Commissioner of Income Tax, Kolkata Vs. Mukundray K. Shah  Insc 376 (10 April 2007)
S.H. KAPADIA & B. SUDERSHAN REDDY
CIVIL APPEAL NO. 1873 OF 2007 (Arising out of S.L.P. (C) No.13570 of 2006)
A short question which arises for determination in this civil appeal filed
by the Department: whether payments made by M. K. Shah Exports Pvt. Ltd. (for
short, 'MKSEPL') during the Accounting Year ending 31.3.2000 (Assessment Year
2000-01) amounting to Rs.5.99 crores was made to the two firms M/s. M.K.
Foundation (for short, 'MKF') and M/s. M.K. Industries (for short, 'MKI')
for the benefit of respondent-assessee herein, Mukundrai K. Shah.
Department sought to tax the said amount of Rs.5.99 crores as undisclosed
income in the hands of the assessee. On 24.8.2000, the Department searched the
premises of the assessee under Section 132 of Income Tax Act, 1961(for short,
'the Act'). During the search apart from cash and jewellery a diary titled
"ML-20" was seized. On 16.11.2000, during the search the statement of
Kalpesh Shah, son of the assessee, was also recorded under Section 132(4) of
the said Act. Statement of the assessee was also recorded on that date. The
diary indicated investment of Rs.26.35 crores by the assessee in 9% RBI Relief
Bonds during the accounting year ending 31.3.2000. By the Assessment Order
dated 29.11.2002, the said amount of Rs.5.99 crores was assessed as a deemed
dividend under Section 2(22)(e) of the said Act. The A.O. took into
consideration the income of the assessee for the block period, under Chapter
XIV-B at Rs.65.77 crores. This was for the block period 1.4.90 to 24.8.2000
(for short, "block period").
The diary was seized from the premises of MKSEPL. It belonged to the
assessee. The assessee was asked to explain the sources of investment of
Rs.26.35 crores in purchase of 9% RBI Relief Bonds during Financial Year 19992000.
The said Bonds were purchased between 17.11.99 and 11.2.2000. The A.O. found
that the said Bonds were purchased from the money received from MKF and MKI
(for short, 'two firms') in which the assessee was the partner. In the books of
account the said two firms were shown to have received back the loans and
advances from three companies M.K. Tea (P) Ltd. (for short, 'MKTPL'), Safari
Capital (P) Ltd. (for short, 'SCPL') and MKSEPL, which three companies were
closely related companies, in which the assessee had controlling interest. All
three companies were private limited companies in which the assessee had
considerable voting power. However on the basis of the said diary and the cash
flow chart, the A.O. concluded that Rs.5.99 crores was paid by MKSEPL
(including SCPL) and Rs.94 lakhs by MKTPL in the Accounting Year 1999-2000 to
MKF and MKI respectively for the purchase of 9% RBI Relief Bonds by the
assessee. In the circumstances, by the Assessment Order, the Department
assessed the said sum as deemed dividend in the hands of the assessee under
Section 2(22)(e) of the Act. It was held that MKSEPL, SCPL and MKTPL (for
short, 'three companies) were the companies in which the public was not
substantially interested; that the assessee was one of the shareholders having
more than 10% total voting rights of MKSEPL and SCPL; that in MKTPL the total
shareholding of the assessee was 9.3% and, therefore, he was not the beneficial
owner of the shares of the said companies. It was further held by the A.O. that
SCPL stood merged with MKSEPL with effect from 18.5.98. This was by the Order
of the Calcutta High Court dated 5.7.2001.
