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G.R. Govindarajulu Naidu and anr. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 297 and 298 of 1966 (Reference Nos. 67 and 68 of 1966)
Judge
Reported in[1973]90ITR13(Mad)
ActsIncome Tax Act, 1922 - Sections 2(6A) and 10(2); Companies Act, 1956 - Sections 153, 205 and 206
AppellantG.R. Govindarajulu Naidu and anr.
RespondentCommissioner of Income-tax
Appellant AdvocateS. Padmanabhan, Adv.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredKishanchand Lunidasingh Bajaj v. Commissioner of Income
Excerpt:
direct taxation - cash advances - sections 2 (6a) and 10(2) of income tax act, 1922 and sections 153, 205 and 206 of companies act, 1956 - whether sum debited in account of assessee in books of company cash advances within meaning of section 2 (6a) (e) - section 2 (6a) deems loan taken by shareholder from company as dividend - for invoking this deeming provision loan must be by company to registered shareholder - section 206 prohibits application of section 2 (6a) on other share holders - section 153 prohibits trust either express, implied or constructive being recognised as shareholder - section 2 (6a) (e) cannot be invoked against assessee family - mere adjustment of book entries could not be treated as payment by way of loan by company to shareholders - question answered in favour of.....ramanujam, j.1. the assessee-family held 3,300 partly paid up shares in a private limited company known as ' chandra textiles private ltd. ' the share capital of the said company was 5,000 ordinary shares of rs. 100 each and its accounting year was the calendar year. as on december 31, 1956. 50 per cent. of the value of the stares had been paid up by way of application and allotment money. the trading results of the company for the years ending on december 31, 1956, and december 31, 1957, did not result in any profit or loss. but a loss of rs. 1,90,202 and rs. 4,370, respectively, was determined under the income-tax act for those two years. in the year ended on december 31, 1956, a sum of rs. 1,50,242 was debited to the profit and loss account and credited to the 'development rebate.....
Judgment:

Ramanujam, J.

1. The assessee-family held 3,300 partly paid up shares in a private limited company known as ' Chandra Textiles Private Ltd. ' The share capital of the said company was 5,000 ordinary shares of Rs. 100 each and its accounting year was the calendar year. As on December 31, 1956. 50 per cent. of the value of the stares had been paid up by way of application and allotment money. The trading results of the company for the years ending on December 31, 1956, and December 31, 1957, did not result in any profit or loss. But a loss of Rs. 1,90,202 and Rs. 4,370, respectively, was determined under the Income-tax Act for those two years. In the year ended on December 31, 1956, a sum of Rs. 1,50,242 was debited to the profit and loss account and credited to the 'development rebate reserve ' account. Similarly, for the year ended on December 31, 1957, a sum of Rs. 1,20,875 was debited to the profit and loss account and credited to the 'development rebate reserve' account. For the year ended on December 31, 1958, also a further sum of Rs. 84,088 was debited to the profit and loss account of the year and transferred to ' development rebate reserve' account. Thus, as on December 31, 1958, a sum of Rs. 3,55,204 stood to the credit of ' development rebate reserve ' and was shown in the balance-sheet under the head 'reserve and surplus'. In the assessment years 1957-58 and 1958-59 the development rebate allowed by the department amounts to Rs. 3,58,212. In the previous year ended on December 31, 1957, the assessee-family was due to the company Rs. 16,418 inclusive of interest. After eliminating the opening debit balance and the interest amount, the advances received by the assessee-family during the year amounts to Rs. 7,111.52. The Income-tax Officer considered the said sum of Rs, 7,111.52 as dividend under Section 2(6A)(e) as, according to him, the company had accumulated profits of over Rs. 1,50,000 in the shape of development rebate reserve to the credit of ' reserve and surplus'. Similarly, in the year ending March 31, 1959, a sum of Rs. 1,46,728 was assessed as dividend under Section 2(6A)(e) for the same reason and the above sum of Rs. 1,46,728 had been arrived at by adding up the withdrawals during the year and the amount of first and second calls of the share monies payable on 3,300 shares held by the assessee's family on January 21, 1959, and March 25, 1959, and deducting the opening debit balance as also the cash deposit made by the assessee during the year excluding interest.

