TMI Blog1993 (12) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... that a firm can be a shareholder in a company through its partners and the names of the partners are registered as the representatives of the firm and, therefore, the appellant was a registered shareholder in Jaiprakash Associates (P.) Ltd., and, the provisions of section 2(22)(e) of the IT Act, 1961, were attracted to its case. (ii) In coming to the above finding he has clearly violated the principle laid down by the Hon'ble Supreme Court in the case of CIT v. C.P. Sarthy Mudaliar [1972] 83 ITR 170 and Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 holding that it is only where a loan is advanced by the company to a registered shareholder as distinct from a beneficial shareholder and the other conditions set out in section 2(6A)(e) of the Act of 1922 (corresponding to section 2(22)(e) of the IT Act, 1961) are satisfied as "deemed dividend" within the meaning of the above provisions. 3. The learned Commissioner of Income-tax, Lucknow, also erred in holding that the appellant firm had a substantial interest in Jaiprakash Associates (P.) Ltd. He has also erred in holding that the Assessing Officer had failed to examine the assessability of deemed dividend under section 2(22)(e) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passing the order under section 263 of the IT Act, 1961 on 22-2-1991 (see para 5 of this order) and had thereby wrongly held that the concerned issue was not properly examined by the Assessing Officer. 7. The learned Commissioner of Income-tax, Lucknow, also erred in holding that the Assessing Officer had not examined the aspect of work-in-progress and that "In the mining of stone there is always work-in-progress in the form of stones lying on the surface of the quarry, consignment of which did not reach the destination etc." ignoring the facts as submitted to him by the appellant in its reply the show-cause notice dated 3-12-1990. 8. The learned Commissioner of Income-tax Lucknow, did not allow the appellant proper and sufficient opportunity to have it say or make necessary compliance of the reasons relied on by him in setting aside the assessment directing the Assessing Officer to make a fresh assessment. 9. Without prejudice to the aforesaid grounds, the learned Commissioner of Income-tax, Lucknow erred on facts and in law in setting aside the assessment order, instead of confirming himself to the issues discussed in the impugned order, on which the learned CIT was of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of loan in the hands of the firm was not taxable under section 2(22)(e) provides that if the loan is received by a shareholder it is only then that the said loan can be deemed to be dividend in his hands. He has pointed out that no doubt admittedly the assessee-firm was the owner of the shares but it was not a shareholder in the books of the company which advanced loans. He has pointed out that the shares stood registered in the names of the partners and, thus, technically in the eyes of law it is the partners who were shareholders and the firm was only the beneficial owner of those shares. For that he has relied on the ratio laid down by the Hon'ble Supreme Court in the case of Howrah Trading Co. Ltd. v. CIT [1959] 36 ITR 215, in the case of C.P. Sarathy Mudaliar, in the case of Rameshwarlal Sanwarmal and the decision of Hon'ble Calcutta High Court in the case of ITO v. Chandmull Batia [1978] 115 ITR 388 (Cal.). On the basis of these decisions, the learned counsel for the assessee has stressed that setting aside the order under section 263 was against the very specific proposition of law propounded by the Hon'ble Supreme Court in the abovesaid decisions and, thus, the present or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as dividend income of the family falling within section 2(6A)(e) of the Income-tax Act, 1922. 12. 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. 13. The Hon'ble Supreme Court had further followed the same decision in the case of Rameshwarlal Sanwarmal in which too the Hon'ble Supreme Court had held that where the assessee-HUF was the beneficial owner of certain shares in a private company which stood in the name of its karta in the register of shareholders and the company advanced loans to three concerns owned by the HUF, the loans could not be regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployed 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 the 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. 18. Like-wise the case of Malabar Fisheries Co. too has no application to the present facts of the case, as in that case again the position of a partner vis-a-vis the firm was propounded. The facts were that a firm constituting of four partners carried on six different businesses. During the accounting periods relevant to the assessment years 1960-61 to 1963-64, it installed various items of machinery in respect of which development rebate was allowed to it under section 33. The firm was dissolved on 31-3-1963 and under this deed of dissolution one of the firm's businesses was taken over by one of the partners and the remaining five by two of the other partners and the fourth partner received a sum of Rs. 3,81,082 in lieu of his share in the assets of the firm. The question was whether the rebate allowed to the firm could be withdrawn on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has very vehemently argued out that this was not permissible under the law. It is only the interest paid to a partner which is disallowed under section 40(b). Admittedly Smt. Rekha Dixit was not a partner prior to 1-11-1985, any interest paid to her prior to that date was not disallowable. He has pointed out that the distribution of the profits was according to the partnership agreement. In the said agreement, clause 8 provided as under : "8. It is hereby mutually agreed that the Firm's profits shall be ascertained only on the close of 31st March of each year and such partners who have retired or died before 31st March, shall have no claim or title to any share of profits or losses for that accounting year." 23. Clause 16 of the said agreement further provided as under : " 16. It is hereby mutually agreed that on the retirement or death of a partner, such partner or the representatives of the deceased partner, as the case may be, shall not be entitled to claim any share of profit and he or she will be entitled to claim interest @ 24% on the credit balance from the first day of the accounting year till the payment of aforesaid balance." 