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Tarulata Shyam and ors. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 98 of 1967
Judge
Reported in[1971]82ITR485(Cal)
ActsIncome Tax Act, 1922 - Section 2(6A), 5A(7), 23A and 66
AppellantTarulata Shyam and ors.
RespondentCommissioner of Income-tax
Appellant AdvocateA.P. Choudhury, ;S.R. Pal and ;A.N. Basu, Advs.
Respondent AdvocateB.L. Pal and ;N.L. Pal, Advs.
Cases ReferredNavnit Lal C. Javeri v. K.K. Sen
Excerpt:
- .....advanced; it is immaterial what the extent of his shareholding is. the third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit at the date of the loan. this is an important limit prescribed by the relevant section. the fourth condition is that the loan must not have been advanced by the company in the ordinary course of its business. in other words, this provision would not apply to cases where the company which advances a loan to its shareholder carries on the business of money-lending itself ; and the last condition is that the loan must have remained outstanding at the commencement of the shareholder's previous year in relation to the assessment year.....
Judgment:

K.L. Roy, J.

1. The assessee and the original applicant in this reference was one P. C. Shyam who died during the pendency of the reference and his heirs and legal representatives have been substituted in his place as the applicants.

2. The assessee was substantial shareholder and managing director of Duiaguri Tea Co. (P.) Ltd. Admittedly, the company is one in which the public are not substantially interested within the meaning of Section 23A of the Indian Income-tax Act, 1922 (hereinafter referred to as ' the Act'). The reference concerns the assessment year 1957-58, the corresponding previous year being the calender year 1956. At the commencement of that year there was a credit balance of Rs. 65,246 in the assessee's account in the books of the said company brought forward from the earlier year. Between the 11th January and the 12th November the cash withdrawals by the assessee from the company amounted to Rs. 4,97,442. Deducting therefrom the opening credit balance of Rs. 65,246 and outstanding dividends of Rs. 1,40,000 declared on the 31st December, 1955, in favour of the assessee's major sons transferred to his account and a further dividend of Rs. 19,493 credited to the assessee's account from Kathoni Tea Estate, the total loan or advance taken by the assessee from the company as on the 12th November, 1956, came to Rs. 2,72,703. On the 29th December, 1956, the assessee repaid the company a total sum of Rs. 1,93,000 and on the 31st December, 1956, the last day of the previous year, the assessee's account was credited with another sum of Rs. 80,000 in respect of the dividend due to him and his wife and a further sum of Rs. 29,326 was credited for hypothecation. Thus, before the previous year ended, the assessee's account was credited with an aggregate sum of Rs. 2,99,326 which exceeded the debit balance of Rs. 2,72,703 as on the 12th November, 1956. In effect, the position was that there was no advance or loan due by the assessee to the company at the end of the relevant previous year.

3. The Income-tax Officer found that the accumulated profits of the company as on the 1st January, 1956, amounted to Rs. 6,83,005 and he accordingly treated the sum of Rs. 2,72,703 as dividend under Section 2(6A)(e) of the Act and grossed up that amount under Section 16(2) and gave credit for tax in accordance with the latter section.

4. The assessee's appeal to the Appellate Assistant Commissioner was unsuccessful and the assessment of this amount as dividend was confirmed.

5. On further appeal by the assessee to the Income-tax Appellate Tribunal, there was a difference of opinion between the Accountant Member and the Judicial Member. The Accountant Member took the view that the moment a payment was made as envisaged in Section 2(6A)(e) it became clothed with the character of dividend and no subsequent action of the parties could take it out of mischief of that section. There was no provision in the Act that if any such payment was returned by the shareholder to the company either within the same accounting year or subsequently, it would cease to be governed by the provisions of that section. He was, therefore, of the opinion that the sum of Rs. 2,72,703 was taxable as dividend under Section 2(6A)(e).

6. The Judicial Member, on the other hand, held that the total income of the assessee during the relevant previous year could be computed and assessed only at the end of that previous year. It could not be computed at interim periods during that previous year. If it was found that although the shareholder had taken a loan from the company during the course of a previous year but had returned the same to the company before the close of that previous year, it could only be said while computing the shareholder's total income at the end of that previous year that no advance or loans from the company of which he was a shareholder stood for his benefit at the time relevant for computation of his total income. Accordingly, he held that the sum of Rs. 2,72,703 was not a dividend within the meaning of Section 2(6A)(e) of the Act :

7. On such difference of opinion the following question was referred to the President of the Tribunal under Section 5A(7) of the Act;

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,72,703 is to be treated as dividend income in the hands of the assessee within the meaning of Section 2(6A)(e) ?'

