T.U. Mehta, J.
1. The question which is involved in this reference is whether the payment by way of advance or loan by a closely-held company to its shareholder amounting to a 'deemed' dividend within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922, is a 'distribution of dividend' within the meaning of section 23A thereof, so as to save the said company from the super-tax liability under it.
2. Facts of the case are that the respondent-assessee is a private limited company governed by the provisions of section 23A of the Act of 1922. We are concerned with the assessment years 1958-59, 1959-60 and 1960-61. The total income for these three years of this company after the decision given by the Tribunal with regard to these assessment years was respectively Rs. 96,026, Rs. 2,41,990 and Rs. 2,66,209. After deducting tax from its income, the balance of distributable profits for these years was respectively Rs. 46,573, Rs. 1,17,365 and Rs. 1,46,415. It is an admitted position that the respondent-assessee did not distribute any dividend for these years. It is also not in dispute that the minimum amounts of dividend, which the respondent-assessee should have distributed to escape from the mischief contemplated by section 23A of the Act, were respectively Rs. 20,958, Rs. 52,814 and Rs. 73,207.
3. For these three assessment years, it was found that the respondent-assessee has advanced loans to a shareholder amounting respectively to Rs. 77,961, Rs. 47,022 and Rs. 71,595. The payment of these loan amounts to the shareholder concerned amounted to 'deemed dividends' under clause (e) of sub-section (6A) of section 2 of the Act. The convention of the assessee before the Income-tax Officer was that, since the payment of these loan amounts amounted to 'deemed dividends', the said payments must be treated as 'distribution of dividend' within the meaning of section 23A, and, therefore, so far as the first year is concerned, there was no breach of any of the provisions of section 23A as the 'deemed dividend' in the form of loan for that year exceeded the amount of dividend which ought to have been distributed under section 23A. For the remaining two years, the payment of loans was short by less that 5% and, therefore, action under section 23A was not justified before giving it an opportunity to make good the deficiency. These contentions of the assessee did not find favour with the Income-tax Officer who, therefore, passed the necessary orders under section 23A imposing additional super-tax for all the three years.
4. The assessee went in appeal and the Appellate Assistant Commissioner, who heard this appeal, relied upon the decision given by the Calcutta High Court in the case of Moore Avenue Properties Pvt. Ltd. v. Commissioner of Income-tax : 59ITR466(Cal) and held that the amounts deemed to have been declared as dividend under clause (e) of section 2(6A) of the Act, should be considered as dividend distributed for the purpose of section 23A. The Appellate Assistant Commissioner further found that in the first year such deemed dividend exceeded the minimum amount distributable under section 23A but in two later years, distribution fell short of the required minimum by less than 5% and, a therefore, the Income-tax Officer was required to give an opportunity to the assessee to make good the dividend to the required percentage. Since no such opportunity was given, the Appellate Assistant Commissioner found that none of the orders passed under section 23A by the Income-tax Officer could survive.
5. The matter was thereafter taken by the department to the Appellate Tribunal. The Appellate Tribunal agreed with the view taken by the Appellate Assistant Commissioner relying upon the above referred Calcutta decision and further held that even if the matter was in doubt, the view which was favourable to the assessee should be taken.
6. Being aggrieved by this decision of the Tribunal, the revenue has preferred this reference in which the following question is referred to us for our opinion :
'Whether the a Tribunal was right in law in holding that deemed dividends under section 2(6A)(e) of the Act of 1922 are to be taken into account in determining the applicability of section 23A of the Act of 1922 ?'
7. The contention raised on behalf of the revenue in this reference by Shri Kaji was that the purpose for which the deeming fiction is created by clause (e) of sub-section (6A) of section 2 was to tax the loan in the hands of the shareholder who receives the same from a closely-held company as dividend, but that does not mean that the dividend of the company gets distributed within the meaning of section 23A. He pointed out that the object of section 23A is to prevent the closely-held company from accumulating profits and hence, if the view taken by the Tribunal is accepted, the said object would be frustrated. Referring to the case law on the subject, he pointed out the distinction between the meanings of the words 'payment' and 'distribution' and contended that even if payment of a loan is deemed to be a dividend under section 2(6A)(e), it can never amount to 'distribution' of a dividend within the meaning of section 23A.