2. The assessee contended before the Income-tax Officer that the company had no accumulated profits, that the reserve for initial depreciation and development rebate are special provisions for specific purposes and as such it should not be taken as accumulated profits. But, this contention was not accepted by the Income-tax Officer who held that the initial depreciation and development rebate reserve having come out of the profits, it is an accumulated profit as it was open to the company to sell the assets on which depreciation and development rebate had been allowed and to reduce the reserve created for that purpose and there is nothing in Section 2(6A)(e) to suggest that the accumulated profits should be such as to be immediately available for distribution as dividends.

3. The assessee appealed to the Appellate Assistant Commissioner contending that the company had no accumulated profits, that the reserve for initial depreciation and development rebate ought not to be considered as part of the accumulated profits, as such a reserve could not be reduced except by selling the assets. The Appellate Assistant Commissioner held that the initial and development reserve is a specific reserve created for a specified purpose, that no advance could be given out of the said reserve, that the object of Section 2(6A)(e) is to prevent companies accumulating profits and not declaring dividends and dividends reaching the hands of the shareholders by way of loans and that, therefore, the amounts in question cannot be treated as ' dividends ' under Section 2(6A)(e).

4. The revenue filed appeals to the Appellate Tribunal questioning the deletion of these two items. The Tribunal, however, held that the amounts standing to the credit of ' initial and development rebate reserve ' in the balance-sheet of the company as on December 31, 1958, under the heading 'reserves and surplus' except to the extent of Rs. 66,653 were free reserves and formed part of the accumulated profits of the company, and that the sums of Rs. 7,111 and Rs. 1,46,728 to the debit of the assessee in the books of the company were taxable under Section 2(6A)(e). It is seen from the order of the Tribunal in appeal that it accepted the case of the assessee that as regards the assessment year 1958-59, the Income-tax Officer; wrongly took into account the withdrawals from and payments to the company from 31st March, 1957, up to 31st December, 1958 and excluded such amounts for the period up to March 31, 1958 even though the assessee's accounting year ended only on March 31, 1958, and that fin fact as on March 31, 1958, the assessee stood at a credit of Rs. 7,855. The Tribunal, therefore, directed the Income-tax Officer to verify the position as to whether the assessee was in fact a creditor of the company as on March 31, 1958, and that if so, no amount was assessable as dividend under Section 2(6A)(e) for the assessment year 1958-59.

5. At the instance of the assessee the following two questions had been referred to this court under Section 66(1) of the Income-tax Act, 1922.

' (1) Whether, on the facts and circumstances of the case, the Tribunal is right in holding that the amounts set apart as initial and development rebate reserves in the account of M/s. Chandra Textiles (P.) Ltd. could be held as part of the accumulated profits of the company ?

(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,65,000 debited in the account of the assessee in the books of the company for the year ended on December 31, 1958, towards first and second call monies due in January and March, 1959, are cash advances within the meaning of Section 2(6A)(e) '

6. This court in T.C. No. 271 of 1966 had to consider the question whether a 'development rebate reserve' is the accumulated profits of a company within the meaning of Section 2(22)(e) of the Income-tax Act, 1961 (corresponding to Section 2(6A)(e) of the earlier Act) and having regard to the nature and the purpose of such a reserve, it was held that the ' development rebate reserve ' is not a tied up reserve, that it is not an expenditure or an outgoing but only an allowable deduction in the profit and loss account, that it is not a charge on the profits of the company and that, therefore, such a reserve will have to be taken as ' accumulated profits ' as contemplated in Section 2(22)(e). Faced with the above decision, the learned counsel for the assessee, contends that there is definitely a distinction between a ' development rebate ' and 'initial depreciation' and that a reserve created towards initial depreciation cannot be treated as accumulated profits for the purpose of invoking Section 2(6A)(e). He urges that the profit of the company can properly be ascertained only after allowing for depreciation, both basic as well as initial, that these amounts were charges on the profits, and that the net profits could be ascertained only after allowing for these depreciations. He refers to the decision in Commissioner of Income-tax v. P.K. Badiani, : [1970]76ITR369(Bom) , where the difference between ' depreciation ' and ' development rebate ' was pointed out. In that case the Bombay High Court, while dealing with the scope of the words ' accumulated profits ' in Section 2(6A)(e) pointed out that an allowance for depreciation is to replace the value of an asset to the extent it has depreciated during the period of accounting and as the value has, to that extent, been lost, the corresponding allowance for depreciation takes its place, and that, when arriving at the profits for that period the amount of depreciation has to be deducted, because the amount of the value lost by depreciation is a capital loss which must be replaced first, as otherwise, the initial capital would, to that extent, incorrectly and falsely be converted into and treated as profits. According to the learned judges in that case, development rebate, on the other hand, is not intended to replace any capital loss by wear and tear or in any such other way and it, therefore, forms part of the real profits, and even after it is allowed as a deduction under Section 10(2)(vib), it continues to retain its original character of profits. The reason behind that decision appears to be that the allowance for depreciation is to provide a lund which equals the value of the asset which has depreciated by normal wear and tear and to offset the loss of value in a capital asset, while the development reserve is intended for the extension of industry by adding something to its existing machinery or other assets and to encourage the capital formation through the medium of savings out of current profits, and that the depreciation is a charge on the profits while development reserve is a saving out of the current profits.

