I have a running account with my company. I overdrew during the year, but the account was squared up by a journal adjustment on the last day of the year against another shareholder's credit balance. Can the withdrawals still be deemed dividend?
Yes. The Supreme Court held that the legal fiction comes into play as soon as the money is paid, so each withdrawal made when the shareholder has no credit balance is a deemed dividend on the date it is made. A subsequent adjustment or repayment, even one made on the last day of the accounting year, does not alter the position.
Decided by the Supreme Court (Suhas C. Sen J and K. Venkataswami J (judgment per Sen J)) on 1997-12-09, reported as Supreme Court of India, judgment dated 9 December 1997; no equivalent-citation line and no appeal number traced. It bears on section 2(22)(e), section 256(1) of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters.
This is the answer to the two most common defences on a current account: 'the account was squared up' and 'someone else's money was really being paid out'. On the first, the Court applied Tarulata Shyam — the legislature deliberately did not make the loan's subsistence on the last day of the previous year a pre-requisite for the fiction. On the second, the Court's approach is instructive and hard-edged: the assessee produced a letter from another shareholder's father directing the company to make Rs 1 lakh available to her out of his account, and the Tribunal had believed it, but the company only gave effect to it by a book entry on 31 March 1973 while the withdrawals ran from 3 July 1972; because the other shareholder's credit balance stood intact throughout, the money as a matter of fact came from the company. The lesson is that a book adjustment dated after the withdrawals does not retrospectively change the source. Read this with CIT v Mukundray K. Shah, which settles what figure is taxed on such an account.
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The appellant was a major shareholder with a substantial interest in Universal Radiators Pvt. Ltd., a company in which the public were not substantially interested, and had a running account with it. For assessment year 1973-74 (accounting period 1 April 1972 to 31 March 1973) the Income Tax Officer found that between 3 July 1972 and 22 March 1973 she had withdrawn Rs 93,027 from the company on a series of dates when she had no credit balance in her account; on 3 July 1972 her account already showed an excess withdrawal of Rs 1,831.14. The company had sufficient accumulated profits. The Income Tax Officer treated the whole Rs 93,027 as deemed dividend under s.2(22)(e) and the Appellate Assistant Commissioner dismissed her appeal. The Tribunal allowed her appeal, relying on a letter dated 3 April 1972 from A.P. Madhavan, father of another shareholder, the minor A.C. Mahesh, directing the company to make Rs 1 lakh available to the appellant out of Mahesh's account; the Tribunal held that Mahesh owed money to the appellant and that the withdrawals were therefore from Mahesh's account and not from accumulated profits. On a reference under s.256(1) the Madras High Court answered in favour of the Revenue, pointing out that the letter was given effect to only on 31 March 1973 by debiting Rs 1 lakh to Mahesh's account and crediting the appellant, while the withdrawals had been made steadily between 3 July 1972 and 22 March 1973 with Mahesh's credit balance remaining intact throughout.
The appeal was dismissed with no order as to costs. The withdrawals amounted to a grant of loan or advance by the company to the shareholder; the legal fiction came into play as soon as the monies were paid, and the assessee must be deemed to have received dividends on the dates on which she withdrew the amounts. That the loan or advance was ultimately repaid or adjusted does not alter the fact that in the eye of law she received dividend from the company during the relevant accounting period, and the adjustment made on the very last day of the accounting year did not alter the position.
The Court found no fault with the High Court's reasoning. On the facts found by the Tribunal it was not possible to hold that the appellant had been paid out of funds lying to Mahesh's credit: to pay her, Mahesh's account was not debited at all and his entire credit balance stood as it was until the last day of the accounting year, so the High Court had decided the case on the Tribunal's own findings and had not reappraised the evidence or disbelieved the letter. On the statutory question, the Court set out s.2(22)(e) as it then stood and held that the withdrawals amounted to a loan or advance and that the fiction operated at the moment of payment. It applied Smt. Tarulata Shyam v. Commissioner of Income Tax, 108 ITR 345, in which it had been held that the statutory fiction created by s.2(6A)(e) of the 1922 Act came into operation at the time of the payment of the advance or loan, the legislature having deliberately not made the subsistence of the loan on the last date of the previous year a pre-requisite for raising the fiction.
