1. The Commissioner of Income-tax, Madras, applied to the Income-tax Appellate Tribunal, Madras Bench, under Section 66(1) of the Indian Income-tax Act, 1922, for referring the following two questions of law for the opinion of this court:
' 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 7,81,500 was not assessable as dividend under Section 2(6A)(e) of the Indian Income-tax Act, 1922, in the hands of the assessee for the assessment year 1961-62 ?'
2. Whether, on the materials available on record, the Appellate Tribunal was right in its conclusion that the loan would not be covered by the expression ' payment for the benefit of the assessee ' and, as such, Section 2(6A)(e) would be inapplicable to the facts of the case ?'
2. The Income-tax Appellate Tribunal stated a case and referred only the first question of law to this court. In its view, the question as framed was comprehensive enough to include the second question of law raised by the revenue in the reference application. However, the revenue approached this court under Section 66(2) of the Indian Income-tax Act, 1922, for a direction to the Tribunal to refer the second question also to this court. This court by its order dated February 8, 1973, directed the Tribunal to draw up a statement of the case and refer to this court the second question also. It is thereafter the Tribunal has referred the second question and this reference has been numbered as T.C. No. 221 of 1974, while the reference of the first question has been numbered as T.C. No. 418 of 1971. The result is that both the tax cases are concerned with the same order of the Income-tax Appellate Tribunal and the two questions separately covered by the two cases also arise out of the same order of the Tribunal.
3. The assessee in the present case was the managing director of M/s. Mahalakshmi Textile Mills Ltd., holding 750 shares out of a total of 5,984 shares. One, N.S. Karuppiah Chettiar was holding 2 shares in the company and he was also an employee of the company. During the relevant previous year ended on March 31, 1961, the assessment year being 1961-62, the company advanced Rs. 14,41,500 to M/s. Mahalakshmi Handlooms, the business of a Hindu undivided family of which Karuppiah Chettiar was the karta. Out of the sum of Rs. 14,41,500, the Hindu undivided family advanced Rs. 7,81,500 to the assessee as a loan. The Income-tax Officer came to the conclusion that a large percentage of the loan taken by Karuppiah Chettiar from the company was on behalf of and for the benefit of the assessee and consequently treated the sum of Rs. 7,81,5013 as dividend under Section 2(6A)(e) of the Indian Income-tax Act, 1922, and assessed it inthe hands of the assessee. In the opinion of the Income-tax Officer, Sri N.S. Karuppiah Chettiar was functioning as a mere conduit pipe for siphoning the loans from the company for the benefit of the assessee.
4. Against the order of the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner who allowed the appeal holding that the said Karuppiah Chettiar could not be considered to be a dummy or agent or benamidar of the assessee and any payment by way of advance or loan to Karuppiah Chettiar could not be considered to be a payment to the assessee especially as there were many other transactions of substantial value between the company and Karuppiah Chettiar which had been accepted as having genuinely and independently taken place between him and the company. He also took the view that the word 'payment' occurring in Section 2(6A)(e) in the context meant payment for services rendered or for goods received or to meet a pre-existing liability and in the present case the loan or advance paid to the assessee by Karuppiah Chettiar cannot be construed as payment on behalf of the shareholder or for the individual benefit of the assessee-shareholder.
5. As against this order of the Appellate Assistant Commissioner the revenue preferred an appeal to the Income-tax Appellate Tribunal, Madras. That Tribunal agreed with the conclusion of the Appellate Assistant Commissioner and dismissed the departmental appeal. It is the correctness of this order of the Tribunal confirming the order of the Appellate Assistant Commissioner that is being challenged before this court in the form of the two questions extracted already.
6. We may point out that if we answer the second question in favour of the revenue, it will necessarily follow that the first question also will have to be answered in favour of the revenue. Consequently, we shall take up the second question first.
7. Section 2(6A)(e), so far as is relevant, is as follows:
'2. (6A) 'dividend'includes--...
