PETITIONER:
TARULATA SYAM AND ORS.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, WEST BENGAL
DATE OF JUDGMENT28/04/1977
BENCH:
SARKARIA, RANJIT SINGH
BHAGWATI, P.N.
FAZALALI, SYED MURTAZA
CITATION:
1977 AIR 1802 1977 SCR (3) 697
1977 SCC (3) 305
ACT
Indian Income Tax Act, 1922--S. 2(6A)(e)--Scope of.
Company a s. 23A Company in which public are not sub-
stantially interested --Had accumulated profits--Gave loan
to a shareholder--Loan repaid before end of the financial
year--Loan if dividend within s. 2(6A)(e).
HEADNOTE
Under section 2(6A)(e).of the Indian Income-tax Act,
1922, the term dividend includes any payment by a company
not being a company in which the public are substantially
interested within the meaning of s. 23A of any sum (whether
as representing a part of the assets of the company or
otherwise) by way of advance or loan to a shareholder or any
payment by any such company on behalf or for the individual
benefit of a shareholder to the extent to which the company
in either case possesses accumulated profits. According to
s. 12(1A) of the Act, income from other sources includes
dividends. Sub-section (lB) of s. 12 provides any payment
by a company to a shareholder by way of advance or loan
which would have been treated as dividend within the meaning
of s. 2(6A)(e) in any previous year relevant to any assess-
ment year prior to the assessment year ending on the 31st
day of March, 1956 had that clause been in force in that
year, shall be treated as a dividend received by him in the
previous year relevant to the assessment year ending on the
31st day of March, 1956, if such loan or advance remained
outstanding on the first day of such previous year. The
provisions of S. 2(6A)(e) and s. 12(lB) had been borrowed
and adopted with certain alterations from s. 108(2) of the
Commonwealth Income Tax Assessment Act of Australia the
last limb of which provided that payment to a shareholder by
way of advance or loan was to be treated as dividend paid by
the company on the last day of the year of income of the
company in which payment was made.
The appellant-assessee was a shareholder and Managing
Director of a Private Ltd. Company. In the calendar year
1956 (assessment year 195758), the assessee withdrew in cash
from the company a sum of Rs. 4.97 lakhs, which was less
than the accumulated profits of the company. Before the end
of the year, the assessee repaid the whole amount. Deduct-
ing a sum of Rs. 1.59 lakhs which was credited to the asses-
see’s account by way of dividend in the company’s books, the
Income-tax Officer treated the balance of Rs. 2.72 lakhs as
dividend income in the ,assessee’s hands and grossed up the
amount under s. 16(2). appeal, the Accountant Member of the
Appellate Tribunal held that any payment made as envisaged
in s. 2(6A)(e) became dividend and must be treated as the
assessee’s income and no subsequent repayment could take it
out of the mischief of the provision. The Judicial Member
on the other band held that since total income of the asses-
see during the relevant previous year could be computed and
assessed only at the end of that year any advance or loan
taken during the interim periods of the previous year would
have to. be ignored. On reference the President agreed with
the Accountant Member.
The High Court answered the reference in favour of the
Revenue.
698
were taken and (ii) the last limb of s. 108(1) of the Aus-
tralian Act should be read into the Indian Act because what
was explicit in. s. 108(1) of the Australian Act is
implicit in s. 2(6A),(e) and s. 12(lB) of the Indian Act.
Dismissing the appeal,
HELD: The fiction created by s. 2(6A)(e) read with s.
12(lB) of the Act is attracted as soon as all the conditions
necessary for its application exist in a case. [707 C]
1. In Navnit Lal C. Javeri v.K.K. Sen, Appellate Assist-
ant Commissioner Income-tax [1965] 1 SCR 909, this Court
held that the combined effect of these two provisions is
that three kinds of payments made to a shareholder of a
company are treated as taxable dividend to the extent of the
accumulated profits held by the company, namely, payments
made to the shareholder by way of advance or loan, pay-
ments made on his behalf and payments made for his individu-
al benefit. The five conditions to be satisfied are: (i)
The company must be one in which the public are not substan-
tially interested within the meaning of s. 23A; (ii) The
borrower must be a shareholder at the date when the loan was
advanced; (iii) The loan advanced can be deemed to be divi-
dend only to the extent of the accumulated profit on the
date of the loan; (iv) The loan must not have been advanced
by the company is the ordinary course of its business and
(v) The loan must have remained outstanding at the com-
mencement of the shareholder’s previous year in relation to
the assessment year 1955-56. [707 D-G]
In the instant case the company was a controlled company
within the meaning of s. 23A; the assessee was its share-
holder; the company possessed "accumulated profits" in
excess of the amount paid to the assessee during the previ-
ous years; and the company’s business was not money lending.