Therefore, according to the Order of Assessment, the alleged repayments by
MKSEPL including SCPL were not repayments but they were payments made by MKSEPL
(including SCPL) to MKF and MKI for the individual benefit of the assessee
amounting to Rs.5.99 crores which was held to be a deemed dividend under
Section 2(22)(e) of the Act. Before the A.O. the assessee contended that during
the financial year 1999-2000, his shareholding in MKTPL was only 9.3% and,
therefore, he was not having substantial interest in the said company;
that similarly he was not having substantial interest in SCPL in which his
shareholding in the F.Y 1999-2000 was only 0.2%; that the assessee was one of
the partners in MKF and MKI and that the said two firms did not have
substantial interest in MKSEPL, SCPL and MKTPL; that reserves and surplus of
MKSEPL cannot be taken as reserves and surplus of SCPL which was merged with
the company with effect from 18.5.98; that MKI had advanced loan to SCPL which
was repaid; that payment made by MKSEPL to MKF was through the current account
and that the withdrawal made by the assessee from the two firms were debited to
his capital account in the books of MKF and MKI and, therefore, the assessee
contended that the said payments were not made to the said two firms for his
individual benefit. These arguments were rejected by the A.O. It was held that
the assessee had substantial interest in MKSEPL in which SCPL stood merged with
effect from 18.5.98; that there was no merit in the contention of the assessee
that the two firms, in which he was the partner, were not beneficial owner of
shares of MKSEPL and SCPL; that the only relevant criteria was whether payments
made to the said two firms was for the individual benefit of the assessee, who
was the shareholder in MKSEPL. This point, according to the A.O., became
relevant since the only issue which arose for determination in this case was
the issue of deemed dividend under Section 2(22)(e) of the Act. According to
the A.O., the said two firms MKI and MKF, were the conduits enabling the assessee
to take out the money from the company by using the said two firms as conduits.
According to the A.O., payment of Rs.5.99 crores was not made directly to the
assessee by MKSEPL but through the above-mentioned two firms MKF and MKI. At
this stage, it needs to be mentioned that there is no dispute that 9% RBI
Relief Bonds were purchased by the assessee out of the funds available with MKI
and MKF who in turn were funded by MKSEPL including SCPL. It is also not in
dispute that the assessee had the majority of the voting power in MKSEPL. It is
not in dispute that the said company, MKSEPL, had accumulated profits but
according to the A.O. the said company deliberately refused to distribute the
said accumulated profits as dividends to its shareholders and instead adopted
the device of advancing the said accumulated profits as loan to the assessee
who was the shareholder of the said company.
According to the A.O., it was a device to evade payment of tax on
Aggrieved by the Assessment Order dated 29.11.2002, the assessee went in
appeal to Commissioner of Income Tax (Appeals) (for short, 'CIT (A)') under
Section 158BC(c) read with Section 143(3) of the Act. By the Order dated
21.2.03, it was held by CIT (A) that the assessee did not possess any
substantial interest in MKTPL or in SCPL during F.Y 1999-2000; that MKF and MKI
had no substantial interest in MKSEPL, SCPL and MKTPL during F.Y. 1999-2000;
that SCPL did not make any loan to MKI during the financial year 1999- 2000;
that SCPL had borrowed money from MKI and all payments made by SCPL during F.Y.
1999-2000 were repayments of loans advanced by MKI; that the assessee had 16%
share in MKF; that MKSEPL had a current account in the books of MKF and that in
most cases MKF had advanced loans to MKSEPL. According to CIT(A), MKSEPL have
repaid those loans to MKF in which the assessee had substantial interest.
According to CIT(A), the nature of transactions between MKF and MKSEPL
consisted of a running account; it consisted of giving of loans and repayments
thereof. According to CIT(A), none of the two firms had any substantial
interest in MKSEPL, SCPL and MKTPL. According to CIT(A), all withdrawals made
by the assessee from MKF and MKI including the impugned sum were debited to the
assessee's capital account in the books of MKF and MKI. According to CIT(A),
MKSEPL and SCPL had a regular account in MKF and MKI even before the purchase
of the said Bonds and that the said two firms had advanced loans to MKSEPL and
SCPL even in the earlier years as well as in the financial year 1999-2000 and,
therefore, there was no motive in the debtor companies repaying their debts to
MKF and MKI. According to CIT(A), merely because repayments were made by MKSEPL
and SCPL through MKF and MKI in January/February 2000 and merely because the
said amounts were partly utilized by the said two firms in making payments to
the assessee who bought 9% RBI Relief Bonds therefrom, did not necessarily mean
that the assessee had routed the funds of MKSEPL through MKF and MKI for his
individual benefit. According to CIT(A), MKF and MKI were two separate
entities; that there was no material to show that MKF and MKI were used as
conduits for routing the money from MKSEPL to the assessee. According to
CIT(A), while the total investment made by the assessee in purchase of Bonds
during F.Y. 1999-2000 was Rs.26.35 crores, the Department has sought to assess
only Rs.5.99 crores as deemed dividend and, therefore, according to CIT, the
allegation made by the A.O. was baseless. According to CIT(A) there was no
material to show that MKSEPL and SCPL had made payments to the said two firms
for the benefit of the assessee enabling him to purchase the said Bonds in F.Y.
