G.T Nanavati, J.:— Income-tax Reference No. 360 of 1980 is made at the instance of the assessee and the other reference is made at the instance of the Revenue. The questions which are referred to this court under section 256(1) of the Income-tax Act, 1961, are as under:

At the instance of the assessee:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 5,21,964 was deemed dividend in the hands of the assessee under section 2(22)(e) of the Income-tax Act, 1961?”

At the instance of the Revenue:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal erred in law in holding that the provisions of section 194 of the Act are not applicable to the instant case and therefore, the assessee was not liable to pay any interest under section 201(1A) of the Act?”

2. One Dahyabhai Motibhai Amin also known as Dahyabhai Motibhai Manasvi, the assessee in Income-tax Reference No. 360 of 1980, and his brother, Purshottamdas Amin, were running a flour mill in partnership in the early 1940s. This firm was dissolved and the business was taken over by a new partnership firm consisting of Rasiklal D. Amin and Jashbhai P. Amin. In 1959, Jashbhai retired and, therefore, Rasiklal carried on the said business as sole proprietor. In 1962, the business was converted into a private limited company known as Kohinoor Flour Mills Private Limited. It appears that 3,690 shares were allotted to Rasiklal and 1,851 shares were allotted to Manasvi. It also appears that Rasiklal was residing outside India and the affairs of the company were managed by Manasvi. Some time after the formation of the company, Rasiklal returned to India and found that the company was mismanaged. He, therefore, filed a petition in this court alleging mismanagement and claimed that management should be handed over to him as he was the major shareholder. Jashbhai, who was earlier doing the business with Rasiklal, also filed a suit against Rasiklal on the ground that Rs. 6 lakhs were payable to him but Rasiklal had failed to discharge that obligation. Manasvi, the father of Rasiklal, also filed a suit against Rasiklal claiming that Rasiklal was merely a nominee of Manasvi and his joint family and the shares which stood in the name of Rasiklal really belonged to the joint family. Ultimately, there was a compromise between the parties and a consent order was obtained from this court. Because of that, Dahyabhai Motibhai, that is, Manasvi, and his family had to pay Rs. 6 lakhs to Rasiklal for relinquishment of his right, title and interest in the undivided properties of Manasvi, that is, Dahyabhai Motibhai Amin. The said amount was to be paid immediately. It appears that as Manasvi did not have that much cash with him, it was further agreed that in order to enable Manasvi and his other sons to pay to Rasiklal the said amount of Rs. 6 lakhs, the company, that is, Kohinoor Flour Mills Private Limited, should give Rs. 6 lakhs directly to Rasiklal and other arbitrators who had earlier given an award in this behalf and debit the same by way of loan to Manasvi, that is, Dahyabhai Motibhai Amin. This happened during the year 1967–68. Therefore, during the assessment proceedings for the year 1968–69, a question arose as to whether the said amount of Rs. 6 lakhs be treated as deemed dividend as per section 2(22)(e) of the Act. The Income-tax Officer held that the aforesaid amount of Rs. 6,02,900 was deemed dividend in the hands of Manasvi in view of the said settlement and in view of the fact that the said amount was advanced by the company to its shareholder. In the appeal filed by the assessee, the Appellate Assistant Commissioner set aside the order passed by the Income-tax Officer and restored the matter to his file for a fresh decision. The Income-tax Officer again held that the said amount of Rs. 6 lakhs was a loan by the company to its shareholder Manasvi, and, therefore, the same had to be regarded as deemed dividend. He, however, found that the total accumulated profits of the company were Rs. 5,21,964 and, therefore, the said amount was treated as deemed income of the assessee. The appeal to the Appellate Assistant Commissioner failed and, therefore, the assessee appealed to the Tribunal.

3. While holding the amount of Rs. 5,21,964 as deemed dividend and income of the assessee, the Income-tax Officer also initiated proceedings against the company, viz. Kohinoor Flour Mills Private Limited, under section 194 read with section 201 of the Act for its failure to deduct tax while making the said payment. The Income-tax Officer found that the assessee-company was a defaulter and, therefore, directed the company to pay interest amounting to Rs. 1,22,828 for the said default. The company preferred an appeal to the Appellate Assistant Commissioner who upheld the order passed by the Income-tax Officer and dismissed the appeal. The company then preferred an appeal to the Tribunal.