The last condition was not applicable because it was a
transitory provision applicable to the assessment year
1955-56 only while the assessment year in this case was
1957-58. [708 A]
2. (a) The language of ss. 2(6A)(e) and 12(lB) is clear
and unambiguous. There is no scope for importing into the
statute words which are not there. Such importation would
be not to construe it but to amend the statute. Even if
there be a casus omissus, the defect can be remedied only by
legislation and not by judicial interpretation. [708 H]
(b) No justification to depart from the normal rule
of construction according to which the intention of the
legislature is primarily to be gathered from the words used
in the statute has been made out.
(c) The Indian Legislature has deliberately omitted to
use in ss. 2(6A)(e) and 12(lB) words analogous to those in
the last limb of s. 108(1) of the Australian Act. When ss.
2(6A)(e) and 12(lB) were inserted by Finance Act, 1955,
Parliament must have been aware of the provision contained
in s. 108 of the Australian Act. In spite of such aware-
ness, Parliament has not thought it fit to borrow the whole
hog what is said in s. 108(1) no far as the last limb of
that section is concerned. Our Parliament imported only a
very restricted version, and incorporated the same as the
5th condition in s. 12(lB) to the effect, that the payment
deemed as dividend shall be treated as dividend received by
him in the previous year relevant to the assessment year
ending on the 31st March, 1956 if such loan or advance
remained outstanding on the last day of such previous year
The word "such" prefixed to the previous year shows that the
application of this clause is confined to the assessment
year ending on 31st March, 1956. [709 C-D]
In the instant case the assessment year did not end on
31st March, 1956 which showed that the Legislature has
deliberately not made the subsistence of the loan or advance
or its being outstanding on the last date of the previous
year relevant to the assessment year, a prerequisite for
raising the statutory fiction. In other words, even if the
loan or advance ceased to, be
699
outstanding at the end of the previous year, it could still
be deemed as dividend if the other four conditions factually
existed to the extent of the accumulated profits possessed
by the company. [709 E-F]
(d) Under s. 3 which is the charging section, the previ-
ous year is the unit of time on which the assessment is
based. As the taxability of income is related to its re-
ceipt or accrual in the previous year, the moment dividend
is received whether, actual or deemed, income taxable under
the residuary head, "income from other sources", arises.
The charge being on accrual or receipt, the statutory fic-
tion created by ss. 2(6A)(e) and s. 12(lB) would come into
operation at the time of payment by way of advance or loan
provided the other conditions are satisfied. [709 G-H]
JUDGMENT
CIVIL APPELLATE JURISDICTION: C.A. No. 147 of 1972.
(Appeal by Special Leave from the Judgment and Order
dated 19.2.1971 of the Calcutta High Court in Income Tax
Ref. No. 98/67)
G.C. Sharma, D.N. Mukherjee, A. K. Ganguly and G.S.
Chatterjee, for the appellants.
B.B. Ahuja and R.N. Sachthey, for respondent.
G.C. Sharma, D.K. Jain, Anup Sharma, S.P. Nayar and
Miss K. Jaiswal for the Intervener.
The Judgment of the Court was delivered by
SARKARIA J. Whether any payment by a Company, not being
a Company in which the public are subsantially interested
within the meaning of s. 23A, of any sum by way of advance
or loan to a shareholder, not exceeding the accumulated
profits possessed by the Company, is to be deemed as his
dividend under Section 2(6A) (e) read with Section 12(lB) of
the Income-tax Act, 1922, even if that advance or loan is
subsequently repaid in its entirely during the relevant
previous year in which it was taken, is the only question
that falls to be determined in this appeal by special leave.
The assessment year is 1957-58, and the corresponding
previous year is the calendar year 1956. The assessee is a
shareholder and the Managing Director of M/s. Dolaguri Tea
Co. (P) Ltd. The Company is admittedly one in which the
public are not substantially interested within the meaning
of s. 23A of the Indian Income-tax Act, 1922 (for short,
the Act). At the commencement of the previous year, there
was in the books of the Company a credit balance of Rs.
65,246/- in the assessee’s account, which had been brought’
forward from the earlier year. Between the 11th January and
the 12th November, 1956, the assessee withdrew in cash from
time to time from the Company, amounts, aggregating Rs.