According to CIT(A), MKSEPL and SCPL were the debtors of MKF and MKI in the
regular course of business and, therefore, payments made by MKSEPL to MKF and
MKI were repayments of loans and that the said payments were not for purchase
of Bonds by the assessee.
Accordingly, the appeal was allowed by CIT(A).
Aggrieved by the decision dated 21.2.03, the matter was carried in appeal by
the Department to the Tribunal.
By the judgment dated 28.1.05, the Tribunal held that in this case Section
2(22)(e) was attracted since disbursement was made by MKSEPL (company); that
SCPL had no independent existence in law in January/February 2000 when payments
were made by MKI and MKF to the assessee who bought the said Bonds; that SCPL
disbursed Rs.2.04 crores and Rs.75 lakhs in January 2000; that SCPL stood
merged in MKSEPL vide Order of the High Court dated 5.7.2001 with retrospective
effect, i.e. 18.5.98; that in January 2000 SCPL had no legal existence since
the merger had taken place with effect from 18.5.98; that merger had taken
place under a voluntary scheme in which every shareholder of the two companies
agreed; that, therefore, there was no merit in the contention of the assessee
that his shareholding in SCPL and the accumulated profits of SCPL were not
liable to be taken into account; according to the Tribunal, in the aforestated
circumstances, all payments should be taken to have originated from MKSEPL; the
Tribunal further found that the accumulated reserves of MKSEPL was Rs.55
crores, nearly ten times in excess of Rs.5.99 crores taxed as deemed dividend.
It is not in dispute that the assessee had more than 10% of the total voting
power in MKSEPL.
In the circumstances, the Tribunal took the view that MKSEPL made payment to
the said two firms for the benefit of the assessee who thereafter bought the
said Bonds. According to the Tribunal, MKSEPL was the only company which made
the disbursement through MKF and MKI. According to the Tribunal, it is true
that the assessee bought the said Bonds for Rs.26.35 crores but the A.O. had
taxed only a fraction of Rs.5.99 crores.
However, according to the Tribunal, for the purposes of applicability of
Section 2(22)(e) of the said Act payment has to originate from a company. After
excluding known company sources, according to the Tribunal, the A.O.
was right in restricting the deemed dividend amount to Rs.5.99 crores since
known company sources had to be eliminated. According to the Tribunal, the A.O.
was right in identifying MKSEPL as the originating company, the identity of the
ultimate beneficiary, the amount to be taxed, that is, Rs.5.99 crores and the
sufficiency of accumulated profits of MKSEPL in which the assessee had more
than 10% voting power. Accordingly the Tribunal allowed the Department's
Aggrieved by the decision of the Tribunal dated 28.1.05, the assessee
carried the matter in appeal to the High Court under Section 260A of the said
Act. By the impugned judgment the High Court held in favour of the assessee on
two counts. According to the High Court, the assessee had declared the primary
facts in the Returns. According to the High Court, the present case did not
fall under Chapter XIV-B of the said Act.
According to the High Court, this was not the case of undisclosed income.
According to the High Court, this was a matter of regular assessment. According
to the High Court, none of the Authorities below have held that the entries in
the books of accounts were fictitious.
According to the High Court, full details were disclosed during the block
period in the Returns filed by the assessee. According to the High Court, all
payments were made by cheque. According to the High Court, moneys were lent and
advanced by MKSEPL to MKF and MKI in normal course of business. According to
the High Court, the Tribunal had erred in holding that MKF and MKI were
conduits for routing the money from MKSEPL through the two firms to the
assessee; that there was no evidence in that regard; that the two firms did not
have substantial interest in MKSEPL; that there was no evidence to show that
payments were made by MKSEPL for the individual benefit of the assessee and to
enable him to purchase 9% RBI Relief Bonds; that CIT(A) was right in holding
that when Rs.26.35 crores was invested in the above financial year then A.O.
had no reason to treat Rs.5.99 crores as deemed dividend under Section 2(22)(e)
and for the above reasons the High Court set aside the judgment of the Tribunal
dated 28.1.05. Hence this civil appeal.
