9911796707
TMI Blog1977 (4) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... guri Tea Co. (P.) Ltd. The company is admittedly one in which the public are not substantially interested within the meaning of section 23A of the Indian Income-tax Act, 1922 (for short, " the Act "). At the commencement of the previous year, there was in the books of the company a credit balance of Rs. 65,246 in the assessee's account, which had been brought forward from the earlier year. Between the 11th January and the 12th November, 1956, the assessee withdrew in cash from time to time from the company, amounts aggregating Rs. 4,97,442. The first two cash amounts of Rs. 3,50,000 and Rs. 40,400 were taken by the assessee on 11th January, 1966. Deducting therefrom the opening balance of Rs. 65,246 and two more items, namely, Rs. 1,40,000, being outstanding dividends declared on 31st December, 1955, of his major son, and transferred to his account, and a further dividend of Rs. 19,493 credited to his account from Kathoni Tea Estate, there remained a sum of Rs. 2,72,703 to the debit of the assessee in the books of the company as on the 12th November, 1956. On December 29, 1956, the assessee paid back to the company a sum of Rs. 1,90,000. On December 31, 1956, his account was credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces or loans taken during the interim periods of the previous year would just have to be ignored. " On these premises, the Judicial Member came to the conclusion that the sum of Rs. 2,72,703 grossed up to Rs. 3,19,345 was not a dividend within the fiction under section 2(6A)(e) of the Act. On account of this difference of opinion, the following question was referred to the President of the Tribunal: " Whether, on the facts and in the circumstances of the cases, the sum of Rs. 2,72,703 net (Rs. 3,19,245 gross) is to be treated as dividend income in the hands of the assessee within the meaning of section 2(6A)(e) ?" The President agreed with the Accountant Member and held that an advance or loan received by the shareholder of a private company forthwith assumes the character of a dividend and becomes his income by virtue of the fiction created by section 2(6A)(e) and it ceases to be a liability for the purpose of taxation, although the assessee may, in fact or in law, remain liable to the company to repay it. If the assessee repays the loan subsequently, such repayment would not liquidate or reduce the quantum of the income which had already accrued, as such repayment is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (1) of section 4 computed in the manner laid down in this Act." Section 3 is the charging section. Two of the principles deducible from the section are: (1) That the tax is levied on the total income of the assessable entity; (2) That each previous year is a distinct unit of time for the purpose of assessment, and the profits made or liabilities or losses incurred before or after the relevant previous year are wholly immaterial in assessing the profits of that year unless there is a statutory provision to the contrary. Section 4(1), so far as it is material, reads as follows : " 4. (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which-- (a) are received or are deemed to be received in the taxable territories in such year by or on behalf of such person, or (b) if such person is resident in the taxable territories during such year.-- (i) accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year, or (ii) accrue or arise to him without the taxable territories during such year, or ...... (c) if such person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril, 1956. In the relevant assessment year, section 16(2) of the Act was operative and ran as follows: " 16. (2) For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him, and shall be increased to such amount as would, if income-tax (but not super-tax) at the rate applicable to the total income of the company ......... for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited or distributed, were deducted therefrom, be equal to the amount of the dividend." Mr. G. C. Sharma, counsel for the appellants, contends that the scope of the fiction created by section 2(6A)(e) should be confined to those advances and loans only, which are not repaid but remain subsisting at the end of the previous year in which they were taken. It is argued that the sole object of this provision is to curb the evil of distributing profits under the guise of loans or advances; that if an advance or loan is repaid in the same accounting year, it cannot be said that it was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme of the Act which generally avoids double taxation. The upshot of the arguments of Mr. Sharma is that under the Act only that item or entity is taxable which is rationally capable of being considered as the income of the assessee; that an advance or loan which is genuine and not a subterfuge for payment of dividend and is not subsisting or outstanding at the end of the previous year on account of its repayment by the shareholder, cannot reasonably be deemed to be his dividend income within the contemplation of section 