24. From the above clauses of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income chargeable under the head 'profits and gains of business or profession'........... (a)................ (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm..............." The very section provides that it is only an interest to a partner which is inadmissible under section 40(b). Here in this case, Smt. Rekha Dixit was not a partner up to 1-11-1985. The sharing of the profit was according to the partnership deed duly executed by the partners and agreed upon by them and, thus, that sharing of profit will not make Smt. Rekha Dixit a partner before 1-11-1985. This fact finds support even from the assessment order made by the Assessing Officer disallowing the interest paid to those partners upto the period when they ceased to be partner, i.e., from 1-11-1985 onwards. We are, therefore, of the opinion that the interest paid to Smt. Rekha Dixit up to 30-10-1985 was not disallowable under section 40(b) and the order passed to the contrary by the learned CIT under section 263 was not correct in the eyes of law. 27. The next point raised by the learned CIT in his order was regarding dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of the above facts, the learned counsel has stressed that the finding to the contrary of the learned CIT was based on wrong interpretation of law and should be set aside. 29. On the other hand, the learned D.R. has vehemently stressed that for all intents and purposes it was a new firm as certain old partners have been dropped and new partners have been admitted and there is also a change in the sharing ratio of the partners. He has, thus, stressed that the order passed by the learned CIT was perfectly correct and should not be disturbed. 30. After hearing the parties at length on the point, we are of the opinion that the arguments advanced by the learned counsel for the assessee have force. Section 187(2) clearly provides the circumstances under which it shall be treated to be only change in the constitution and not dissolution of the firm. The only circumstances under which the firm is treated to be dissolved is the death of one of the partners. In fact, the Partnership Act provides that even the death of the partner does not dissolve the partnership, if it has been agreed upon between the partners to the contrary. Any how, in this case the said contingency is not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mistaken notion. We hold accordingly. 34. The last point raised by the learned CIT is regarding the work-in-progress in respect of supply of black stone to Vishakhapatnam. 35. The brief facts were that the assessee-firm was assigned the job of supplying black stone at a royalty of Rs. 2.50 per cu.m. It was further contended that the firm engaged labour on piece rate basis. Work undertaken by the labour involved digging up 77,688 cu.m. of stone for the period 1-4-1985 to 31-3-1986 and the bills were submitted to Jai Prakash Associates (P.) Ltd. for 77,688 cu.m. of stone at the rate of Rs. 60 per cu.m. The assessee submitted that labour bills covered the entire period of 1-4-1985 to 31-3-1986 leaving no extra production at the surface which was not billed by the assessee. In the opinion of the learned CIT while scrutinizing the assessment order, there must have been some work-in-progress in the form of stone lying at the surface of the quarry and the Assessing Officer had not examined that aspect and consequently he directed him to scrutinise the same and thereafter pass a speaking order regarding the work-in-progress. 36. The learned counsel for the assessee has vehemently st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer or to the notice of the learned CIT or to the notice of the Department. Hence, in the absence of such evidence on circumstances, we feel that merely on the basis of conjecture and surmises to set aside the order is not justified in the eyes of law. It is correct that section 263 does provide revisionary/supervisory jurisdiction to the learned CIT over the erroneous/prejudicial order of the Assessing Officer, yet it does not give an absolute discretion to set aside all the orders. Order under section 263 is not only an administrative order but it is a quasi-judicial order and subject to judicial scrutiny in appeal. Under these circumstances, we feel that this section does not provide power to the learned CIT to pass any order that he thinks merely on the basis of conjectures and surmises. This point of ours find support from the decisions of various High Courts reported in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.), CIT v. Kashi Nath Co. [1988] 170 ITR 28 (All.), J.P. Srivastava Sons (Kanpur) Ltd. v. CIT [1978] 111 ITR 326 (All.), CIT v. R.K. Metal Works [1978] 112 ITR 445 (Punj. Har.) and in the case of Venkatakrishna Rice Company v. CIT [1987] 163 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l corrective or as a review of a subordinate's order in exercise of the supervisory power but it is to be invoked and employed only for the purpose of setting right distortions and prejudices to the revenue which is a unique conception which has to be understood in the context of and in the interest of revenue administration. Such a power cannot in any manner be equated to or regarded as approaching in any way the appellate jurisdiction or even the ordinary revisional jurisdiction conferred on the Commissioner of Income-tax under section 264. Here in this present case, the assessee had returned an income of Rs. 6,99,000 and the Assessing Officer had completed the assessment on an income of Rs. 72,16,000 after full scrutiny. The learned CIT has only set aside the order merely on guess work and without applying the law even propounded by the Hon'ble Supreme Court and other various High Courts on other issues. This decision applies with full force to the present case in which in our opinion the learned CIT has only invoked the provision of section 263 only with an idea to get a sheer escapement of revenue, which too, in our opinion, was not borne out by facts. 42. In the case of R.K ..... X X X X Extracts X X X X X X X X Extracts X X X X
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