According to Mr. Mohan Parasaran, learned Additional Solicitor General
appearing for the appellant (Department), the High Court should not have
interfered with the findings of facts recorded by the Tribunal; that there was
no substantial question of law; that no perversity in the findings recorded by
the Tribunal so as to warrant interference under Section 260A of the Act;
that the Department had searched the premises, it had seized the diary
"ML-20" which contained entries subsequently corroborated by cash
flow chart which indicated that money had originated from MKSEPL to the two
firms through which it had gone to the assessee and, therefore, the Department
was right in assessing Rs.5.99 crores as deemed dividend in the hands of the
assessee under Section 2(22)(e). Learned counsel urged that the five entries
discovered in the search represented five transactions/payments for purchase of
9% RBI Relief Bonds. These, according to the learned counsel, were not
repayment of loans, they were payments for purchase of the said bonds during
the F.Y. 1999-2000.
On behalf of the assessee (respondent), Mr. N.K.
Poddar, learned senior counsel, submitted that the impugned block assessment
was wholly without jurisdiction having regard to the fact that the alleged
deemed dividend of Rs.5.99 crores relate to transactions recorded and reflected
in the regular books and tax records even before the search; that no
incriminating document or evidence was found by the Department during the
search which falsify such transactions entered into by the assessee in the
normal course; that the expression "undisclosed income" has been
defined in Section 158B(b) of the said Act and since block assessment was
relatable to such evidence recovered during search in the present case Section
158BB(1) was not applicable in this case since no such evidence was recovered
during the search. Learned counsel submitted that Chapter XIV-B was put on the
Statute Book to enable assessment of undisclosed income detected on evidence
found during the search. According to the learned counsel, the block assessment
was intended to be an assessment in addition to the regular assessment.
Learned counsel submitted that in the present case for want of such
evidence, the Department was not entitled to make additions on account of
deemed dividend to the tune of Rs.5.99 crores. During the search, according to
the learned counsel, nothing except a cash flow chart giving details of
investments made by the assessee in purchase of the said Bonds of the value of
Rs.26.35 crores was furnished. According to the learned counsel, the diary
"ML-20" was the ledger copy of the investment account in 9% RBI Relief
Bonds which copy was a print- out from the regular accounts of the assessee;
that the investment of Rs.26.35 crores, reflected in ML-20, was made by the
assessee out of his disclosed funds and through regular books of accounts, and
that the seized diary did not contained any incriminating information.
Learned counsel urged that in the course of block assessment proceedings the
A.O. directed the assessee to furnish details as to the source of funds out of
which Rs.26.35 crores was made and when it was explained to the A.O. that the
assessee had made such investments in 9% RBI Relief Bonds out of the moneys
withdrawn from MKF and MKI and that books of accounts maintained regularly by
the said two firms indicated such withdrawals the A.O. directed the authorized representatives
of the assessee to prepare a statement indicating the source from which moneys
came in the hands of the two firms and out of which withdrawals were made by
the assessee to make investment in the 9% RBI Relief Bonds, therefore,
according to the learned counsel, no incriminating material whatsoever was
found in the course of the search which could enable the A.O.
to invoke Section 2(22)(e) of the Act. According to the learned counsel, in
the above circumstance, Chapter XIV- B dealing with block assessment was
wrongly invoked by the A.O.
On the nature of the transactions, learned counsel urged that during the
F.Y. 1999-2000, the assessee had invested Rs.26.35 crores in the purchase of
bonds; that the said investment was made out of the disclosed sources through
cheques and that the said investment was mentioned in the bank accounts and in
the tax records of the assessee long before the search. Learned Counsel urged
that the immediate source of investment was the withdrawal of Rs.26.35 cores
from the parners' capital account with MKF and MKI. It was urged that the cash
flow statement was not an admission on the part of the assessee and, therefore,
it was not open to the Department to invoke Chapter XIV-B. Learned counsel
submitted that the Tribunal had erred in holding that the fact that SCPL had a
running current account with MKI in the usual course of business, was
irrelevant. Learned counsel submitted that SCPL had borrowed substantial
amounts from MKI and in January 2000 SCPL repaid Rs.2.79 crores to MKI which
were not on behalf of or for the benefit of the assessee. It was urged that MKI
had never borrowed money from SCPL at any time. Learned counsel urged that the
Tribunal was wrong in holding that the fact that MKI had never borrowed money from
SCPL, was irrelevant. Learned counsel urged that Rs.2.79 crores were withdrawn
by the assessee from his firm styled MKI on 28.1.2000 and such withdrawal was
debited by MKI to the capital account of the assessee. It was urged that MKSEPL
had borrowed substantial amounts from MKF; and MKSEPL had made repayments to
MKF during the F.Y. 1999-2000 against the earlier debt owed by MKSEPL to MKF.