2(6A)(e) read with section 12 of the Act. Mr. Sharma has taken us through various decisions having a bearing on the problem. The cases referred to, discussed or sought to be distinguished by him are: K. M. S. Lakshmana Aiyar v. Addl. Income-tax Officer [1960] 40 ITR 469 (Mad), Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax [1965] 56 ITR 198 (SC), Commissioner of Income-tax v. K. Srinivasan [1963] 50 ITR 788 (Mad), Walchand & Co. Ltd. v. Commissioner of Income-tax [1975] 100 ITR 598 (Bom) and Commissioner income-tax v. P. K. Badiani [1970] 76 ITR 369 (Bom). Mr. Sharma also has referred to section 108 of the Commonwealth Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) have been found to exist by the income-tax authorities and the Tribunal, the loan had to be treated as the assessee's dividend income, the moment it was received, and the subsequent repayment of the loan could not neutralise or take it out of that category of income. Counsel has drawn our attention to the observations of this court in Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax [1965] 56 ITR 198 (SC). He has further adopted the reasoning of the Bombay High Court in Walchand & Co. Ltd. v. Commissioner of Income- tax [1975] 100 ITR 598 (Bom). Section 2(6A)(e) and section 12(1B) were inserted in the Act by the Finance Act, 1955, which came into operation on April 1, 1955. These provisions seem to have been adapted with alterations from section 108 of the Commonwealth Income-tax Assessment Act in force in Australia. Section 108 reads as follows : " Loans to shareholders.--(1) If amounts are paid or assets distributed by a private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of the amount or value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is this presumption juris et de jure which is the foundation of the statutory fiction incorporated in section 2(6A)(e). Thus, section 108 of the Commonwealth Act appears to be more reasonable and less harsh than its Indian counterpart. From the above discussion it emerges clear that the fiction created by section 2(6A)(e) read with section 12(1B) of the Act is inexorably attracted as soon as all the conditions necessary for its application exist in a case. In Navnit Lal's case [1965] 56 ITR 198, 202 (SC) this court, after an analysis of these provisions, listed these conditions, as follows : "... the combined effect of these two provisions is that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. There three kinds of payments are (1) payments made to the shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before section 12(1B) can be invoked against a shareholder. The first condition is that the company in question must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be said that the loans had been advanced by the company in the ordinary course of its business. Thus, all the factual conditions for raising the statutory fiction created by sections 2(6A)(e) and 12(1B) appeared to have been satisfied in the instant case. Mr. Sharma, however, contends that in order to attract the statutory fiction one other essential condition is that the loan or advance must be outstanding at the end of the previous year, and if the loan had ceased to exist owing to repayment or otherwise before the end of the year--as in the present case--the fiction cannot be invoked. In this connection, counsel has again referred to the last limb of section 108(1) of the Commonwealth Income-tax Act according to which the payment to a shareholder by way of advance or loan is to be treated as a dividend paid by the company on the last day of the year of income of the company in which the payment is made. It is urged that the principle in the last limb of sub-section (1) of section 108 of the Commonwealth Act should also be read into the Indian statute. It is maintained that the omission of such words from sections 2(6A)(e) and 12(1B) does not show that the intendment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same as the " fifth condition " in sub-section (1B) of section 12 to the effect, that the " payment deemed as dividend shall be treated as a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of March, 1956, if such loan or advance remains outstanding on the last day of such previous year ". The word " such " prefixed to the " previous year " shows that the application of this clause is confined to the assessment year ending on March 31, 1956. In the instant case we are not concerned with the assessment year ending March 31, 1956. This highlights the fact that the legislature has deliberately not made the subsistence of the loan or advance, or its being outstanding on the last date of the previous year relevant to the assessment year, a pre-requisite for raising the statutory fiction. In other words, even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed as a " dividend " if the other four conditions factually exist, to the extent of the accumulated profits possessed by the company. At the commencement of this judgment we have noticed some general principles, one of which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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