1971 (2) TMI 4 - HC - Income Tax

Assessee is a substantial shareholder of a company - accumulated profits - money advanced to shareholder - loan was repaid - whether the loan repaid is taxable as dividends

Summary

Issues Involved:
1. Whether the sum of Rs. 2,72,703 is to be treated as dividend income in the hands of the assessee within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922.
2. Whether the repayment of the loan by the assessee before the end of the accounting year affects its characterization as dividend income.
3. Interpretation and application of section 2(6A)(e) and section 12(1B) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Treatment of Rs. 2,72,703 as Dividend Income:
The primary issue was whether the sum of Rs. 2,72,703 withdrawn by the assessee from Dulaguri Tea Co. (P.) Ltd. should be treated as dividend income under section 2(6A)(e) of the Indian Income-tax Act, 1922. The Income-tax Officer found that the accumulated profits of the company amounted to Rs. 6,83,005 and treated the sum of Rs. 2,72,703 as dividend. The Appellate Assistant Commissioner upheld this assessment. However, there was a difference of opinion in the Income-tax Appellate Tribunal. The Accountant Member opined that once a payment is made under section 2(6A)(e), it becomes dividend, irrespective of subsequent repayments. The Judicial Member disagreed, stating that the total income should be computed at the end of the previous year and if the loan is repaid before the year-end, it should not be considered as dividend. The President of the Tribunal, agreeing with the Accountant Member, held that the loan assumed the character of dividend immediately upon payment and remained so despite any repayment.

2. Impact of Loan Repayment on Dividend Characterization:
The assessee argued that since the loan was repaid before the end of the accounting year, it should not be treated as dividend. The Supreme Court in Navnit Lal C. Javeri v. K. K. Sen clarified that a loan or advance by a company to its shareholder is deemed as dividend to the extent of the company's accumulated profits, and this characterization is immediate and unaffected by subsequent repayment. The Court emphasized that the purpose of section 2(6A)(e) is to prevent tax evasion by treating such advances as dividends to ensure they are taxed appropriately. Therefore, the repayment of the loan does not alter its initial characterization as dividend.

3. Interpretation and Application of Relevant Sections:
Section 2(6A)(e) includes any payment by a company, not substantially interested by the public, by way of advance or loan to a shareholder, as dividend to the extent of accumulated profits. Section 12(1B) further treats such payments as dividend if they remained outstanding at the beginning of the relevant previous year. The Court noted that these provisions were introduced to counteract tax evasion strategies where companies would avoid distributing profits as dividends and instead provide loans to shareholders. The Court ruled that the tax liability attaches at the moment the loan is borrowed, regardless of subsequent repayment within the same accounting year.

Conclusion:
The High Court upheld the view that the sum of Rs. 2,72,703 was taxable as dividend income under section 2(6A)(e) of the Indian Income-tax Act, 1922, and the repayment of the loan before the end of the accounting year did not affect its characterization as dividend. The Court relied on the Supreme Court's interpretation in Navnit Lal C. Javeri v. K. K. Sen, which emphasized that the legislative intent was to prevent tax evasion by treating such advances as dividends immediately upon payment. The Court answered the reference in the affirmative and in favor of the department, confirming the tax liability on the amount as dividend income.