8. The reference was heard by the President himself, who, on a review of the case law, and particularly the decision of the Supreme Court in Javeri's case, held that an advance of loan received by a shareholder of a private company forthwith assumed the character of a dividend and became his income by virtue of the fiction created by Section 5(6A)(e) and it ceased to be a liability for the purpose of taxation, although the assessee might, in fact or in law, remain liable to the company for its repayment. If the assessee repaid the loan subsequently, such payment would not liquidate or reduce the quantum of the income which had already accrued as such repayment would not be allowed as a permissible deduction under Section 12(2). Agreeing, therefore, with the view taken by the Accountant Member he answered the question referred In the affirmative.

9. In view of the majority decision the Tribunal dismissed the assessee's appeal, but at his instance referred the following question of law for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,72,703 net (Rs. 3,19,245 gross) is to be treated as dividend income in the hands of the assessee within the meaning of Section 2(6A)(e) of the Indian Income-tax Act, 1922?'

10. Before dealing with the contentions raised in this reference it would be convenient to set out the relevant provisions of the Act as applicable to the assessment year concerned in this reference. Section 3 charges to tax the total income of an individual, a Hindu undivided family, a firm or other association of persons or of a company. Section 4(1) provides that the total income of any previous year is the aggregate of all income, profits and gains accruing of arising to or received by an assessee during that year. Section 2(6A) gives an inclusive definition of dividend. Clauses (a) to (d) deal with the distribution by a company, inter alia of its accumulated profits. Clause (e) provides that dividend includes 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 of or for the individual benefit of a shareholder, to the extent to which the company in either case, possesses accumulated profits ; but dividend does not include-

(i) .....

(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company ;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of Clause (e) to the extent to which it is so set off.

11. Section 12(1) provides that the tax shall be payable by an assessee under the head 'Income from other sources' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the proceeding heads).

12. Section 12(1B) provides that any payment by a company to a shareholder by way of advance or loan which would have been treated as a dividend within the meaning of Section 2(6A)(e) in any previous year relevant to any assessment year prior to the assessment year ending on the 31st day of March, 1956, had that clause been in force in that year shall be treated as a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of March, 1956, if such loan or advance remained outstanding on the first day of such previous year. It is to be observed that the provisions of both Sections 2(6A)(e) and 12(1B) were introduced in the Act by the Finance Act, 1955, with effect from the 1st April, 1955. In the relevant assessment year Sections 16(2) of the Act was operative and provided as follows :

13. ''For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him and shall be increased to such amounts as would, if income-tax... at the rate applicable to the total income of the company .... for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited, or distributed, were deducted therefrom, be equal to the amount of the dividend.' This sub-section was repealed by the Finance Act, 1959, which also introduced Section 12 (1A) in the Act under which profit from other sources shall include dividend and any dividend declared by a company or distributed or paid by it within the meaning of Clauses (a), (b), (c), (d) or (e) of Section 2(6A) shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. There could be no dispute that the assessment in the present reference is governed by the provisions of Section 16(2) and not Section 12(1A). Mr. Choudhury, learned counsel for the applicant, raised the following main contentions in support of the reference, viz., (i) that the amount of Rs. 2,72,703 was not taxable as dividend as admittedly there was no outstanding advance or loan due by the assessee to the company at the end of the relevant previous year. Under the law, on repayment, the loan is wiped out and at the end of the accounting year there was no loan or advance outstanding from the company to the assessee and, therefore, there could be no question of the application of Section 2(6A) (e) ; that even if be held that the amount was taxable as dividend then deduction should be allowed of the amount of repayment under Section 12(2).