(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.'
8. There is no controversy that the company in question is a company in which the public are not substantially interested within the meaning of Section 23A. Equally there is no controversy that the loans were advanced to Karuppiah Chettiar out of the accumulated profits of the company. It is against this background we shall have to examine whether the materialsin the present case bring the transactions in question within the scope of the statutory provision referred to above. It is clear from a reading of the statutory provision that the said provision includes three different transactions :
(i) any payment by a company of any sum by way of advance or loan to a shareholder ;
(ii) any payment by any such company on behalf of a shareholder;
(iii) any payment by any such company for the individual benefit of a shareholder.
9. From this it is clear that the first case deals with a payment to the shareholder directly. The second and third cases contemplate payment by a company not to the shareholder but to a third party and so far as the second case is concerned such payment to a third party the company makes on behalf of the shareholder and so far as the third case is concerned such payment the company makes to a third party for the individual benefit of the shareholder. It is clear, as far as the present case is concerned, there was no payment by the company to the assessee either by way of advance or loan. Consequently, the first contingency contemplated by the statutory provision has no application to the present case. Equally, the company had not paid the money to Karuppiah Chettiar on behalf of the assessee and, therefore, the second contingency contemplated by the statutory provision also is not satisfied in the present case. With the result, we are left with the third contingency, viz., whether the payment of money by the company to Karuppiah Chettiar was for the individual benefit of the assessee or not.
10. Dealing with this question, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal principally relied on two circumstances. One was that Karuppiah Chettiar was the karta of a Hindu undivided family which was carrying on business as Mahalakshmi Handlooms and it was that joint family which obtained the loan from the mills in question and if out of the said loans moneys were advanced to the assessee in question, to contend that such a case falls within the scope of the statutory provision referred to above, will be adding a second fiction to the fiction already created by the statute. In other words, Section 2(6A)(e) creates a fiction with regard to what constitutes a ' dividend' and that section will apply only when the company pays the money to the shareholder and when it pays the money to somebody else from whom the shareholder obtains a loan that will not be covered by Section 2(6A)(e). The second aspect which seems to have weighed both with the Appellate Assistant Commissioner and with the Tribunal is that the word 'payment' occurring in Section 2(6A)(e) with regard to the second and third contingencies, contemplate' payment, of money in the discharge of a liability or a debt that the company owes tothe payee and, therefore, will not take in payment of any money by way of loan or advance. According to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal the dictionary meaning of the word 'payment' itself leads to such a conclusion. It is on the basis of these two reasonings only both the Appellate Assistant Commissioner and the Tribunal came to the conclusion that the present case will not fall within the scope of Section 2(6A)(e) of the Indian Income-tax Act, 1922.
11. We are of the opinion that the Tribunal committed a serious error of law in coming to such a conclusion because it completely overlooked the admission of the assessee himself and also wrongly interpreted the word 'payment' occurring in Section 2(6A)(e) of the Indian Income-tax Act, 1922. As far as the word 'payment' is concerned, the ordinary dictionary meaning of the word 'payment' is the act of paying and in the case of money, the act of paying the money by one person to another. The word 'payment', in itself, does not either expressly or by necessary implication, connote payment of a sum of money towards a pre-existing liability or by way of discharge of an existing obligation or by way of a payment to a person by way of hire or wages to which the payee was already entitled. Therefore, on the application of the very test which the Tribunal purported to apply, viz., the ordinary and common-sense meaning of the word ' payment ', it can mean only one thing, viz., the act of paying, and it cannot connote anything more. The result is, the conclusion of the Tribunal that the payment of an amount by way of loan will not fall within the scope of the word ' payment ' in Section 2(6A)(e) is clearly erroneous.
