Law:

Section:

Section 2(22) of the Income-tax Act, 1961 - Deemed dividend - Assessment year 1962-63 - Whether amount of development rebate reserve in excess of statutory percentage required to be made under Act, is part of accumulated profits of company within meaning of section 2(22)(e) - Held, yes FACTS The assessee was the governing director of a private limited company. During the year ending 31-12-1961, he had drawn a sum of Rs. 71,792. These drawings were conceded to be the loans and advances from the company. The balance sheet of the company on 31-12-1961 showed that the development rebate reserve at the beginning of the year was in excess of the statutory percentage required to be made under the Act by Rs. 98,827. The Income-tax Officer in making the assessment for 1962-63 of the assessee applied section 2(22)(e), and, assessed a sum of Rs. 71,792 as "deemed dividend" on the ground that the development rebate reserve formed part and parcel of the accumulated profits within the meaning of that clause. On appeal, the Appellate Assistant Commissioner was of the view that the development rebate reserve could not be treated as accumulated profit on the ground that the reserve was created for a specific purpose and under the provisions of the Act, no advance or loans could be given out of the reserve and that, therefore, the amount would not be available for distribution of dividends. In that view, he held that the said sum of Rs. 71,792 was not liable to be treated and taxed as dividend under section 2(22)(e). On revenue's appeal, the Tribunal held that a reserve made towards the development rebate to extent it was not required to be made under the Act was a free reserve and, therefore, the sum of Rs. 71.792 was fully covered by the accumulated profits and was to be treated as dividend under section 2(22)(e). On reference : HELD Under sections 33 and 34, there is no ban on distribution of reserve for development rebate by way of dividends or profits, but if the reserve is distributed then the assessment for the year for which the rebate was granted is liable to be amended under section 155(5) as if the development rebate originally allowed was wrongly done. It may also be…

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