14. Mr. Choudhury contended that the assessee's method of accounting was mercantile. The Income-tax Officer was not entitled to look only on the debit side of the accounts and ignore the credit side. It was only the balance at the end of the accounting year that should have been considered for the purpose of Section 2(6A)(e). Mr. Choudhury further considered that if it was the intention of the legislature to rope in even loans repaid before the close of the relevant accounting year to be taxed as dividend under Section 2(6A)(e) it has failed to express such intention in clear and unambiguous language. According to the canons of construction of taxing statutes taxing provisions should be interpreted in accordance with the plain meaning of the language used and in case of ambiguity or doubt the construction should be in favour of the taxpayer. Such a provision should not be interpreted on the presumed intention of the legislature. Though Mr. Choudhury cited various authorities including passages from both Craies and Maxwell on the Interpretation of Statutes and also several decisions of the Supreme Court, in view of the fact that this particular provision has been interpreted by the Supreme Court in Navnit Lal C. Javeri v. K. K. Sen, : [1965]56ITR198(SC) it is not necessary to refer to these authorities. For the proposition that in any event the amount of the loan repaid should have been allowed as a deduction under Section 12(2), Mr. Choudhury cited the authority of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax, : [1951]20ITR1(SC) . But in that case what was allowed as deduction was the interest paid on a debenture loan taken for the purpose of maintaining the assessee's dividend income and the case is not an authority for the proposition that even the repayment of the principal amount of a loan is allowable under Section 12(2).

15. As in our opinion the answer to the question referred is more or less concluded by the decision of the Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, it is not necessary to refer to the argument of Mr. Pal for the department or to discuss the other authorities cited by learned counsel in this case. The validity of Section 2(6A)(e) and Section 12(1B) was challenged before the Bombay High Court in a writ petition. The High Court rejected the application and an appeal was preferred to the Supreme Court. After setting out the provisions of Section 2(6A)(e) and Section 12(1B) the court observed as follows at page 202 of the report:

'It is thus clear that the combined effect of these two provisions is that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. These three kinds of payments are: (1) payments made to the shareholder by way of advance or loan ; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before Section 12(1B) can be invoked against a shareholder. The first condition is that the company in question must be one in which the public are not substantially interested within the meaning of Section 23A as it stood in the year in which the loan was advanced. The second condition is that the borrower must be a shareholder at the date when the loan was advanced; it is immaterial what the extent of his shareholding is. The third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit at the date of the loan. This is an important limit prescribed by the relevant section. The fourth condition is that the loan must not have been advanced by the company in the ordinary course of its business. In other words, this provision would not apply to cases where the company which advances a loan to its shareholder carries on the business of money-lending itself ; and the last condition is that the loan must have remained outstanding at the commencement of the shareholder's previous year in relation to the assessment year 1955-56.'

16. The last condition is not germane to the present case. In the samecase it was further observed at page 204 that in considering the questionas to whether a particular item in the hands of a citizen could be regarded as his income or not, it would be inappropriate to apply the tests traditionally prescribed by the Income-tax Act as such. This seems to answer Mr. Choudhury's contention that a loan cannot be treated as an item of income. The Surpreme Court further observed at page 207 :

'The companies to which the impugned section applies are companies in which at least 75 per cent. of the voting power lies in the hands of persons other than the public, and that means that the companies are controlled by a group of persons allied together and having the same interest. In the case of such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act, It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. 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 or 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. 11 Is this kind of a well-planned device which Section 12(1B) intends to reach for the purpose of taxation.'

17. It is clear from the above cited passage that if a controlled company adopted a device of making a loan or advance to one of its shareholders such a shareholder would 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 had received the said loan by way of dividend. Whether the loan is ultimately repaid to the company or not is immaterial. This decision would seem to answer all the contentions raised by Mr. Choudhury against the assessment of the amount as dividend. Further, as pointed out by both the Accountant Member and the President of the Income-tax Appellate Tribunal, neither the Bombay High Court nor the Madras High Court, who had also an occasion to consider this question, had any doubts that the liability to tax attached as soon as the loan was taken from the company. For instance, in the Madras case of K.M.S. Lakshmana Aiyar v. Additional Income-tax Officer, [1960] 40 I.T.R. 469 (Mad.) it was observed that under Section 2(6A)(e) a loan or advance by a controlled company to its shareholder would attract tax liability though such a loan might be repaid subsequently even during that year. Again, the Bombay High Court in Navnit Lal C. Javeri v. K.K. Sen, from which the aforesaid appeal was taken to the Supreme Court, has observed as follows : 'The tax is attracted at the point of time when the said loan is borrowed by the members.' We have, therefore, no hesitation in holding that the liability to be taxed attaches to any amount taken as a loan by a shareholder from the company at the moment the loan is borrowed and it is immaterial whether the loan is repaid before the end of the accounting year or not. The answer to the question referred must, therefore, be in the affirmative and in favour of the department. The applicants are to pay the costs of this application.

Sankar Prasad Mitra, J.

18. I agree.


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