4,97,442/-. The first two cash amounts of Rs. 3,50,000/-
and Rs. 40,400/-, were taken by the assessee on 11.1.1966.
Deducting therefrom the opening balance of Rs. 65,246/-
and two more item, namely, Rs. 1,40,000/- being outstand-
ing dividends declared on 31.12.1955 of his major son, and
transferred to his account, and a further dividend of Rs.
19,493/- credited to his account from Kathoni Tea Estate,
there remained a sum of Rs. 2,72,703/- to the debit of the
assessee
700
in the books of the Company as on the 12th November, 1956.
On December 29, 1956, the assessee paid back to the Company
a sum of Rs. 1,90,000/-. On December 31, 1956, his account
was credited with another sum of Rs. 80,000/- in respect of
the dividend due to him and his wife, and with a further
sum of Rs. 29,326/- for hypotecation. In this manner before
the end of the previous year, the assessee’s account was
credited with an aggregated amount of Rs. 2,99,326/- which
exceeded the debit balance of Rs. 2,72,70,3/- as on November
12, 1956.. Thus at the end of the relevant previous year,
no advance or loan was due to the Company by the assessee.
The Income-tax Officer found that the accumulated prof-
its of the Company as on January 1, 1956, amounted to Rs.
6,83,005. He, therefore, deducted the two aforesaid items
of Rs. 1,40,000/- and Rs. 19,493/-, aggregating Rs.
1,59,493/-, from the amount paid in cash to the assessee and
treated the balance of Rs. 2,72,703/- as the net ’dividend’
income in the hands of the assessee within the meaning of
Section 2 (6A)(e). The/income-tax Officer grossed up that
amount under Section 16(2) and gave credit for tax in ac-
cordance with that Section to the assessee.
The assessee’s appeal to the Appellate Assistant
Commissioner having failed, he preferred a further appeal to
the Income-tax Appellate Tribunal. There was a divergence
of opinion between the Members of the Tribunal. The Ac-
countant Member took the view that the moment a payment is
made as envisaged in Section 2(6A)(c) it becomes clothed
with the character of a dividend and has to be treated as
such income of the assessee, and no subsequent action or
repayment by the share-holder can take it out of the mis-
chief of this provision. He therefore held that the sum of
Rs. 2,72,703/- was taxable dividend under Section
2(6A)(e).
The Judicial Member expressed a contrary opinion. In
his view, the total income of the assessee during the rele-
vant previous year could be computed and assessed only at
the end of that year; it could not be computed at interim
periods during the previous year. "If it is found that
although the shareholder had taken by way of advance or loan
an amount from the Company during the course of a previous
year but had returned the same to the Company before the
close of that previous year, it can only be said while
computing the shareholder’s total income at the end of that
previous year that no advance or loan from the 23A Company
of which he was a shareholder stood for his benefit at the
time relevant for computation of his total income. The
advances or loans taken during the interim periods of the
previous year would just have to be ignored." On these
premises, the Judicial Member came to the conclusion that
the sum of Rs. 2,72,703/- grossed up to Rs. 3,19,245/-, was
not a dividend within the fiction under Section 2(6A) (e) of
the Act.
On account of this difference of opinion, the following
question was referred to the President of the Tribunal:
"Whether on the facts and in the circum-
stances of the case, the sum of Rs. 2,72,703/-
net (Rs. 3,19,245/- gross)
701
is to be treated as dividend income in the
hands of the assessee within the meaning of
Section 2(6A) (e) ?"
The President agreed with the Accountant Member and held
that an "advance or loan received by the shareholder of a
Private Company forthwith assumes the character of a divi-
dend and becomes his income by virtue of the fiction created
by Section 2(6A) (e) and it ceases to be a liability for the
purpose of taxation, although the assessee may, in fact or
in law, remain liable to the Company torepay it. If
the assessee repays the loan subsequently, such repayment
would not liquidate or reduce the quantum of the income
which had already accrued as such repayment is not be al-
lowed as a permissible deduction under Section 12(2). On
these premises he answered the question in the affirma-
tive.
In accordance with the majority opinion, the Tribunal
dismissed the assessee’s appeal, but, at his instance,
referred the same question for opinion to the High Court
under Section 66(1) of the Act.
The High Court held that the tax was attracted at the
point of time when the said loan was borrowed by the share-
holder and it was immaterial whether the loan was repaid
before the end of the accounting year or not. On this
reasoning it answered the question in favour of the Revenue
and against the assessee.
Hence this appeal by the assessee.
