1. The only point involved in this appeal pertains to the applicability of the provisions of section 2(22) (e) of the Income-tax Act, 1961 (the Act).
2. The assessee is an individual. The assessment year is 1978-79, and the relevant previous year is financial year ended on 31-3-1978.
(a) The assessee owns 202 shares out of 2,000 shares of Cama Motors (P.) Ltd. (Cama Motors).
(b) The assessee is one of the three trustees of R. J. Cama Family Trust, which holds 400 shares of Cama Motors.
(c) The assessee along with Shri J. R. Cama holds 13 shares of Cama Motors.
(d) The assessee along with Shri B. D. Rawal was a partner in a firm of Victory Wood Works, to which Miss Aiyesha Jahangir Cama was admitted to the benefits of the partnership.
(e) Cama Motors had given a loan of Rs. 20,000 to Victory Wood Works on 26-12-1975.
(f) With effect from 1-1-1977, the assessee became a sole proprietor of Victory Wood Works vide deed of dissolution of partnership dated 11-7-1977.
(g) As on 31-3-1977 the loan account in the name of Victory Wood Works stood at Rs. 23,037.80 (along with interest) in the books of Cama Motors and as on 31-3-1978, it was Rs. 25,437.80 (along with interest).
4. On the basis of an intimation received from the ITO Companies Circle-II, Ahmedabad assessing Cama Motors, the ITO assessing the assessee enquired of her as to why an amount of Rs. 25,437.80 outstanding in the name of Victory Wood Works in the books of Cama Motors should not able treated as deemed divided in her hands by virtue of the provisions of section 2(22) (e). The assessee, vide her reply dated 3-3-1981, inter alia, stated before the ITO that this amount should not be treated as deemed dividend within the meaning of the said section because Victory Wood Works was not the registered shareholder of Cama Motors and that when the amount was originally advanced in December 1975, it was given to the said firm and not to her in her individual capacity. In support of her stand, the assessee relied on the decision of the Honble Supreme Court in the cases of Rameshwarlal Sanwarmal v. CIT  122 ITR 1, CIT v. C. P. Sarathy Mudaliar  83 ITR 170 and Smt. Tarulata Shyam v. CIT  108 ITR 345. The ITO, however, treated Rs. 25,438 as deemed dividend under section 2(22) (e), as under : "9. It is true that the deemed dividend can be taxed only in the hands of the registered shareholder. To that extend the assessee who became the proprietor of Victory Wood Works with effect from 1-1-1977 was a registered shareholder of the company for and from assessment year 1978-79. The next question is that as to at what point of time the amount should be taxed. The facts before the Supreme Court in smt.
Tarulata Shyam v. CIT  108 ITR 345 were different. In that case the amount was advanced in the beginning of the year but loan was returned before the end of the accounting year. In spite of that the Supreme Court held that this amount should be taxed under section 2(22) (e). In the case before us, the amount was advanced to the firm in which the assessee was 8 annas partner during the year 1975. The firm was dissolved with effect from 1-1-1977 and as per the deed of dissolution reported above, the assessee became the sole proprietor of the entire concern with all its assets and liabilities with effect from 1-1-1977. Therefore, in the books of the company the assessee became the debtor for the first time with effect from 1-1-1977 it could be from the assessee only. The company thus got an enforceable right against the assessee alone with effect from 1-1-1977 only and on 31-3-1978 the assessee a registered shareholder was a debtor to the company to the extent of Rs. 25,438. It is, therefore, clear that the money was advanced by the company to the assessee with effect from 1-1-1977 and, therefore, it is liable to be taxed in the hands of the assessee during assessment year 1978-79. Accordingly, the amount of Rs. 25,438 is added in the assessees hands as deemed dividend under section 2(22) (e)." 5. In appeal, after considering the submissions made on behalf of the assessee, the AAC upheld the action of the lTO in the following manner : "It is held that the said position as adopted by the ITO is legal and valid in view of the fact that the loan is deemed to have been taken by the appellant during the year under appeal. The transaction falls within the definition deemed dividend under section 2(22) (e) as the conditions laid down therein are satisfied. The appellant has placed reliance on certain judicial decisions which have been duly discussed by the ITO in the assessment order and rejected. The main reliance placed is on the Supreme Courts decision in Rameshwarlal Sanwarmal v.CIT  122 ITR 1, wherein it is held that the shareholder would mean the registered holder of shares and not beneficial holder. This decision does not help the appellants case because it is admitted in letter dated 5-7-1983 that the appellant is shareholder of 202 shares as also 50 equity shares in the name of minor out of 2,000 equity shares of the company. The position of share holdings of the other family members is not indicated but is clear that the appellant being a person who has substantial interest in the company, the advance or loan to her is a deemed dividend. The ITO was, therefore, justified in including the loan together with the accrued interest thereon as income under section 2(22) (e) of the Act." 6. Being aggrieved by the order of the AAC, the assessee came up in appeal before the Tribunal. The learned counsel for the assessee submitted that since the assessee owned only 202 shares out of 2,000 shares of Cama Motors, she cannot be held to be a person who has a substantial interest in the company within the meaning of section 2(22) (e) read with section 2(32). In this connection, he invited the attention of the Tribunal to the list of persons holding shares of Cama Motors (Pages 9 to 11 of the paper book). He further submitted that the shares of Cama Motors held in the name of R. J. Cama Family Trust of which the assessee was one of the three trustees, could not be considered for the purposes of the applicability of the provisions of section 2(22) (e), as the assessee cannot be held to be a beneficial owner of such shares within the meaning of section 2(32). Similarly, 13 shares of Cama Motors held in the joint names of the assessee and J. R.J. Cama should not be considered for the purposes of the applicability of the provisions of section 2(22) (e). The learned counsel for the assessee further submitted that the AAC was not justified in considering 50 shares of Cama Motors held by minor Aiyesha Jahangir Cama by her father and guardian J. R. J. Cama, in deciding the issue whether the provisions of section 2(22) (e), were applicable to the assessees case. In other words, he wanted to impress upon the Tribunal that the AAC has wrongly held that the assessee was a person who has a substantial interest in Cama Motors. His other line of argument was that since the original loan of Rs. 20,000 was given to the firm of Victory Wood Works on 26-12-1975 and not to the assessee in her individual capacity, the fact that on 1-1-1977 the assessee became the sole proprietor of the said firm would not justify the income-tax authorities to hold that the said loan was advanced to the assessee and that too on 1-1-1977. He emphasised the point that the same amount should not be held to have been advanced to two different entitles on two different dates. Again, according to the learned counsel for the assessee, the applicability of the provisions of section 2(22) (e), could have been considered, if at all, when the loan was first given to Victory Wood Works on 26-12-1975 and not on any other subsequent date.
