Karnataka H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of s. 104 of the IT Act, 1961, were applicable to the instant case for the asst. yr. 1975-76 ?

Counsel Appeared

G. Sarangan, for the Assessee : H. Raghavendra Rao, for the Revenue

S.RAJENDRA BABU, J.:

This is a reference under the IT Act, 1961, and the question referred for our opinion is as follows :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of s. 104 of the IT Act, 1961, were applicable to the instant case for the asst. yr. 1975-76 ?”

The facts leading to this reference are as follows : A sum of Rs. 1,23,053 was paid to the managing director of the assessee- company should be treated as dividend under s. 2(22) of the IT Act, 1961 (in short “the Act”). If that amount is taken as a dividend distributed, then there will hardly be a balance of Rs. 2,800 to be distributed and that is too small an amount compared to the paid-up capital of the assessee-company and, as such, the provisions of s. 104 of the Act are inapplicable.

The assessee is a trading company in which the public are not substantially interested. For the asst. yr. 1975-76, the company was assessed to tax on a total income of Rs. 6,27,430. The assessee not having distributed any dividends to its shareholders, the ITO initiated proceedings under s. 104 of the , and, on that basis, levied an additional income-tax at 25 per cent of the amount disallowed. The assessee appealed unsuccessfully both to the AAC and thereafter to the Tribunal. Aggrieved by the order of the Tribunal, at the instance of the assessee, the question of law set forth above has been referred for our opinion.

The stand of the assessee is that, having regard to s. 205(2A) of the Companies Act, 1956, the assessee was prevented from paying dividends without making necessary transfer to the general reserve and also that they had certain difficulties in closing the books of account and holding the general body meeting. In these circumstances, the assessee could not declare any dividends. This stand of the assessee did not appeal to any of the authorities or the Tribunal as, in their view, by reason of the statutory amendment by the Finance Act, 1973, the legal bar that had been there was removed because the said amendment specifically provided that the amount of dividend actually distributed within the said period of 12 months only should be reduced from the distributable income making it clear that the distribution should be made within 12 months from the end of the accounting year. The restrictions available under the Companies Act, have no relevance and cannot be a fetter on the taxing authority in dealing, with the matter under s. 104 of the Act as the said provisions are not subject to the provisions of the Companies Act. The loan given to the managing director in the sum of Rs. 1,23,053 could not be treated as deemed dividend within the meaning of s. 2(22)(e) of the ,. The ITO took the view that though giving of a loan comes under s. 2(22)(e) of the , the same cannot be held as distributed dividend as per s. 109 of the , and, therefore, attracts the levy of additional tax under s. 104 of the Act.

Before this Court, it was submitted that the view of the Tribunal that s. 205(2A) of the Companies Act, is no bar to attract s. 104 of the , was plainly wrong. When once the company is covered by s. 104 of the Act, the loans advanced to shareholders covered by s. 2(22)(e) of the Act, should be deducted from the accumulated profits and, in such an event, would not attract s. 104 of the Act.

Under s. 2(22)(e) of the Act , a loan to a shareholder by a company is deemed to be a dividend. Therefore, the question that arises for our consideration is whether, by reason of s. 2(22)(e) of the Act, a loan to a shareholder or a payment on his behalf is assessable as dividend thereof so as to be treated as a distributed dividend for the purpose of s. 104 of the Act.

The Calcutta High Court in Moore Avenue Properties (P) Ltd. vs. CIT (1966) 59 ITR 466 (Cal), on the basis that fictions have to be treated as realities and carried to their logical end, held that, for the purposes of s. 104, deemed dividend should also be taken into consideration while determining the percentage of the distributable income. In sharp contrast to this view, the Gujarat High Court in CIT vs. Bombay Mineral Supply Co. (P.) Ltd. (1978) 112 ITR 577 (Guj), has held that payment of a loan which is deemed as a dividend cannot be construed as distribution of dividend within the meaning of s. 23A of the Indian IT Act, 1922 (equivalent to s. 104 of the Act), and further held that the two sections operate in two different fields.