Subsequent 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 withdrew the aforesaid amounts from the company.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that the legal fiction comes into play as soon as the money is paid, so each withdrawal made when the shareholder has no credit balance is a deemed dividend on the date it is made. A subsequent adjustment or repayment, even one made on the last day of the accounting year, does not alter the position. This was decided by the Supreme Court (Suhas C. Sen J and K. Venkataswami J (judgment per Sen J)) and bears on section 2(22)(e), section 256(1) of the Income Tax Act 1961. It is reported as Supreme Court of India, judgment dated 9 December 1997; no equivalent-citation line and no appeal number traced. This is the answer to the two most common defences on a current account: 'the account was squared up' and 'someone else's money was really being paid out'. On the first, the Court applied Tarulata Shyam — the legislature deliberately did not make the loan's subsistence on the last day of the previous year a pre-requisite for the fiction. On the second, the Court's approach is instructive and hard-edged: the assessee produced a letter from another shareholder's father directing the company to make Rs 1 lakh available to her out of his account, and the Tribunal had believed it, but the company only gave effect to it by a book entry on 31 March 1973 while the withdrawals ran from 3 July 1972; because the other shareholder's credit balance stood intact throughout, the money as a matter of fact came from the company. The lesson is that a book adjustment dated after the withdrawals does not retrospectively change the source. Read this with CIT v Mukundray K. Shah, which settles what figure is taxed on such an account. If it applies to you, the first step is this: Reconstruct the shareholder's account date by date and identify every date on which the account went into, or further into, debit. That is where the exposure sits, not at the year end.
The appellant was a major shareholder with a substantial interest in Universal Radiators Pvt. Ltd., a company in which the public were not substantially interested, and had a running account with it. For assessment year 1973-74 (accounting period 1 April 1972 to 31 March 1973) the Income Tax Officer found that between 3 July 1972 and 22 March 1973 she had withdrawn Rs 93,027 from the company on a series of dates when she had no credit balance in her account; on 3 July 1972 her account already showed an excess withdrawal of Rs 1,831.14. The company had sufficient accumulated profits. The Income Tax Officer treated the whole Rs 93,027 as deemed dividend under s.2(22)(e) and the Appellate Assistant Commissioner dismissed her appeal. The Tribunal allowed her appeal, relying on a letter dated 3 April 1972 from A.P. Madhavan, father of another shareholder, the minor A.C. Mahesh, directing the company to make Rs 1 lakh available to the appellant out of Mahesh's account; the Tribunal held that Mahesh owed money to the appellant and that the withdrawals were therefore from Mahesh's account and not from accumulated profits. On a reference under s.256(1) the Madras High Court answered in favour of the Revenue, pointing out that the letter was given effect to only on 31 March 1973 by debiting Rs 1 lakh to Mahesh's account and crediting the appellant, while the withdrawals had been made steadily between 3 July 1972 and 22 March 1973 with Mahesh's credit balance remaining intact throughout. The matter was decided on 1997-12-09 by the Supreme Court (Suhas C. Sen J and K. Venkataswami J (judgment per Sen J)). On those facts the Supreme Court held as follows. The appeal was dismissed with no order as to costs. The withdrawals amounted to a grant of loan or advance by the company to the shareholder; the legal fiction came into play as soon as the monies were paid, and the assessee must be deemed to have received dividends on the dates on which she withdrew the amounts. That the loan or advance was ultimately repaid or adjusted does not alter the fact that in the eye of law she received dividend from the company during the relevant accounting period, and the adjustment made on the very last day of the accounting year did not alter the position.
The Court found no fault with the High Court's reasoning. On the facts found by the Tribunal it was not possible to hold that the appellant had been paid out of funds lying to Mahesh's credit: to pay her, Mahesh's account was not debited at all and his entire credit balance stood as it was until the last day of the accounting year, so the High Court had decided the case on the Tribunal's own findings and had not reappraised the evidence or disbelieved the letter. On the statutory question, the Court set out s.2(22)(e) as it then stood and held that the withdrawals amounted to a loan or advance and that the fiction operated at the moment of payment. It applied Smt. Tarulata Shyam v. Commissioner of Income Tax, 108 ITR 345, in which it had been held that the statutory fiction created by s.2(6A)(e) of the 1922 Act came into operation at the time of the payment of the advance or loan, the legislature having deliberately not made the subsistence of the loan on the last date of the previous year a pre-requisite for raising the fiction. In the words reproduced by the source cited on this page: "Subsequent 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 withdrew the aforesaid amounts from the company." The decision followed or applied Smt. Tarulata Shyam & Ors. v. Commissioner of Income Tax, West Bengal, 108 ITR 345 (SC) — applied.