7. The learned counsel for the revenue, however, relies on the decision of the Calcutta High Court in Commissioner of Income-tax v. Sri Bibhuti Bhusan Dutt, [1963] 48 I.T.R. 233 wherein it has been held that even a depreciation reserve would form part of the accumulated profits for the purpose of Section 2(6A)(e) of the Income-tax Act. In that case the assets of a company including house and buildings were distributed amongst the shareholders on 19th April, 1947. As the balance-sheet of the company of 31st March, 1947, showed a profit balance of Rs. 2,52,939, the income-tax authorities held that there was a distribution of accumulated profits. But, the Tribunal directed the exclusion of a sum of Rs. 46,200 which was shown as a depreciation reserve in the balance-sheet from the amount of accumulated profits. The High Court took the view that the fund set apart as a reserve for meeting depreciation was also a part of the accumulated profits, available for distribution and the Tribunal was not, therefore, justified in excluding the sum of Rs. 46,200 in determining the amount which should be treated as having been distributed as dividend under Section 2(6A). The court, while meeting the contention put forward by the assessee in that case that the profits as such could be properly ascertained only after allowing for the depreciated value of the assets, expressed the view that the fact that the company could have shown a depreciated value of the property itself in its balance-sheet and in such a case the reserve would not have appeared in the balance-sheet is not a ground for excluding such reserve from the accumulated profits and that the assessee, having adopted the method of not showing the depreciated value of the assets in the balance-sheet, cannot escape from the position that the separate reserve shown as depreciation was part of the profits of the company. The learned judges in that case referred to the following passage at page 637 in Palmer's Company Law, twentieth edition, chapter 64, as explaining the true scope of the words ' divisible profits ':

'It is evident from the preceding observations that it is legally permissible for the company to distribute dividend out of assets which do not represent profits made as the result of its trading or business. The connotation of divisible profits, or profits in the legal sense, is much wider than that of profits in the business sense. The former term includes, e.g., reserves accumulated from past profits, from realised capital profits, indeed, before the requirement of a share premium account by the 1947-48 legislation, from premiums obtained on issue of new shares, whereas none of these items is regarded and rightly so by the businessman or accountant as trading profits,'