Learned counsel submitted that the assessee had a credit balance of Rs.6.72
crores in his capital account standing in the books of partnership firm of MKF
as on 1.4.1999.
Learned counsel urged that the withdrawals made by the assessee from MKF
were only out of his capital account with MKF and that the said withdrawals
were debited by MKF to the capital account of the assessee. Learned counsel
further urged that there was no evidence on record to show that payments by
SCPL to MKI and/or the payment by MKSEPL to MKF was for the benefit of the
assessee. Learned counsel submitted that payments were made by each of the two
companies, namely, SCPL and MKSEPL to MKI and MKF respectively in liquidation
of their respective dues owed by each of the two companies to the said two
firms. Learned counsel urged that no payment was ever made by SCPL and MKSEPL
to the assessee. Learned counsel urged that the existence of reserves in the
balance-sheet of MKSEPL in the sum of Rs.55 crores as on 31.3.1999 is wholly
irrelevant for the purposes of Section 2(22)(e) of the Act. Learned counsel
urged that similarly the fact that the assessee owed Rs.8.18 crores to MKI as
on 31.3.2000, was wholly irrelevant for the purposes of Section 2(22)(e) of the
Learned counsel submitted that Section 2(22)(e) had no application in the
matter of the above two facts. Learned counsel urged that the Tribunal failed
to appreciate that the assessee did not hold any shares in SCPL on or after
1.4.1999 and, therefore, he did not have any interest in SCPL on the dates when
Rs.2.79 crores were repaid by SCPL to MKI.
Learned counsel contended that the accumulated profits of MKSEPL could not
be treated in law as the accumulated profits of SCPL in spite of the Order
dated 5.7.2001 passed by the High Court approving the merger of SCPL with
MKSEPL, even when such merger was made effective from 18.5.98. Learned counsel
submitted that the Tribunal had failed to appreciate that MKSEPL had not merged
with SCPL but it is SCPL which had merged with MKSEPL. As a result of the said
merger the accumulated profits of MKSEPL did not vest in SCPL.
Learned counsel, therefore, submitted that the subsequent event of the
Court's Order dated 5.7.2001 approving merger of SCPL with MKSEPL can not
enable the Revenue to treat the accumulated profits of MKSEPL as part of the
accumulated profits of SCPL. Learned counsel further submitted that MKF never
held any shares in MKSEPL. Learned counsel urged that Rs.2.04 crores were paid
on 11.1.2000 and Rs.75 were paid on 28.1.2000 by SCPL to MKI. Therefore,
according to the learned counsel, if SCPL wanted to declare dividends it could
have done so only to the extent of accumulated profits in its own hands and
since SCPL on the above two dates could not have declared dividends in excess
of its accumulated profits, the Department was wrong in treating the
accumulated profits of MKSEPL as accumulated profits of SCPL merely because the
merger became effective retrospectively with effect from 18.5.98.
We find merit in this civil appeal. The companies having accumulated profits
and the companies in which substantial voting power lies in the hands of the
person other than the public (controlled companies) are required to distribute
accumulated profits as dividends to the shareholders. In such companies, the
controlling group can do what it likes with the management of the company, its
affairs and its profits. It is for this group to decide whether the profits
should be distributed as dividends or not. The declaration of dividend is
entirely within the discretion of this group. Therefore, the legislature
realized that though funds were available with the company in the form of
profits, the controlling group refused to distribute accumulated profits as
dividends to the shareholders but adopted the device of advancing the said
profits by way of loan to one of its shareholders so as to avoid payment of tax
on accumulated profits. This was the main reason for enacting Section 2(22)(e)
of the Act.
In the case of Commissioner of Income-Tax, Madras-I v. L. Alagusundaram
Chettiar (1977) 109 ITR 508, the Madras High Court held that the word
"payment" in the said section means the act of paying and, therefore,
in that case it was held that payment by the company to Karuppiah Chettiar was
for the benefit of the assessee, the Managing Director of the company, L.
