Important Point
The statutory fiction created by Section 2(22)(e) of Income-Tax Act, 1961 would come into operation when assessee, a substantial sharehold­er of the company, makes excessive withdrawals from company fund.

Judgment

Sen, J.-The appellant, Miss P. Sarada, is a major shareholder of Messers Universal Radiators Pvt. Ltd. (hereinafter referred to as “the company”). It is a company in which public were not substantially interested. While completing the assessment of the appellant for the assessment year 1973-74, the Income Tax Officer found that during the period 3.7.1972 to 22.3.1973 she had withdrawn a total sum of Rs. 93,027 from the company.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 : (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 in the computation of the appellant’s income. The assessee’s appeal to the Appellate Assist­ant Commissioner was dismissed. However, on further appeal, the Tribu­nal upheld the case of the assessee.

2. 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 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 of Rs. 1 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 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.

3. At the instance of the Commissioner of Income Tax, the following 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 assessee from Messers Universal Radiators Private Limited totalling Rs. 93,027 cannot be assessed under Section 2(22)(e) of the Income-Tax Act, 1961 for the year 1973-74.”

The High Court answered the question in the negative and in favour of the Revenue.

4. 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 assessee 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 assessment, her credit balance had been entirely wiped out and in fact 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 particulars of the withdrawals are as under :

“3.7.72 Rs. 1,831.14

  (Excess withdrawal)

03.08.72 Rs. 5,000.00

02.09.72 Rs. 5,000.00

12.09.72 Rs. 7,998.00

03.10.72 Rs. 5,000.00

03.11.72 Rs. 5,000.00

01.12.72 Rs. 5,000.00

11.12.72 Rs. 7,998.00

18.12.72 Rs. 4,749.00

18.12.72 Rs. 8,522.00

02.01.73 Rs. 5,000.00

03.02.73 Rs. 5,000.00

05.03.73 Rs. 5,000.00

09.03.73 Rs. 7,999.00

17.03.73 Rs. 10,000.00

22.03.73 Rs. 3,930.00

 Rs. 93,02