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CASE NO.: Appeal (civil)  1873 of 2007

PETITIONER: Commissioner of Income Tax, Kolkata

RESPONDENT: Mukundray K. Shah

DATE OF JUDGMENT: 10/04/2007

BENCH: S.H. KAPADIA & B. SUDERSHAN REDDY

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO. 1873 OF 2007 (Arising out of S.L.P. (C) No.13570 of 2006)

KAPADIA, J.

Leave granted. 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  1999\0272000.  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)

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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 \026 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

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Rs.5.99 crores was not made directly to the assessee by  MKSEPL but through the above-mentioned two firms \026  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 accumulated profits.   

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

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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. 1999-2000.   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 appeal.

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

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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

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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

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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 Act.   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

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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 \026 (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

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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 XIV-B.   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 the respondent.

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

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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 appropriate  question."                                         (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

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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.