12. As far as the materials on record are concerned, as we already pointed out, there are admissions of the assessee himself. The Income-tax Officer examined the assessee as well as Karuppiah Chettiar with reference to their transactions with the company in question. The Income-tax Appellate Tribunal has annexed a copy of the deposition of the assessee dated December 31, 1965, as annexure 'C' to the statement of the case and a copy of the deposition of Sri Karuppiah Chettiar dated October 18, 1965, as annexure 'C-l' to the statement of the case. A perusal of these two depositions will make it clear that the parties who were directly concerned with the transactions themselves did not make any . distinction between the Hindu undivided family as a unit and Karuppiah Chettiar as an individual. The entire deposition of the assessee as well as Karuppiah Chettiar proceeded only on the basis that Sri Karuppiah Chettiar only was dealing with the mill and not the Hindu undivided family. Consequently, embarking upon the theory of a second fiction, the Tribunal completely ignored the deposition of the assessee as well as Karuppiah- Chettiar. . Having regard to the frame of the second question, normally, if the Tribunal had not taken into account all the relevant materials available before it, we would have given an opportunity to the Tribunal to consider all the relevant materials and to record its finding. In this case, the materials available which had been ignored and which had not been taken into account by the Tribunal, are the very admissions of the assessee himself and, therefore, there is no question of our giving a further opportunity to the Tribunal to consider those materials along with the other materials that were considered, for recording a finding on the question in controversy.
13. We shall now give the relevant questions and answers in the deposition of the assessee himself :
' Q. What is the nature of your relationship with Karuppiah Chettiar ?
A. Business relationship.
Q. Can you give me some more details of the nature of this business relationship ?
A. Whenever I required monies, I used to get from him and then repay him.
Q. So, I am to take it that your business relationship with him consisted only in taking and giving loans to him ?
A. So far as I am personally concerned, that is the only relationship.
Q. You have told me earlier that you had taken loans from him. Is that correct ?
Q. Did you give him any pro-notes while taking loans ?
Q. Do you remember how much of loans you have taken from him ?
A. No, but the accounts would show.
Q. Did he charge you interest ?
Q. You have stated earlier that for purchase of yarn for Karuppiah Chettiar, you have to give him credits. But at the same time it appears that he was in a position to give you large loans ?
Q. Did you at any time try to observe how Karuppiah Chettiar was managing this ?
A. He used to take loans from Mahalakshmi Textile Mills.
Q. Did the mills take any security before giving any loans to Karuppiah Chettiar ?
Q. So was it only on faith that the loans were being given ?
Q. Am I to understand that the loans taken from Mahalakshmi Textile Mills by Karuppiah Chettiar were given to you in turn as loans ?
A. Not always. Whenever I required loans, I used to tell him and he in turn will take from Mahalakshmi Textile Mills or otherwise and give it to me.
Q. On examination of evidence I have with me I find that at times, even as much as 90% of the loans taken from Mahalakshmi Textile Mills by Karuppiah Chettiar were given to you as loans. Whenever you required the loans, did you ask Karuppiah Chettiar or through any agent ?
Q. Were there instructions to the mills to give any amount of loans asked for by Karuppiah Chettiar ?
A. That has been the practice and whenever he asked, he gets from the mills.
Q. Were there any board's resolution authorising the mills to pay such sums to Karuppiah Chettiar ?
A. That was in the usual course of business.
Q. I find from the books of accounts that only to Sri Karuppiah Chettiar such large loans have been given ?
A. May be.
Q. Then, how can you say that it was in the course of business ?
A. I mean the usual course of business with Karuppiah Chettiar.
Q. Has the mills given similar large loans to others also besides Karuppiah Chettiar ?
A. I could not tell you.
Q. Is it not strange that as managing director of Mahalakshmi Textile Mills, when you could have taken the loans directly from the mills you did not choose to do so, but resorted to taking the loans through Karuppiah Chettiar ?
