P. SARADA versus COMMISSIONER OF INCOME TAX (CENTRAL)

Citation: [1997] SUPP. 6 S.C.R. 325 · Decided: 09-12-1997 · Supreme Court of India · Bench: S.C. SEN · Disposal: Dismissed

Judgment (excerpt)

P. SARADA 
v. 
COMMISSIONER OF INCOME TAX (CENTRAL) 
MADRAS 
DECEMBER 9, 1997 
[SUHAS C. SEN AND K. VENKATASWAMI, JJ.] 
Income Tax Act, 1961: Section 2(22)(e). 
A 
B 
Income Ta~Deemed Divide11d-AY 1973-74-Assessee was C 
shareholder in a p1ivate limited company and had a rn1111i11g account with 
it-Assessee overdrew from this account-Held: Such overdrawal amounted 
to deemed divide11d-Subseque11t repayment or adjustme11t, immate1ia/. 
The appellant-assessee was a shareholder in a private limited com-
pany and had a running account with it. During the accounting year D 
relevant to the assessment year 1973-74 between the period 3.7.1972 and 
223.1973 the assessee had withdrawn a total sum of Rs. 93,027. At the 
material time the assessee did not have any credit balance in her account 
with the company. M, who owed some money to the assessee, wrote a letter 
to the company directing it to make available to the assessee a sum of Rs. E 
1 lakh from out of his account. However, M's account was not debited till 
the very last day of the accounting year. The Income Tax Otlicer (ITO) 
treated the aforesaid excess withdrawal as deemed dividend under Section 
2(22)(e) of fhe Income Tax Act, 1961. The appellant-assessee contended 
that the excess withdrawal had not been made from the company's account 
but from the amount standing to the credit of M in the books of the 
company and, therefore, the said excess withdrawal could not be treated 
as deemed dividend. The assessee's appeal to the Appellate Assistant 
Commissioner was dismissed. However, on further appeal, the Tribunal 
upheld the case of the assessee. The High Court answered the reference in 
the negative and in favour of the Revenue. Hence this appeal. 
Dismissing the appeal, this Court 
F 
G 
HELD : I.I. The withdrawals made by the appellant from the com-
pany amounted to grant of loan or advance by the company to the 
shareholder. The legal fiction under Section 2(22)(e) of the Income Tax H 
325 
326 
SUPREME COURT REP6RTS (1997) SUPP. 6 S.C.R. 
A Act, 1961 came into play as soon as the company paid the monies to the 
appellant. The assessee must be deemed to have received dividends on the 
dates on which she withdrew the aforesaid amounts of money from the 
company. The loan or advance taken from the company may have been 
ultimately repaid or adjusted byt that will not alter the fact that the 
B assessee, in the eye of law, had received dividend from the company during 
the relevant accounting year. [329-E-F] 
Smt. Tmulata Shyam v. CIT, 1118 ITR 345, relied on. 
1.2. In the instant case, the assessee made excess withdrawals on 
C various dates between 3-7-1972 and 22-3-1973 when the account of M had 
not been debited. The assessee's account was consequently overdrawn. On 
the very last day of the accounting year some adjustment was made but 
that will not alter the position that the assessee had drawn a total amount 
of Rs. 93,027 between 3-7-1972 and 22.3.1973 from the company when her 
account with the company did not have any credit balance at all. That 
D means these advances made by the company to the assessee will have to 
be treated as deemed dividends paid on the dates when the withdrawals 
were allowed to be made. Subse11uent adjustment of the account made on 
the very last day of the accounting year will not alter the position that the 
assessee had received notional dividends on the various dates when she 
E withdrew the aforesaid amounts from the company. [330-A-C] 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 649 (NT) 
of 1987. 
From the Judgment and Order dated 3.7.84 of the Madras High 
F 
Court in T.C. No. 1258 of 1979. 
G 
T.A. Ramachandran and Ms. Janaki Ramachandran, for the Appel-
lant in C.A. No. 649/87 and C.A. No. 3894-95/84. 
K.N. Shukla, K.N. Nagpal and B. K. Prasad for the Respondent. 
The Judgment of the Court was delivered by 
SEN, J. The appellant, Miss P. Sarada, is a major shareholder of 
Mcssers Universal Radiators Pvt. Ltd. (hereinafter referred to as "the 
company"). It is a company in which public were not substantially inter-
H csted. While completing the assessment of the appellant for the assessment 
.,,. 
P. SARADAv. C.I.T. [SEN, J.] 
327 
year 1973-74, the Income Tax Officer found that during the period 3.7.1972 A 
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 th

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