault with the reasoning of the High Court.

      Section 2(22)( e) as it stood at the material time defined dividend to
include "any payment by a company, not being a company in which the
public are snbstantially interested, of any sum by way of advance or loan
to a shareholder, being a person who has a substantial interest in the           D
company ........... to the extent to which the company ......... possesses ac-
cumulated profits". In the instant case there is no dispute that the appellant
had a substantial interest in the company. The nature of the company is
also not in dispute.
                                                                                 E
      From the facts as stated hereinabove, it appears that the withdrawals
made by the appellant from the company amounted to grant of loan or
advance by the company to the shareholder. The legal fiction came into
play as soon as the monies were paid by the company to the appellant. The
assessee must be deemed to have received dividends on the dates on which
she withdrew the aforesaid amounts of money from the company. The Joan F
or advance taken from the company may have been ultimately repaid or.
adjusted but that will not alter the fact that the assessee, in the eye of law,
had received dividend from the company during the relevant accounting
period.

       It was held by this Court in the case of Smt. Tantlata Shyam & Ors.       G
v. Commissioner of lncome Tax, West Bengal, 108 ITR 345 that the statutory
fiction created by Section 2(6A)(e) of the Indian Income Tax Act, 1922
would come into operation at the time of the payment of advance or loan
to a shareholder by the company. The legislature had deliberately not made
the subsistence of the loan or advance, or its remaining outstanding, on the     H
    330                    SUPREME COURT REPORTS (1997) SUPP. 6 S.C.R.

A last date of the previous year relevant to the assessment year a prerequisite
    for raising the statutory fiction.

          In the instant case, excess withdrawals were made by the assessee on
    various dates between 3.7.1972 to 22.3.1973 when the account of Mahesh
    had not been debited. The assessee's account was consequently overdrawn.
B   On the very last day of acconnting year some adjustment was made but
    that will not alter the position that the assessee had drawn a total amount
    of Rs. 93,027 between 3.7.1972 to 22.3.1973 from the company when her
    account with the company did not have any credit balance at all. That
    means these advances made by the company to the assessee will have to
C   be treated as deemed dividends paid on the dates when the withdrawals
    were allowed to be made. Subsequent adjustment of the account made on
    the very last day of the accounting year will not alter the position that the
    assessee had received notional dividends on the various dates when she
    withdrew the aforesaid amounts from the company.

D         A point was taken that the High Court has reappraised the fact and
    has disbelieved the letter dated 3.4.1972 which was accepted as genuine by
    the Tribunal. It was contended that it was not open to the High Court to
    doubt this letter.

E         This argument is misconceived. The High Court has proceeded on
    the basis of the facts found by the Tribunal. There is no dispute that the
    assessee had withdrawn various sums of money between 3.7.1972 and
    22.3.1973 when she did not have any credit balance with the company. In
    order to pay her these sums of money the account of Mahesh was not
    debited at all. The entire credit balance of Mahesh stood as it was till the
F   very last day of the accounting year. On these facts found by the tribunal,
    the High Court concluded that it was not possible to hold that the assessee
    was paid money out of the founds lying to the credit of Mahesh. The High
    Court decided the case entirely on the basis of the facts found by the
    tribunal.
G          We find no merit in this appeal. The appeal is dismissed with no
     order as to costs.

     Y.S.S.                                                   Appeal dismissed.