9911796707
TMI Blog1974 (8) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... S.D.U.M.S. Private Ltd. (hereinafter referred to as " the company ") to the assessee's wife and minor children as dividend under section 2(6A)(e) and assessed it in the hands of the assessee by invoking section 16(3) of the Act. The company charged interest on the loan advanced to the minor children and this amount which came to Rs. 1,201 was not allowed as a deduction from the income by the Income-tax Officer. The assessee preferred an appeal to the Appellate Assistant Commissioner and contended that the legal fiction of considering the income of the wife and minor children as that of the assessee cannot be extended to the loan taken by the wife and minor children from the company and that when the assessee himself had not taken any loan from the company the question of assessment of the loans taken by his wife and minor children does not arise. The Appellate Assistant Commissioner did not agree with the assessee in these contentions and held that the Income-tax Officer was right in treating the loans taken by the assessee's wife and minor children as dividend income of the assessee under sections 2(6A)(e) and 16(3) of the Act. He also held that the interest paid on the loans ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r minor child of such individual as arises directly or indirectly-... (iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart ; or (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration." It is not in dispute that all the conditions in section 2(6A)(e) are satisfied in the present case and the said sum of Rs.26,065 will have to be treated as dividend as contemplated by that provision. The learned counsel for the revenue contended that having regard to the purpose and nature of the provision in section 16(3) as an anti-tax avoidance provision and as a provision intended to bring in the income of a third party in certain circumstances into that of the assessee, a broad and liberal interpretation should be given to this provision. Section 2(6A)(e) also created a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan is treated in reality for tax purposes as payment of dividend to him. If that is so really this deemed div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icability of the section is that the borrower should be a shareholder and such loans and advances are by fiction treated as dividend substitutes, such dividend shall be deemed to arise to the borrower out of the shares held by him. The fiction created by section 2(6A)(e) stops with including the loan as dividend. It does not go further and say in whose total income this will be a included for the purpose of the Act. That will have to be decided only with reference to the other provisions of the Act. Once this position is reached there would be no difficulty at all in testing the applicability of section 16(3). Under the last mentioned provision so much of the income of the wife or minor child as arises directly or indirectly from the assets transferred to the wife or minor child otherwise than for adequate consideration shall be included in the total income of the individual. The assets transferred to the wife and minor children otherwise than for adequate consideration are the shares in the company. By deeming the loans and advances as dividend paid to the shareholder, section 2(6A)(e) has made such loans as income arising to such shareholder from the shares held. The learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the total income of the husband under section 16(3). While holding that it cannot be included the Bombay High Court observed : " But section 16(3) permits inclusion of the income of a wife in the income of her husband for purposes of assessment only if such income arises directly or indirectly from assets transferred to the wife by the husband otherwise than for adequate consideration ; in other words, such inclusion is permissible only where the income of the wife actually arises directly or indirectly. Where by a mere fiction the income is deemed to have been received but which has not in fact been received, in our judgment, section 16(3) can have no application. There is no warrant for the submission that the expression' as arises directly or indirectly' in clause (a) of sub-section (3) of section 16 is to be equated with the expression ' deemed to have been distributed ' in section 23A(1). " A similar question came up for consideration before the Privy Council in George N. Houry v. Commissioner of Income-tax . Section 22 of the East African Income-tax (Management) Act, 1952, which was similar to section 23A of the Indian Income-tax Act, 1922, as it stood prior to its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not as the income of any other person if ' paid' in this section were to include what is deemed to be paid by the earlier section. It appears to their Lordships to be the unavoidable conclusion that in construing section 24 the income ' paid ' within the meaning of that section and as such attributed to the father cannot include income deemed to be distributed by virtue of section 22 and as such attributed to the child. " These two decisions were followed in Commissioner of Income-tax v. M. K. Mackar Pillai, when a similar question arose with reference to the deemed dividend distributed under section 23A. It could be seen from section 23A that the fictional distribution of the dividend was without reference to the amount in fact reaching the hands of the shareholder. Though the amount has not reached the hands of the shareholder by the fiction created, the undistributed profits were deemed to have been distributed and the income was made taxable in the hands of the shareholder. Thus unlike section 2(6A)(e) the section not only creates a fiction but goes further and says in whose total income such deemed distribution will have to be included for the purpose of the Act. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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