8. The view taken by the learned judges in that case was that a lossor depreciation of fixed capital does not affect the divisible profits or renderit necessary to make good the same out of income. But, with due respect,we are not in a position to accept the position of law enunciated in thatcase that the method adopted by the assessee in treating the amount ofdepreciation will make any difference on the question whether it is part ofaccumulated profits or not. With respect, we agree with the view expressedin Commissioner of Income-tax v. P.K. Badiani that the amount of depreciation, which is allowed as a deduction being the value lost by depreciation,is a capital loss which must be replaced first to give a correct and truepicture of the profits, as otherwise, there is bound to be a distorted picturein the profit and loss account. In our opinion, such depreciation being theamount of loss by depreciation to the capital, it should be treated as acharge on the profits unlike the development rebate. In Motor House(Gujarat) Ltd. v. Commissioner of Income-tax, : [1963]48ITR419(Bom) , the Bombay High Court wasdealing with the question as to whether the initial depreciation is to betaken into account in computing the written down value under Section 10(2)(vii). In that case the revenue contended that all these threekinds of depreciation were liable to be included in computing the writtendown value while the assessee contended that the amount of initialdepreciation was not liable to be included in the computation ofthe written down value. It was held therein that in view of the specificprovision in Clause (vi) of Sub-section (2) of Section 10, the initialdepreciation cannot be deducted in determining the written down valueas the object is to safeguard the interest of the assessee in the matterof his getting normal depreciation in the subsequent years but forthe provision for initial and additional depreciation. The correctlegal position, in our view, appears to be this. There are three kindsof depreciation allowance : (1) normal depreciation which is allowed every year till the cost price is wiped out by the amount of depreciation, i. e., till the written down value is reduced to zero--vide first part of Section 10(2)(vi), (2) initial depreciation which is allowed only in the first year of the new construction or the first year of the new plant or machinery--vide latter part of Section 10(2)(vi), and (3) additional depreciation which is allowed for the first five years of a building which is newly erected or for the first five years of the use of the plant or machinery. The initial depreciation is an allowable deduction from and out of the profits in addition to the normal and additional depreciation. But the sum of depreciation allowance granted annually under the said two heads, normal and additional, will not be diminished or affected by this initial depreciation allowance. However, all the three depreciation allowances are intended to enable buildings, plant or machinery to be depreciated in a shorter period than otherwise they would have been. The grant of all these three depreciation allowances is, however, subject to the condition that the total depreciation under all the three heads, in any event, cannot exceed the original cost. This indicates that even the initial depreciation, which may not go to reduce the written down value, is intended to meet a capital loss. This is also clear from the fact that it is taken into account in the calculation of the balancing charge under Section 10(2)(vii). We hold, therefore, that an initial depreciation reserve will not be accumulated profits for the purposes of Section 2(6A)(e).

9. As the revenue has all along proceeded on the basis that the entire sum of Rs. 3,58,212 being the initial depreciation and development rebate reserve was accumulated profits, it has not ascertained the separate figures for initial depreciation and development rebate reserve. The learned counsel for the assessee, however, after verifying the figures from the account books of the company represents that the amount of development rebate reserve itself far exceeded Rs. 1,65,000 so as to attract Section 2(6A)(e). In view of that fact our decision in T. C. No. 271 of 1966 directly governs this case as well. Therefore, we must hold that there were sufficient accumulated profits in the company so as to enable the revenue to invoke Section 2(6A)(e). We, therefore, answer the first question in favour of the revenue.

10. This takes us to the second question. From the facts stated earlier, it is seen that the assessee-family had a running account with the company and there have been actual cash deposits and withdrawals during the year in question. But, if these actual deposits and withdrawals are alone considered, the assessee will only be a creditor. But, what seems to have happened is that the amounts due by the assessee-family towards first and second call monies amounting to Rs. 1,65,000 to the company have been debited against the assessee and the call monies have been treated as having been paid up This transaction by which a debit entry has been made against the assessee towards the call monies of Rs. 1,65,000 due by it and a credit entry made in favour of the company in relation thereto, is treated as a loan transaction by the company to the assessee-family and the sum of Rs. 1,65,000 is treated as advance within the meaning of Section 2(6A)(e). Admittedly, there has been no cash payment of that sum made by the company to the assessee, but, it is only a book adjustment in the company's accounts under which the assessee has become a debtor and the company has become a creditor in the said sum. But for the said sum of Rs. 1,65,000, there is no room for the application of Section 2(6A)(e). Therefore, we have to find out as to whether the sum of Rs. 1,65,000 is advance or loan made by the company to the assessee so as to attract Section 2(6A)(e).

11. According to the learned counsel for the assessee, the said sum cannot be an advance or loan by the company to the assessee as there was no flow of that money from one to the other and that a mere book entry by which the assessee became a debtor to the company cannot attract Section 2(6A)(e). According to the learned counsel, there should be an actual cash advance or loan from the company to the assessee so as to attract the said section and the word 'payment ' occurring in Section 2(6A)(e) is quite significant. He refers to Sub-clauses (ii) and (iii) of Section 2(6A)(e) as indicating the idea of flow of money so as to amount to ' payment '. Reference also is made to Sections 12(1) and 12(1B) where also the same words 'payment' by a company to a shareholder by way of ' advance or loan ' have been used. The learned counsel suggests that the payment by way of loan or advance so as to be taken as an income from other sources under- Section 12 should be an actual income, and that the mere creation of a debtor and creditor relationship between the company and the assessee cannot amount to an income from other sources coming within the scope of Section 12(1) and 12(1B). The learned counsel refers in support of his stand to the decision in Commissioner of Income-tax v. Jamnadas Sriniwas Private Ltd., : [1970]76ITR656(Cal) . In that case the scope of Section 2(6A)(e) came up for consideration. The court expressed the view that by introducing Clause (e) to Section 2(6A) the legislature has created a fiction and has made the payments referred to in Clause (e) as dividend for the purpose of the Act, and that the definition of the word ' dividend ' is an all inclusive definition taking in five different categories of sums, four of which are distributions by a company and the fifth one is a payment by the company. As to the scope of the word 'payment ', the court felt that it connoted different meanings one of which is a receipt by a single person. We are not in a position to say that the above decision throws any light on the scope of the word 'payment'. That decision merely makes a distinction between the two words ' payment ' and ' distribution'. While distribution connotes an idea of apportionment between more than one person, payment connotes that the recipient is a single person.

