JUDGMENT
Bharucha, J.
1. The common question raised by these references reads thus :
“Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that sums of Rs. 5,90,050 and Rs, 8,70,891 are not liable to be treated as dividends under section 2(6A)(e) of the Income-tax Act, 1961, for the assessment years 1958-59 and 1959-60 is in law justified ?”
2. Counsel are agreed that the allusion in the question should be to section 2(6A)(e), of the Indian Income-tax Act, 1922. We shall so read the question.
3. By reason of 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 of otherwise) by way of advance or loan to a shareholder or any payment by any such company of behalf, or for the individual benefit, of a shareholder, to the extent to which the company in either case possesses accumulated profits….”
4. We are here concerned with the assessment years 1958-59 and 1959-60. The relevant accounting years are the Samvat years 2013 and 2014. Samvat year 2013 commenced on November 3, 1956, and ended on October 23, 1957. Samvat year 2014 commenced on October 24, 1957, and ended on November 12, 1958.
5. The assessee was a shareholder of Krishna Steel Industries Pvt. Ltd. (hereinafter referred to as “to company”) and of Steel Industries of Hindustan Pvt. Ltd. (hereinafter referred to as Steel Industries”). It is not in dispute that the public were not substantially interested in the company or in Steel Industries.
6. The questions posed refer only to transactions between the assessee and the company.
7. For the assessment year 1958-59, according to the statement of the case, the Income-tax Officer noticed that the assessee was a debtor of the company K and that “the net amount of the debit of the assessee by taking each item of loans and advances by itself, after setting off the credit amount on the same day on which the debit occurred, came to Rs. 12,71,289”. The reserves and surpluses of the company were Rs. 5,90,050. The Income-tax Officer held that this sum of Rs. 5,90,050 was to be treated as “deemed dividends” under section 2(6A)(e). Injregard to Steel Industries, the Income-tax Officer found that the sum of Rs. 3,30,063 should be treated as “deemed dividend” under section 2(6A)(e). The Income-tax Officer rejected the assessee’s contention that the accounts between the assessee and the company and the Steel Industries were mutual current accounts and that very often, it was the assessee who was the creditor. For the assessment year 1959-60, the amount standing to the debit of the assessee in the books of the company, after setting off the credit amount on the same day on which the debit occurred, came to Rs. 8,70,891. The reserves and surpluses of the company were Rs. 9,82,375. The entire amount of Rs. 8,70,891 was treated as “deemed dividend” under section 2(6A)(e)”. In regard to Steel Industries, the amount of Rs. 1,15,259 was treated by the Income-tax Officer as “deemed dividend”.
8. When the matter came up before the Appellate Assistant Commissioner, he took guidance from the order of the Tribunal for the assessment year 1957-58 where, “under similar circumstances, it was held that the assessee had accounts with the above two companies purely by way of temporary mutual accommodation and the overdrawn amounts could not be treated as ‘dividends’.”
9. The Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal noted that the matter had been discussed at length in its order for the assessment year 1957-58 and to quote the statement of the case” no fresh facts or arguments were put before the Tribunal to justify a different view”.
10. It is necessary, in the circumstances, to refer to the order of the Tribunal for the assessment year 1957-58. The only contention then raised before the Tribunal was that advances to the assessee by the company and Steel Industries had been wrongly assessed as deemed dividend under section 2(6A)(e). The accounting year for the assessment before the Tribunal was the year ended October 31, 1956 (the Diwali year), for business and ordinary dividends. For deemed dividends under section 2(6A)(e), the Income-tax Officer had taken the year ended March 31, 1957, to be the previous year. The assessee’s current account in the company showed that there had been continuous transactions, that a substantial credit balance had been maintained until October 5, 1956, when, for the first time in the calendar year 1956, the account showed a debit of about Rs. 1,00,000. This indebtedness continued up to 1956, and, on December 31, 1956, the debit balance against the assessee was Rs. 6,23,541. A similar situation existed in the assessee’s account in Steel Industries. The Tribunal held that the Income-tax Officer had been in error in taking, for the purposes of deemed dividends under section 2(6A)(e), an accounting year other than the assessee’s ordinary accounting year. The Tribunal scrutinized the copies of the current accounts of the assessee with the company and the Steel Industries and found that they were more often than not indebted to the assessee. In the Tribunal’s view, section 2(6A)(e) did not apply to cases of this kind. The transactions had been purely by way of temporary mutual accommodations and the overdrawn amounts did not represent loans or advances to a shareholder.