4. In the appeal filed by Dahyabhai Motibhai Amin, the Tribunal held that the purpose or the object for which the loan was advanced by the company to its shareholder, Dahyabhai, was really irrelevant and, therefore, the said amount of loan was rightly treated by the Income-tax Officer and the Appellate Assistant Commissioner as deemed dividend in the hands of the assessee, Dahyabhai. The Tribunal, therefore, dismissed the appeal filed by Dahyabhai. The appeal filed by the company was allowed by the Tribunal. One member of the Tribunal held that section 194 cannot be interpreted to cover cases where the advance is given or the loan is made to a shareholder of the company in the middle of the accounting year. The other member of the Tribunal was of the view that payment of Rs. 6 lakhs made by the company to Rasiklal and two arbitrators by debiting the said amount as loan to Manasvi, that is, Dahyabhai Amin, was an integral part of the arrangement arrived at between the parties and the payment was made under an order of the High Court and not voluntarily by the company and, therefore, section 194 read with section 2(22)(e) did not apply to the facts of the case.

5. As the assessee was not satisfied with the decision of the Tribunal as regards the said amount being treated as dividend in the hands of the assessee and as the Revenue was not satisfied with the decision of the Tribunal that section 194 did not apply to the facts of the case, both of them applied to the Tribunal for referring the questions raised by them to this court.