12. Having regard to the words ' payment by way of loan or advance ' employed in Section 2(6A)(e), we are of the view that there should be an outgoing or flow of money from the company to the shareholder so as to attract the said provision. Some light is thrown by the provision in Section 205(5) of the Companies Act, 1956, which provides that no dividend shall be payable except in cash, the only exception being the issue of fully paid up bonus shares or the payment towards unpaid call monies on any shares held by the members. In this case, there cannot be any dispute that the sum of Rs. 1,65,000 cannot be treated as an advance, for it is not an amount paid towards any other amount due by the company to the assessee-family. The only question then is whether the said sum represents the payment by way of loan by the company to the assessee-family. Having regard to the setting in which the said Clause (e) of Section 2(6A) occurs, it is not possible to say that the payment contemplated will include a notional payment by way of book entries.

13. In Paton v. Inland Revenue Commissioners, [1938] A.C. 341 : 21 T.C. 626 : [1938] 6 I.T.R. 644 the House of Lords considered a somewhat similar question. In that case a person borrowed from a bank certain sum on the security of some property. The borrower had paid nothing either towards the principal or interest, but the bank debited his account each half year with the interest on the sum borrowed and carried forward the accumulated amount. On these facts the borrower sought the benefit of Section 36(1) of the English Income Tax Act, 1918, which provided that:

' Where interest payable in the United Kingdom on an advance from a bank carrying on a bona fide banking business in the United Kingdom is paid to the bank without deduction of tax out of profits or gains brought into charge to tax, the person by whom the interest is paid shall be entitled, on proof of the facts to the satisfaction of the special commissioners, to repayment of tax on the amount of the interest. '

14. In determining the scope of the word 'paid' in that section,Macmillan L.J. expressed; --

' It is a condition of a claim for repayment of tax onlSank interest under Section 36, Sub-section (1) that the taxpayer shall have 'paid' to his bank the interest in respect of which he claims repayment of tax. In my opinion this means that the taxpayer must really, and not merely notionally, have paid the interest. There must be payment such as to discharge the debt. The payment must be a fact, not a fiction.... As I have already said, what the Income Tax Act requires as the condition of repayment of tax on interest is that the sum due as interest shall have been actually' discharged, not merely constructively paid. To warrant repayment of tax, there must have been a real payment of the tax and a real payment of interest without deduction of tax. '

15. The learned counsel for the revenue, however, contends that the assessce-family was under a legal obligation to pay the call monies as and when demanded and that in making a credit entry in favour of the company and a debit entry against the assessee-family there is a notional payment by the company to the assessee and a notional repayment by the assessee-family to the company towards the call arrears and that the creation of the debtor and creditor relationship as a result of the book entries made by the company is quite sufficient to treat the company as the lender and the assessee-family as a borrower. The learned counsel referred us to the various provisions in the Indian Companies Act and certain passages in the Treatise on Company Law by Palmer, to emphasise the nature of the liability of the assessee to pay the call monies and also the various remedies open to the company to enforce payment of the same, including the right to forfeit the shares. But, in our view, that will not throw any light on the question as to whether the credit and debit entries made in the company's books will amount to a payment by way of loan so as to attract Section 2(6A)(e). The .revenue places reliance on a decision of this court in T. Sundaram Chettiar v. Commissioner of Income-tax, : [1963]49ITR287(Mad) . In that case a shareholder in a company in which public were not substantially interested borrowed a sum of Rs. 70,000, from the company in 1945. After her death in 1947, her son, the assessee, inherited the shares. He undertook to discharge the liability of his mother for the amount of the principal and interest due from her to the company. He, however, failed to discharge the debt. For the assessment year 1955-56 the Income-tax Officer invoked Section 2(6A)(e) and Section 12(1B) and treated the loan as ' dividend '. On those facts this court held that for the purpose of attracting Sections 2(6A)(e) and 12(13), what was required was a jural relationship of debtor and creditor between the shareholder and the company, that it was not necessary that payment should have been made in cash or in specie to the assessee and that the revenue is entitled to treat the loan as dividend to the extent of the accumulated profits of the company. The learned judges in that case, dealing with the crucial question as to whether there was a ' payment' of a loan to the assessee, expressed :