Before dealing with the contentions canvassed,
it is necessary to have a look at the general
scheme and the relevant provisions of the Act,
Section 2 (6A)(e) of the Act reads as follows:
(6A) "dividend" includes---
(a) to (d) ..
(e) any payment by a company, not being a
company in which the public are substantially
interested within the meaning of section 23A
of any sum (whether as representing a part of
the assets of the company or otherwise) by
way of advance or loan to a shareholder or any
payment by any such company on behalf or for
the individual benefit of a shareholder, to
the extent to which the company in either case
possesses accumulated profits;
but "dividend" does not include-
(i) a distribution made in accordance with
sub-clause (c) or sub-clause (d) in respect of
any share issued for full cash consideration
where the holder of the share is not entitled
in the event of liquidation to participate in
the surplus assets;
(ii) any advance or loan made to a share-
holder by a company in the ordinary course of
its business where the lending of money is a
substantial part of the business of the compa-
ny;
702
(iii) any dividend paid by a company which
is set off by the company against the whole or
any part of any sum previously paid by it and
treated as a dividend within the meaning of
clause (e), to the extent to which it is so
set off;
Explanation. The expression "accumulated
profits", wherever it occurs in this clause,
shall not include capital gains arising before
the 1st day of April, 1946, or after the
31st day of March, 1948, and be-fore the 1st
day of April, 1956;
Sub-section (15) defines ’total income’ as meaning
"total amount of income, profits and gains referred to in
sub-section (1 ) of Section 4 computed in the manner laid
down in this Act."
Section 3 is the charging section. Two of the princi-
ples deducible from the Section are:
(1 ) That the tax is levied on the total
income of the assessable entity;
(2) That each previous year is a distinct
unit of time for the purpose of assessment,
and the profits made or liabilities or losses
incurred before or after the relevant previous
year are wholly immaterial in assessing the
profits of that year unless there is a statu-
tory provision to the contrary.
Section 4 (1 ) so far as it is material reads as follows:
"Section 4(1): Subject to the provisions of
this Act, the total’ income of any previous
year of any person includes all income, prof-
its and gains from whatever source derived
which-
(a) are received or are deemed to be re-
ceived in the taxable territories in such year
by or on behalf of such person, or
(b) if such person is resident in the taxa-
ble territories during such year,--
(i) accrue or arise or any deemed to accrue
or arise to him in the taxable territories
during such year, or
(ii) accrue or arise to him without the
taxable territories during such year, or
(iii) ........
(c) if such person is not resident in the
taxable territories during such year, accrue
or arise or are deemed to accrue or arise to
him in the taxable territories during such
year:
(emphasis supplied)
"Provided that .. ... .. .."
The principles deducible from Sec. 4(1) are:
(1 ) The charge is on accrual or receipt
basis. Such receipt or accrual may be actual
or statutory, i.e. the result of any statutory
fiction created by the Act.
703
(2) If a particular amount of income is
taxed under any of the clauses (a), (b) or (c)
of the sub-section the same amount cannot be
taxed under any other clause either in the
same year or in a different year. That is to
say, income which is taxed on accrual under
clause (b) (ii) cannot be taxed again on
receipt under clause (a) or on remittance
under clause (b)(iii) (see Kanga and Palkhiwa-
la, Vol. I, 1959 Edition, page 153).
(3) The receipt spoken of in this clause
is the first receipt after the accrual of the
income See the decision of this Court in
Keshav Mills v. Commissioner of Income-
tax(1)].
Sub-section (1) of Sec. 4 also highlights
the basic principle embodied in the charging
section 3, that the accrual or receipt of
income (actual or deemed) is taxed with regard
to the relevant previous year.
Section 12 deals with the residuary head:
"Income from other sources".
Its sub-section (1A) says that:
"Income from other sources shah include
’dividends’. Sub-section (lB) in crucial. It
provides:
"Any payment by a company to a share-
holder by way of advance or loan which would
have been treated as a dividend within the
meaning of clause (e) of sub-section (6A) of
section 2 in any previous year relevant to any
assessment year prior to the assessment year
ending on the 31st day of March, 1956 had
that clause been in force in that year, shall
be treated as a dividend received by him in
the previous year relevant to the assessment
year ending on the 31st day of March, 1956, if
such loan or advance remained outstanding on
the first day of such previous year".
Sub-section (2), inter alia lays down that in computing
any income by way of dividend, allowance shah be given for
any reasonable sum paid by way of commission or remuneration
to a banker or any other person realising such dividend on
behalf of the assessee.
