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SUPREME COURT OF INDIA
H.R. KHANNA, N.L. UNTWALIA AND JASWANT SINGH, JJ.
P. K. Badiani, Appellant
Versus
The Commissioner of Income-tax, Bombay, Respondent.
Civil Appeal No. 1695 of 1971,
D/- 21-9-1976.
Advocates appeared
M/s. V. Rajagopal and A. G. Pudissery, Advocate, for Appellant; Mr. S. T. Desai, Senior Advocate, M/s. B. B. Ahuja and R. N. Sachthey, Advocate with him), for Respondent.
Companies Acts - Income-tax Act, 1922 - Section 66-A (2) - Purpose of taxation certain distributions or payments - Available for distribution among shareholders - purpose of taxation certain distributions or payments - Whether development rebate reserve created by company by duly charging amount to profit and loss account and being allowable under Act constituted accumulated profits of company within the meaning of Section 2 (6-A) (e) of Act - Whether aggregate of development rebates allowed to Company under Section 10 (2) (vi-b) of 1922 Act could be treated as accumulated profits in the hands of Company under Section 2 (6-A) (e) - Whether capitalized or not if such distribution entails the release by company to its shareholders of all or any part of the assets of company - assessed was a major shareholder which was indisputable a Company in which the public were not substantially interested within the meaning of Section 23-A of 1922 Act - Assesses was also the Managing Director of the said Private Limited Company - He had a mutual open and current account in books of Company - Accounting year of which was calendar year i.e. commencing from January and ending in December - Assesses in his accounting year had withdrawn considerable amounts of money from the Companies account - Income-tax Officer treated the withdrawals made by assessed as advances or loans given by Company to him and taxed the amount as dividend under Section 2 (6-A) (e) of the 1922 Act - Appellate Assistant Commissioner modified the figure of deemed dividend calculated by the Income-tax Officer and took highest amount of advance made to assesses by the Company at a particular point of time in the year in question as the amount of dividend taxable in the hands of the assesses - Said amount was within the total figure of accumulated profits in the hands of the Company at the relevant time - It may just be stated here that according to the 1922 Act only accumulated profits possessed by company at the end of the corresponding previous year had to be taken into account unlike the corresponding provision engrafted in Section 2 (22) of the Income-tax Act, 1961 - Hereinafter referred to as the 1961 Act read with Explanation II thereto - It was found that the aggregate amount of development rebate allowed to Company under Section 10 (2) (vi-b) – Held, Acceptance of contention would necessarily postulate reading in Section 2 (6-A) (c) words accumulated profits as are liable to be taxed under the Act - Words as are liable to be taxed under the Act are not there in the definition and it would not in court opinion be permissible to so construe the clause as if those words were a part of that clause - There is also nothing in the language or context of that clause as would warrant such a construction - Accumulated profits would retain their character as such even though a part of them were not taxed as profits under Act - Purpose of Section 2 (6-A) of the 1922 Act corresponding to Section 2 (22) of the 1961 Act is to include within term dividend for the purpose of taxation certain distributions or payments of certain items of money or the like as deemed dividend for the purpose of taxation - Under clause (e) an advance or loan of money to a shareholder by a private Company has been directed to be treated as dividend to the extent to which the Company possessed accumulated profits - Advance or the loan by a legal fiction, is to resemble the actual dividend - For purpose of distribution of the dividend the amount of development rebate could form part of the profits of the Company it would be so for the purposes of clause (e) also - Court attention was directed to a new facet of the question under consideration and that is this. In clauses (a) to (d) of Section 2 (6-A) of the 1922 Act so also in the corresponding clauses of Section 2 (22) of the 1961 Act expression accumulated profits is qualified by expression whether capitalized or not - But the latter phrase is conspicuously absent in clause (e) - What is the purpose of this difference in the phraseology of various clauses of sub-section (6-A) reason is not far to seek and yet not helpful to assesses in this case - A company may if its constitution so allows capitalize profits instead of dividing them by applying them in paying up unissued shares, or debentures or other securities, and issuing such shares or securities as fully paid to its members, thereby transferring the sum capitalized from profit and loss or reserve account to share or loan capital account - To the same effect is the statement of the law to be found in Palmers