An advance or loan taken by a shareholder from a private company is taxable as dividend under Section 2 (6a) (e) of the Act, even if it is repaid before the end of the previous year.

( 1 ) THE assessee and the original applicant in this reference was one P. C. Shyam who died during the pendency of the reference and his heirs and legal representatives have been substituted in his place as the applicants.

( 2 ) THE assessee was substantial shareholder and managing director of Duiaguri Tea Co. (P.) Ltd. Admittedly, the company is one in which the public are not substantially interested within the meaning of Section 23a of the Indian Income-tax Act, 1922 (hereinafter referred to as " the Act" ). The reference concerns the assessment year 1957-58, the corresponding previous year being the calender year 1956. At the commencement of that year there was a credit balance of Rs. 65,246 in the assessee's account in the books of the said company brought forward from the earlier year. Between the 11th January and the 12th November the cash withdrawals by the assessee from the company amounted to Rs. 4,97,442. Deducting therefrom the opening credit balance of Rs. 65,246 and outstanding dividends of Rs. 1,40,000 declared on the 31st December, 1955, in favour of the assessee's major sons transferred to his account and a further dividend of Rs. 19,493 credited to the assessee's account from Kathoni Tea Estate, the total loan or advance taken by the assessee from the company as on the 12th November, 1956, came to Rs. 2,72,703. On the 29th December, 1956, the assessee repaid the company a total sum of Rs. 1,93,000 and on the 31st December, 1956, the last day of the previous year, the assessee's account was credited with another sum of Rs. 80,000 in respect of the dividend due to him and his wife and a further sum of Rs. 29,326 was credited for hypothecation. Thus, before the previous year ended, the assessee's account was credited with an aggregate sum of Rs. 2,99,326 which exceeded the debit balance of Rs. 2,72,703 as on the 12th November, 1956. In effect, the position was that there was no advance or loan due by the assessee to the company at the end of the relevant previous year.

( 3 ) THE Income-tax Officer found that the accumulated profits of the company as on the 1st January, 1956, amounted to Rs. 6,83,005 and he accordingly treated the sum of Rs. 2,72,703 as dividend under Section 2 (6a) (e) of the Act and grossed up that amount under Section 16 (2) and gave credit for tax in accordance with the latter section.

( 4 ) THE assessee's appeal to the Appellate Assistant Commissioner was unsuccessful and the assessment of this amount as dividend was confirmed.

( 5 ) ON further appeal by the assessee to the Income-tax Appellate Tribunal, there was a difference of opinion between the Accountant Member and the Judicial Member. The Accountant Member took the view that the moment a payment was made as envisaged in Section 2 (6a) (e) it became clothed with the character of dividend and no subsequent action of the parties could take it out of mischief of that section. There was no provision in the Act that if any such payment was returned by the shareholder to the company either within the same accounting year or subsequently, it would cease to be governed by the provisions of that section. He was, therefore, of the opinion that the sum of Rs. 2,72,703 was taxable as dividend under Section 2 (6a) (e ).

( 6 ) THE Judicial Member, on the other hand, held that the total income of the assessee during the relevant previous year could be computed and assessed only at the end of that previous year. It could not be computed at interim periods during that previous year. If it was found that although the shareholder had taken a loan from the company during the course of a previous year but had returned the same to the company before the close of that previous year, it could only be said while computing the shareholder's total income at the end of that previous year that no advance or loans from the company of which he was a shareholder stood for his benefit at the time relevant for computation of his total income. Accordi