It is to be noted that sub-section (6A) of section 2
and subsections (1A) and (lB) u/s 12 were inserted in the
Act by the Finance Act, 1955, with effect from the 1 st
April, 1956.
In the relevant assessment year, Section 16(2) of the
Act was operative and ran as follows:
"16(2) For the purpose of inclusion in the
total income of an assessee any dividend shall
be deemed to be income of the previous year in
which it is paid, credited or distributed or
deemed to have been paid, credited or
(1) [1953] 23 I.T.R. 230.
704
distributed to him, and shall be increased to
such amount as would, if income-tax (but not
super-tax) at the rate applicable to the total
income of the company ..... for the finan-
cial year in which the dividend is paid,
credited or distributed or deemed to have been
paid, credited or distributed were deducted
therefrom, be equal to the amount of the
dividend."
Mr. G.C. Sharma, Counsel for the appellants contends
that the scope of the fiction created by Sec. 2(6A)(e)
should be confined to those advances and loans only, which
are not repaid but remain subsisting at the end of the
previous year in which they were taken. It is argued that
the sole object of this provision is to curb the evil of
distributing profits under the guise of loans or advances;
that if an advance or loan is repaid in the same accounting
year, it cannot be said that it was a device for distribu-
tion of profits. It is submitted that only in the case of
an advance or loan which remains outstanding at the end of
the accounting year, Sec. 2(6A) (e) raises an irrebutable
presumption that it was a payment of dividend under the
cloak of a loan. It is maintained that if this construc-
tion of Sec. 2(6A)(e) is not adopted, it will lead to ex-
tremely oppressive, unreasonable and anamolous results,
including double taxation. To illustrate his point Counsel
compares and contrasts the position of a shareholder who
promptly, after a short period, repays the loan in the same
year, with one who does not do so but allows it to remain
outstanding and be carried over to the next year, and there-
after a dividend is declared. If the interpretation adopted
by the High Court is correct---says Mr. Sharma--the share-
holder in the prior case who had promptly repaid the loan
would not be entitled under sub-clause (iii) of Clause (e)
of s. 2(6A) to set off any part of the subsequently declared
dividend against the loan which he had repaid earlier, but
will have to pay double tax on the same item, once on it as
deemed dividend and then on it as declared dividend. His
liability cannot be reduced to the extent of the dividend;
because at the date on which the dividend was declared, no
loan was outstanding against which. it could be set off. As
against the former, the latter shareholder who makes full
use of the loan and does not repay any part of the loan in
the same year, but leaves it unpaid till a dividend is
declared next year, will get relief by set off of the subse-
quently declared dividend, in whole or in part against the
loan outstanding against him.
Another example cited by Mr. Sharma is of a case where
the accumulated profit, say is Rs. 9,000/- and the share-
holder takes an advance or loan of Rs. 3,000/- and he
repays it after a week, and again gets the same amount
(Rs. 3,000/-) back as a loan, and again repays it after a
week, and again retakes the same amount as loan--all the
three loans being taken and repaid, in the same year. If
the unrestricted interpretation of the provision, sought by
the Revenue were to be adopted, the same amount of loan in
all the three transactions of loan would be subjected to
triple taxation. Such an absurd and oppressive result, says
the Counsel, would be against the intendment of the provi-
sion and inconsistent with the scheme of the Act which
generally aims avoids double taxation. The upshot of the
arguments of Mr.
705
Sharma is that under the Act, only that item or entity is
taxable which is rationally capable of being considered as
the income of the assessee; that an advance or loan which
is genuine and not a subterfuge for payment of dividend and
is not subsisting or outstanding at the end of the previous
year on account of its repayment by the shareholder cannot
reasonably be deemed to be his dividend income within the
contemplation of s. 2(6A)(e) read with s. 12 of the Act.
Mr. Sharma has taken us through various decisions having a
bearing on the problem. The cases referred to, discussed or
sought to be distinguished by him are: K.M.S. Lakshman Aiyar
v. Assistant Income-tax Officer,(1) Navnit Lal C. Javeri
v.K.K. Sen, Appellate Assistant Commissioner, Income-tax,
Bombay;(2) Commissioner of Income-tax, Madras v.K. Srini-
vasan; (3) Walchand & Co. Ltd. v. Commissioner of Income-
tax, Bombay;(4) Commissioner, Income-tax Bombay v.R.K.
