TMI Blog2005 (7) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... invoke the provision of section 263 of the Act on the facts and circumstances of the case, but the question is whether the Tribunal has rightly treated the loan given by the company to the assessee as deemed dividend income within the purview of section 2(22)(e) of the Act. Thus, we are of the opinion that the principle laid down by the apex court in the cases of CIT v. C.P. Sarathy Mudaliar[ 1971 (10) TMI 8 - SUPREME COURT] and Rameshwarlal Sanwarmal v. CIT [ 1979 (12) TMI 1 - SUPREME COURT] applies to the present case and the order of the Tribunal is in conformity with the decisions of the apex court. We accordingly uphold the same. So far as question No. 4 is concerned, the Tribunal has recorded a categorical finding on a consideration of the clause of the partnership deed that Smt. Rekha Dixit became the partner in a partnership firm with effect from November 1, 1985, and, therefore, the finding of the Tribunal is a finding of fact. There is no reason to interfere with such finding. In view of the aforesaid finding, the interest paid to Smt. Rekha Dixit prior to November 1, 1985, the provision of section 40(b) cannot be invoked. The order of the Tribunal is, accordingly, upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to share the profits of the assessee-firm for the entire accounting year ending on March 31, 1986? 2. The brief facts of the case are that the assessee-opposite party (hereinafter referred to as the assessee ) was a contractor and was working as sub-contractor with Jai Prakash Associates (P.) Ltd. It filed a return for the assessment year 1986-87 on July 31, 1986. The said return was revised on June 31, 1988, showing an income of Rs. 6,99,000/-. An assessment was completed on February 21, 1989, at Rs. 72,16,000/- after full scrutiny of the case. Thereafter, on December 3, 1990, the Commissioner of Income-tax, after scrutinizing the assessment order, came to the conclusion that the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the Revenue. Consequently, he issued a notice on December 3, 1990, and after hearing the assessee and its objection raised against the notice, passed an order on February 22, 1991, under section 263 of the Act, setting aside the assessment order with certain directions to the Assessing Officer to reframe the same on the basis of those directions. It is against this order that the assessee filed an appeal before the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... du undivided family could not be considered as loans advanced to a shareholder of the company and could not, therefore, be deemed to be its income.' The brief facts of the case were that members of a Hindu undivided family acquired shares in a company with the funds of the family. Loans were granted to the Hindu undivided family and the question was whether the loans could be treated as dividend income of the family falling within section 2(6A)(e) of the Income-tax Act, 1922. The Hon'ble Supreme Court while deciding the case had opined that section 2(6A)(e) gives an artificial definition of dividend. It does not take in dividend actually declared or received. The dividend taken note of by the said provision is a deemed dividend and not a real dividend. For certain purposes the Legislature has deemed a loan granted to a shareholder as 'dividend'. Hence section 2(6A)(e) must necessarily receive a strict construction. When section 2(6A)(e) speaks of shareholder it refers to the registered shareholder and not to the beneficial owner. The hon'ble Supreme Court while deciding this case had followed the decision of Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215; [195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantive amendment cannot be given effect retrospectively. The salary paid to a partner by a firm which grows and sells tea was exempt from tax under rule 24 of the Income-tax Rules, 1922, to the extent of 60 per cent. thereof representing agricultural income and the rest was liable to tax only to the extent of 40 per cent. The principle enunciated by the hon'ble Supreme Court was that the partner being, employed by the firm in which he was a partner cannot be said to be different than the firm employing him. There was no question of any interpretation of the word 'shareholder'. The only point involved was that relationship of a partner shown as an employee of the firm vis-a-vis the said firm, hence this ruling has no application to the present case. 4. The next point taken up by the Commissioner of Income-tax was regarding the interest paid to Smt. Rekha Dixit from March 31, 1981, to November 1, 1985. The brief facts on this point are that Smt. Rekha Dixit became a partner of that firm with effect from November 1, 1985, on the basis of the partnership deed. The firm was reconstituted from November 1, 1985. Some old partners were deleted and some new partners were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not disallowable under section 40(b) and the order passed to the contrary by the learned Commissioner of Income-tax under section 263 was not correct in the eyes of law. 5. Heard Sri R. K. Upadhyaya, learned standing counsel for the Revenue. No one appears on behalf of the assessee. 