Law:

Section:

Section 2(22) of the Income-tax Act, 1961 [Corresponding to section 2(6A)(e) of the Indian Income-tax Act, 1922] - Deemed dividend - Assessment years 1957-58 and 1958-59 - Whether provisions of section 2(6A)(e) of 1922 Act are not ultra vires Parliament and beyond its legislative competence - Held, yes - Assessee was managing director of 'P' Ltd. which claimed its receipts as agricultural income - Later, assessee borrowed certain amount from 'P' Ltd. - ITO brought to tax loan taken by assessee as deemed dividend within meaning of section 2(6A)(e) of 1922 Act - Assessee raised contention that amount of loan was not taxable as income derived by 'P' Ltd. was wholly agricultural income and, thus, money received by him retained character of agricultural income - Whether, even if accumulated profits in hands of company were derived from agriculture and as agricultural income these profits were exempt from tax, money received by shareholder would not retain same character - Held, yes - Whether, therefore, assessee's contention that monies he obtained as loans from 'P' Ltd., which fell within scope of section 2(6A)(e) of 1922 Act continued to retain character as agricultural income, could not be accepted - Held, yes FACTS The assessee was the managing director of 'P' Ltd. This company was in receipt of income, which was claimed to be wholly agricultural. In the year of account corresponding to the assessment year 1957-58 the assessee borrowed sums from 'P' Ltd. He also borrowed monies from two other firms one of which also he was a managing director, and of the other he was only a shareholder. All these were companies in which the public had no substantial interest, and they thus came within the scope of section 23A of 1922 Act. The amounts on which the assessee was assessed to tax represented the total of the advances or loans taken by the assessee from these three firms. The Income-tax Officer applied section 2(6A)(e) of 1922 Act and brought these sums to tax. One of the objections taken by the assessee to the assessment was that section 2(6A)(e) of 1922 Act was invalid and inoperative. The Parliament had not the legislative competence to enact the statutory…

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