Badiani. (5)
Mr. Sharma also has referred to Sec. 108 of
the Commonwealth income-tax Act as in force in Australia,
and submitted that since the substance of Sec. 2(6A)(e) and
s. 12(lB) has been borrowed from s.108 of the said Act and
the object of these provisions in the two enactments is the
same, it will not be illegitimate to determine and circum-
scribe the scope of the fiction created by the provision in
question in the light of the principles indicated in Sec.
108 of the Commonwealth Act.
On the other hand, Mr. Ahuja appearing for the Revenue,
submits that sub-clause (iii) which permits a set off
against a loan deemed as dividend, does not apply in cases
where the dividend is not declared in the same accounting
year because to hold otherwise would be against the basic
scheme ingrained in ss. 3 and 4 of the Act, according to
which the unit of time for the purpose of assessment is the
previous year of the assessee. Mr. Ahuja further maintains
that even if during the same accounting year after repayment
of the loan, a dividend is declared, sub-clause (iii) will
apply, and the Income-tax Officer will not be debarred from
reducing, in an appropriate case, the amount treated by him
as ’dividend’ under clause (e) of s. 2(6A) to the extent of
the subsequently declared dividend, on the principle of
notional set off underlying sub-clause (iii). The point
sought to be made out is that since the treatment of the
loan to the assessee shareholder as his dividend rests on a
legal fiction, it will not be an illegitimate use of sub-
clause (iii) to allow a notional set off to meet such a
situation. Thus construed, says the Counsel, there would be
no anomaly.
Mr. Ahuja further submitted that s. 2(6A)(e) was enact-
ed to suppress the evil of receiving profits or dividends
under the guise of loans by the shareholders of a controlled
Company, as such a malpractice resulted in evasion of tax.
This provision, it is urged should be construed in a manner
which suppresses the mischief and advances the remedy. It is
maintained that the language of the provisions in question
(1) [1959] XL I.T.R.469 (Mad.) (2) [19651 1, SCR 909-56
I.T.R. 198.
(3) (1963) 50, ITR 788 (Mad). (4) 100 I.T.R. 598(Bom).
(5) [1970] 76 I.T.R. 369 (Bom).
706
is plain and unambiguous and no question of seeking external
aid for its interpretation arises; the Court must give
effect to it regardless of the hardship, if any, resulting
therefrom. The sum and substance of his arguments is, that
since all the factual ingredients necessary for raising the
fiction contemplated by s. 2(6A) (e) and s. 12(lB) have been
found to exist by the Income-tax authorities and the Tribu-
nal, the loan had to be treated as the assessee’s dividend
income, the moment it was received, and the subsequent
repayment of the loan could not neutralise or take it out of
that category of ’income’. Counsel has drawn our attention
to the observations of this Court in Navnit Lal C. Javeri v.
K.K. Sen, Appellate Assistant Commissioner of Income-tax
(supra). He has further adopted the reasoning of the Bombay
High Court in Walchand & Co. v. Commissioner of Income-tax,
Bombay (supra)-
Section 2(6A)(e) and s. 12(lB) were inserted in the Act
by. the Finance Act 1955 which came into operation on 1-4-
1955. These provisions seem to have been adapted, and
borrowed with alterations, from s. 108 of the Commonwealth
Income-tax Assessment Act in force in Australia. Section
108 reads as follows:
"Loans to shareholders, (1 ) If amounts
are paid or assets distributed by a private
company to any of its shareholders by way of
advances or loans, or payments are made by the
company on behalf of or for the individual
benefit of, any of its shareholders, so much,
if any, of the amount or value of those ad-
vances, loans or payments, as, in the opinion
of the Commissioner, represents distributions
of income shall, for the proposes of this Act
other than the purposes of Division 11A of
Part III and Division 4 of Part VI be deemed
to be dividends paid by the company on the
last day of the year of income of the company
in which the payment or distribution is made.
(2) Where the amount or value of an
advance, loan or payment is deemed, under the
last preceding sub-section, to be a dividend
paid by a company to a shareholder, and the
company subsequently sets off the whole or a
part of a dividend distributed by it in satis-
faction in whole or in part of that advance,
loan or payment, that dividend shall, to the
extent to which it is so set off, be deemed,
not to be a dividend for any purpose of this
Act."