' As stated already, the assessees themselves undertook to discharge the loans due by their mother to the two companies. It is not necessary that payment should have been made by the company to the shareholder in the current coins of the realm. Earl Jowitt points out in his Dictionary of English Law under the caption ' payment' as follows, at page 1318; ' Payment in fact is an actual payment from the payer to the payee; payment in law is a transaction equivalent to actual payment. We are unable to agree with the contention urged on behalf of the assessees that inasmuch as no sum of money was received in cash or in specie by the assessees from the companies, there can be no payment within the meaning of Section 12(1B) of the Act. The substantial requirement to attract the applicability of Section 12(1B) is that there should be the jural relationship of debtor and creditor between the shareholder and the company.'

16. Though the above observations appear on the first blush to support the stand taken by the revenue on the facts of that case, there cannot be any controversy that originally a sum of Rs. 70,000 was paid by the company to the assessee's mother in her capacity as a shareholder, and the shares along with the liability for repayment of the loan was inherited by the assessee. As there was a factual payment of the loan by the company to the shareholder at the first instance, the learned judges felt that there need not be actual payment to the assessee himself and that continuation of the jural relationship of debtor and creditor between the assessee and the company was sufficient to attract Section 2(6A)(e). But, in the case on hand, there is no payment of loan as such and the call amounts due by the assessee were treated as having been paid up by making a credit entry in favour of the assessee-family. It is difficult to treat this as the actual payment by way of a loan. We are, therefore, of the view that the sum of Rs. 1,65,000 cannot be treated as payment by way of loan by the company to the assessee-family and that, therefore, Section 2(6A)(e) could not be invoked.

17. The assessee-family also raised a further contention before us that, in any event, the family not being a shareholder of the company, Section 2(6A) cannot be invoked even if the said sum of Rs 1,65,000 is treated as payment by way of loan by the company. The learned counsel refers to the decision in Commissioner of Income-tax v. C.P. Sarathy Mudaliar, : [1972]83ITR170(SC) , wherein their Lordships of the Supreme Court had taken the view that the word ' shareholder ' occurring in Section 2(6A)(e) would refer only to the registered shareholder and not to the beneficial owner, that though the members of a Hindu undivided family acquired the shares in a company with the funds of the family and loans are granted to them, such loans could not be considered as loans advanced to a ' shareholder ' of the company and could not, therefore, be deemed to be its income by way of a deemed dividend under Section 2(6A)(e) of the Act. The following are their observations:

' Section 2(6A)(e) gives an artificial definition of 'dividend'. It does not take in dividend actually declared or received The dividend taken note of by that provision is a deemed dividend and not a real dividend. The loan granted to a shareholder has to be returned to the company. It does not become the income of the shareholder. For certain purposes, the legislature has deemed such a loan as ' dividend '. Hence, Section 2(6A)(e) must necessarily receive a strict construction. When Section 2(6A)(e) speaks of 'shareholder', it refers to the registered shareholder and not to the beneficial owner. The Hindu undivided family cannot be considered as a shareholder either under Section 2(6A)(e) or under Section 23(A) or under Section 16(2) read with Section 18(5) of the Act. Hence, a loan given to a Hindu undivided family cannot be considered as a loan advanced to a ' shareholder ' of a company. '

18. Even assuming that the assessee-family had acquired shares of the company with the joint family funds, the shareholding is in the individual name of Govindarajulu Naidu and he is a registered shareholder of the company. In view of Section 153 of the Companies Act, 1956, which prevents any trust, express, implied or constructive being recognised as members of a company and of Section 206 which provides that no dividend shall be paid by a company in respect of any share except to the registered shareholder of the company, and of the decision of the Supreme Court just now referred to, it is clear that the sum of Rs. 1,65,000 even if treated as a loan by the company to the joint family, cannot be said to be a loan to the registered shareholder as to deem it as a dividend under Section 2(6A)(e).

