The
Commissioner of Income-Tax Vs. M/S. Mysodet (P) Ltd., Bangalore [1999] INSC 75
(17 March 1999)
N.Santosh
Hedge, S.P.Bharucha SANTOSH HEGDE, J.
This
appeal arises from the judgment and order of the High Court of Karnataka dated
13.12.1989 made in I.T.R.C. No.21/82. The following question was referred to
the High Court for its opinion under Section 256(1) of the Income Tax Act, 1961
(hereinafter referred to as `the Act') :
"Whether
on the facts and in the circumstances of the case, the Tribunal was right in
law in holding that the provision of Section 104 of the Income-tax Act, 1961
was applicable to the instant case for the assessment year 1975- 76?" The
facts leading to the abovesaid reference are as follows :
The
respondent-Company is a trading company in which the public are not
substantially interested. The assessing authority assessed the income of the
Company for the assessment year 1975-76 at Rs.6,27,430/- holding that the
Company did not distribute any dividend to its shareholders.
The
Income Tax Officer initiated proceedings under Section 104 of the Act,
demanding additional income-tax of Rs.31,434/-.
Against
the said assessment order, the respondent- Company preferred an appeal before
the Appellate Assistant Commissioner. Having failed before the said Authority,
a further appeal was preferred before the Appellate Tribunal which, in turn,
rejected the said appeal and on a prayer made by the Company, the Tribunal
referred the abovenoted question for opinion of the High Court.
Before
the High Court, the assessee relied upon a judgment of the Calcutta High Court
in Moore Avenue Properties (P) Ltd. v. C.I.T. (1966) 59 ITR 466 which took the
view that in view of the deemed definition given in Section 2(22)(e) of the
Act, any loan advanced to a shareholder out of the accumulated profits of the
Company in which public do not have a substantial interest, would amount to
payment of dividend. Hence, Section 104 of the Act would not be attracted.
Per
contra, the Revenue relied upon a judgment of the Gujarat High Court in the
case of CIT v. Bombay Mineral Supply Co. (P) Ltd. (1978) 192 ITR 577 wherein it
was held that payment of a loan which is deemed as a dividend cannot be
construed as distribution of dividend within the meaning of Section 23A of the
1922 Act (equivalent to Section 104 of the Act). The Karnataka High Court
preferred to rely upon the Calcutta High Court judgment and allowed the
reference, holding in favour of the assessee. Now the Revenue is in appeal
before us.
It was
contended on behalf of the Revenue in this appeal that even if it is to be held
that payment of a loan by a Company is to be deemed to be a dividend, such
payment cannot be treated as distribution of dividend as contemplated in
Section 104 of the Act for avoiding the levy of super-tax. The stand of the
Revenue before us is that for the purpose of avoiding the levy under Section
104 of the Act, there should be in fact distribution of dividend as such in favour
of all the shareholders and a deemed payment of dividend is not what is contemplated
under the said Section. It was also contended before us that the view taken by
the Calcutta High Court (supra) does not lay down the correct position in law
and, on the contrary, the view taken by the Gujarat High Court (supra) should
be accepted.
In the
instant case, during the year under reference, the company had paid a sum of
Rs.1,23,053/- to its Managing Director as a loan and the balance amount left
with the company was admittedly not sufficient to distribute as dividend among
other shareholders. Therefore, the company had contended that in view of the
fact that under Section 2(22)(e) of the Income Tax Act, 1961, payment of any
advance or loan to a shareholder being a deemed payment of dividend, there was
no case for invoking the provision of Section 104 of the Act. As stated above,
this contention did not find favour with the assessing and other authorities
except the High Court.
The
question, therefore, is whether the company concerned has for the relevant
year, distributed its surplus income or not, so as to attract or not to attract
the rigour of Section 104 of the Act. Section 2(22)(e) of the 1961 Act reads as
under :
"(22)(e)
"dividend" includes - any payment by a company, not being a company
in which the public are substantially interested, of any sum (whether as
representing a part of the assets of the company or otherwise) by way of
advance or loan to a shareholder, being a person who has a substantial interest
in the company, or any payment by such company on behalf, or for the individual
benefit, of any such shareholder, to the extent to which the company in either
case possesses accumulated profits;" A perusal of this Section shows that
for the purpose of the Act, any payment made by a company of any sum of money
by way of advance or loan to its shareholders is deemed to be a dividend. Since
the Act has not provided for any other definition of the word
"dividend" except the ones enumerated in Section 2(22) of the Act, it
should be construed that this definition would be applicable to all provisions
which contain the term "dividend" in the Act.
Section
104 of the Act reads as under :
"104.
Income-tax on undistributed income of certain companies. - (1) Subject to the
provisions of this section and of sections 105, 106 107 and 107A, 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 distributable income of the company of that
previous year, the Income-tax Officer shall make an order in writing that the
company shall, apart from the sum determined as payable by it on the basis of
the assessment under section 143 or section 144, be liable to pay income-tax at
the rate of - (a) fifty per cent., in the case of an investment company, (b)
thirty-seven per cent., in the case of a trading company, and (c) twenty-five
per cent., in the case of any other company, within India.) on the distributable
income as reduced by the amount of dividends actually distributed, if any,
within the said period of twelve months.
