TMI Blog1986 (4) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's wife. The assessment year involved is 1966-67 and the relevant accounting year is the financial year ending on March 31, 1966. On June 20, 1964, the assessee purchased two adjacent plots of land at Alipore Road, Calcutta, one in the joint name of himself and his wife and the other in the names of his two minor sons. Thereafter, in the accounting year relevant to the assessment year under reference, the assessee started constructing a multi-storied building known as " Jindal House ". Several self-contained flats were planned to be constructed in this building. The construction of the building was completed some time in early 1968. The entire " Jindal House " belonged to the assessee, his wife and his two minor sons, in equal proportion. As the assessee was contemplating selling of some of the flats in future, on April 21, 1965, he and his wife entered into an agreement with the company to sell six flats for Rs. 3,95,000 to it, which was wholly controlled by the assessee and his wife. As per clause 4 of the said agreement, the company agreed to pay Rs. 3,50,000 to the assessee and his wife by way of earnest money and further agreed to pay the balance amount of Rs. 45,000 on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the sum of Rs. 90,223 cannot be considered as loan or advance within the meaning of sub-clause (e) of clause (22) of section 2 of the Income-tax Act, 1961. If, however, I was unable to deliver the possession of the flats to the company as agreed upon, then I would have been under obligation to refund Rs. 90,223. On the happening of such a contingency, the company would have become creditor and I debtor and I would have been under obligation to repay Rs. 90,223. This has not happened." The Income-tax Officer, however, in his order dated April 26, 1971, held that the agreement dated April 21, 1965, was an " arranged affair " on the grounds that (i) the agreement was signed by the assessee in dual capacity, viz., as a seller as well as the managing director, on behalf of the company ; (ii) the agreement was entered into in April, 1965, while the building was ready only in May, 1968; (iii) there was no provision in the agreement as to what will happen to the earnest money, if the assessee did not build or abandoned the construction of the flats. He, therefore, concluded that the advance received by the assessee by way of iron rods would fall within the mischief of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded before the Tribunal that by the agreement for sale entered into between the assessee and his wife with the company, the company became a debtor of the assessee and his wife to the extent of Rs. 3,95,000. He further pointed out that in the company's books of account, the earnest money (iron rods) paid by the company had been debited to " Purchase of Flats Account It was further submitted that each and every payment made by a company to its shareholder cannot be treated as a loan but one has to establish that there was a relation of a creditor and debtor between the company and its shareholder. It was further submitted that in view of the terms contained in the agreement for sale, the value of the iron rods given by the company to the assessee and his wife was not a loan but was a, sort of part payment made by the company towards its indebtedness of Rs. 3,95,000. As regards the agreement for sale, it was submitted on behalf of the assessee that the Income-tax Officer was not justified in treating the agreement as an " arranged affair " in view of the fact that the assessee and the company are two separate entities. It was further submitted that the fact that the assessee had subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to this court has been reproduced earlier. The second and third questions were rejected by the Tribunal. The said questions are as follows: " (ii) Whether the iron rods supplied by the company to the assessee and his wife jointly or the money value thereof represented a payment by the company for the individual benefit of the assessee as envisaged in section 2(22)(e) of the Act ? (iii) Whether there was any material before the Tribunal in support of its finding that instead of getting the iron rods from the company before entering into an agreement with it for sale of flats, the assessee and his wife thought of a device for circumventing the provisions of section 2(22)(e) of the Act by making an agreement with the company whereby it was made the debtor of the assessee and his wife ?" In rejecting question No. (ii), the Tribunal observed that the assessee did not dispute before the Tribunal that the expression " any sum " would not necessarily be money transaction only but could include money value of articles or things advanced by a company, although before the income-tax authorities, the assessee's contention was that the expression " any sum " would not include the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible allowance ; but that is wholly irrelevant in considering the applicability of clause (iii) of sub-section (2) to the problem arising in this case." The next decision cited by Dr. Pal is in the case of CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC). There, the Supreme Court held (at p. 173): " 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 that provision is a deemed dividend and not a real dividend. The loan granted to a shareholder has to be returned to the company. It does not become the income of the shareholder. For certain purposes, the Legislature has deemed such a loan as 'dividend'. Hence, section 2(6A)(e) must necessarily receive a strict construction." The Supreme Court further held in that case that only the loan advanced to a shareholder would be deemed to be dividend under the provisions of section 2(6A)(e) of the old Act corresponding to section 2(22)(e) of the 1961 Act. Dr. Pal has also relied on the judgment of the Madras High Court in the case of G. R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13. In that case, a sum of Rs. 1,65,000 was debi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) by way of advance or loan to shareholder, being a person who has a substantial interest in the company, or any payment by any 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. It is no doubt true that the company had not given any advance or loan to the assessee in cash. The question is whether, in view of the arrangement made by the company and its director, it can be said that a payment has been made by the company on behalf of or for the individual benefit of the assessee. We are only confined to the facts of this case which are not in dispute. The findings of the Tribunal have not been challenged. The Tribunal found that the company in question is one in which the public are not substantially interested within the meaning of section 2(18) of the Act. Secondly, the assessee is a person having substantial interest in the company. Thirdly, the company had accumulated profits on the relevant date. The only dispute was whether there was any payment made to the assessee for his individual benefit. The Tribunal held as follows : "The only point disputed on behalf of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolling group can do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. When the Legislature realised that though money was reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in certain exceptional cases, the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud." In the instant case, iron rods were supplied to the assessee and his wife valued at Rs. 1,80,446 (Rs. 90,223 in the assessee's case). The company was carrying on business in iron materials. The iron rods were given to the assessee and his wife, who controlled the company, for the construction of Jindal House which again belonged to the assessee and his wife and their minor children. The iron rods were supplied. The assessee received the value of the materials. Such value expressed in terms of money is the price of the materials. The sum of Rs. 1,80,446 was thus paid by the company as advance. Section 2(22)(e) makes it clear that any payment by any company of any sum representing a part of the assets by way of advance would come within the mischief of the said section. By debiting the said sum in an account styled " Purchase of Flats Account " and not on any account for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