19. On the other hand, the revenue contends that this point does not arise out of the Tribunal's order as the same was not urged before the Tribunal, that the Tribunal had no opportunity to express its opinion thereon and that, therefore, the assessee cannot raise this question. He relies on the decisions in Kusumben D. Mahadevia v. Commissioner of Income-tax, : [1960]39ITR540(SC) , Commissioner of Income-tax V. Scindia Steam Navigation Co, Ltd., : [1961]42ITR589(SC) , B.B. Iranee v. Commissioner of Income-tax, : [1966]60ITR437(SC) and Commissioner of Income-tax v. Kirkend Coal Co., : [1969]74ITR67(SC) , in support of his submission that this new point should not be entertained. It is true that in the above decisions it has been observed that when a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order, notwithstanding that it may arise on the finding given by it and that it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order. But, as pointed by the Supreme Court in almost the first and leading decision on this point in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., if the question as framed is sufficient to cover the new point which is actually argued before the court and the point does not involve any factual investigation and that point raised is not foreign to the scope and framework of the question referred, it is competent for the court to entertain the new point to be advanced. As a matter of fact the Supreme Court has consistently entertained new points, particularly points of law if they are within the ambit of the question referred already in the following decisions: Sundaram & Co. (P.) Ltd. v. Commissioner of Income-tax, : [1967]66ITR604(SC) , Raja Sharda Narain Singh v. Commissioner of Income-tax, : [1968]68ITR209(SC) , Estate of the Late A.M.K.M. Karuppan Chettiar v. Commissioner of Income-tax, : [1969]72ITR403(SC) and Commissioner of Income-tax v. Indian Molasses Co. P. Ltd., : [1971]78ITR474(SC) . In the last of the decisions referred to above the assessee claimed deduction of certain amounts in computing its profits as expenditure within the meaning of Section 10(2)(xv) of the Income-tax Act, 1922, but its claim was disallowed on the ground that it was a capital expenditure. But the Tribunal allowed the claim holding that the amount was not a capital expenditure. The Tribunal, however, did not consider the question whether the expenditure was laid out or expended wholly or exclusively for the purpose of the business, and the question referred to the High Court was whether the amount represented revenue expenditure. The High Court, while considering that reference, did not allow the Commissioner to raise the point that even assuming that the expenditure was revenue in nature, the requirements of Section 10(2)(xv) were not satisfied on the ground that the question was not expressly raised before the Tribunal. On these facts the Supreme Court expressed the view that the question as to whether the amount represented revenue expenditure did not exclude the enquiry whether the expenditure was wholly or exclusively laid out for the purpose of the business, that because before the Tribunal stress was not pointedly laid by the revenue upon the ingredients which enable an expenditure to be claimed and allowed, it could not be said that the question did not arise out of that order and that the High Court was wrong in refusing to allow the Commissioner to raise the argument that the requirements of Section 10(2)(xv) were not satisfied. According to their Lordships of the Supreme Court the expression ' question of law arising out of such order ' in Section 66(1) is not restricted only to those questions which have been expressly argued and decided by the Tribunal, and if a question of law had been raised before the Tribunal, even if an aspect of that question is not raised, that aspect may be urged before the High Court. In this case the question is whether the sum of Rs. 1,65,000 alleged to have been taken as loan from the company by the assessee-family will attract Section 2(6A)(e) of the Act. It was argued before the Tribunal that the said sum cannot be treated as a loan by the company to the assessee-family so as to attract Section 2(6A)(e). But it was not argued that, in any event, the loan is not to a registered shareholder for the purpose of invoking that section. We consider that the new point that the loan by the company was not to a registered shareholder is only one aspect of the question of the applicability of Section 2(6A)(e). On the facts and circumstances of this case, we are, therefore, of the view that the point has to be entertained and dealt with.

