The payment by a company to a third party for the benefit of a shareholder is deemed dividend in the hands of the shareholder under Section 2(22)(e) of the Income-tax Act, 1961 only if the payment is meant for the benefit of the shareholder.

( 1 ) THIS reference arises out of the assessment of Nandlal Kanoria, the assessee, to income-tax in the assessment year 1969-70 for which the previous year ended on the 31st March, 1969. The relevant facts found and/or admitted are shortly as follows :

( 2 ) THE assessee is an individual. A large number of shares in North Bihar Sugar Mills Ltd. (hereinafter referred to as "the company") were owned by the assessee and the members of his family and they had substantial interest in the company within the meaning of Section 2 (32) of the I. T. Act, 1961.

( 3 ) DURING the relevant period, the assessee obtained two loans from a sole proprietary concern, Indira and Co. , respectively, of Rs. 75,000 on the 30th July, 1968, and of Rs. 2,00,000 on the 2nd September, 1968. At the assessment, the ITO brought on record a certificate issued by Indira and C6. to the effect that the said sum of Rs. 75,000 had been paid out of a loan received 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 and 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 and 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 and Co. out of which a cheque for Rs. 2,00,000 was issued by Indira and 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 and Co. and the corresponding repayment by Indira and 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 Section 2 (22) of the I. T. Act, 1961, in the hands of the assessee. Deducting the gross dividend actually received by the assessee from the company, the ITO added back an amount of Rs. 1,73,750 as deemed dividend to the income of the assessee.

( 4 ) BEING aggrieved, the assessee preferred an appeal. The AAC found that the payments made by the company to Indira and Co. were made on behalf of the former's shareholders and that such payments were solely for the individual benefit of the assessee. The AAC also found that the business of the company was manufacture and sale of sugar and molasses and not money-lending for which it had no licence and as such the assessee could not claim the statutory exemption provided by the said s. 2 (22) of the Act and upheld the assessment.

( 5 ) THE assessee preferred a further appeal before the Income-tax Appellate Tribunal and contended that there was no loan or advance directly by the company to the assessee. It was contended further that the first loan had been granted by the company to Indira and Co. in the ordinary course of its business. Funds from different sources had blended in the hands of Indira and Co. as recorded in its accounts and as such payments by the company to Indira and Co. were not for the benefit of the assessee. The loans to the assessee were made by Indira and Co. , and it could not be said that Indira and Co. received any amount from the company for the benefit of the assessee.

( 6 ) IT was contended on behalf of the revenue on the other hand that the real intention of the assessee and Indira and Co. would be evident from the fact that against or in respect of the sum of Rs, 75,000 received from the company, Indira and Co. issued a cheque for the same amount in favour of the assessee. It was submitted that Indira and Co, was the conduit pipe through which the loan came from the company to the assessee and, therefore,