1989 (9) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 2(22)(e) of the Income-tax Act.
2. Burden of proof on the assessee and the Revenue.

Summary:

Issue 1: Applicability of section 2(22)(e) of the Income-tax Act

The court examined whether the payments made by a closely held company to the sons of a substantial shareholder could be considered as deemed dividends u/s 2(22)(e) of the Income-tax Act. The assessee held 75% of the shares in the company, and the other shareholders were his wife and father. For the assessment years 1975-76 and 1976-77, the company made gifts to the assessee's sons. The Income-tax Officer treated these gifts as deemed dividends in the hands of the assessee, asserting they were payments made on behalf of, or for the benefit of, the assessee.

The Commissioner of Income-tax (Appeals) and the Tribunal found that the payments were not made to the assessee or on his behalf or for his individual benefit. The Tribunal dismissed the Revenue's appeals, stating that the Income-tax Officer's conclusions were based on assumptions rather than facts.

The court held that for section 2(22)(e) to apply, three conditions must be met: (1) the company should not be one in which the public are substantially interested, (2) the shareholder should have a substantial interest in the company, and (3) the company should possess accumulated profits at the time of payment. The court found that the Revenue failed to prove that the gifts were made on behalf of or for the benefit of the assessee. Therefore, section 2(22)(e) was not applicable.

Issue 2: Burden of proof on the assessee and the Revenue

The court addressed whether the assessee discharged the burden of proof and whether the Revenue had any burden to discharge. The Commissioner of Income-tax (Appeals) and the Tribunal found that the assessee had proven that the gifts were genuine and made to his sons, who invested the amounts in their own names and included them in their wealth-tax returns. The Income-tax Officer did not doubt the genuineness of the transactions.

The court held that the burden was on the Revenue to prove that the payments were made on behalf of or for the benefit of the assessee. The assessee had discharged his burden of proof, and the Revenue failed to provide evidence to the contrary.

Conclusion:

The court answered the questions of law in favor of the assessee and against the Revenue. Section 2(22)(e) was not applicable to the facts of the case, and the assessee had discharged his burden of proof. The judgment was forwarded to the Income-tax Appellate Tribunal, Cochin Bench.