6. Learned standing counsel reiterated the submissions made on behalf of the Revenue before the Tribunal. He submitted that in fact it is the assessee's firm who was the shareholder in the company of M/s. Jai Prakash Associates (P.) Ltd. being the real beneficiary and even though the shares were in the name of the partners, the assessee who is the real owner of the shares be treated as the shareholder and, accordingly, the interest from loan given by M/s. Jai Prakash Associates (P.) Ltd., to the assessee-company be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. In support of his contention, he relied upon the following decisions: (1) Ram Narain and Brothers v. CIT reported in [1969] 73 ITR 423 (All); (2) CIT v. R.M. Chidambaram Pillai reported in [1977] 106 ITR 292 (SC); (3) Malabar Fisheries Co. v. CIT reported in [1979] 120 ITR 49 (SC); (4) Pandit Lashkari Ram v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11. Clause (e) of section 2(22) of the Act as it existed clearly provides that if the loan is received by the shareholder, it is only then the said loan can be deemed to be dividend in his hands. In the present case, admittedly, the assessee-firm was not the shareholder of the company M/s. Jai Prakash Associates (P.) Ltd. and the partners of the firm were the shareholders in the books of the company, therefore, the loan advanced by the company to the firm cannot be deemed to be dividend inasmuch as loan was not to the shareholder but to the partnership firm which was not the shareholder in the books of the company. It is settled principle of law that the deeming provision has to be construed strictly. 12. In the case of Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215; [1959] 29 Comp Cas 282, the apex court held that a person who has purchased shares in a company under a blank transfer and in whose name the shares have not been registered in the books of the company is not a shareholder in respect of such shares within the meaning of section 18(5) of the Income-tax Act, notwithstanding his equitable right to the dividend on such shares, and is not, therefore, entitled to have thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares and between whom and the company exists the bond of membership and ownership of a share in the share capital of the company. 14. Similar question came up for consideration before the apex court in the case of CIT v. C.P. Sarathy Mudaliar reported in [1972] 83 ITR 170. In the said case, section 2(6A)(e) of the Act, 1922 was under consideration, which was synonymous to section 2(22)(e) of the Income-tax Act 1961. In the said case, members of Hindu undivided family acquired shares in a company with the funds of the family. Loans were granted to the Hindu undivided family and the question was whether the loans could be treated as dividend income of the family falling within section 2 (6A)(e) of the Act 1922. The apex court held that only loans advanced to shareholders could be deemed to be dividends under section 2(6A)(e) of the Act the Hindu undivided family could not be considered to be a shareholder under section 2(6A)(e) of the Act and hence, the loans given to the Hindu undivided family will not be considered as loans advanced to a shareholder of the company and cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not relevant and applicable to the present case. The decisions in the cases of Pandit Lashkari Ram v. CIT reported in [2005] 272 ITR 309 (All) and CIT v. Shri Bhagwan Das reported in [2005] 272 ITR 367 (All) are relating to the question of jurisdiction and validity of the order passed under section 263 of the Act by the Commissioner of Income-tax. On the facts of that case, the Division Bench of this court upheld the order of the Commissioner of Income-tax by which the assessment order has been revised. In the present case, the Tribunal has decided the issue on the merits and the question involved is not of jurisdiction to invoke the provision of section 263 of the Act on the facts and circumstances of the case, but the question is whether the Tribunal has rightly treated the loan given by the company to the assessee as deemed dividend income within the purview of section 2(22)(e) of the Act. 17. In the case of Ram Narain and Brothers v. CIT reported in [1969] 73 ITR 423 (All), the assessee-firm purchased immovable property together with the super structure thereon. It was claimed that by reason of certain entries in the accounts of the firm, the cost of the property was debited t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hdrawn on the ground that there was a sale or transfer of the machinery within the meaning of section 34(3)(b) read with section 2(47). It was held that section 34(3)(b) was not applicable to the case and the development rebate allowed to the firm could not be withdrawn. 20. In view of the aforesaid discussions, we are of the opinion that the principle laid down by the apex court in the cases of CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170 and Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 (SC) applies to the present case and the order of the Tribunal is in conformity with the decisions of the apex court. We accordingly uphold the same. 21. So far as question No. 4 is concerned, the Tribunal has recorded a categorical finding on a consideration of the clause of the partnership deed that Smt. Rekha Dixit became the partner in a partnership firm with effect from November 1, 1985, and, therefore, the finding of the Tribunal is a finding of fact. There is no reason to interfere with such finding. In view of the aforesaid finding, the interest paid to Smt. Rekha Dixit prior to November 1, 1985, the provision of section 40(b) cannot be invoked. The order of the Tribunal is, accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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