6. The Tribunal thought it fit to refer to this court the question's which are stated above

7. What is contended by learned counsel for the assessee was that this is hot a case where payment was made directly by the company to its shareholder as the payment was made by the company to Rasiklal and two arbitrators and not to the assessee, Dahyabhai Amin. He submitted that for that reason, this should be treated as a case where payment was made by the company on behalf of and for the benefit of its shareholder. He also submitted that the said payment was made because of an award passed by the arbitrators and a consent order passed by this court in the company petition and the connected suits. Moreover, the said payment was made to enable Dahyabhai and his other three sons to discharge their liability. Thus, the advance or loan, if at all it can be regarded as an advance or loan or payment falling in the latter part of section 194, the said advance or loan was made to all the four persons or it was a payment made on behalf of the four persons and, therefore, the whole amount of Rs. 5,21,964 should not have been treated as income in the hands of the assessee and at the highest, only a proportionate amount could have been treated as his income. Though Mr. Shah is right on the facts in that the said payment was made in order to enable Dahyabhai and his three sons to discharge their liability to Rasiklal and the said payment was not made to them but directly to Rasiklal and the arbitrators, the contention raised by him that the said amount cannot be regarded as an advance or loan to Dahyabhai Amin cannot be accepted. As stated earlier, the dispute between Dahyabhai and his three sons on the one hand and Rasiklal, the other son of Dahyabhai, on the other hand, was referred to the arbitrators. In the award given by the arbitrators, Dahyabhai Motibhai Amin and his family were held liable to pay Rs. 6 lakhs to Rasiklal for relinquishment of his right, title and interest in the undivided properties of Dahyabhai Amin. The said amount was to be paid immediately after necessary orders in that behalf were obtained from this court. A provision for obtaining necessary orders from this court was made because at that time, the company petition and the connected suits were pending in this court. On the basis of this award and consistently with it, the parties to the proceedings in Company Petition No. 10 of 1964 and other connected suits, prepared the consent terms and filed them in this court. On the basis of the said consent terms, this court had passed an order. In the consent terms, after referring to the obligation of Dahyabhai Amin and his other three sons, a provision was made that “in order to enable respondents Nos. 2,-3, 4 and 5 to pay to the petitioner and the arbitrators, Shri Harshadbhai M. Patel and Shri Indubhai C. Patel, the sum of Rs. 6,00,000 referred to in para (1) above, the company shall give Rs. 6,00,000 to the petitioner and the arbitrators, Shri Harshadbhai M. Patel and Shri Indubhai C. Patel, debiting the same by way of a loan to respondent No. 2”. This provision was made by way of an overall settlement and arrangement between the parties. The nature of payment of Rs. 6,00,000 becomes very clear from clause 6 of the consent order.. Though the liability to pay Rs. 6,00,000 was of Dahyabhai Amin and his other three sons, the payment of Rs. 6,00,000 by the company was to be treated as a loan to Dahyabhai. If the company wanted to treat the said amount as loan to all the four persons including Dahyabhai, then clause 6 would have been worded, in a different manner. Similarly, if the said payment was to be regarded as payment on behalf of or for the benefit of the four persons then also it would have been worded in a different manner. After stating the purpose for which the said amount was given by the company, it was very clearly provided that the whole amount of Rs. 6,00,000 was to be treated as loan to Dahyabhai Amin. In view of this clear expression of the intention, it is difficult to appreciate how it can be urged that the said payment by the company cannot be regarded as loan to its shareholder, viz., Dahyabhai. Merely because a debit entry in this behalf was made after making payment to Rasiklal and the arbitrators, it cannot be said that it was not a loan given to Dahyabhai. Thus, the Tribunal was right in holding that the purpose or object for which the said amount was paid and the fact that the necessary entry in the account books was made some days after making the payment, were not relevant as the parties had made their intention clear by expressly providing that the said payment was to be treated as loan to Dahyabhai. It was in order to secure that the said amount of loan by the company to Dahyabhai was not utilised by Dahyabhai in any other manner that the purpose for which the said amount was given to Dahyabhai was made clear and it was also provided that the said amount should be paid directly by the company to Rasiklal and the two arbitrators. We are, therefore, of the opinion that the said payment of Rs. 6 lakhs by the company was rightly treated by the Tribunal and the authorities below as loan by the company to its shareholder, Dahyabhai. It was, therefore, rightly treated as deemed dividend and thus income in the hands of the assessee-Dahyabhai. It is also difficult to appreciate how the Tribunal after coming to the conclusion that “we have to proceed on the basis that payments are deemed dividend within the meaning of section 2(22)(e) and section 194”, could have taken the view that the company cannot be said to have committed a default contemplated by section 194 and, was, therefore, not liable to pay interest. We fail to appreciate how merely because payment of Rs. 6 lakhs by the company was an integral part of the arrangement between the parties and merely because an order was passed by this court in this behalf in view of the compromise arrived at between the parties, the nature of payment by the company to Dahyabhai would change its character. As stated earlier, this court passed the order because the parties had arrived at a compromise. The order was passed as per the consent terms and all the parties (including the company and Dahyabhai Amin) had agreed that the amount of Rs. 6 lakhs was to be paid by the company and that the said amount be treated as loan to Dahyabhai. This was thus a voluntary payment made by the company to its shareholder. Therefore, the reasoning given by one of the members of the Tribunal for holding that section 194 read with section 2(22)(e) had no application to the facts of the case, is obviously erroneous. In our opinion, the Tribunal was also wrong in holding that section 194 can have application only if the principal officer of the company makes payment to its shareholder at the instance of its shareholder. This would amount to adding words in the section and limiting its scope without any justification. Such interpretation would also defeat the very object of the section. By manipulating and by making a show that the company had given an advance or loan to its shareholder on its own and not at the instance of the shareholder, a shareholder can evade liability to pay tax. In our opinion, the Tribunal totally lost sight of this aspect and, therefore, erroneously held that section 194 can apply only in those cases where the company gives a loan or advance to its shareholder at the instance of the shareholder. It is also not possible to agree with the reasoning given by the other member of the Tribunal. In our opinion, the situations pointed out by the Tribunal for deducting the amount of tax when advance or loan is made by the company to a shareholder in the middle of the year, are more imaginary than real. If payment which is made by the company to a shareholder is in the nature of advance or loan or if the payment is made to a third party on behalf of a shareholder or for his benefit, then there should not be any difficulty in treating that payment as dividend in the hands of the shareholder and deducting tax therefrom. If at the end of the accounting year, the picture regarding profit and loss appears to be quite different, the company or the shareholder will have other remedies available to it or him. If the view expressed by the Tribunal is accepted, then that would lead to a situation where even if a company declares interim dividend, it will be under no obligation to deduct tax. That could not have been the intention of the Legislature and the language of the section does not justify taking such a view.

8. We are, therefore, of the opinion that the Tribunal was wrong in holding that section 194 cannot have any application in a case where advance or loan is given by the company to its shareholders in the middle of the accounting year or where such loan or advance is given not voluntarily and at the instance of the shareholder but because of an order of the court.

9. We, therefore, answer the question referred to this court in Income-tax Reference No. 360 Of 1980, in the affirmative, that is, against the assessee and in favour of the Revenue and the question referred in Income-tax Reference No. 347 of 1980 in the affirmative, that is, in favour of the Revenue and against the assessee. References are disposed of accordingly. No order as to costs in each one of them.