Case: P. Sarada (Miss) Vs. Commissioner of Income Tax (Central) Madras

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 the public were not substantially interested. While completing the assessment of the appellant for the Assessment Yearax Officer found that during the period73 she had withdrawn a total sum of Rs. 93, 027 from the Company.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 appellants income. The assessees appeal to the Appellate Assistant Commissioner was dismissed. However, on further appeal, the Tribunal upheld the case of the assessee2. 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 datedwritten 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 Company3. 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 yeare High Court answered the question in the negative and in favour of the Revenue4. The High Court took note of the fact that the accounting period for the relevant Assessment Year72 toThe assessee was a substantial shareholder of the Company and was drawing funds from the Company tillAs a result of various withdrawals made by the assessee, her credit balance had been entirely wiped out and in fact her account with the Company showed excess withdrawal of a sum of Rs. 1831.14 as onIn spite of this debit balance the assessee between73 on fourteen different dates withdrew a total sum of Rs. 93, 027. The particulars of the withdrawals are asRs. 1831.14 (excess72 Rs.72 Rs.72 Rs.72 Rs.73 Rs.73 Rs.73 Rs.s. 93, 027.14"According to the assessee, the withdrawals had not been made from the Companys account 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 datedwas given effect to by the Company only onby 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 and regularly withdrawn monies from the Company between3. These withdrawals were not made by debiting the credit balance of Mahesh which remained intact tillThe High Court concluded that the various withdrawals made by the assessee were from the Companys accumulated profits

Reasoning: 12. 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 between73 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 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 funds lying to the credit of Mahesh. The High Court decided the case entirely on the basis of the facts found by theg to the assessee, the withdrawals had not been made from the Companys account 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 dateds given effect to by the Company only onby 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 and regularly withdrawn monies from the Company between3. These withdrawals were not made by debiting the credit balance of Mahesh which remained intact tillThe High Court concluded that the various withdrawals made by the assessee were from the Companys accumulatedWe do not find any fault with the reasoning of the HighThis 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 between73 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 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 funds lying to the credit of Mahesh. The High Court decided the case entirely on the basis of the facts found by the