8. As against this, Shri Shah, appearing for the assessee, contended that when the recipient of a loan which is deemed to be dividend under section 2(6A)(e) is taxed on the said amount, the purpose of clause (e) of section 2(6A) as well as of section 23A is fully served and, therefore, the deeming fiction of clause (e) of section 2(6A) should be taken to its logical conclusion and should be carried even for the purpose of determining whether the requirements of section 23A are fulfilled or not. Shri Shah contended that it is not correct to say that the object of section 23A is to see that the profits of a closely-held company are not accumulated and are distributed amongst the shareholders, and in support of this, he put a great stress on clause (ii) of section 23A(1) which enables an Income-tax Officer not to levy super-tax if he thinks that the payment of a dividend or a larger dividend than that declared, would not have resulted in a benefit to the revenue. According to Shri Shah, the only object of section 23A is to look to the interest of revenue and if this object is served by taxing the recipient of the loan on the basis of a deemed fiction under clause (e) of section 2(6A), then no further action under section 23A is called for on the ground that dividend was not 'distributed' amongst the shareholders.
9. Section 2(6A) of the Act, in so far as it is relevant for our purpose, is as under :
'(6A) 'dividend' includes -
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;
(b) any distribution by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest, to the extent to which the company possesses accumulated profits, whether capitalised or not;
(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;
(d) any distribution by a company on the reduction of its capital to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitaliased or not;
(e) any payment by a company, not being a company, in which the public are substantially interested within the meaning of section 23A, 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 or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits...'
10. In this case we are primarily concerned with the provisions contained in clause (e). Sub-section (6A) further provides that the expression 'dividend' does not include any dividend paid by a company, which is set off by the company against the whole or any part of the sum previously paid by it and treated as a dividend within the meaning of clause (e) to the to the extent to which it is so set off. So, according to this provision, if a closely-held company fives loan to any of its shareholders and then sets off either the whole or part of the loan or advance against its dividends, then the amount so set off will not be deemed to be a dividend to the extent of the said set-off. The relevant portion of section 23A, with which we are concerned in this reference, is contained in sub-section (1) thereof which says that where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less then the statutory percentage of the total income of the company of that previous year as reduced as provided in the section then the said Income-tax Officer, unless he is satisfied with regard to clauses (i),(ii) and (iii), shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rates mentioned in the section. This portion of section 23A, therefore, provides that in respect of the previous year, profits and gains should be 'distributed' as 'dividends' as contemplated under the section. The rival contentions of the parties in this reference are with regard to requirements of the 'distribution' of profits and gains as dividends. As already noted above, the assessee's contention is that when a loan given by a closely-held company to one of its shareholders is deemed to be dividend, the payment of that loan should be treated as distribution of dividend within the meaning of section 23A.
