Case: Commissioner Of Income Tax Vs. Mysodet

3. The facts leading to the abovesaid reference are as followsy is a trading company in which the public are into substantially interested. The assessing authority assessed the income of the Company for the assessment yearat 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 additionalAgainst the said assessment order, thepreferred an appeal before the Appellate Assistant Commissioner. Having failed before the said Authority, a further appeal was preferred before the Appellate Tribunal which, in turn, rejected the said appeal and on a prayer made by the Company, the Tribunal referred the abovenoted question for opinion of the High Court.Before the High Court, the assessee relied upon a judgment of the Calcutta High Court in Moore Avenue Properties (P) Ltd. v. C.I.T., 1966(59) ITR 466 which took the view that in view of the deemed definition given in Section 2(22)(e) of the Act, any loan advanced to a shareholder out of the accumulated profits of the Company in which public do not have a substantial interest, would amount to payment of dividend. Hence, Section 104 of the Act would not be attracted.Per contra, the Revenue relied upon a judgment of the Gujarat High Court in the case of CIT v. Bombay Mineral Supply Co. (P) Ltd., 1978(192) ITR 577 wherein it was held that payment of a loan which is deemed as a dividend cannot be construed as distribution of dividend within the meaning of Section 23A of the 1992 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.

Court's reasoning:
8. 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.A perusal of this Section shows that for the purpose of the Act, any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend. Since the Act has not provided for any other definition of the word "dividend" except the ones enumerated in Section 2(22) of the Act, it should be construed that this definition would be applicable to all provisions that this definition would be applicable to all provisions which contains the term "dividend" in the Act.As per the Section, an Income Tax Officer, if satisfied that a company in respect of any previous year has not distributed, as required by the statute, dividends from out of its profits and gains, shall make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under Section 143 or 144, be also liable to payat 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 1992 Act (equivalent to Section 2(22)(e0 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 nor 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 ofby 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 ofin the hands of the receiver of the said amount, Section 104 of the Act provides for levy ofon companies which attempt to avoid payment ofby its shareholders by not distributing its surplus profits and income. In either case, the object of the Act is to see that evasion ofis prevented. Thus it is clear that the Act did not contemplate the levying oftwice, 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 Statue, 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.