(2)
The Income Tax Officer shall not make an order under sub-section (1) if he is
satisfied - (i) that, having regard to the losses incurred by the company in
earlier years or to the smallness of the profits made in the previous year, the
payment of a dividend or a larger dividend than that declared within the period
of twelve months referred to in sub-section (1) would be unreasonable; or (ii)
that the payment of a dividend or a larger dividend than that declared within
the period of twelve months referred to in sub-section (1) would not have
resulted in a benefit to the revenue; or (iii) that at least seventy-five per
cent. of the share capital of the company is throughout the previous year
beneficially held by an institution or fund established in India for a charitable purpose the income
from dividend whereof is exempt under section 11.
(3) If
the Central Government is of opinion that it is necessary or expedient in the
public interest so to do, it may, by notification in the Official Gazette and
subject to such conditions as may be specified therein, exempt any class of
companies to which the provisions of this section apply from the operation of
this section. (4) Without prejudice to the provisions of section 108, nothing
contained in this section shall apply to a company which is neither an Indian
company nor a company which has made the prescribed arrangements for the
declaration and payment of dividends within India." As per this Section, an Income Tax Officer, if satisfied that a
company in respect of any previous year has not distributed, as required by the
statute, dividends from out of its profits and gains, shall make an order in
writing that the company shall, apart from the sum determined as payable by it
on the basis of the assessment under Section 143 or 144, be also liable to pay
income-tax at the rate provided in that Section. The Calcutta High Court in the
case cited above held that loans and advances to the shareholders should be
deemed to be dividend under section 2(6A)(e) of the 1922 Act (equivalent to
Section 2(22)(e) of the 1961 Act). Hence, in its opinion, the provision of
Section 23A(1) (equivalent to Section 104 of the 1961 Act) is not attracted.
Per contra, the Gujarat High Court in the case referred to above, held that the
definition of the word "dividend" as found in Section 2(6A)(e) of the
Act will not be applicable for the dividend to be paid under Section 23A(1) of
the Act inasmuch as the latter Section contemplates an actual distribution of
dividend and not payment of any sum of money which can be termed as
"dividend" by a legal fiction. In the said view of the matter, the
Gujarat High Court was of the opinion that even if the company concerned had
made any advance or payment which under the Act could be deemed to be a
dividend, the same cannot be used as a defence in the proceedings under Section
23A of the Act unless the dividend, as such, has been paid to all the
shareholders.
With
respect, we are unable to agree with the reasoning of the Gujarat High Court.
The object of the Legislature in enacting Section 2(22)(e) and Section 104 of
the 1961 Act is one and the same, namely, to prevent the escapement of super-
tax by some shareholder and/or companies. While under Section 2(22)(e) of the
Act, by a deeming provision, the Legislature has made payment of any advance or
loan to a shareholder a deemed dividend so as to subject such payments to the
levy of super-tax in the hands of the receiver of the said amount, Section 104
of the Act provides for levy of super-tax on companies which attempt to avoid
payment of super-tax by its shareholders by not distributing its surplus
profits and income. In either case, the object of the Act is to see that
evasion of super-tax is prevented. Thus it is clear that the Act did not
contemplate the levying of super-tax twice, namely, once in the hands of the
shareholder who has received it as a deemed dividend and again in the hands of
the Company which, according to the assessing authority, has failed to declare
the dividend.
The
main ground on which the Gujarat High Court based its decision is the
difference in the language used in Sections 2(6A) and 23A of the Act. According
to the High Court, while in Section 2(6A) the Legislature has used the
expression "any payment", in Section 23A it has used the words
"gains distributed". In view of such use of two different expressions
in these two Sections, the High Court came to the conclusion that the deeming
provision in Section 2(6A) is not available while invoking Section 23A of the
Act. This conclusion of the High Court also, in our view, is not correct. It is
true that the two Sections referred to above have used two different verbs but
that by itself, in our opinion, would not take away the effect of the deeming
provision found in the definition clause. If actually the Legislature wanted
the deeming clause not to be made applicable to the provisions of Section 104
of the 1961 Act then it would have said so in categorical terms in the Statute,
in the absence of which the statutory definition given under Sections 2(22)(e)
of 1961 Act, in our view, will have to be applied to the word
"dividend" as found in Section 104 also. The Gujarat High Court had
also placed reliance on a judgment of this Court in the case of Navnit Lal C Javeri
v. K K Sen (1965) 56 ITR 198. In our view, the ratio laid down in the said
judgment could not, in any way, support the ultimate conclusion of the High
Court.
This
Court in the said case was dealing with the constitutionality of Section 23A of
the 1922 Act, and was not dealing with the interpretation of Sections 2(6A) and
23A of the said Act. This Court in that case did not have occasion to decide
the question that has arisen before us.
Hence,
the Gujarat High Court could not have got any assistance from the said
judgment.
In
view of the above discussion, we are of the opinion that the view taken by the
Calcutta High Court in the case referred to above lays down the correct law and
the view taken by the Gujarat High Court does not lay down the correct law.
Therefore, the judgment of the High Court under appeal has to be sustained.
Consequently, this appeal fails and is hereby dismissed. No costs.
Back