TMI Blog1979 (3) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the company and that the said sum of Rs. 2,00,000 was similarly paid out of another loan received from the same source. From the accounts of Indira Co., the ITO found that on the 31st August, 1968, the assessee had repaid an amount of Rs. 1,00,000 by cheque to Indira Co., and that on the same date the latter had issued a cheque in favour of the company. On the 2nd September, 1968, a sum of Rs. 4,75,000 was entered as advanced by the company to Indira Co. out of which a cheque for Rs. 2,00,000 was issued by Indira Co. in favour of the assessee. Subsequent repayment by the assessee was recorded and the entire loan was repaid by the 5th February, 1969. The ITO came to the conclusion that the repayment of Rs. 75,000 by the assessee to Indira Co. and the corresponding repayment by Indira Co. to the company were mere book entries, the net effect of the transactions being that the loan was enhanced from Rs. 75,000 to Rs. 2,00,000. The ITO found that the said amount represented a loan advanced by the company in an indirect way to the assessee and as such was dividend within the meaning of s. 2(22) of the I.T. Act, 1961, in the hands of the assessee. Deducting the gross d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeded on the basis that the onus lay on the assessee to prove that the amount of Rs 2,00,000 did not come from the amount advanced by the company to Indira Co. The Tribunal concluded as follows : " In this case, there was special nature of debt of the assessee in respect of payment made by the company to the assessee. The situs of the debt of the assessee was in the books of account of Indira Co. in the form of payment of equivalent amount by the company to Indira Co. Indira Co. has shifted by entries in books this debt to the books of the assessee." On an application of the assessee under s. 256(1) of the I.T. Act, 1961, the Tribunal had drawn up a statement and referred the following questions of law for the opinion of this court : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,73,750 could be treated as deemed dividend within the meaning of section 2(22)(e) of the Income-tax Act, 1961, and as such could be included in the total income of the assessee ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 8,114 could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed lastly that there was no finding by the Tribunal that Indira Co. was a conduit pipe through which money came from the company to the assessee. In support of his contentions, Mr. Pal cited several decisions which we shall consider hereafter. (a) India Cements Ltd. v. CIT [1966] ITR 52 (SC). This decision was cited for the following observation of the Supreme Court : "....the loan obtained is not an asset or advantage of an enduring nature." (b) CIT v. Rameshwarlal Sanwarmal [1971] 82 ITR 628 (SC). The facts in the case were, inter alia, that in the relevant assessment years certain loans had been advanced to a HUF by a company. It was found that the karta of the family held certain shares in the said company in his capacity as karta. The question arose whether these loans could be deemed to be dividends under s. 2(6A)(e) of the Indian I.T, Act, 1922, which was in pari materia with s. 2(22)(e) of the I.T. Act, 1961. The Supreme Court held that the loans would not come within the mischief of the said section as the loans had been given to the HUF which was not the shareholder. (c) CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC). Here the members of a HUF acquired sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the revenue, contended on the other hand that in the instant case it could not be disputed that the original loan or payment was from the company and the ultimate recipient of the amounts was the assessee. He relied on the entries in the books of Indira Co., showing the account of the assessee where in respect of each item a specific source was indicated. He also relied on the certificates issued by Indira Co. Mr. Sen submitted that the findings of the Tribunal which were findings of fact had not been challenged on behalf of the assessee and, therefore, according to him, the matter stood concluded. In particular, he contended, it had been found by the Tribunal : (a) that there was a payment by the company, namely, in making to Indira Co. ; (b) that the said payment was meant for the benefit of the assessee. He contended that on these unchallenged facts the second part of s. 2(22)(e) of the I.T. Act, 1961, was attracted. Mr. Sen contended further that the object of the section was to prevent the controlling shareholders from receiving accumulated profits of a company in preference to other shareholders and, therefore, the expression " loan and advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents." (c) Smt. Tarulata $hyam v. CIT [1977] 108 ITR 345 (SC). The facts in this case were that the assessee, a shareholder and the managing director of a company in which the public were not substantially interested, had withdrawn in cash from time to time various amounts. Parts of the said amounts had been adjusted against the outstanding dividend and ultimately a sum remained to the debit of the assessee in the books of the company. During the relevant accounting period the assessee paid back to the company part of the amount outstanding. The question arose whether the net amount outstanding during the accounting period could be treated as dividend in the hands of the assessee under s. 2(6A)(e) of the Indian I.T Act, 1922. The Supreme Court held that tax was attracted to the said loans and advances to the extent to which the company concerned had accumulated profits from the moment the loan or advance was received by the shareholders. Even if such loan or advance ceased to be outstanding at the end of the previous year it will still be deemed to be divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing observation of Jenkins L. J. in Davies v. Shell Company of China Ltd. [1951] 32 TC 133, 157 ; [1952] 22 ITR (Supp) 1 (CA): " As loans it seems to me they must prima facie be loans on capital, not revenue account ; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital." In the instant case, it appears to us that the amounts of the two loans received by the assessee, namely, Rs. 75,000 and Rs. 2,00,000 can certainly be taxed in the hands of the assessee as deemed dividend if it can be established that the said amounts were either loans and advances from the company to the assessee or that the payments of Rs. 75,000 and Rs. 4,80,000, respectively, by the said company were meant for the benefit of the assessee. Neither the AAC nor the Tribunal has found that the said amounts, namely, Rs. 75,000 and Rs. 2,00,000, were received by the assessee from the said company by way of loan or advance. It is also not found that Indira Co. was a benamidar or that the company was advancing the amounts in fact to the assessee. The theory of an indirect loan or advance which has been urged o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the subsequent loan of Rs. 2,00,000 from Indira Co. to the assessee. The Tribunal noted that before this amount was advanced, Indira Co. had not only received Rs. 4,80,000 from the company but also another sum of Rs. 1,25,000 from United Provinces Sugar Co. Ltd. These two amounts received from two different sources blended in the hands of Indira Co. and out of the blended fund a sum of Rs. 2,00,000 was advanced to the assessee. The Tribunal refrained from drawing the further conclusion that Rs. 4,80,000 paid by the said company to Indira Co. or any part thereof was meant for the benefit of the assessee. We have been unable to appreciate the observations of the Tribunal in this connection and its conclusions as to the situs of the debt or the shifting of entries in the books of Indira Co. or the relevancy of the same in the controversy before us. We hold that the said sum of Rs. 2,00,000 lent by Indira Co. to the assessee cannot be said to fall within the mischief of s. 2(22)(B) of. the I.T. Act, 1961. Accordingly we answer question No. 1 partly in favour of the revenue and partly in favour of the assessee. We hold that the Tribunal was right in holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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