Case: Tarulata Syam And Ors Vs. Commissioner Of Income-Tax, West Bengal

The assessment year is 1957-58 and the corresponding previous year is the calendar year 1956. The assessee is a shareholder and the managing director of M/s. Dolaguri Tea Co. (P.) Ltd. The company is admittedly one in which the public are not substantially interested within the meaning of section 23A of the Indian Income-tax Act, 1922 (for short, " the Act "). At the commencement of the previous year, there was in the books of the company a credit balance of Rs. 65, 246 in the assessees account, which had been brought forward from the earlier year. Between the 11th January and the 12th November, 1956, the assessee withdrew in cash from time to time from the company, amounts aggregating Rs. 4, 97, 442. The first two cash amounts of Rs. 3, 50, 000 and Rs. 40, 400 were taken by the assessee on 11th January, 1966. Deducting therefrom the opening balance of Rs. 65, 246 and two more items, namely, Rs. 1, 40, 000, being outstanding dividends declared on 31st December, 1955, of his major son, and transferred to his account, and a further dividend of Rs. 19, 493 credited to his account from Kathoni Tea Estate, there remained a sum of Rs. 2, 72, 703 to the debit of the assessee in the books of the company as on the 12th November, 1956. On December 29, 1956, the assessee paid back to the company a sum of Rs. 1, 90, 000. On December 31, 1956, his account was credited with another sum of Rs. 80, 000 in respect of the dividend due to him and his wife, and with a further sum of Rs. 29, 326 for hypothecation. In this manner before the end of the previous year, the assessees account was credited with an aggregated amount of Rs. 2, 99, 326 which exceeded the debit balance of Rs. 2, 72, 703 as on November 12, 1956. Thus at the end of the relevant previous year, no advance or loan was due to the company by the assesseeThe Income-tax Officer found that the accumulated profits of the company as on January 1, 1956, amounted to Rs. 6, 83, 005. He, therefore, deducted the two aforesaid items of Rs. 1, 40, 000 And Rs. 19, 493 aggregating Rs. 1, 59, 493 from the amount paid in cash to the assessee and treated the balance of Rs. 2, 72, 703 as the net " dividend " income in the hands of the assessee within the meaning of section 2(6A)(e). The Income-tax Officer grossed up that amount under section 16(2) and gave credit for tax in accordance with that section to the assesseeThe assessees appeal to the Appellate Assistant Commissioner having failed, he preferred a further appeal to the Income-tax Appellate Tribunal. There was a divergence of opinion between the members of the Tribunal. The Accountant Member took the view that the moment a payment is made as envisaged in section 2(6A)(e) it becomes clothed with the character of a dividend and has to be treated as such income of the assessee, and no subsequent action or repayment by the shareholder can take it out of the mischief of this provision. He, therefore, held that the sum of Rs. 2, 72, 703 was taxable as dividend under section 2(6A)(e)The Judicial Member expressed a contrary opinion. In his view, the total income of the assessee during the relevant previous year could be computed and assessed only at the end of that year; it could not be computed at interim periods during the previous year. " If it is found that although the shareholder had taken by way of advance or loan an amount from the company during the course of a previous year but had returned the same to the company before the close of that previous year, it can only be said while computing the shareholders total income at the end of that previous year that no advance or loans from the section 23A company of which he was a shareholder stood for his benefit at the time relevant for computation of his total income. The advances or loans taken during the interim periods of the previous year would just have to be ignored. "On these premises, the Judicial Member came to the conclusion that the sum of Rs. 2, 72, 703 grossed up to Rs. 3, 19, 345 was not a dividend within the fiction under section 2(6A)(e) of the Actaccount of this difference of opinion, the following question was referred to the President of the Tribunal" Whether, on the facts and in the circumstances of the cases, the sum of Rs. 2, 72, 703 net (Rs. 3, 19, 245 gross) is to be treated as dividend income in the hands of the assessee within the meaning of section 2(6A)(e) ?"The President agreed with the Accountant Member and held that an advance or loan received by the shareholder of a private company forthwith assumes the character of a dividend and becomes his income by virtue of the fiction created by section 2(6A)(e) and it ceases to be a liability for the purpose of taxation, although the assessee may, in fact or in law, remain liable to the company to repay it. If the assessee repays the loan subsequently, such repayment would not liquidate or reduce the quantum of the income which had already accrued, as such repayment is not to be allowed as a permissible deduction under section 12(2). " On these premises, he answered the question in the affirmativeIn accordance with the majority opinion, the Tribunal dismissed the assessees appeal but, at his instance, referred the same question for opinion to the High Court under section 66(1) of the ActThe High Court held that the tax was attracted at the point of time when the said loan was borrowed by the shareholder and it was immaterial whether the loan was repaid before the end of the accounting year or not. On this reasoning it answered the question in favour of the revenue and against the assesseeHence, this appeal by the assessee