It was decided by the Supreme Court on 1997-12-09 and is reported as Supreme Court of India, judgment dated 9 December 1997; no equivalent-citation line and no appeal number traced. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(22)(e), section 256(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with no order as to costs. The withdrawals amounted to a grant of loan or advance by the company to the shareholder; the legal fiction came into play as soon as the monies were paid, and the assessee must be deemed to have received dividends on the dates on which she withdrew the amounts. That the loan or advance was ultimately repaid or adjusted does not alter the fact that in the eye of law she received dividend from the company during the relevant accounting period, and the adjustment made on the very last day of the accounting year did not alter the position. It arises in Assessment & Scrutiny, How Tax Law Is Read and Evidence & Burden of Proof matters, on section 2(22)(e), section 256(1) of the Income Tax Act 1961, and was decided by Suhas C. Sen J and K. Venkataswami J (judgment per Sen J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you are going to say the money came from someone else's credit balance in the company's books, make sure the debit to that person's account is contemporaneous with the withdrawal. A year-end journal entry will not do. Do not argue that the account was square at 31 March. Tarulata Shyam and this decision both foreclose it. Where the shareholder genuinely has a credit balance with the company, keep it visible and take withdrawals against it; on the reasoning approved in Mukundray K. Shah, a payment that merely discharges the company's existing debt to the shareholder is not a loan at all. If the company had no accumulated profits on the date of a particular withdrawal, take that point withdrawal by withdrawal — the charge is capped by accumulated profits as at the date of each payment.
Still good law. The citator search has now been run: 102 later decisions cite this judgment, 14 of them from the Supreme Court or a High Court. The Delhi High Court in Mohan Anand v ACIT (13 February 2002) held its own conclusion to be in conformity with it; the Allahabad High Court applied it in CIT v Unad Cloth Export (P) Ltd (21 October 2011), stating that the legal fiction comes into play as soon as the monies are paid; and the Madras High Court applied it in CIT v Madurai Chettiyar Karthikeyan (16 April 2014). It was also relied on by the Calcutta High Court in Mukundray K. Shah v CIT (12 May 2005), the decision later affirmed by the Supreme Court. Nothing overruling or doubting it was found; the Delhi Tribunal in ACIT v Seema Devi Bansal (18 July 2018) merely held it inapplicable on the facts. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The indiankanoon print view is an OCR of the old Supreme Court record and carries obvious transcription defects, none of which touch the holding. The text says the assessee withdrew on 'fourteen different dates' but the table that follows lists sixteen rows; one row is dated '3.11.97' in a table otherwise running from July 1972 to March 1973 and is plainly 3.11.72; a clause is duplicated ('the withdrawals made by the assessee had to the company, the withdrawals made by the assessee had to be treated as withdrawals from the account of Mahesh'); 'must be deemed to the revived dividends' plainly should read 'received'; and 'Messers', 'madhavan' and 'mahesh' appear with inconsistent capitalisation. The print view shows no equivalent-citation line and no appeal number. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with no order as to costs. The withdrawals amounted to a grant of loan or advance by the company to the shareholder; the legal fiction came into play as soon as the monies were paid, and the assessee must be deemed to have received dividends on the dates on which she withdrew the amounts. That the loan or advance was ultimately repaid or adjusted does not alter the fact that in the eye of law she received dividend from the company during the relevant accounting period, and the adjustment made on the very last day of the accounting year did not alter the position.
TaxSphere, “Miss P. Sarada v CIT”, https://taxnotice.vittsphere.com/caselaw/case/p-sarada-v-cit-running-account-withdrawals-year-end-adjustment/ (validity last checked 2026-09-07)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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