1. The question referred to us by the Income-tax Appellate Tribunal for the assessment years 1967-68, 1968-69 and 1969-70 reads as under :
'Whether, on the facts and in the circumstances of the case, the applicant-assessee is entitled to the set-off of deemed dividends against the dividends actually declared ?'
2. It may be mentioned that a similar reference is already pending for the assessment year 1962-63, but due to some technical difficulty, the said reference has not yet been numbered. We have been told that the Tribunal had given detailed judgment for the said assessment year whilst disposing of a similar contention of the assessee in Income-tax Application No. 7516 of 1967-68. That judgment has been perused by us and we are in substantial agreement with what the Tribunal has observed in paragraphs 6 and 7 of the said appellate judgment. However, we will set down a few facts to dispose of the present reference. The reference for the earlier year will be required to be disposed of in accordance with our present decision after the same is duly numbered.
3. The assessee before us in this reference in the executor of the estate of her husband, late P. K. Badiani. The said P. K. Badiani owned 10,460 shares of Sadhana Textile Mills Pvt. Ltd. During the three assessment years in question, he received certain dividend amounts from the said company and claimed set-off of actual dividends received in these three years, against certain dividends treated in earlier years as deemed dividends under s. 2(22)(e)(iii) of the I.T. Act, 1961. His contention was that the dividends actually declared should be set off against such deemed dividends.
4. The aforesaid claim was rejected by the ITO. The view of the ITO was subsequently confirmed both by the AAC and at the later stage by the Tribunal.
5. Section 2(22)(e) provides as under :
'2. In this Act, unless the context otherwise requires, - ...
(22) dividend includes - ...
(e) any payment by a company, not being a company, in which the public are substantially interested, 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, being a person who has a substantial interest in the company, or any payment by any such shareholder, to the extent to which the company in which either case possesses accumulated profits;'
6. However, cl.(e) provides for certain relief and it is enacted, but dividend does not include -
'(iii) 'any dividend paid by a company which is set off by the company against the whole or any part of the any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off.''
7. The question, therefore, is whether dividends paid by Sadhana Textile Mills Pvt. Ltd. for the three assessment years could be regarded as having been set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-cl. (e) to the extent to which the dividend was so set off.
8. Now, we find from the detailed judgment of the Tribunal for the earlier assessment year 1962-63, that the payment of the dividends for these three assessment years and for the said year had been made by the company (Sadhana Textile Mills Pvt. Ltd.) to the assessee without any set-off, and indeed not set-off was possible because by that time the assessee has already repaid the entire debt the which had been considered to be deemed dividends and his account with Sadhana Textile Mills Pvt. Ltd. had been converted into a credit balance as on April 1, 1961 (relevant for the assessment year 1962-63). The same position, it would seem, continues to exist for the three assessment years under consideration. The statutory provisions require a set-off to be made by the company in respect of these dividends and this set-off can only be against some amount receivable by the company. If the accounts of the assessee with the company is converted into a credit balance by the respective relevant date, then there would be no occasion for the company to set off the amount of dividends. Indeed, there could be no set-off in such a case and there had been none in fact. The company paid dividends for these three years as well as for the assessment year 1962-63 in specie to the assessee.
9. The learned advocate for the assessee urged that if the provision was construed in this manner, it would amount to doubt taxation of the assessee. Although we are in agreement with his submission that there might be double taxation of the assessee, that would not be itself be sufficient to permit a trained construction - almost an impossible one - on the phraseology employed by the Legislature in giving relief to the individual assessee by providing what dividend will be excluded in view of past deemed dividends. The requirements prescribed are clear and specific. They are required to be fully complied with and in the instant case, they could not be complied with and were not complied with. If that be so, the exclusion of the dividends from the income of the assessee for the three years as well as for the earlier year neither permissible nor possible.
10. Reference was made at the Bar to three cases, none of the which direct bearing on the question and would not seem to assist the assessee in the construction which he seeks from us. The first of the said case was CIT v. Badiani : 76ITR369(Bom) . That case was concerned with calculations of deemed dividends under s. 2(6A)(e) of the Indian I.T. Act, 1922, and that decision appeared to be irrelevant for the purpose of putting the proper interpretation on cl. (22)(e)(iii) with which we are directly concerned in the present reference. Mr. Rajgopal also referred us to the headnote in Tata Iron & Steel Co. Ltd. v. Upadhyaya : 96ITR1(Bom) , which deals with the adjustment made in respect of the dividends declared by B. R. Ltd., a subsidiary of the Tata Iron & Steel Co Ltd. The relevant discussion in the judgment is to be found from page 17 onwards of the report. If the facts are properly perused, it is found that the dividends of Rs. 17,29,647 payable to the Tata Iron & Steel Co. Ltd. as dividends by its subsidiary B. R. Ltd. was in fact adjusted by the subsidiary company against the loan or deposit which it had earlier given to the Tata & Steel Co. Ltd. The deposit represented a liability which Tata Iron & Steel Co. Ltd. owed to B. R. Ltd. which liability was subsisting on the date on which the dividend was declared and which liability was reduced by the amount of the dividend by the company declaring the dividend. These facts are totally within what is enacted by the Legislature in Sub-cl. (e)(iii) and, therefore, this case is of no assistance to Mr. Rajgopal's contention.
11. The last of the three cases cited at the Bar was CIT v. Narasimhan : 118ITR60(Mad) , where the Madras High Court had occasion to consider the application of s. 2(22)(e) of the I.T. Act, 1961. This decision was concerned with calculations of deemed dividends and not with what was to be excluded by sub-cl.(iii).
12. The phraseology employed by the Legislature is specific and clear. In our opinion, the facts are found by the Tribunal in the assessee's case and these facts are not in dispute before us and did not warrant exclusion of the dividends received by the assessee. If that be so, the question referred to must be answered against the assessee and in favour of the Revenue.
13. Accordingly, the question referred to us is answered as under :
The assessee was not entitled to set off deemed dividends against the dividends actually declared in the three assessment years.
14. The assessee to pay the costs of the reference to the Revenue.