1986 (4) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Whether the value of iron rods supplied amounted to dividend u/s 2(22)(e) of the Income-tax Act, 1961.
2. Whether the iron rods supplied represented a payment by the company for the individual benefit of the assessee.
3. Whether the transaction was a device to circumvent the provisions of section 2(22)(e).

Summary:

Issue 1: Dividend u/s 2(22)(e)
The primary question was whether the value of iron rods worth Rs. 1,80,446 supplied by M/s. Machino Techno Sales (Pvt.) Ltd. to the assessee amounted to dividend within the meaning of section 2(22)(e) of the Income-tax Act, 1961. The Tribunal found that the company, controlled by the assessee and his wife, supplied iron rods to facilitate the construction of "Jindal House." The Tribunal concluded that this transaction fell within the mischief of section 2(22)(e) as it was an advance made by the company, benefiting the assessee. The High Court upheld this view, stating that the legal fiction created by section 2(22)(e) must be carried to its logical conclusion within its framework.

Issue 2: Payment for Individual Benefit
The Tribunal held that the iron rods supplied by the company to the assessee and his wife were for their individual benefit. The assessee argued that the transaction was a part payment towards the company's indebtedness of Rs. 3,95,000 for the purchase of flats. However, the Tribunal found that the company, controlled by the assessee and his wife, used this arrangement to benefit the assessee individually. The High Court agreed with the Tribunal's finding that the transaction was for the individual benefit of the assessee, thus falling under section 2(22)(e).

Issue 3: Device to Circumvent Section 2(22)(e)
The Tribunal and the High Court both found that the agreement for the sale of flats was an "arranged affair" to circumvent the provisions of section 2(22)(e). The Tribunal noted that the agreement was signed by the assessee in dual capacities and that the flats were delivered much later than the agreement date. The High Court upheld the Tribunal's view that the transaction was a device to avoid tax obligations, emphasizing that the income-tax authorities are entitled to pierce the corporate veil to look at the reality of the transaction.

Conclusion:
The High Court answered the question in the affirmative, holding that the value of iron rods supplied amounted to dividend u/s 2(22)(e) of the Income-tax Act, 1961, and was assessable in the hands of the assessee. The court found that the transaction was for the individual benefit of the assessee and was a device to circumvent the provisions of section 2(22)(e).