20. The learned counsel for the revenue places before us the decision in Commissioner of Income-tax v. Rameshwarlal Sanwarmal, : [1971]82ITR628(SC) and presses for our acceptance of the said decision as expounding the correct legal position in preference to the decision in Commissioner of Income-tax v. C.P. Sarathy Mudaliar relied on by the assessee. As already stated, in Commissioner of Income-tax v. C.P. Sarathy Mudaliar, it has been held that to attract Section 2(6A)(e), the loan by ine company should be to the registered shareholder and not to the beneficial owner and that a Hindu undivided family could not be considered to be a shareholder under that section even if it be the beneficial owner of the shares. In Commissioner of Income-tax v. Rameshwarlal Sanwarmal the Supreme Court had, however, held that the shares held by a karta of a Hindu undivided family in his individual name could be considered to be the shares held by the Hindu undivided family and that the loans made to the family could be taken to come within the definition of ' dividend ' in Clause (e) of Section 2(6A) and assessed on that basis in the hands of the Hindu undivided family. In that case one ..Saharia held certain shares in a private company as the karta of his Hindu undivided family. During the assessment years in question certain loans were advanced by the company to the Hindu undivided family. The question arose as to whether those loans could be. deemed as dividends as denned in Section 2(6A) of the Income-tax Act. The Supreme Court, after referring to the view taken in an earlier decision in Kishanchand Lunidasingh Bajaj v. Commissioner of Income-tax, : [1966]60ITR500(SC) holding that where the shares acquired with the funds of the Hindu undivided family were held in the name of the karta, the Hindu undivided family could be assessed to tax on the dividend from those shares, took the view that the loan taken by the Hindu undivided family from the company could be treated as a loan to the shareholder. Though as contended by the revenue this decision somewhat strikes a different note from the one in Commissioner of Income-tax v. C.P. Sarathy Mudaliar, we are of the view that the decision in Commissioner of Income-tax v. C.P. Sarathy Mudaliar being the later in point of time and being a decision which has considered the legal relationship between a company and its shareholder, represents the correct legal position, if we may say so with respect. The significance of the prohibition of a trust being a shareholder of a company contained in Section 153 of the Companies Act and of the dividend being paid only to a registered shareholder as enjoined in Section 206 of the Companies Act has not been noted in the earlier decision. Section 2(6A) deems a loan taken by a shareholder from a company as a dividend received by him. For invoking this deeming provision., the loan must be by a company to the registered shareholder, as, otherwise, the said section will create a deemed dividend even when there is a loan by a company to a person other than a shareholder, which the company cannot do under Section 206 of the Companies Act. It is not as if Section 2(6A) empowers the company to pay dividends to persons other than its registered shareholders. The mere fact that the Hindu undivided family is the beneficial owner of the shares will not make it a registered shareholder. As a matter of fact there is a specific prohibition of the Hindu joint family being a shareholder of.a company, as Section 153 of the Companies Act prohibits a trust, either express, implied or constructive, being recognised as a shareholder. In those circumstances, Section 2(6A)(e) cannot, be invoked unless the legislature introduces a further deeming clause to the effect that the joint family which is thfc beneficial owner of the shares shall be deemed to be the registered shareholder of the company. As pointed out by the Supreme Court in Commissioner of Income-tax v. C.P. Sarathy Mudaliar, Section 2(6A) has to be strictly construed, and it is not possible to construe that section as importing two fictions, one that the loan granted to a shareholder should be deemed to be a dividend and that the beneficial owner of the shares is deemed a registered shareholder of the company. We are, therefore, of the opinion that Section 2(6A)(e) cannot be invoked as against the assessee-family.

21. The second question in this case is, therefore, answered in favour of the assesses.

T.C. No. 298 of 1966.

22. In this case the assessee is admittedly a registered shareholder of the company with 500 partly paid up shares, and any loan taken by her from the company has to be deemed to be a dividend from the company so as to attract Section 2(6A)(e) of the Act. It is also not in dispute that only if the amount of Rs. 12,500 being the call-monies due by the assessee is taken as a loan from the company during the assessment year in question, Section 2(6A)(e) will stand attracted. But, the question is whether the debit and credit entries made in relation to the assessee's liability for Rs. 12,500 towards the arrears of call-monies due by her could be treated as a loan without the actual flow of money from the company to the shareholder. We have already expressed the view in T.C. No. 297 of 1966 that the mere adjustment of book entries could not be treated as ' payment by way of loan by the company to its shareholders '. In that view the second question referred in this case also will have to be answered in favour of the assessee and the first question in favour of the revenue. They are accordingly answered. There will, however, be no order as to costs in both.


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