Alagusundaram Chettiar, and was therefore assessable as dividend in the
hands of the assessee. In the said judgment it has been held that the basic
test to be applied in such cases is not whether loan given is a benefit but
whether payment by the company to Karuppiah Chettiar was for the benefit of the
assessee who was the Managing Director of the paying company.
Applying the above test to the facts of the present case, we are of the view
that the Tribunal was right in holding, on examination of the cash flow
statement, that MKSEPL had made payments to MKF and MKI for the benefit of the
assessee which enabled the assessee to buy 9% RBI Relief Bonds in the F.Y.
1999-2000. It is in this sense that the Tribunal was right in holding that the
two firms were used as conduits by the assessee. It is not in dispute that the assessee
had more than 10% of voting power in MKSEPL during the block period. It is not
in dispute that the assessee had substantial interest of about 16% in MKF. It
is not in dispute that the three companies were the controlled companies. There
is one more point which needs to be mentioned. The timing of so-called
repayments by the company to MKF and MKI and the immediate withdrawal of the
funds by the assessee-cum-Director-cum-shareholder-cum-partner and the timing
of investment in purchase of Bonds were around the same time. Moreover, in
MKSEPL the assessee is not only a shareholder having more than 10% of total
voting power, he is also a Director of that company. The said company is also a
partner in MKF and MKI which explains why the amount of Rs.5.99 crores was
routed by splitting the said amount into two parts of Rs.2.79 crores and
Rs.3.20 crores. In the present case, the most important aspect, which has not
been considered by the High Court, was that withdrawal of money by the assessee
from his capital account, in the books of MKI, during F.Y. 1999-2000 led to a
debit balance of Rs.8.18 crores as on 31.3.2000. To this extent, the finding
given by the A.O. and by the Tribunal remains unchallenged. Lastly, on the
maintainability of the block assessment, we are of the view that the Department
was right in assessing the said amount as deemed dividend in the hands of the
assessee under Section 2(22)(e) of the Act. The impugned Assessment Order was
passed under Section 158BC. That assessment originated on account of a search
conducted under Section 132(1) of the Act. In that search the diary
"ML-20" was identified. That identification was the starting point of
connected enquiries resulting in the detection of undisclosed income of Rs.5.99
crores. In other words, undisclosed income, in the nature of deemed dividend,
did not arise from any scrutiny proceedings, tax evasion petitions, surveys,
information received from external agency etc. The undisclosed income was
detected by the A.O. wholly and exclusively as a result of a search and,
therefore, the Department was right in invoking the provisions of Chapter
There is one more aspect in this regard. From the facts, indicated above,
the Department has established a sort of circular trading in this case. One of
the important features of circular trading is to route the funds through
conduits. In such cases the picture emerges only after seeing the cash flow
statements. In the present case, ML-20 made the A.O. to hold enquiries and in
that enquiry the cash flow statement emerged, therefore, the Department was
right in invoking the provisions of Chapter XIV-B in the present case. The five
payments had direct co-relation with Rs.5.99 crores paid by MKSEPL to MKF and
MKI and payments by the said two firms to the assessee who used the said money
to buy 9% RBI Relief Bonds. Therefore, the said payment by the company through
the two firms was for the benefit of the assessee. Therefore, the said funds
were not repayment of loans, they were for purchase of 9% RBI Relief Bonds by
As regards the contention advanced on behalf of the assessee that the
accumulated profits of MKSEPL could not be treated as the accumulated profits
of SCPL in spite of the Order of merger with effect from 18.5.98, we agree with
the view expressed by the A.O. that on merger the accounts of the two companies
had merged and, therefore, the reserves had to be taken on the basis of merged
account. Moreover, the assessee had substantial interest in MKSEPL right from
the inception. Lastly, in the present case, we are concerned with the block
assessment which covers the period 1.4.1990 to 24.8.2000.
Before concluding, we quote hereinbelow the relevant paragraphs from the
judgment of the Calcutta High Court in the case of Nandlal Kanoria v.
Commissioner of Income-Tax, Central, Calcutta reported in (1980) 122 ITR 405
at p. 415:
"The only question which remains to be considered is that whether the
said company made the payments of the said sum of Rs.
