1975 (12) TMI 20 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payment by way of advance or loan by a closely-held company to its shareholder amounting to a "deemed" dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922, is considered a "distribution of dividend" within the meaning of section 23A.
2. Whether the Tribunal was correct in holding that deemed dividends under section 2(6A)(e) should be considered in determining the applicability of section 23A.

Issue-wise Detailed Analysis:

1. Deemed Dividend as Distribution of Dividend:

The primary issue in this case is whether advances or loans made by a closely-held company to its shareholders, which are deemed dividends under section 2(6A)(e) of the Indian Income-tax Act, 1922, can be considered as "distribution of dividend" under section 23A. The court examined the language and purpose of both sections.

The court noted that section 2(6A) defines "dividend" to include various distributions by a company, including loans or advances to shareholders. However, section 23A requires the distribution of profits and gains as dividends to avoid additional super-tax. The court emphasized that "distribution" implies a division among multiple shareholders, whereas a "payment" of a loan is to a single shareholder and does not satisfy the requirements of distribution.

The court further explained that the legislative intent behind section 23A is to prevent the accumulation of profits in closely-held companies and ensure that profits are distributed among shareholders to avoid tax evasion. The court concluded that treating a loan as a distribution of dividend would defeat this purpose, as the loan would eventually be repaid, and the company's accumulated profits would remain unaffected.

2. Tribunal's Interpretation:

The Tribunal had relied on the decision of the Calcutta High Court in Moore Avenue Properties Pvt. Ltd. v. Commissioner of Income-tax [1966] 59 ITR 466, which held that deemed dividends under section 2(6A)(e) should be considered as distributed dividends for the purpose of section 23A. However, the court disagreed with this interpretation.

The court pointed out that the Calcutta High Court's decision did not thoroughly analyze the distinction between "payment" and "distribution" and the legislative intent behind section 23A. The court emphasized that legal fictions, such as deeming a loan as a dividend, should not be extended beyond their intended purpose. The court reiterated that the purpose of section 23A is to compel the distribution of actual dividends and not to treat fictional or deemed dividends as actual distributions.

The court also referred to various judicial precedents, including decisions of the Supreme Court and other High Courts, which supported the view that section 23A requires the actual distribution of dividends and not deemed distributions. The court highlighted that the object of section 23A is to prevent the accumulation of profits in closely-held companies and ensure that profits are distributed among shareholders to avoid tax evasion.

Conclusion:

The court concluded that the Tribunal was not correct in holding that deemed dividends under section 2(6A)(e) should be considered in determining the applicability of section 23A. The court held that the payment of a loan, deemed as a dividend under section 2(6A)(e), cannot be construed as the distribution of dividend within the meaning of section 23A. The court answered the question in favor of the revenue and against the assessee, stating that the respondent-assessee should bear the costs of the revenue in this reference.