It will be seen that under s. 108( 1 ) formation of "the
opinion of the Commissioner" is the sine qua non for bring-
ing this provision into provision into operation. It has
been held be the Australian Board of Review that the mere
fact that a shareholder in a private Company has become
indebted to it, does not justify the formation of the opin-
ion by the Commissioner such as is indicated in sub-section
(1) of s. 108. "There must be something that goes beyond a
mere debt automatically arising upon a taking of accounts
and which points to a subterfuge whereby a payment which,
upon examination, is found to relate to the income of the
Company and to represent the distribution thereof, is made
to appear to be a loan or advance" (I.C.T.B.R. (N.S.) Case
No.80.)
707
It is noteworthy that at least in one material aspect
the Indian law is different from that under s. 108(1) of the
Commonwealth Act as explained and interpreted by the Board
in the case mentioned above. Under s. 108, the raising of
the fiction is dependent upon a positive finding recorded by
the Commissioner of Income-tax that the payment represents
distribution of the Company’s. income. But s. 2 (6A) (e) and
s. 12 of the Act do not leave this question to the adjudica-
tion of the income-tax authorities. Parliament has itself,
in the exercise of its legislative judgment, raised a con-
clusive presumption, that in all cases where loans are
advanced to a shareholder in a Private Ltd. Company’ having
accumulated profits, the advances should be deemed to be the
dividend income of the shareholder. It is this presumption
juris et de jure which is the foundation of the statutory
fiction incorporated in s. 2(6A)(e).. Thus s. 108 of the
Commonwealth Act appears to be more reasonable and less
harsh than its Indian counterpart.
From the above discussion it emerges clear that the fiction
created 2(6A) (e) read with s. 12(lB) of the Act is inexora-
bly attracted as soon as all the conditions necessary for
its application exist in a case. In Navnit Lags case
(supra), this Court, after an analysis of these provisions,
listed these conditions, as follows:
"... the combined effect of these two
provisions is that three kinds of payments
made to the. shareholder of a company to which
the said provisions apply, are treated as
taxable dividend to the extent of the accumu-
lated profits held by the :company. These
three kinds of payments are: (1 ) payments
made to the shareholder by way of advance or
loan, (2) payments made on his behalf and (3)
payments made for his individual benefit.
There are five conditions which must be satis-
fied before section 12(lB) can be invoked
against a shareholder. The first condition
is that the company in -question must be one
in which the public are not ’substantially
interested within the meaning of section 23A
as it stood in the year in which the loan was
advanced. The second condition is that the
borrower must be a shareholder at the date
’when the loan was advanced; it is immaterial
what the extent of his shareholding is. The
third condition is that the loan advanced to a
shareholder by such a company can be deemed to
be dividend only to the extent to which it is
shown that the company possessed accumulated
profit at the date of the loan. This is an
important limit prescribed by the relevant
section. The fourth condition is that the
loan must not have been advanced by’ the
company in the ordinary course of its busi-
ness. In other word’s, this provision would
not apply to cases where the company which
advances a loan to its shareholder earnes on
the business of money lending itself; and the
last condition is that the loan must have
remained outstanding at the commencement of
the shareholders previous year in relation to
the assessment year 1955-56."
(emphasis supplied)
The first four conditions factually exist in the instant
case. The last condition is not applicable because it was
a transitory provision
6--707 SCI 77
708
applicable to the assessment year 1955-56 only, while we are
concerned with the assessment year 1957-58 and the previous
year is the calendar year 1956. There is no dispute that
the company is a controlled (Private Ltd.) company in which
the public are not substantially interested within the
meaning of s. 23A. Further-the assessee is admittedly a
shareholder and Managing Director of that Company. It is
also beyond controversy that at all material times, the
company possessed "accumulated profits" in excess of the
amount which the assessee-shareholder was paid during the
previous year. The Income-tax Officer found that on January
1, 1956, the accumulated profits of the Company amounted to
Rs. 6,83,005/- while from, 11.1.1956 to 12.11.1956, the
assessee received in cash from time to time from the Company
payments aggregating Rs. 4,97,449/-. After deducting the
opening credit balance and some other items credited to his
account, the Income-tax Officer found that in the previous
year the assessee share-holder had received a net payment
of Rs. 2,72,703/- by way of loan or advance from the Compa-
ny. The Company’s’ business is not money lending and it
could not be said that the loans had been advanced by the
company in the ordinary course of its business. Thus all
the factual conditions for raising statutory fiction created
by ss.2(6A)(e) and 12(IB) appeared to have been satisfied
in the instant case.
