1999 (3) TMI 7 - SC - Income Tax

Applicability of provisions of section 104 - In view of the deemed definition given in section 2(22)(e) of the Act, any loan advanced to a shareholder out of the accumulated profits of the company in which the public do not have a substantial interest, would amount to payment of dividend - accordingly section 104 is applicable

Summary

Issues:
Interpretation of section 104 of the Income-tax Act, 1961 regarding the applicability of deemed dividends and distribution of surplus income by a company.

Analysis:
The case involved a question referred to the High Court regarding the applicability of section 104 of the Income-tax Act, 1961 to a trading company that did not distribute dividends to its shareholders for the assessment year 1975-76. The respondent-company argued that under section 2(22)(e) of the Act, any loan advanced to a shareholder should be deemed as a payment of dividend, thus exempting it from section 104. The High Court relied on a Calcutta High Court judgment supporting this view, while the Revenue cited a Gujarat High Court judgment opposing it. The key contention was whether deemed dividends should be considered as actual distribution of dividends under section 104.

Section 2(22)(e) of the Act deems any payment by a company to a shareholder as a dividend, and section 104 imposes income tax on companies not distributing dividends as required. The Calcutta High Court held that deemed dividends fall under this provision, preventing the levy of super-tax. In contrast, the Gujarat High Court argued that actual distribution of dividends, not deemed payments, is necessary to invoke section 104. The Supreme Court disagreed with the Gujarat High Court, emphasizing that the legislative intent behind both sections is to prevent super-tax evasion, and deeming provisions should apply to section 104 as well.

The Gujarat High Court's reliance on language differences between sections 2(22)(e) and 104 was dismissed by the Supreme Court, stating that the deeming provision should apply uniformly across the Act unless explicitly stated otherwise. The Supreme Court rejected the Gujarat High Court's interpretation, emphasizing that the purpose of preventing super-tax evasion should not lead to double taxation. Additionally, the Gujarat High Court's reference to a previous judgment was deemed irrelevant as it did not address the specific issue at hand. Ultimately, the Supreme Court upheld the High Court's judgment, dismissing the Revenue's appeal and affirming the company's position.