11. It should be noted that clause (e) of section 2(6A) of the Act and section 23A were both substituted simultaneously, for the original provisions by the Finance Act, 1955, with effect from 1st April, 1955. The object of both of the provisions is to prevent avoidance of tax by the shareholders of a closely-held company. In such a company, a few shareholders, who effectively control it, can easily exploit its juristic personality, by restraining it from distributing its yearly dividends and thereby accumulating its profits, and thus saving themselves from a higher tax incidence resulting from the distribution of dividend. At the same time, they can take the advantage of undistributed dividend by taking loan from the company. The rates of tax and super-tax being higher in the case of an individual than in the case of a company, tax avoidance by such a method would be very tempting. It is for this reason that, as observed by Veeraswami J. (as then he was) in T. V. Sundaram Iyengar & Sons (P.) Ltd. v. Commissioner of Wealth-tax : 72ITR107(Mad) , in most tax systems of advanced States in the world there is regulation of accumulation of undistributed corporate profits which are considered either unhealthy from certain economic points of view, or as opening up avenues for evasion that it would be wrong to say that the object of section 23A is not be prevent the accumulation of profits in the hands of a close company. It should be noted that before clause (e) of section 2(6A), and section 23A were substituted for the old provisions in the year 1955, the Income-tax Officer was bound to make an order in writing that undistributed income of the company should be deemed to have been distributed amongst its shareholders in certain proportion, and such deemed dividend was included in the total incomes of the shareholders. The legislature tried to prevent accumulation of profits by this method, but it created some problems with the result that, to achieve the same object of preventing accumulation of profits in the hands of the company, the legislature provided for the levy of additional tax on the company itself, and further treated loans in the hands of the shareholders as deemed dividends under clause (e) of section 2(6A). The fact that Explanation 2 of the section fixes different statutory percentages with regard to different types of companies, again emphasises that the main object of the section is to prevent accumulation of profits in the hands of certain type of companies beyond a particular limit. Thus the legislature has made a two-pronged attack, one by enacting clause (e), and thus treating loan as a dividend, and the other by compelling the company to distribute its dividend. Thus, clause (e) of section 2(6A) and section 23A are expected to work independently in their own sphere for achieving the same object.
12. Explaining the purpose of section 23A, the Supreme Court has observed in Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax : 56ITR198(SC) :
'The object of this section is to prevent avoidance of super-tax by shareholders of a company in which the public are not substantially interested. As is well known, the rates of super-tax applicable to companies are much lower than the rates applicable to individual assesses. The legislature thought that individuals tried to avoid the payment of super-tax at a higher rate by transferring to a private limited company in return for share the sources of their income and then the profits made by the company were allowed to accumulate in the hands of the company, dividends not being declared, and the said profits would ultimately be distributed in a capital form by one device or another. The object of section 23A was to defeat such attempts. The main effect of the provisions of section 23A appears to be that a company should not accumulate more than 40 per cent. of its net profits to build up reserves or to provide for capital expenditure. It will be recalled that section 2(6A) has taken within the definition of 'dividend' the accumulated profits of such companies; and so, section 23A attempts to reach such accumulated profits for the purpose of taxation.'
13. The court further observed under explaining the scheme of the object of section 23A (pages 207, 208) :
'When the legislature realised that though money was reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescribed for companies. This object was defeated by section 23A which provides that in the case of undistributed profits, tax would be levied on the shareholders on the basis that the accumulated profits will be deemed to have been distributed amongst them. Similarly, section 12(1B) provides that if a controlled company adopts the device of making a loan of advance to one of its shareholders, such shareholders will be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he has received the said loan by way of dividend. It is clear that when such a device is adopted by a controlled company, the controlling group consisting of shareholders have deliberately decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company, but the main object underlying the loan is to avoid payment of tax. It may ultimately be repaid to the company and when it is so repaid, it may or may not be treated as part of accumulated profits. It is this kind of a well planned device which section 12(1B) intends to reach for the purpose of taxation.'
14. In Commissioner of Income-tax v. Abdul Rahim Osman & Co. (India) (P.) Ltd. : 86ITR436(SC) , the Supreme Court has made some very categorical observations with regard to the object 23A to prevent a closely held company from accumulating its profits. These observations are as under (page 438) :
'This provision is procedural and applies only to companies in which the public are not substantially interested. It seems to have been enacted with a view to deter private companies which do not distribute more than 60% of their assessable income on pain of exposing them to the drastic consequences of subjecting their undistributed balance of the net income to additional super-tax. The object of the section is to prevent the shareholders from adopting a device to avoid payment of super-tax, inasmuch as the rates of super-tax for the companies being lower, there may be a temptation to get the company to accumulate profits and capitalise them, such as, for instance, to issue bonus shares which were not assessable as income in the hands of the shareholders. It is to avoid these artifices and force such companies to declare the minimum statutory dividends, though in the light of the changed defination of 'dividend' under section 2(6A) may attract tax even when they reach the shareholders in capitalised forms, or where they are distributed to them on liquidation from accumulated profits over the years, they will be chargeable as dividends.'
