K.K. Desai, J.
1. This reference under section 66(1) of the Indian Income-tax Act, 1922, has arisen out of a single judgment given by the Income-tax Appellate Tribunal on May 21, 1962, in the matter of two appeals before the Tribunal bearing Nos. 5118 and 5119 of 1961-62 in connection with assessment years 1957-58 and 1958-59, the respective accounting years being calendar years 1956 and 1957. The question referred is as follows :
'Whether, on the facts and in the circumstances of the case, the sums of Rs. 39,725 and Rs. 17,921 were rightly treated as dividends paid to the two shareholders by the assessee-company within the meaning of section 2(6A)(e) of the Act ?'
2. The short relevant facts are as follows :
The assessee is a private limited company. In the assessment year 1957-58 the assessee-company paid Rs. 24,500 and Rs. 15,225 aggregating to Rs. 39,725 as loans to two of its shareholders. In the assessment year 1958-59 the assessee-company paid the sums of Rs. 11,500 and Rs. 6,421 aggregating to Rs. 17,921 as loans to two of its shareholders.
3. The books of accounts of the assessee-company disclosed that in the assessment years 1956-57 and 1957-58, M. J. Rajpal and B. M. Rajpal being respectively managing director and director of the company had been paid certain amounts by way of salary. In respect of the salary paid to these two directors in the assessment years 1956-57 and 1957-58, the Income-tax Officer disallowed the respective sums of Rs. 18,000 and Rs. 36,000 as excessive salaries debited and paid to these directors. The disallowed amounts were thus added to the income computable to income-tax in the above two years. The profits and/or income assessed to tax was thus for the two years ascertained on the footing of the disallowance of the above two amounts.
4. The question of holding the loans advanced in the above two years to the two shareholders of the assessee-company as 'dividends' under the provisions of section 2 (6A) (e) was considered by the Income-tax Officer and in appeals from his orders by the Appellate Assistant Commissioner and finally by the Income-tax Appellate Tribunal by the above order dated May 21, 1962.
5. Now, under the above sub-section (6A)(e), the loans advanced cannot admittedly be held to be dividends unless the assessee-company possessed accumulated profits. The relevant parts of sub-section (6A)(e) run as follows :
'(6A) 'dividend' includes - .... (e) 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 or otherwise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits......' (Underlining is ours).
6. The Income-tax Officer actually calculated the accumulated profits of the assessee-company from 1948-49 to 1956-57 at Rs. 57,995 as per Schedule 'B' attached to the assessment order for the year 1957-58. The contention on behalf of the assessee-company in connection with the calculation of the figure of Rs. 57,995 as accumulated profits in the above Schedule 'B' before the Appellate Tribunal was that the same had been arrived at by totaling up and/or addition of figure of assessed income in the assessment orders for the previous years. The submission was that in the assessed income, by disallowing expenditure and disbursements made, in fact the total income/profits of the assessee-company were ascertained. The figures of profits in the assessment orders did not take into account disbursements and outgoings in fact made by the assessee-company. The profits as ascertained by the previous assessment order thus did not represent the true facts regarding the (commercial) profits accumulated and in the hands of the assessee-company. In that connection, strong reliance was placed on the phrase 'possesses accumulated profits' as contained in the above section. The submission was that the phrase 'accumulated profits' in the section had the meaning of actual commercial profits in the hands of the assessee-company. Now, these contentions made were rejected by the Appellate Tribunal. The judgment of the Appellate Tribunal has the effect of holding that, in law, for ascertaining accumulated profits, the assessed income of the an assessee-company for the previous years as mentioned in the assessment orders already made would be the correct basis. By totaling up the income assessed by the previous assessment orders, one could directly ascertain whether an assessee-company possessed accumulated profits. This finding was made by the Tribunal by stating :
'It is sufficient if the company possesses the accumulated profits and, secondly, the word 'possesses', in this context, can only mean possesses after calculating the profits of the company as per the provisions of the Act and also..... 'possession of the accumulated profits may be in the abstract only and not actual possession' and further 'now the profits as per the provisions of the Act can only be the assessed profits and not the book profits or the profits possessed, i.e., left with the assessee after making all sorts of disbursements'.'
7. These findings are challenged in this reference. In that connection, Mr. Rajagopal has emphasised the fact that profits for the present assessment years were arrived at by disallowing the expenses of salaries in fact made by the company to the extent of Rs. 36,000 in the assessment year 1957-58 and Rs. 18,000 in the assessment year 1956-57. He has developed his contention by referring to the provisions in the Act which entitle the tax officers to disallow expenditure and disbursement made by an assessee-company by making a finding that such expenditure and disbursements were not made wholly and exclusively for commercial purposes. He has, with certain emphasis, argued that it would be contrary to the intent and purpose of the above section to arrive at 'accumulated profits' of an assessee without taking into account expenditure and disbursements in fact made though disallowed by the tax officers whilst assessing income.
8. Mr. Joshi for the revenue was unable to seriously contend that the amounts of outgoings and expenditures, in fact incurred by an assessee-company could be considered as continuing in the hands of an assessee-company for ascertaining its accumulated profits.
9. It is clear on the plain language of the above section that loans advanced to shareholders can be held to be dividend only if an assess-company is found to be in possession of accumulated profits at the relevant dates. Apparently, the commercial profits accumulated by the concerned assessee-company cannot be ascertained and/or calculated without reckoning or taking into account all and singular the disbursements made and expenditure in fact incurred. The intent and purpose of the section appears to be to prevent disbursements to shareholders of the profits made by a company by way of loans and not by way of dividends. It is difficult to hold that the phrase 'accumulated profits' in this section refers to the aggregate of the assessed income arrived at by disallowing disbursements and expenditures in fact incurred. There was no justification for the tax authorities and the Appellate Tribunal to proceed to arrive at the accumulated profits of the assessee-company by merely totalling up the income of the assessee-company as assessed by previous assessment orders. That the profits and/or income mentioned in these orders will not reflect the profits accumulated and in fact in the hands of the assessee-company for payment of salaries to the two directors in the amounts which we have already referred to above. It is true that bogus accounts and/or bogus debit entries can be found out and will not represent actual expenditure and/or disbursement. Such fraudulent debits would not form part of the true expenditure of the company and will accordingly continue in the hands of an assessee as part of the accumulated profits. This, however, does not mean that what is in fact expended and disbursed can be held to be possessed and to continue in the hands of the assessee-company and can form part of the 'accumulated profits'. This being the true position in law, the findings made by the tax authorities and the Appellate Tribunal against the assessee-company that the sum of Rs. 57,995 was its accumulated profits from 1948-49 to 1956-57 must be held to be arrived at on a basis that is not warranted by law. The further findings are all supported by the above erroneous finding and on that footing it has been held against the assessee-company that the loans advanced to the shareholders in the assessment year 1957-58 to the extent of Rs. 39,725 and in the assessment year 1958-59 to the extent of Rs. 17,921 was dividend within the meaning of the above section. That finding is entirely unjustified and is set aside.
10. In the result, out answer to the above question is in the negative.
11. The assessee-company is entitled to costs, but as the paper book has not been prepared in accordance with the rules, the respondent will pay costs to the assessee-company except for the preparation of paper book.