1974 (8) TMI 53 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of loans as dividend under Section 2(6A)(e) of the Indian Income-tax Act, 1922.
2. Applicability of Section 16(3) for including deemed dividend in the total income of the assessee.
3. Deductibility of interest paid on loans taken by the wife and minor children.

Detailed Analysis:

1. Inclusion of Loans as Dividend under Section 2(6A)(e):

The primary issue was whether the loans advanced by M/s. S.D.U.M.S. Private Ltd. to the assessee's wife and minor children could be treated as dividend under Section 2(6A)(e) of the Indian Income-tax Act, 1922. The court noted that all conditions under Section 2(6A)(e) were satisfied, and hence, the sum of Rs. 26,065 had to be treated as dividend. The section creates a fiction by treating loans and advances to a shareholder as dividend to the extent of the company's accumulated profits.

2. Applicability of Section 16(3) for Including Deemed Dividend in the Total Income of the Assessee:

The Tribunal had held that the loans taken by the wife and minor children were not includible in the assessee's total income under Section 16(3) as they did not arise directly or indirectly from the shares held. However, the court disagreed, stating that Section 2(6A)(e) creates a fiction by treating loans as dividend substitutes, which should be considered as income arising from the shares held. The court emphasized that the fiction created under Section 2(6A)(e) stops with including the loan as dividend and does not extend to specifying whose income it should be included in. This determination must be made with reference to other provisions of the Act, such as Section 16(3).

The court further elaborated that for the purposes of Section 16(3), the income of the wife or minor child arising directly or indirectly from assets transferred without adequate consideration should be included in the total income of the individual. Since the shares were transferred to the wife and minor children without consideration, the deemed dividend arising from these shares should be included in the assessee's income.

3. Deductibility of Interest Paid on Loans Taken by the Wife and Minor Children:

The Income-tax Officer had not allowed the deduction of interest amounting to Rs. 1,201 paid on the loans taken by the wife and minor children. The Appellate Assistant Commissioner upheld this decision, stating that the interest paid could not be said to have been incurred solely for the purpose of earning the income. The court did not specifically address this issue in detail but implicitly supported the view that the interest was not deductible against the deemed dividend income.

Conclusion:

The court concluded that the loans advanced to the wife and minor children were includible under Section 16(3) of the Act in the total income of the assessee. The reference was answered in the negative and in favor of the revenue, with counsel's fee set at Rs. 250.