1993 (8) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 5,21,964 was deemed dividend u/s 2(22)(e) of the Income-tax Act, 1961.
2. Whether the provisions of section 194 of the Act are applicable, and consequently, whether the assessee was liable to pay interest u/s 201(1A) of the Act.

Summary:

Issue 1: Deemed Dividend u/s 2(22)(e)
The Tribunal held that the amount of Rs. 5,21,964 was deemed dividend in the hands of the assessee, Dahyabhai Motibhai Amin, under section 2(22)(e) of the Income-tax Act, 1961. The payment of Rs. 6 lakhs by Kohinoor Flour Mills Private Limited to Rasiklal and the arbitrators was treated as a loan to Dahyabhai. The court noted that the purpose or object for which the loan was advanced was irrelevant. The clear intention expressed in the consent terms indicated that the payment was to be treated as a loan to Dahyabhai. Thus, the Tribunal and the authorities below were correct in treating the amount as deemed dividend and income in the hands of the assessee.

Issue 2: Applicability of Section 194 and Liability u/s 201(1A)
The Tribunal erred in holding that section 194 did not apply to the case and that the company was not liable to pay interest u/s 201(1A). The court clarified that the payment of Rs. 6 lakhs by the company was a voluntary payment made to its shareholder, Dahyabhai, and thus section 194 was applicable. The Tribunal's reasoning that section 194 applies only if the payment is made at the instance of the shareholder was incorrect. The court emphasized that such an interpretation would defeat the purpose of the section and allow shareholders to evade tax liability. Therefore, the Tribunal was wrong in holding that section 194 cannot apply to advances or loans given in the middle of the accounting year or due to a court order.

Conclusion:
The court answered both questions in the affirmative, against the assessee and in favor of the Revenue. The references were disposed of accordingly, with no order as to costs.