15. These observations show that, while the function of clause (e) of section 2(6A) is to treat the loans in the hands of a shareholders as dividend, the function of section 23A is to compel a closely-held company to distribute its dividends and not to accumulate profits.
16. The dichotomy of the operative fields of clause (e) of section 2(6A) and section 23A becomes more evident if we an illustration. Suppose a closely-held company to which the provisions of section 23A apply, distributes its dividend in a particular year complying with the statutory limit fixed by the section, and thereafter, advances a loan to one of its shareholders out of the remaining accumulated profit. In such a case, the company will obviously not be liable to any action under section 23A as the provisions of this section stand complied with. But none the less, the shareholder who receives the loan would be liable under clause (e) of section 2(6A) as the loan received by him would necessarily be treated as a deemed dividend. It is important to note that though that loan would be treated as a deemed dividend, the same would not be computed as a further dividend distributed amongst the shareholders of the company. In our opinion, this illustration conclusively shows how clause (e) of section 2(6A), and section 23A operate independently on different fields to achieve the same object. That being so, the fiction created by clause (e) of section 2(6A) cannot be projected to section 23A as is done by the Tribunal, because the purpose of this fiction is fully served the moment the loan is treated as a dividend in the hands of the shareholders concerned. It is a well-settled principle that legal fictions are created for a definite purpose and are limited to the purpose for which they are created and should not be extended beyond their legitimate field.
17. Shri Shah's stress on clause (ii) of section 23A(1) is, in our opinion, totally misplaced and misconceived, as the satisfaction of the Income-tax Officer contemplated by this clause is merely to enable the said officer not to take any further action if he finds, after considering the factual data, including the individual assessments of the shareholders case the dividend was actually distributed, that it would not have resulted in a benefit to the revenue if a dividend or a larger dividend was declared. Obviously, the clause had nothing to do with the object of section 23A as it comes into operation only after the concerned company is committed to a particular course of action.
18. We find that, on a plain reading of its language, section 23A speaks of 'profits and gains distributed as dividends'. This expression thus expressly says that (1) there must be a 'distribution', (2) that distribution should be of profits and gains. i.e., not of capital, and (3) that distribution should be of real and actual dividend and not that of a notional or a fictional one. A 'payment' by way of advance or loan contemplated by clause (e) of section 2(6A) does not satisfy any of these three requirements because, (1) 'payment' of a loan can never be treated as 'distribution' of anything, (2) a loan need not always come out of profits and gains, as it can come even out of capital, and (3) loan is only a fictional dividend under clause (e) of section 2(6A). We shall presently discuss these three important aspects of the matter.
19. That a 'payment' by way of an advance or loan is not a 'distribution' of dividend is too obvious a proposition to be emphasised. A loan ceases to be a loan if it is not repayable, while we have never heard of a distributed dividend involving a liability for repayment. This is the basic difference between the two. Moreover, a 'distribution' may result in an eventual 'payment', but 'payment' is not always the result of 'distribution'. To 'distribute' means 'to give each a share' and hence a 'distribution' results in 'payment' to more than one person. But a 'payment' simpliciter may be made only to one person to the exclusion of all others. Sub-section (6A) of section 2 itself recognises the distinction because clauses (a) to (d) thereof all provide for instances of 'distribution' of a company. Thus, by using the word 'distribution' in clauses (a) to (d) and the word 'payment' in clause (e), the legislature itself has emphasised the basic difference between the two concepts. In Punjab Distilling Industries Ltd. v. Commissioner of Income-tax : 57ITR1(SC) , the Supreme Court has explained the meaning of the expression 'distribution' appearing in clause (d) of section 2(6A) of the Act of 1922, as under (page 9) :
'What then is the meaning of expression 'distribution' The dictionary meaning of the expression 'distribution' is to give each a a share, to give to several persons'. The expression 'distribution' connotes something actual and not notional. It can be physical; it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts or by actually paying to each one of them the amount due to him... The only difference between the expression 'paid' and the expression 'distribution' is that the latter necessarily involves the idea of division between several persons which is the same as payment to several persons.'