Reasoning: These provisions seem to have been adapted with alterations from section 108 of the Commonwealth Income-tax Assessment Act in force in AustraliaIt will be seen that under section 108(1) formation of " the opinion of the Commissioner " is the sine qua non for bringing this provision into operation. It has been held by the Australian Board of Review that the mere fact that a shareholder in a private company has become indebted to it does not justify the formation of the opinion by the Commissioner such as is indicated in sub-section (1) of section 108" There must be something that goes beyond a mere debt automatically arising upon a taking of accounts and which points to a subterfuge whereby a payment which, upon examination, is found to relate to the income of the company and to represent the distribution thereof, is made to appear to be a loan or advance."From the above discussion it emerges clear that the fiction created by section 2(6A)(e) read with section 12(1B) of the Act is inexorably attracted as soon as all the conditions necessary for its application exist in a caseWe have given anxious thought to the persuasive arguments of Mr. Sharma. His arguments, if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity. But the language of sections 2(6A)(e) and 12(1B) is clear and unambiguous. There is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretationTo us, there appears no justification to depart from the normal rule of construction according to which the intention of the legislature is primarily to be gathered from the words used in the statuteThere are five conditions which must be satisfied before section 12(1B) can be invoked against a shareholder. The first condition is that the company in question must be one in which the public are not substantially interested within the meaning of section 23A as it stood in the year in which the loan was advanced. The second condition is that the borrower must be a shareholder at the date when the loan was advanced ; it is immaterial what the extent of his shareholding is. The third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit at the date of the loan. This is an important limit prescribed by the relevant section. The fourth condition is that the loan must not have been advanced by the company in the ordinary course of its business. In other words, this provision would not apply to cases where the company which advances a loan to its shareholder carries on the business of money-lending itself ; and the last condition is that the loan must have remained outstanding at the commencement of the shareholders previous year in relation to the assessment year 1955-56. (Emphasis supplied)The first four conditions factually exist in the instant case. The last condition is not applicable because it was a transitory provision applicable to the assessment year 1955-56 only, while we are concerned with the assessment year 1957-58, and the previous year is the calendar year 1956. There is no dispute that the company is a controlled (private limited) company in which the public are not substantially interested within the meaning of section 23A. Further, the assessee is admittedly a shareholder and managing director of that company. It is also beyond controversy that at all material times, the company possessed " accumulated profits " in excess of the amount which the assessee-shareholder was paid during the previous year. The Income-tax Officer found that on January 1, 1956, the accumulated profits of the company amounted to Rs. 6, 83, 005 while from January 11, 1956, to November 12, 1956, the assessee received in cash from time to time from the company payments aggregating Rs. 4, 97, 442. After deducting the opening credit balance and some other items credited to his amount, the Income-tax Officer found that in the previous year the assessee-shareholder had received a net payment of Rs. 2, 72, 703 by way of loan or advance from the company. The companys business is not money-lending and it could not be said that the loans had been advanced by the company in the ordinary course of its business. Thus, all the factual conditions for raising the statutory fiction created by sections 2(6A)(e) and 12(1B) appeared to have been satisfied in the instant caseIn our opinion, the Indian legislature has deliberately omitted to use in sections 2(6A)(e) and 12(1B) words analogous to those in the last limb of sub-section (1) of section 108 of the Commonwealth Act. When sections 2(6A)(e) and 12(1B) were inserted by the Finance Act, 1955, Parliament must have been aware of the provision contained in section 108 of the Commonwealth Act. In spite of such awareness, Parliament has not thought it fit to borrow whole hog what is said in section 108(1) of the Common-wealth Act. So far as the last limb of section 108(1) is concerned our Parliament imported only a very restricted version, and incorporated the same as the " fifth condition " in sub-section (1B) of section 12 to the effect, that the " payment deemed as dividend shall be treated as a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of March, 1956, if such loan or advance remains outstanding on the last day of such previous year ". The word " such " prefixed to the " previous year " shows that the application of this clause is confined to the assessment year ending on March 31, 1956. In the instant case we are not concerned with the assessment year ending March 31, 1956. This highlights the fact that the legislature has deliberately not made the subsistence of the loan or advance, or its being outstanding on the last date of the previous year relevant to the assessment year, a pre-requisite for raising the statutory fiction. In other words, even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed as a " dividend " if the other four conditions factually exist, to the extent of the accumulated profits possessed by the companyAt the commencement of this judgment we have noticed some general principles, one of which is, that the previous year is the unit of time on lot which the assessment is based (section 3). As the taxability of an income is related to its receipt or accrual in the previous year, the moment a dividend is received, whether it is actual dividend declared by the company or is a deemed dividend, income taxable under the residuary head, " income from other sources ", arises. The charge being on accrual or receipt the statutory fiction created by section 2(6A)(e) and section 12(1B) would come into operation at the time of the payment by way of advance or loan, provided the other conditions are satisfiedWe do not propose to examine the soundness or otherwise of the illustrations given by Mr. Sharma since they are founded on assumed facts which do not exist in the present case