75,000 and Rs. 4,80,000 to Indira & Co. for the benefit of the assessee.
So far as Rs.
75,000 is concerned it is found by the Tribunal, though not very clearly,
that this amount was received by Indira & Co. from the said company and the
same amount was given to the assessee by Indira & Co. The Tribunal inferred
from the said facts that this was a payment by the said company meant for the
benefit of the assessee. This conclusion involves two findings of fact, namely,
the factum of payment by the company and the motive or intention of the company
making such payment, namely, a benefit accruing to the assessee. These are
essentially findings of fact and have not been challenged by the assessee by an
(emphasis supplied) We also quote hereinbelow para 19 and para 21 of the
judgment of the Bombay High Court in the case of Commissioner of Income-Tax
(Central), Bombay v.
P.K. Badiani reported in (1970) 76 ITR 361:
"19. Now, the assessee's account for 1st April, 1957, to 31st March,
1958, shows that there are credits as well as debits. What has to be
ascertained is whether the debits are "loans", so that they can be
deemed as dividends. The account is a mutual, open, and current account. Every
debit, i.e., every payment by the company to the assessee, may not be a loan. To
be treated as a loan, every amount paid must make the company a creditor of the
assessee for that amount. If, however, at the time when the payment is made by
the company is already a debtor of the assessee, the payment would be merely a
repayment by the company towards its already exisiting debt.
It would be a loan by the company only if the payment exceeds the amount of
its already existing debt and that too only to the extent of the excess.
Therefore, the position as regards each debit will have to be individually
considered, because it may or may not be a loan. The two basic principles are,
that only a loan, which would include the other payments mentioned in section
2(6A)(e), can be deemed to be dividend and that too only to the extent that the
company has at the date of the payment "accumulated profits" after
deducting therefrom all items legitimately deductible therefrom.
xxx xxx xxx 21. As regards questions Nos. 3 and 4, Mr.
Rajgopal contended that the debit balance, if any, at the last date of the
assessee's accounting year 1st April, 1957 to 31st March, 1958, should be taken
as the amount to be treated as dividend and as the assessee's account is on the
last day to his credit, no amount can be deemed to be dividend. As already
pointed out, the position has to be ascertained at the date of each payment by
the company to the assessee and this contention must, therefore, be rejected.
If Mr. Rajgopal's contention was to be accepted, the result would be that if a
shareholder borrows a large amount during the year, but repays it on the last
day of the year, it would not be considered to be a loan, though the facts show
that he did borrow a loan. Such a contradiction of the real fact would result
if Mr. Rajgopal's contention were to be accepted. Mr. Rajgopal further
contended that in any event the highest amount to the assessee's debit on any
day of the year should be the amount to be deemed to be dividend. This
argument, again, ignores the principle laid down by us, that the position at
the date of each payment must be considered.
Moreover, there is another reason and that is that if it were to be so done,
it would not enable the position of the balance of the "accumulated
profits" being taken into account, as more than one shareholder may have
borrowed loans from the company in an account similar to that of the assessee.
All these contentions of Mr.Rajgopal ignore the basic fact that section
2(6A)(e) uses the words "any payment" which means, every payment, and
section 2(6A)(e) requires the determination of two factors, viz., whether the
payment is a loan and whether at the date when the payment is made there were
"accumulated profits" and that these two factors are to be correlated
and the result must be ascertained at the date of each such payment."
(emphasis supplied) The above two judgments indicate that the question as to
whether payment made by the company is for the benefit of the assessee is a
question of fact. In this case, the Tribunal has concluded that the payment
routed through MKF and MKI was for the benefit of the assessee. This was a
finding of fact. It was not perverse.
Therefore, the High Court should not have interfered with the said finding.
Further, the above two judgments lay down that the concept of deemed dividend
under Section 2(22)(e) of the Act postulates two factors, namely, whether
payment is a loan and whether on the date of payment there existed
"accumulated profits". These two factors have to be correlated. This
correlation has been done by the Tribunal coupled with the fact that all withdrawals
were debited in the capital account of the firm leading to the debit balance of
Rs.8.18 crores. The High Court has erred in disturbing the findings of fact.
For the above reasons, we set aside the impugned judgment of the High Court.
Accordingly, the appeal stands allowed with no order as to costs.
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