20. Moreover, 'distribution' of a dividend involves a prescribed process and fulfilment of some necessary and important formalities which are never involved in 'payment' in the nature of a loan. This aspect is pointedly indicated by the Supreme Court in the above referred case in the following words (pages 9,10 :
'Distribution is culmination of a process. Firstly, there will be a resolution by the general body of a company for reduction of capital by distribution of the accumulated profits amongst the shareholders; secondly, the company will file an application in the court for an order confirming the reduction of capital; thirdly, after it is confirmed, it will be registered by the Registrar of Joint Stock Companies; fourthly, after the registration the company issues notices to the shareholders inviting applications for refund of the share capital; and, fifthly, on receiving the applications the company will distribute the said profits either by crediting the proportionate share capital to each of the shareholders in their respective accounts or by paying the said amounts in cash. Out of the said five steps the first four are only necessary preliminary steps which entitle the company to distribute the accumulated profits. Credits or payments are related to the said declaration; that is to say, distribution is from and out of the accumulated profits resolved to be distributed by the company.
21. In Commissioner of Income-tax v. Jamnadas Sriniwas P. Ltd. : 76ITR656(Cal) , the High Court of Calcutta has construed the words 'distribution' and 'paid' or 'payment' and it has observed as under (pages 660, 661) :
'We have to bear in mind that under section 2(6A) of the Indian Income-tax Act, 1922, which is an all-inclusive definition or dividend, five different categories of sums have been included, four of these are distributions by a company and the fifth one is payment by a company. In that definition of 'dividend' the legislature had used the expressions 'distribution ' as well as 'payment' in the Indian Income-tax Act, 1922, as it stood prior to the introduction of the Finance Act, 1956. With that background it is not possible to say that when the legislature has used the expression 'distributed' in clause (b) of the second proviso to Paragraph D of Part II of the Finance Act, 1956, it intended to include 'paid' or 'payment'. By enacting clause (e) of section 2(6A) of the Indian Income-tax Act, 1922, the legislature has created a fiction and has made the payments referred to in clause (e) 'dividend' for the purposes of the said Act. But the legislature has not made the further fiction and has not made them 'dividend distributed by a company'. In this connection it is necessary to bear in mind that the expressions 'distribution' and 'payment' connote different meanings. 'Distribution' is division amongst several persons. It connotes an idea of apportionment among more than one person. In the case of 'distribution' the recipients would be more than one, while in the case of 'payment' the recipient may be a single person. Where two different expression with two different meanings have been used in a statute, unless there is a clear indication to the contrary, such construction should not be made as to make the two expressions synonymous.'
22. In Commissioner of Income-tax v. Mayur Madhukant Mehta : 85ITR230(Guj) , the question arose whether in a case where the amount of loan given by a section 23A-company to a shareholder, exceeded the accumulated profits of the company, the entire accumulated profits would be liable to be taxed as dividend in the hands of the shareholder under section 2(6A)(e) of the Indian Income-tax Act, 1922, and that not only that part of the loan which represents the proportionate share of the shareholder in accumulated profits of the company. While discussing this question, Bhagwati C.J.(as he then was) has made the following very pertinent observations which are very useful for the purpose of this reference. At page 234 of the report, he had observed as under :
'There is no reference in section 2(6A)(e) to any holding of shares by the shareholder nor is there any reference to the concept of distribution of the accumulated profits. There could not in fact be any reference to distribution of accumulated profits pro rata amongst the shareholders, since such reference would have been wholly incompatible with the subject-matter of the section which deals essentially with an individual shareholder who receives payment from the company. Here the body of shareholders is not on the scene but only an individual shareholder who receives payment from the company and who is, therefore sought to be taxed on such payment. The concept of distribution of accumulated profits is wholly absent in section 2(6A)(e) and it is not possible to project that concept in the section and then to read the section as meaning that so much of the payment as represents the proportionate share of the shareholder in the accumulated profits must be treated as dividend. To construe section 2(6A)(e) in the manner suggested on behalf of the assessee would involve reading words in the section which are not there. A comparison of the language of section 2(6A)(e) with that of clauses (a), (b), (c) and (d), of section 2(6A) also supports this conclusion. Section 2(6A), clauses (a), (b), (c) and (d), speak of distribution by a company amongst shareholders and the concept of taking the share of accumulated profits represented by the distribution received by each shareholder is inherent in each one of these clauses. But, when we come to section 2(6A)(e) it is clear that the section is dealing with an individual shareholder who receives payment from the company and this payment is sought to be taxed in his hands as dividend.'
