Important point
Statutory definition of dividend given in Section 2(22)(e) of the Income Tax Act would apply to ‘dividend’ as found in Section 104 and as such loan advanced to shareholder out of accumulated profit of Company would amount to payment of dividend within meaning of Section 104 also.

Headnote:Income Tax Act, 1961-Section 104 read with Section 2(22)(e)-Additional tax on undistributed income of certain Companies-Statutory definition of dividend given under Section 2(22)(e) applicable to word ‘dividend’ as found in Section 104 also-Any loan advanced to shareholder out of accumulated profits of Company would amount to payment of dividend within meaning of Section 104 also-Object of Section 2(22)(e) and Section 104 is one and same-In either case object is to see that evasion of super-tax is prevented.
       Held : A perusal of Section 2(22)(e) shows that for the purpose of the Act, any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend. Since the Act has not provided for any other definition of the word “dividend” except the ones enumerated in Section 2(22) of the Act, it should be construed that this definition would be applicable to all provisions which contain the term “dividend” in the Act. (Para 9)
       The object of the Legislature in enacting Section 2(22)(e) and Section 104 of the 1961 Act is one and the same, namely, to prevent the escapement of super-tax by some shareholder and/or companies. While under Section 2(22)(e) of the Act, by a deeming provision, the Legislature has made payment of any advance or loan to a shareholder a deemed dividend so as to subject such payments to the levy of super-tax in the hands of the receiver of the said amount, Section 104 of the Act provides for levy of super-tax on companies which attempt to avoid payment of super-tax by its shareholders by not distributing its surplus profits and income. In either case, the object of the Act is to see that evasion of super-tax is prevented. Thus it is clear that the Act did not contemplate the levying of super-tax twice, namely, once in the hands of the shareholder who has received it as a deemed dividend and again in the hands of the Company which, according to the assessing authority, has failed to declare the dividend. (Para 11)
       It is true that the two Sections referred to above have used two different verbs but that by itself, in our opinion, would not take away the effect of the deeming provision found in the definition clause. If actually the Legislature wanted the deeming clause not to be made applicable to the provisions of Section 104 of the 1961 Act then it would have said so in categorical terms in the Statute, in the absence of which the statutory definition given under Sections 2(22)(e) of 1961 Act, in our view, will have to be applied to the word “dividend’ as found in Section 104 also. (Para 12)
       In the instant case, during the year under reference, the company had paid a sum of Rs. 1,23,053/- to its Managing Director as a loan and the balance amount left with the company was admittedly not sufficient to distribute as dividend among other shareholders. Therefore, the company had contended that in view of the fact that under Section 2(22)(e) of the Income Tax Act, 1961, payment of any advance or loan to a shareholder being a deemed payment of dividend, there was no case for invoking the provision of Section 104 of the Act. The stand of the assessee was accepted. (Para 7)

Judgment

Santosh Hegde, J.-This appeal from the judgment and order of the High Court of Karnataka dated 13.12.1989 made in I.T.R.C. No. 21/82.

2. The following question was referred to the High Court for its opinion under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) :

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provision of Section 104 of the Income-tax Act, 1961 was applicable to the instant case for the assessment year 1975-76?”

3. The facts leading to the abovesaid reference are as follows :

The respondent-Company is a trading company in which the public are not substantially interested. The assessing authority assessed the income of the Company for the assessment year 1975-76 at Rs. 6,27,430/- holding that the Company did not distribute any dividend to its shareholders. The Income Tax Officer initiated proceedings under Section 104 of the Act, demanding additional income-tax of Rs. 31,434/-.

Against the said assessment order, the respondent-Company preferred an appeal before the Appellate Assistant Commissioner. Having failed before the said Authority, a further appeal was preferred before the Appellate Tribunal which, in turn, rejected the said appeal and on a prayer made by the Company, the Tribunal referred the abovenoted question for opinion of the High Court.

4. Before the High Court, the assessee relied upon a judgment of the Calcutta High Court in Moore Avenue Properties (P) Ltd. v. CIT1 which took the view that in view of the deemed definition given in Section 2(22)(e) of the Act, any loan advanced to a shareholder out of the accumulated profits of the Company in which public do not have a substantial interest, would amount to payment of dividend. Hence, Section 104 of the Act would not be attracted.

5. Per contra, the Revenue relied upon a judgment of the Gujarat High Court in the case of CIT v. Bombay Mineral Supply Co. (P) Ltd.2 wherein it was held that payment of a loan which is deemed as a dividend cannot be construed as distribution of dividend within the meaning of Section 23A of the 1922 Act (equivalent to Section 104 of the Act). The Karnataka High Court preferred to rely upon the Calcutta High Court judgment and allowed the reference, holding in favour of the assessee. Now the Revenue is in appeal before us.

6. It was contended on behalf of the Revenue in this appeal that even if it is to be that payment of a loan by a Company is to be deemed to be a dividend, such payment cannot be treated as distribution of dividend as contemplated in Section 104 of the Act of avoiding the levy of super-tax. The stand of the Revenue before us is that for the purpose of avoiding the levy under Section 104 of the Act, there should be in fact distribution of dividend as such in favour of all the shareholders and a deemed payment of dividend is not what is contemplated under the said Section. It was also contended before us that the view taken by the Calcutta High Court (supra) does not lay down the correct position in law and, on the contrary, the view taken by the Gujarat High Court (supra) should be accepted.

7. In the instant case, during the year under reference, the company had paid a sum of Rs. 1,23,053/- to its Managing Director as a loan and the balance amount left with the company was admittedly not sufficient to distribute as dividend among other shareholders. Therefore, the company had contended that in view of the fact that under Section 2(22)(e) of the Income Tax Act, 1961, payment of any advance or loan to a shareholder being a deemed payment of dividend, there was no case for invoking the provision of Section 104 of the Act. As stated above, this contention did not find favour with the assessing and other authorities except the High Court.

8. The question, therefore, is whether the company concerned has for the relevant year, distributed its surplus income or not, so as to attract or not to attract the rigour of

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1999 Supreme(SC) 329

Important pointStatutory definition of dividend given in Section 2(22)(e) of the Income Tax Act would apply to ‘dividend’ as found in Section 104 and as such loan advanced to shareholder out of accumulated profit of Company would amount to payment of dividend within meaning of Section 104 also.

Cases Referred (2)