1977 (4) TMI 3 - SC - Income Tax

Section 2(6A)(e) of 1922 Act would be attracted at the time of advance of loan being made to the shareholder except for the specific provisions in s. 12(1B) - legislature has deliberately not made the subsistence of the loan on the date of the previous year a prerequisite for raising the statutory provisions - Therefore even though the loan was not outstanding as of the year end it should be treated as deemed dividend - Assessee s appeal is dismissed

Summary

Issues Involved:
1. Whether a payment by a company to a shareholder by way of advance or loan is deemed as a dividend under section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922, even if repaid within the same year.

Issue-wise Detailed Analysis:

1. Whether a payment by a company to a shareholder by way of advance or loan is deemed as a dividend under section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act, 1922, even if repaid within the same year:

The central issue in this case was whether any payment by a company, not being a company in which the public are substantially interested, to a shareholder by way of advance or loan, is to be deemed as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922, even if the loan is subsequently repaid within the same previous year.

Facts of the Case:
- The assessment year in question is 1957-58, and the corresponding previous year is the calendar year 1956.
- The assessee, a shareholder and managing director of M/s. Dolaguri Tea Co. (P.) Ltd., withdrew amounts aggregating Rs. 4,97,442 from the company during the previous year.
- By the end of the previous year, the assessee had repaid a significant portion of the loan, resulting in no outstanding advance or loan due to the company.

Income-tax Officer's Decision:
- The Income-tax Officer found the company's accumulated profits as Rs. 6,83,005 as on January 1, 1956.
- He treated the net amount of Rs. 2,72,703 as "dividend" income under section 2(6A)(e) and grossed it up under section 16(2).

Appellate Tribunal's Decision:
- The Accountant Member held that the payment became a dividend the moment it was made, regardless of subsequent repayment.
- The Judicial Member disagreed, stating that if the loan is repaid within the same year, it should not be treated as dividend.

High Court's Decision:
- The High Court held that tax was attracted at the point of time when the loan was borrowed, regardless of repayment within the same year.

Supreme Court's Analysis:
- The Supreme Court examined the statutory provisions and the scheme of the Act.
- Section 2(6A)(e) includes any payment by a company by way of advance or loan to a shareholder to the extent of accumulated profits as "dividend."
- Section 12(1B) specifies that such payments shall be treated as dividend if they remain outstanding on the first day of the previous year.

Arguments by the Assessee:
- The assessee argued that the provision should apply only to loans outstanding at the end of the previous year.
- It was contended that the provision aimed to curb the distribution of profits under the guise of loans and should not apply to genuine loans repaid within the same year.

Arguments by the Revenue:
- The revenue argued that the statutory fiction applies the moment the loan is received, and subsequent repayment does not alter its character as dividend.
- It was emphasized that the provision aimed to suppress the practice of evading tax by receiving profits as loans.

Supreme Court's Conclusion:
- The Court held that the language of sections 2(6A)(e) and 12(1B) is clear and unambiguous.
- The statutory fiction of deeming a loan as dividend applies the moment the loan is received, provided other conditions are met.
- The Court rejected the argument that the loan must be outstanding at the end of the previous year to be treated as dividend.
- The Court emphasized that the legislature deliberately omitted words that would make the subsistence of the loan at the end of the year a pre-requisite for the fiction to apply.

Final Judgment:
- The Supreme Court answered the question in favor of the revenue and dismissed the appeal with costs, holding that the loan or advance received by the shareholder is deemed as dividend under section 2(6A)(e) read with section 12(1B), even if repaid within the same year.

Separate Judgments:
- The judgment was delivered by a single judge on behalf of the court; hence, no separate judgments were delivered by the judges.