23. All these observations conclusively show the difference in the meaning which can be attributed to the words 'payment' and 'distribution'.
24. Let us now see how the whole object of section 23A is frustrated, if it is held that payment in nature of a loan amounts to a distribution of dividend. Suppose, a company governed by the provisions of section 23A has 10 shareholders and a loan is given to one of its shareholders whose other income is in a lower bracket. The company does not distribute any of its dividends for a particular year with the result that none of the remaining nine shareholders gets anything either by way of a loan or by way of a dividend. Now can it be said in such a case that the company, by giving a loan of the sufficient amount, which would cover the whole of the dividend, which it was bound to distribute, has distributed its dividends amongst its shareholders The obvious answer to the question is in the negative. If once it is held that the object of section 23A is to prevent a closely-held company from accumulating its profits, then obviously by giving a loan up to the extent of distributable profits under section 23A to one of its shareholders, the company would go on accumulating its profits under section 23A to one of its shareholders, the company would go on accumulating its profits because, as already stated above, repayment of a loan is the main characteristics of every loan and, therefore, on repayment of the loan given to one of the shareholders, the company's accumulated profits would remain the same if it has not distributed any dividend for a particular year. It is thus obvious that if assessee's contention is accepted, then, the whole object, with which the legislature has framed section 23A, would be totally frustrated. To conclude, therefore, it cannot be said that the payment of loan is tantamount to the distribution of the dividend.
25. The second requirement of sub-section (1) of section 23A is that the distribution of dividend should be out of the profits and gains of the concerned company. Even this requirement is not always satisfied if payment of loan to a shareholder is to be treated as distribution of dividends, because on a bare perusal of clause (e) of section 2(6A) it will be found that the loan can be advanced from any part of the asset of the company whether these assets represent accumulated profits or whether they represent the capital of the company.
26. Speaking of third requirement, we find that loan is merely a fictional dividend coming under the deeming provisions of clause (e) of section 2(6A). In our opinion, section 23A does not contemplate the distribution of a fictional or deemed dividend and we get support for this view for the decision of this court in Sakarlal Balabhai & Co. v. Commissioner of Income-tax : 61ITR273(Guj) . Therein this court has held that to arrive at the undistributed balance on which additional super-tax can be levied under section 23A(1) is dividend actually distributed and not any dividend deemed to have been distributed by taking into account the excess distribution of the preceding year or years specified in section 23A(6). This court has further observed that sub-section (1) of section 23A clearly contemplates actual and not deemed distribution and, therefore, the provisions of sub-section (1) cannot be read subject to the provisions of sub-section (6) or as if the provisions of sub-section (6) are incorporated in it. The statutory percentage of distribution cannot be met by bringing in and adding to the sum actually distributed the excess distribution of preceding years. Therefore, this court finally held that once the Income-tax Officer finds that a company has not actually distributed dividend according to the statutory percentage applicable to it, subject to the test of reasonableness embodied in sub-section (1), the company becomes liable to be charged with additional super-tax on the undistributed balance. These observations clearly bring to the forefront the principle that the distribution of dividend, which is contemplated by section 23A is not the payment of a fictional or deemed dividend contemplated by clause (e) of section 2(6A). Similar view is taken even by the Madras High Court in Commissioner of Income-tax v. Sundaram Private Ltd. : 71ITR273(Mad) . In S. C. Cambatta & Co. Ltd. v. Commissioner of Income-tax : 21ITR121(Bom) , the High Court of Bombay has held that distribution of the assessable income of the company under section 23A of the Act of 1922 is to be by way of dividends. Chagla C.J., speaking for the court, has observed in that case that, in his opinion, it is impossible to accept the contention that in the proviso the expression 'distribution' has been used otherwise than distribution as dividends as used in the sub-section. He has further observed that if we were to give that interpretation to the expression 'distribution' in the proviso it would wholly stultify the object of the legislature as laid down in section 23A(1) because by means of the proviso a private company would be doing exactly what section 23A(1) says it cannot do. The following observations made in that case are very much pertinent to the facts of the present case (page 128) :
'Now, the use of the expression 'distributed' in this sub-section makes it clear that whenever the legislature has used 'distributed' with reference to assessable profits or gains of the company in section 23A it has always used it in the sense of 'distributed as dividends'. Therefore, the whole of section 23A deals with distribution of the assessable income or profits or gains of a company which comes within the ambit of section 23A as dividends and not in any other sense.'