Company Law, twenty-first edition page - Capitalization of profits says the learned author, means - That profits which otherwise are the available for distribution among shareholders are not divided among them in cash but that the shareholders are allotted further shares - or debentures - which are paid up wholly or in part out of those profits. The amount paid by the company out of its divisible profits on account of these newly issued shares is known as the bonus, and the shares are referred to as bonus shares – Court think court must look both at the substance and form of the transaction And it was obviously contemplated and was court think certain that no money would in fact pass from the company to the shareholders, but that the entire sum would remain in their hands as paid-up capital - Court cannot therefore avoid conclusion that the substance of the whole transaction was and was intended to be to convert he undivided profits into paid-up capital upon newly created shares - Appeal dismissed
Judgment
UNTWALIA, J.:- This is an appeal by an assessee on grant of a certificate of fitness by the Bombay High Court under Section 66-A (2) of the Income-tax Act, 1922 - hereinafter referred to as the 1922 Act. The assessee is an individual. We are concerned in this case with his assessment for the assessment year 1958-59 - corresponding accounting year being 1st April, 1957 to 31st March, 1958. The Income-tax Tribunal made a composite order disposing of the assessees appeals in respect of two assessment years i.e. 1958-59 and 1959-60. The decision of the Tribunal was partly in favour of the assessee and partly in favour of the Revenue. In respect of the assessment year 1958-59, a reference under Section 66 (1) of the 1922 Act was made by the Tribunal to the High Court. Four questions were referred - one at the instance of the Commissioner of Income-tax and three at the instance of the assessee. The High Court by its judgment under appeal which is reported in Commissioner of Income-tax (Central), Bombay v. P. K. Badiani, 76 ITR 369, has answered almost all the questions against the assessee. Hence this appeal.
2. Mr. V. Rajgopal who had argued the case of the assessee before the High Court appeared before us in support of the appeal also. He could not and did not attack the decision of the High Court as respects questions 2, 3 and 4. But he strenuously urged before us for reversal of the High Court judgment in regard to question No. 1 which was referred at the instance of the Commissioner. If the assessee could succeed before us in getting an answer in his favour to the said question, then, substantially he would have succeeded in getting the whole of the relief.
3. The first and the only question which falls for our examination in this appeal was referred by the Tribunal to the High Court in the following terms:
"(1) Whether the development rebate reserve created by the company by duly charging the amount to the profit and loss account and being allowable under the Act constituted accumulated profits of the company within the meaning of Section 2 (6-A) (e) of the Act?"
4. We proceed to state the necessary facts for determination of the above question only.
5. The assessee was a major shareholder (although at the relevant time being a major or minor shareholder did not make any difference in law) in the Sadhana Textile Mills Pvt. Ltd. which was indisputable a Company in which the public were not substantially interested within the meaning of Section 23-A of the 1922 Act. The assessee was also the Managing Director of the said Private Limited Company. He had a mutual, open and current account in the books of the Company - the accounting year of which was the calendar year i.e. commencing from January and ending in December. The assessee in his accounting year 1957-58 had withdrawn considerable amounts of money from the Companys account. The Income-tax Officer treated the withdrawals made by the assessee as advances or loans given by the Company to him and taxed the amount as dividend under Section 2 (6-A) (e) of the 1922 Act. The Appellate Assistant Commissioner modified the figure of the deemed dividend calculated by the Income-tax Officer and took the highest amount of advance made to the assessee by the Company at a particular point of time in the year in question as the amount of dividend taxable in the hands of the assessee. The said amount was within the total figure of accumulated profits in the hands of the Company at the relevant time i.e. 31st December, 1956. It may just be stated here that according to the 1922 Act only the accumulated profits possessed by the company at the end of the corresponding previous year had to be taken into account unlike the corresponding provision engrafted in Section 2 (22) of the Income-tax Act, 1961 - hereinafter referred to as the 1961 Act read with Explanation II thereto. It was found that the aggregate amount of development rebate allowed to the Company under Section 10 (2) (vi-b) was
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