11. A reference was made of the following question arising out of the Tribunal’s said order :
“Whether, on the facts and in the circumstances of the case, a sum of Rs. 2,74,716 or lesser amount was assessable as dividends under section 2(6A)(e) of the Indian Income-tax Act, 1922 ?”
12. It was decided by this court on November 29, 1977. (The judgment isjCIT v. Ramchand Jethmal [1978] 115 ITR 384.) This court noted that the controversy as to whether the amount of the deemed dividends could properly be brought to tax did not arise, for it was not disputed that, even in respect of deemed dividends, it was the previous year ended October 31, 1956, that had to be taken into account. The finding recorded by the Tribunal that the amounts which were sought to be brought to tax by way of deemed dividends fell outside the year ended October 31, 1956, and that, for the purposes of deemed dividends, a different accounting year could not be taken into consideration had been accepted by the Revenue. Since that finding could not be disturbed, it was not necessary to go into the other questions on which the Tribunal’s decision had been rendered.
13. Mr. Jetly, learned counsel for the Revenue, relied upon the Income-tax Officer’s finding that the assessee’s account with the company was not a mutual current account and that it was not the company which had very often been indebted to the assessee. He submitted that the accumulated profits to be considered should be those shown in the company’s balance-sheet on the last day of the company’s accounting year. Alternatively, he submitted that they should be those shown in the company’s balance-sheet on the first day of the company’s accounting year, the accounting year being in either alternative that in which the loans or advances had been given.
14. Before going into the merits of Mr. Jetly’s submissions, it is necessary to consider the Income-tax Officer’s orders for the two assessment years we are considered with.
15. For the assessment year 1958-59, the Income-tax Officer noted “the position of reserves and surplus and debit of the assessee” in the company “as on October 3, 1957” thus :
Rs.
Reserves and surpluses 5,90,050 Debit balance 1,52,451 16. He made a similar noting as of the same date in respect of Steel Industries. Thereafter, he found the reserves and surpluses of Steel Industries "as on December 31, 1957, to be the earlier found amount as on October 3, 1957, of Rs. 3,30,062." 17. In so far as transactions between the assessee and the company were concerned, the Income-tax Officer stated thus :
“In this case, the net amount to the debit of the shareholder by taking each item of loan and advance after setting off the credit amount on the same day on which the debit occurs comes to Rs. 12,71,289. However, the reserves and surpluses of the company are only Rs. 5,90,050. Therefore, only Rs. 5,90,050 is treated as ‘deemed dividends’.”
18. For the assessment year 1959-60, the Income-tax Officer noted the position of the reserves and surpluses and debit balance of the assessee in the company as on December 31, 1958, thus :
Rs.
Reserves and surplus 9,82,375 Debit balance 92,912 19. In regard to transactions between the assessee and the company, the Income-tax Officer said thus :
“The net amount to the debit of the shareholder by taking each item of loan and advance by itself, after setting off the credit amount on the same day on which the debit occurs, comes to Rs. 8,70,891. The reserves and surpluses of the company, as on December 31, 1958, amount to Rs. 9,82,375. The entire amount of loans and advances is, therefore, treated as ‘deemed dividends’.”
20. It will be seen that in neither of the assessment orders did the Income-tax Officer state what the accounting year of the company was, From the assessment order for the assessment year 1958-59, it is not clear on what day the Income-tax Officer computed the position of its accumulated profits. Whereas in the earlier portion of the order he said that he had done so in respect of both the company as well as Steel Industries as on October 3, 1957, but later, in dealing with the Steel Industries, he said that he had done so as on December 31, 1957.
21. It was submitted by Mr. Jetly that it should be assumed that the company’s accounting year was the calendar year because in the assessment order for 1959-60, the Income-tax Officer had ascertained the position of accumulated profits as on December 31, 1958. That the Income-tax Officer had ascertained this position as on December 31, 1958, does not necessarily lead to the conclusion that the company’s accounting year was the calendar year. There is no finding as to the accounting year of the company. Whether December 31, 1957, fell within the accounting year in which the company had made the loans or advances concerned to the assessee or not we do not know.
