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PETITIONER: THE COMMISSIONER OF INCOME-TAX

       Vs.

RESPONDENT: M/S. MYSODET (P) LTD., BANGALORE

DATE OF JUDGMENT:       17/03/1999

BENCH: N.Santosh Hedge, S.P.Bharucha

JUDGMENT:

     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

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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

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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

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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

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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.