Mr. Sharma, however, contends that in order to attract
the statutory fiction one other essential condition is, that
the loan or advance must be outstanding at the end of the
previous year, and if the loan had ceased to exist owing to
repayment or otherwise before the end of the year-as in the
present case-the fiction cannot be invoked. In this connec-
tion, Counsel has again referred to the last limb of s. 108
(1) of the Commonwealth Income-tax Act, according to which,
the payment to a shareholder by way of advance or loan is to
be treated as a dividend paid by the Company on the last day
of the year of income of the Company in which the payment is
made.
It is urged that the principle in the last limb of sub-
section (1) of s. 108 of the Commonwealth Act should also be
read into. the Indian statute, It is maintained that the
omission of such words from ss. 2(6A) (e) and 12(lB) does
not show that the intendment of the Indian Legislature was
different. According to the Counsel what is implicit in s.
108(1) of the Commonwealth Act, is implicit in ss. 2(6A)(e)
and 12(1B) and the general scheme of the Act which re-
quires that the assessment is to be made on the basis of
total income of the whole previous year. Such a view
concludes Mr. Sharma, would also be in consonance with
reason and justice.
We have given anxious thought to the persuasive argu-
ments of Mr. Sharma. His arguments, if accepted, will
certainly soften the rigour of this extremely drastic provi-
sion and bring it more in conformity with logic and equity.
But the language of ss. 2(6A) (e) and 12(1B) is clear and
unambiguous. There is no scope for importing into the
statute words which are not there. Such importation would
be, not to construe, but to amend the statute. Even if
there be a casus omissus, the defect can be remedied only by
legislation and not by judicial interpretation.
709
To us, there appears no justification to depart from the
normal rule of construction according to which the intention
of the legislature is primarily to be gathered from the
words used in the statute. It will be well to recall the
words of Rowlatt J. in Cape Brandy Syndicase v. I.R.C.(1) at
p. 71, that "in a taxing Act one has to look merely at what
is clearly said. There is no room for any intendment.
There is no equity about a tax. There is no. presumption
as to a tax. nothing is to be read in, nothing is to be
implied. One can only look fairly at the language used".
Once it is shown that the case of the assessee comes within
the letter of the law, he must be taxed, however great the
hardship may appear to. the judicial mind to be.
In our opinion, the Indian Legislature has deliberately
omitted to use in ss. 2(6A)(e) and 12(lB) words analogous to
those in the last limb of sub-section (1) of s. 108 of the
Commonwealth Act. When Sections 2(6A) (e) and 12(lB) were
inserted by the Finance Act, 1955, Parliament must have been
aware of the provision contained in s. 108 of the Common-
wealth Act. In spite of such awareness, Parliament has
not thought it fit to borrow whole hog what is said in s.
108 (1 ) of the Commonwealth Act. So far as the last limb
of s. 108(1) is concerned, our Parliament imported only a
very restricted version and incorporated the same as
the ’fifth condition’ in sub-s. (lB) of s. 12 to the
effect, that the "payment deemed as dividend shall be treat-
ed as a dividend received by him in the previous year
relevant to the assessment year ending on the 31st day of
March, 1956 if such loan or advance remains outstanding on
the last day of such previous year". The word "such" pre-
fixed to the "previous year" shows that the application of
this clause is confined to the assessment year ending on
31-3-1956. In the instant case we are not concerned with the
assessment year ending on 31-3-56. This highlights the fact
that the Legislature has deliberately not made the subsist-
ence of the loan or advance, or its being outstanding on the
last date of the previous year relevant to the assessment
year, a prerequisite for raising the statutory fiction. In
other words, even if the loan or advance ceases to be
outstanding at the end of the previous year, it can still be
deemed as a ’dividend’ if the other four conditions factual-
ly exist, to the extent of the accumulated profits possessed
by the Company.
At the commencement of this judgment we have noticed
some general principles, one of which is, that the previous
year is the unit of time on which the assessment is based
(s. 3). As the taxability of an income is related to its
receipt or accrual in the previous year, the moment a
dividend is received whether it is actual dividend declared
by the company or is a deemed dividend, income taxable under
the residuary head, "income from other sources", arises.
The charge being on accrual or receipt the statutory fiction
created by s. 2(6A)(e) and s.12(IB) would come into opera-
tion at the time of the payment by way of advance or loan,
provided the other conditions are satisfied.
(1) (1921)1,K.B. 64 atp. 71.
710
We do not propose to examine the soundness or otherwise
of the illustrations given by Mr. Sharma since they are
founded on assumed facts which do not exist in the present
case.
For the foregoing reasons we would answer the question
posed in favour of the Revenue and dismiss this appeal with
costs.
P.B.R. Appeal dismissed.
711