27. In that case the question before the court was whether the issue of bonus shares by the assessee-company was distribution of profits as dividends as required by section 23A(1) of the Indian Income-tax Act But the question of issue of bonus shares is now specifically covered by clause (a) of section 2(6A). However, the above observations still hold good in interpreting what type of distribution of dividends is visualised by section 23A of the Act. Thus, we are of the opinion that even the third requirement of the expression 'profits and gains distributed as dividends' of sub-section (1) of section 23A is not fulfilled in case of payment by way of an advance or loan contemplated by clause (e) of section 2(6A).
28. As already noted above, the Tribunal has put great reliance upon the decision given by the Calcutta High Court Moore Avenue Properties Pvt. Ltd. v. Commissioner of Income-tax : 59ITR466(Cal) . The facts of that case were that for the assessment years 1955-56 and 1956-57, the distributable income of the assessee-company were Rs. 9,444 and Rs. 9,616 respectively. The company had not declared dividends in the following years in respect of them but had advanced substantial sums to its shareholders in the relevant accounting years. The question which really arose before the High Court was whether the fact that the advances made during the accounting years would or would not attract provisions of section 23A. The court held that if a company complies with the requirement of section 23A before the period mentioned therein had commenced, an order under the section cannot be made. But while deciding this question the High Court appears to have made the following observations which had led the Tribunal to take the view which it did (page 470) :
'There appears to be no doubt that an advance or loan to a shareholder must be deemed to be dividend in terms of section 2(6A)(e) for the purpose of section 23A.'
29. It appears that these observations were made as none of the parties contended before the High Court the question which is involved in the reference before us. Except this solitary sentence, there is no discussion in the judgment going to show how the payment of loan to a shareholder, which is deemed to be dividend in terms of section 2(6A)(e), would be considered as distribution of dividend for the purpose of section 23A. In fact, the only question which the High Court has discussed is whether a closely-held company can be said to have complied with the requirements of section 23A if dividends were paid before the period mentioned in section 23A had commenced. For the reasons already stated by us above, however, we are of the opinion, with great respect to the learned judges, who have made the above quoted observations, that it is not correct to say that payment of loan, which is deemed as dividend under clause (e) of section 2(6A) can be construed as distribution of dividend within the meaning of section 23A. We are, therefore, of the opinion that the above-quoted observations should not be taken as of any help to the assessee in this case.
30. Shri Shah relied upon some general observations made in Gore-Browne on Companies as regards the different modes of distribution of dividends in a closely-held company. We find that these general observations are of no help to the assessee in view of the peculiar provisions contained in section 23A of the Act.
31. In view of what is stated above, our answer to the question, which is referred to us, is that the Tribunal was not right in law in holding that deemed dividends under section 2(6A)(e) of the Act of 1922 are to be taken into account in determining the applicability of section 23A of the said Act. We, therefore, answer the question in favour of the revenue and against the assessee. Reference is accordingly disposed of. The respondent-assessee that bear the costs of the revenue in this reference.