A. I have been in the practice of taking loans from Karuppiah Chettiar and I continued that.
Q. Have you taken loans from Mahalakshmi Textile Mills through anyone else other than Karuppiah ?
Q. Was there any motive in taking loans from Mahalakshmi Textile Mills through Karuppiah Chettiar ?
A. No motive at all.
Q. Does it not appear strange to you, whereas you could have taken the loans directly ?
A. It does not appear.
Q. I put it to you that most of the loans taken from (mistake for 'by') Karuppiah Chettiar from Mahalakshmi Textile Mills Ltd. were' given almost immediately in toto?
A. Yes, may be.'
14. These statements by way of answers to the questions put to him made by the assessee clearly and indisputably establish that whenever the assessee needed money he asked Karuppiah Chettiar to obtain loans from the mills and the amounts so obtained by Karuppiah Chettiar by way of loans from the mills were passed on by him to the assessee as loans. The Appellate Assistant Commissioner and the Tribunal have completely overlooked these vital admissions made by the assessee himself. It is true that the said Karuppiah Chettiar tn his deposition admitted that he was paying an interest of 8% to the mills for the loans taken by him from the mills and in his turn he was charging 8 1/2% on the amounts advanced by him to the assessee. But that certainly would not constitute the transaction in question as commercial loan advanced by Karuppiah Chettiar to the assessee. The learned counsel for the assessee repeatedly contended before us that a commercial loan of this nature cannot be said to be a benefit obtained by the assessee from the company and the loan itself cannot be said to be a benefit. We are not concerned in this case whether a loan is a benefit or not. We are concerned in this case whether the payment made by the company to Karuppiah Chettiar was for the benefit of the assessee or not. The admissions of the assessee which we have referred to in extenso clearly establish that the loans advanced by the company to Karuppiah Chettiar were for the benefit of the assessee. As far as the commercial character of the loan is concerned, as we have pointed out already, all that is established is that Karuppiah Chettiar was charging interest at 8 1/2|% for the amounts advanced by him to the assessee. But that fact alone would not establish that the transaction in question was a commercial loan and, therefore, it cannot be said to fall within the scope of Section 2(6A)(e) of the Indian Income-tax Act, 1922. We have referred to the admissions of the assessee himself that he himself did not execute any pro-note for the huge sums which he obtained from Karuppiah Chettiar. At the same time, Karuppiah Chettiar himself had executed only pro-notes to the company for the huge amounts which he obtained by way of loan and he admitted that he did not give any other security to the company. From the very fact that Karuppiah Chettiar who was an employee of the company who was started on about Rs. 125 per mensem gross and who was getting only Rs. 390 on the date when he gave evidence was able to obtain loans of such huge amount from the company only on promissory notes without offering any security, particularly when all that he himself owned was only one house and some lands at Kallal worth about Rs. 70,000 or Rs. 80,000 as admitted by him, no other inference is possible except that the loans were-advanced to Karuppiah Chettiar, under such circumstances, only for the benefit of the assessee. The assessee could not have obtained such loans to the extent ofRs. 7,81,500 from anywhere else commercially without even executing promissory notes much less without giving any security even if he had agreed to pay an interest of 8 1/2%. In our opinion, these circumstances, which are admittedly present in this case, which had been completely overlooked by the Tribunal, clearly and without any doubt whatever, establish that the company paid huge amounts to Karuppiah Chettiar by way of loan so that he may in turn pass on the said amount by way of loan to the assessee, the managing director of tho compam''. The result is that the transactions clearly fall within the third contingency contemplated by Section 2(6A)(e) of the Indian Income-tax Act, 1922, viz., payment by the company to Sri N.S. Karuppiah Chettiar for the benefit of the assessee, the managing director of the company, and the materials available on record cannot lead to any other conclusion. Therefore, we answer the second question referred to us, viz., the question covered by T.C. No. 221 of 1974, in the negative and against the assessee. In view of this, we answer the first question, viz., the question covered by T.C. No. 418 of 1971, also in the negative and against the assessee. The Commissioner is entitled to have the costs of these references, one set. Counsel's fee is Rs. 500.