8. Sec. 2 of the , is a “definition” clause and cl. (22)(e) gives an inclusive definition of the term “dividend”. Any advance, loan, payment made on behalf of a share holder or payment for the individual benefit of a shareholder, to the extent to which the company possesses accumulated profits, excluding an advance or loan made to such shareholder by a company in the ordinary course of its business where money-lending is a substantial part of its business, and any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-cl. (e) to the extent to which it is so set off, has to be treated as dividend in the hands of a shareholder for the purpose of tax. The expression “accumulated profits” has been elaborated in Explanations 1 and 2 to the said sub-section. Sec. 104 provides for levy of additional income-tax on undistributed profits. In a case where, in any previous year relevant to the assessment year, the profits and gains were found to have been distributed as dividends by any company within the 12 months immediately before the expiry of that previous year which are less than the statutory percentage of the distributable income of the company of that previous year, the ITO shall make an order holding the company liable to pay income-tax at a certain rate on the distributable income as reduced by the amounts of dividends actually distributed, if any, within the said period of 12 months. But there are certain exceptions and exemptions while applying these pro-visions as provided in sub-s. (2) thereof. It is too well-settled that, when a fiction is created in an enactment and whatever benefits may arise out of the provisions thereof, the same will have to be given due weight. The scheme of s. 2 (22) (e) is that any payment by a company by way of loan or otherwise in the circumstances stated therein would amount to a dividend but if it is set off by any dividend subsequently declared or paid, that part of the sum previously paid by it and treated as dividend within the meaning of sub-cl. (e) to the extent to which it is so set off is excluded from the concept of dividend. If a payment is made by way of loan as contemplated under s. 2(22)(e), such payment is required to be given set off against a dividend and shall not be treated as a dividend to the extent to which it is so set off. Therefore, the subsequent declaration of a dividend, in fact not by reason of the fiction, goes out of the category of the concept of dividend as provided in s. 2(22)(e) then, in a given year, when the loan advanced to a shareholder was covered by s. 2(22)(e), it does not become a dividend for purposes of s. 104 of the , by reason of strict construction adopted by the Gujarat High Court, but subsequently when a dividend is actually declared and is set off against that loan, that ceases to be a dividend by reason of the exclusionary clause contained in s. 2(22) of the Act. Therefore, in either event, it goes out of the category of a dividend for purposes of s. 104 of the Act. Could it be said that, in such an event also, the deeming provisions should not apply . The reasoning adopted by the Gujarat High Court is that the expression “distributed” has acquired a particular connotation as meaning distributed to several persons while payment could be to one or many and “distribution” cannot be made to any single person and for this proposition, it has relied upon a decision of the Supreme Court in Punjab Distilling Industries Ltd.’s case (supra). The context in which the

Supreme Court made the observations pointing out the distinction between the terms “distribution” and “payment” was with reference to actual payment or actual distribution and not as to whether, in the concept of distribution, a deemed dividend would also fall or not and, therefore, the reliance on the expressions “dividend”, “distribution” and “payment” in the Supreme Court decision, with great respect, in our view, is misplaced. The true effect of the expression “distributed” could be properly understood by a close examination of s. 104 of the , itself in that, in the earlier part of the section, the expression used is “distributed” dividend which does not bear a proper proportion to the distributable profits while, in the latter part of the section, the expression used is “actually distributed”. Therefore, the legislature itself has borne in mind that the expression used in the earlier part, namely,”distributed”, would not necessarily mean “actually distributed” while, in the latter part, the expression “actually distributed” meant distributed in fact as opposed to distributed in a hypothetical or theoretical sense. The other reasoning on which the Gujarat High Court relied for its conclusion is that, in a case where an assessment has been made under s. 104 or a company to which s. 104 is applicable has distributed profits coming within the limits prescribed under s. 104, it is not liable to taxation thereof, but nevertheless makes a loan out of the remaining distributable profits to any shareholder, then both ss. 104 and 2(22)(e) could stand together though they operated in different fields. And, in such a case, the loan made, though a deemed dividend for purposes of s. 2(22)(e), will not be a dividend for purposes of s. 104 of the ,. It is certainly permissible for a company to make a payment by way of loan or otherwise as contemplated under s. 2(22)(e), but then it will be taxable only in the hands of the shareholder and not in the hands of the company because section 104 conceives of a particular situation where liability to pay additional tax is attracted and not in every case where dividend is declared or a loan is paid. Therefore, to say that s. 2(22)(e) and s. 104 of the , operated in different fields and deemed dividend thereunder will not be a dividend for purposes of s. 104, in our opinion, with great respect, does not flow from it. Hence, we have got to dissent from the view expressed by the Gujarat High Court in Bombay Mineral Supply Co.’s case (supra), and concur with the view expressed by the Calcutta High Court in Moore Avenue Properties (P) Ltd. (supra).

Learned counsel on either side relied upon various other decisions. But none of them has a direct bearing upon the issue before us and, therefore, we have not made any reference to any one of them although we have given careful and anxious consideration to each one of them and derived information and knowledge in analysing the provisions with which we are concerned in this case. As the assessee is succeeding on the first contention, it is unnecessary to consider the second contention as to the effect of s. 205(2A) of the Companies Act, in cases governed by s. 104 of the Act.

In the circumstances, the question referred for our opinion is answered in the negative and in favour of the assessee.

[Citation :182 ITR 235]