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K. Sreedharan v. Commissioner Of Income-Tax And Another

Kerala High Court

Jun 24, 1992

Judgment

Subsequent
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Structured Summary of the Opinion (K.A. Nayar, J.)

Factual and Procedural Background

For the assessment year 1984–85 the petitioner was assessed to income-tax by an assessment order (Exhibit P-1). The Income-tax Officer made additions to the petitioner's income as follows: (a) deemed dividend under section 2(22)(e) — Rs. 1,20,000; (b) addition for insufficient drawings — Rs. 10,928; (c) unexplained investment in Ramananda Textiles — Rs. 10,000; and (d) 4/5ths share of agricultural income of minor sons and wife — Rs. 11,260.

The petitioner filed a revision against the assessment; the revisional authority issued Exhibit P-2. Exhibit P-2 accepted the petitioner's claim to exclude the addition for the 4/5ths share of agricultural income but rejected the petitioner's contentions in respect of (a), (b) and (c). The petitioner filed the present writ petition challenging Exhibit P-2. The addition for insufficient drawings was not challenged before the court; the petitioner's challenge was limited to the additions characterized as deemed dividend (Rs. 1,20,000) and the unexplained investment (Rs. 10,000).

Legal Issues Presented

Whether the sum of Rs. 1,20,000 received by the petitioner on March 26, 1984 from the private limited company fell within the definition of "deemed dividend" under section 2(22)(e) of the Income-tax Act (i.e., whether it was a loan or advance by the company to a shareholder substantially interested in the company).
Whether the petitioner could, for the first time before the writ court, contend that a recorded withdrawal date (July 23, 1983) was a clerical mistake and ought to be treated as July 6, 1983, so as to avoid the addition of Rs. 10,000 as unexplained investment.

Arguments of the Parties

Petitioner's Arguments

As to the unexplained investment (Rs. 10,000): The petitioner said the amount was invested in a sister concern and that the withdrawal from M/s Sreedharan and Co. Ltd. was on July 6, 1983 (not July 23, 1983), and that the July 23 date was a clerical mistake.
As to the deemed dividend (Rs. 1,20,000): The petitioner contended that he had availed a loan of Rs. 2,57,250 from Syndicate Bank on March 2, 1984 which was paid to the company on the same day (thus constituting a loan from the petitioner to the company). The Rs. 1,20,000 received on March 26, 1984 was, he said, repayment (part-payment) of that earlier loan and therefore not a loan or advance by the company to him within section 2(22)(e).

Respondent / Revisional Authority's Findings

As to the unexplained investment: The revisional authority found the investment date to be July 6, 1983 but the withdrawal date to be July 23, 1983 and therefore rejected the explanation offered by the petitioner.
As to the deemed dividend: The revisional authority concluded, on verification, that the Rs. 1,20,000 was actually an advance given by the company. The revisional authority sought the petitioner's bank account to verify whether the petitioner had availed a bank loan and advanced the proceeds to the company. The revisional authority also relied on an extract from a letter dated February 15, 1988 from the petitioner which stated that the Rs. 1,20,000 returned by Sreedharan and Co. Ltd. on March 26, 1984 was paid onward by the petitioner for income-tax and other payments; on that basis the revisional authority concluded the amount was for the purpose of income-tax payment and treated it as an advance from the company.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court addressed each challenged addition by analysing the decision-making recorded in Exhibit P-2 rather than deciding disputed factual questions itself.

On the unexplained investment (Rs. 10,000): The court noted that the petitioner's contention that the withdrawal date recorded as July 23, 1983 was a clerical mistake (and should have been July 6, 1983) was raised for the first time before the writ court and had not been put before the Income-tax Officer or the revisional authority. The court held that such a contention could not be raised for the first time in the writ petition; accordingly, there was no basis to interfere with Exhibit P-2 insofar as it rejected the petitioner's explanation and directed the addition of Rs. 10,000 as income from other sources.

