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TMI Blog1975 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of distributable profits for these years was respectively Rs. 46,573, Rs. 1,17,365 and Rs. 1,46,415. It is an admitted position that the respondent-assessee did not distribute any dividend for these years. It is also not in dispute that the minimum amounts of dividend, which the respondent-assessee should have distributed to escape from the mischief contemplated by section 23A of the Act, were respectively Rs. 20,958, Rs. 52,814 and Rs. 73,207. For these three assessment years, it was found that the respondent-assessee has advanced loans to a shareholder amounting respectively to Rs. 77,961, Rs. 47,022 and Rs. 71,595. The payment of these loan amounts to the shareholder concerned amounted to " deemed dividends " under clause (e) of sub-section (6A) of section 2 of the Act. The contention of the assessee before the Income-tax Officer was that, since the payment of these loan amounts amounted to " deemed dividends ", the said payments must be treated as " distribution of dividend " within the meaning of section 23A, and, therefore, so far as the first year is concerned, there was no breach of any of the provisions of section 23A as the " deemed dividend " in the form of loan fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to tax the loan in the hands of the shareholder who receives the same from a closely-held company as dividend, but that does not mean that the dividend of the company gets distributed within the meaning of section 23A. He pointed out that the object of section 23A is to prevent the closely-held company from accumulating profits and hence, if the view taken by the Tribunal is accepted, the said object would be frustrated. Referring to the case law on the subject, he pointed out the distinction between the meanings of the words " payment " and " distribution " and contended that even if payment of a loan is deemed to be a dividend under section 2(6A)(e), it can never amount to distribution " of a dividend within the meaning of section 23A. As against this, Shri Shah, appearing for the assessee, contended that when the recipient of a loan which is deemed to be dividend under section 2(6A)(e) is taxed on the said amount, the purpose of clause (e) of section 2(6A) as well as of section 23A is fully served and, therefore, the deeming fiction of clause (e) of section 2(6A) should be taken to its logical conclusion and should be carried even for the purpose of determining whether the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses accumulated profits..." In this case we are primarily concerned with the provisions contained in clause (e). Sub-section (6A) further provides that the expression " dividend " does not include any dividend paid by a company, which is set off by the company against the whole ; or any part of the sum previously paid by it and treated as a dividend within the meaning of clause (e) to the extent to which it is so set off. So, according to this provision, if a closely-held company gives loan to any of its shareholders and then sets off either the whole or part of the loan or advance against its dividends, then the amount so set off will not be deemed to be a dividend to the extent of the said set-off. The relevant portion of section 23A, with which we are concerned in this reference, is contained in sub-section (1) thereof which says that where the Income-tax Officer is satisfied that in respect of any previous year the profits and gains distributed as dividends by any company within the twelve months immediately following the expiry of that previous year are less than the statutory percentage of the total income of the company of that previous year as reduced as provided in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in the hands of a close company. It should be noted that before clause (e) of section 2(6A), and section 23A were substituted for the old provisions in the year 1955, the Income-tax Officer was bound to make an order in writing that undistributed income of the company should be deemed to have been distributed amongst its shareholders in certain proportion, and such deemed dividend was included in the total incomes of the shareholders. The legislature tried to prevent accumulation of profits by this method, but,it created some problems with the result that, to achieve the same object of preventing accumulation of profits in the hands of the company, the legislature provided for the levy of additional tax on the company itself, and further treated loans in the hands of the shareholders as deemed dividends under clause (e) of section 2(6A). The fact that Explanation 2 of the section fixes different statutory percentages with regard to different types of companies, again emphasises that the main object of the section is to prevent accumulation of profits in the hands of certain type of companies beyond a particular limit. Thus the legislature has made a two-pronged attack, one by en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescribed for companies. This object was defeated by section 23A which provides that in the case of undistributed profits, tax would be levied on the shareholders on the basis that the accumulated profits will be deemed to have been distributed amongst them. Similarly, section 12(1B) provides that if a controlled company adopts the device of making a loan or advance to one of its shareholders, such shareholders will be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he has received the said loan by way of dividend. It is clear that when such a device, is adopted by a controlled company, the controlling group consisting of shareholders have deliberately decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company ; but the main object underlying the loan is to avoid payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a case, the company will obviously not be liable to any action under section 23A as the provisions of this section stand complied with. But none the less the shareholder who receives the loan would be liable under clause (e) of section 2(6A) as the loan received by him would necessarily be treated as a deemed dividend. It is important to note that though that loan would be treated as a deemed dividend, the same would not be computed as a further dividend distributed amongst the shareholders of the company. In our opinion, this illustration conclusively shows how clause (e) of section 2(6A), and section 23A operate independently on different fields to achieve the same object. That being so, the fiction created by clause (e) of section 2(6A) cannot be projected to section 