22. We must mention that it is also quite unclear how the Income-tax Officer calculated the accumulated profits. It is equally unclear what he meant when he said thus :
“In this case, the net amount to the debit of the shareholder by taking each item of loan and advance after setting off the credit amount on the same day on which the credit occurs, comes to…..”
23. It is relevant to note that the Appellate Assistant Commissioner held for the relevant assessment years that the assessee’s account with the company was purely by way of temporary mutual accommodation and that the overdrawn amounts could not be treated as dividends. The Tribunal said that no fresh facts were put before it to justify a view different from that taken by it for the assessment year 1957-58, which was that the company and the Steel Industries were more often indebted to the assessee that the other way round. The position, on facts found, would appear to be, therefore, that the company was more often indebted to the assessee than the other way round even in the previous years corresponding to the assessment years here concerned.
24. In any event, no authority has been shown to us by Mr. Jetly which supports the proposition that the accumulated profits should be computed on the basis of figures shown in the balance-sheet of the company as on the last day of the company’s accounting year.
25. In Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198, the Supreme Court was concerned with a challenge to the vires of section 2(6A)(e). Before discussing the merits of that challenge, the Supreme Court analyzed section 2(6A)(e) and found that a loan advanced to a shareholder by a company could be deemed to be a dividend only to the extent to which it was shown that the company possessed accumulated profits at the date of the loan.
26. This court in CIT v. P. K. Badiani [1970] 76 ITR 369, took the same view in a reference. The assessee in that case was the major shareholder of a private limited company. He had mutual, open and current account in the books of the company and had withdrawn through that account a certain sum in an accounting year. The court analyzed the provision of section 2(6A)(e) and found that the position of loans and advance which were to be deemed to be dividends by reason of section 2(6A)(e) was similar to that of declared dividends. Care had to be taken to debit every payment legitimately made out of the fund of accumulated profits as and when such payment was made because, by reason of such payment, the quantum of the fund got reduced. If this was not done, there was a danger of a mistake occurring and payments out being treated as having been made out of accumulated profits even if the aggregate of the former exceeded the amount of the latter. The accumulated profits had to be nationally reduced by the amount of all loans, etc., which were deemed to be dividends under the fiction under section 2(6A)(e). The position that emerged was “that section 2(6A)(e) requires that when every loan is advanced to a shareholder, the amount of ‘accumulated profits’ must be ascertain”.
27. In CIT v. Mayur Madhukant Mehta [1972] 85 ITR 230, the Gujarat High Court took a similar view.
28. Mr. Jetly drew our attention to the judgment of the Supreme Court in CIT v. V. Damodaran , in support of his alternative contention. Before we consider it, we must point out, first, that the Income-tax Officer has not proceeded upon the basis that the appropriate data for the computation of the company’s accumulated profits is the first day of its accounting year in which the loans or advances were given to its shareholders and, secondly, that, upon the record, we do not even know what the company’s accounting year is.
29. In Damodaran’s case , the question before the Supreme Court was whether the profits earned by a company during the year in which loans were advanced to the assessee, that is to say, the current profits, could be regarded as included in its accumulated profits. The Supreme Court found that the distinction between accumulated profits and current profits had long held the field and the current profits could not be included in accumulated profits. This case does not assist Mr. Jetly in regard to his alternative submission.
30. The position, as found by the Supreme Court in Navnit Lal C. Javeri v. K. K. Sen, AAC and this court’s judgment in CIT v. P. K. Badiani [1970] 76 ITR 369, is that, for the purposes of section 2(6A)(e), the company’s accumulated profits must be determined on the day on which the loan or advance to the shareholder is made. Neither of Mr. Jetly’s submission can, therefore, be upheld. Inasmuch as the Income-tax Office failed to compute the amounts of the deemed dividends on the basis of the company’s accumulated profits on each day a loan or advance to the assessee was made, his orders on this aspect must fall.
31. In the light of what we have stated, we do not find it necessary to decide what, in regard to section 2(6A)(e), the effect would be of anjaccount mutual, current and open between a company and its shareholder.
32. The question put to us is answered in the affirmative and in favour of the assessee.
33. The Revenue shall pay to the assessee the costs of the reference.