His third line of attack was that even assuming for the sake of arguments that the provisions of section 2(22) (e), were applicable in the assessees case, since the conversion of the partnership concern into proprietary concern took place on 1-1-1977, the relevant previous year would be the financial year ended on 31-3-1977 and, therefore, the deemed dividend could not be brought to tax in the assessment year under consideration, viz., 1978-79. Finally he submitted that even assuming for the sake of arguments the provisions of section 2(22) (e) were applicable in the assessees case, Rs. 20,638 (being the balance as on 31-3-1976) could be brought to tax, if at all, and not Rs. 25,438 (being the balance as in 31-3-1978). He, therefore, urged that Rs. 25,438 included in the total income of the assessee should be deleted.
The learned representative for the department, on the other hand, strongly supported the action of the income-tax authorities. According to him, since the assessee became a debtor in the previous year relevant to the assessment year under consideration, the loan amount plus interest thereon was rightly treated as deemed dividend by invoking the provisions of section 2(22) (e).
7. I have carefully considered the rival submissions of the parties and I find considerable force in the submissions made on behalf of the assessee. The Honble Supreme Court has, time and again, held that the deeming provisions contained in the Act, should be strictly construed.
It is not in dispute that section 2(22) (e), is one such section.
Sub-clause (e) of clause (22) of section 2 reads as under : (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 company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;" As a rightly pointed out on behalf of the assessee that these provisions have to be read along with the provisions of clause (32) of section 2, which reads as under : "person who has a substantial interest in the company, in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power;" On proper reading of the aforesaid provisions of the Act, it is quite clear that any payment by a company by way of advance or loan to a shareholder has to be considered in the year in which such payment is made by the company. In the instant case, it is not in dispute that Rs. 20,000 was advanced to Victory Wood Works (a partnership concern) on 26-12-1975. Therefore, in my view the determination of the applicability of the provisions of section 2(22) (e), could be considered, if at all, in respect of the assessment year 1976-77 and that too in the case of the said firm. Since the said firm was not holding any shares in Cama Motors, the provisions of that section could not be attracted on the date on which the loan of Rs. 20,000 was advanced to the said firm. Almost after one year of the advance of Rs. 20,000, the said firm became a proprietary concern of the assessee on 1-1-1977. As per the deed of dissolution dated 11-7-1977, the assessee took over all the assets and liabilities of the said firm. At this stage Cama Motors was not at all in the picture and, therefore, I fail to appreciate how the provisions of section 2(22) (e) could be applicable in the assessees case when Cama Motors had not advanced any loan to her. Further, I find from the list of the shareholders of Cama Motors that the assessee was not holding shares carrying not less than twenty per cent of the voting power and, therefore, she cannot be treated to be a person who has substantial interest in the company (viz., Cama Motors) within the meaning of the provisions of section 2(32). In this view of the matter, I am of the opinion that the first two submissions made on behalf of the assessee are well founded and should be accepted. Apart from this, I also find considerable force in the other two submissions made on behalf of the assessee. It is pertinent to note that the assessees previous year for the year under consideration started from 1-4-1977 and ended on 31-3-1978. Since the conversion of Victory Wood Works from partnership to proprietary concern took place on 1-1-1977, i.e., three months before the starting of the relevant previous year, Rs. 25,438 could not be brought to tax in the year under consideration. Further, I entirely agree with the submissions made on behalf of the assessee that the amount which, if at all, could be brought to tax would be Rs. 23,038 and not Rs. 25,438 as has been held by the income-tax authorities. However, in view of my decision on the first two submissions made on behalf of the assessee and accepted by me, it is not necessary to discuss any thing further on the alternative submissions made by the learned counsel for the assessee. For all these reasons, I hold that the income-tax authorities were not justified in invoking the provisions of section 2(22) (e), and in including Rs. 25,438 in the total income of the assessee for the year under consideration. The same is, therefore, deleted from the total income of the assessee.