23A as is done by the Tribunal, because the purpose of this fiction is fully served the moment the loan is treated as a dividend in the hands of the shareholder concerned. It is a well-settled principle that legal fictions are created for a definite purpose and are limited to the purpose for which they are created and should not be extended beyond their legitimate field. Shri Shah's stress on clause (ii) of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, visualises " payment " even to a " shareholder " of a company. Thus, by using the word " distribution " in clauses (a) to (d) and the word " payment " in clause (e), the legislature itself has emphasised the basic difference between the two concepts. In Punjab Distilling Industries Ltd. v. Commissioner of Income-tax [1965] 57 ITR 1, the Supreme Court has explained the meaning of the expression " distribution " appearing in clause (d) of section 2(6A) of the Act of 1922, as under : " What then is the meaning of the expression 'distribution' ? The dictionary meaning of the expression "distribution ' is ' to give each a share, to give to several persons '. The expression ' distribution ' connotes something actual and not notional. It can be physical ; it can also be constructive. One may distribute amounts between different shareholders either by crediting the amount due to each one of them in their respective accounts or by actually paying to each one of them the amount due to him ...... The only difference between the expression ' paid ' and the expression ' distribution ' is that the latter necessarily involves the idea of division between several persons which is the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enacting clause (e) of section 2(6A) of the Indian Income-tax Act, 1922, the legislature has created a fiction and has made the payments referred to in clause (e) ' dividend ' for the purposes of the said Act. But the legislature has not made the further fiction and has not made them ' dividend distributed by a company '. In that context we have to construe Explanation (ii) of the Finance Act, 1956. Explantion (ii) of the Finance Act of 1956 states that the expression ' dividend ' shall be deemed to include ' any distribution ' included in the expression 'dividend' as defined under clause (6A) of section 2 of the Income-tax Act. Therefore, it is clear that it did not include other payments by a company which were not distributions but were still 'dividends' within the meaning of clause (6A) of section 2 of the Indian Income-tax Act, 1922. In this connection it is necessary to bear in mind that the expressions 'distribution' and 'payment' connote different meanings. ' Distribution ' is division amongst several persons. It connotes an idea of apportionment among more than one person. In the case of ' distribution ' the recipients would be more than one, while in the case of ' paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders and the concept of taking the share of accumulated profits represented by the distribution received by each shareholder is inherent in each one of these clauses. But, when we come to section 2(6A)(e) it is clear that the section is dealing with an individual shareholder who receives payment from the company and this payment is sought to be taxed in his hands as dividend." All these observations conclusively show the difference in the meaning which can be attributed to the words " payment " and " distribution ". Let us now see how the whole object of section 23A is frustrated, if it is held that payment in nature of a loan amounts to a distribution of dividend. Suppose, a company governed by the provisions of section 23A has 10 shareholders and a loan is given to one of its shareholders whose other income is in a lower bracket. The company does not distribute any of its dividends for a particular year with the result that none of the remaining nine shareholders gets anything either by way of a loan or by way of a dividend. Now can it be said in such a case that the company, by giving a loan of the sufficient amount, which would cover the whole of the dividend, which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 23A clearly contemplates actual and not deemed distribution and, therefore, the provisions of sub-section (1) cannot be read subject to the provisions of sub. section (6) or as if the provisions of sub-section (6) are incorporated in it. The statutory percentage of distribution cannot be met by bringing in and adding to the sum actually distributed the excess distribution of preceding years. Therefore, this court finally held that once the Income-tax Officer finds that a company has not actually distributed dividend according to the statutory percentage applicable to it, subject to the test of reasonableness embodied in sub-section (1), the company becomes liable to be charged with additional super-tax on the undistributed balance. These observations clearly bring to the forefront the principle that the distribution of dividend, which is contemplated by section 23A is not the payment of a fictional or deemed dividend contemplated by clause (e) of section 2(6A). Similar view is taken even by the Madras High Court in Commissioner of Income-tax v. Sundaram Private Ltd. [1969] 71 ITR 273. In S. C. Cambatta Co. Ltd. v. Commissioner of Income-tax [1952] 21 ITR 121, the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectively. The company had not declared dividends in the following years in respect of them but had advanced substantial sums to its shareholders in the relevant accounting years. The question which really arose before the High Court was whether the fact that the advances made during the accounting years would or would not attract provisions of section 23A. The court held that if a company complies with the requirement of section 23A before the period mentioned therein had commenced, an order under the section cannot be made. But while deciding this question the High Court appears to have made the following observations which had led the Tribunal to take the view which it did : " There appears to be no doubt that an advance or loan to a shareholder must be deemed to be dividend in terms of section 2(6A)(e) for the purpose of section 23A. " It appears that these observations were made as none of the parties contended before the High Court the question which is involved in the reference before us. Except this solitary sentence, there is no discussion in the judgment going to show how the payment of loan to a shareholder, which is deemed to be dividend in terms of section 2(6A) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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