On the deemed dividend (Rs. 1,20,000) under section 2(22)(e) (as described in the opinion: any payment by a private limited company by way of advance or loan to a shareholder substantially interested will be deemed dividend): the court identified the central question as whether the Rs. 1,20,000 received on March 26, 1984 was a loan or advance by the company (and hence a deemed dividend) or was repayment to the petitioner of funds earlier advanced by him to the company.

The court examined the revisional authority's reasoning: the revisional authority had asserted that on verification the amount was an advance by the company and had requested production of the petitioner's bank account to check the bank loan and the alleged earlier advance to the company. The revisional authority also relied on the petitioner's letter of February 15, 1988, which described the subsequent disposition of the Rs. 1,20,000 (payment of income-tax and transfer to a sister concern).

The court emphasised that the relevant inquiry was whether there was evidence before the revisional authority to conclude that the petitioner had availed of a bank loan and had advanced that loan to the company. The opinion states there is no recordation that the bank account was not produced and it is not stated that there was no evidence before the revisional authority to support its conclusion that the petitioner had availed a bank loan and advanced the proceeds to the company. On that basis the court found fault with Exhibit P-2's rejection of the petitioner's claim and quashed Exhibit P-2 insofar as it rejected the petitioner's contention regarding the Rs. 1,20,000.

The court directed that the first respondent should take on file the petitioner's revision petition (No. RP. 25.S. 264/87-88.CIT(C)) and dispose of the petitioner's claim for exclusion of Rs. 1,20,000 after giving the petitioner an opportunity of being heard.

Holding and Implications

Holding: The original petition was allowed to the extent that Exhibit P-2 was quashed insofar as it rejected the petitioner's contention in respect of Rs. 1,20,000 added as deemed dividend for the assessment year 1984–85. The court refused to interfere with Exhibit P-2 insofar as it rejected the petitioner's contention regarding the unexplained investment of Rs. 10,000. The petition was otherwise disposed of in accordance with these directions.

Implications and immediate consequences:

The revisional order Exhibit P-2 remains intact in respect of the unexplained investment (Rs. 10,000) and the addition for insufficient drawings (which was not challenged before the court).
The portion of Exhibit P-2 that rejected the petitioner's claim concerning Rs. 1,20,000 (treated as deemed dividend under section 2(22)(e)) has been quashed; the first respondent is directed to re-adjudicate the petitioner's revision petition No. RP. 25.S. 264/87-88.CIT(C) after giving the petitioner an opportunity to be heard.
No broader legal precedent is stated to have been laid down by the court in this opinion; the decision effects the parties' rights by remitting the deemed-dividend issue for fresh consideration with a hearing.

Show all summary ...

K.A Nayar, J.:— For the assessment year 1984–85, the petitioner was assessed to income-tax. Exhibit P-1 is the assessment order. In computing the income of the petitioner, the Income-tax Officer made the following additions to the petitioner's income:

(Rs.) (a) Deemed dividend under section 2(22)(e) of the Income-tax Act. 1,20,000 (b) Addition for insufficient drawings 10,928 (c) Unexplained investment in Ramananda Textiles 10,000 (d) 4/5ths share of agricultural income of minor sons and wife 11,260

2. Aggrieved by the assessment order, the petitioner filed a revision.

3. Exhibit P-2 is the revisional order. The revisional authority accepted the claim of the petitioner to exclude the addition of 4/5ths share of agricultural income of minor sons and wife. The revisional authority has not accepted the contention of the petitioner in respect of the addition to the petitioner's income under the heads (a), (b) and (c) mentioned above. The petitioner, therefore, filed this writ petition challenging exhibit P-2 revisional order. The addition on account of insufficient drawings has not been challenged before me. The only challenge is on account of addition of deemed dividend and unexplained investment. Regarding the unexplained investment, the contention of the assessee was that a sum of Rs. 10,000 was invested in a sister concern and the amount was withdrawn on July 23, 1983, from the private limited company, namely, M/s. Sreedharan and Co. Ltd. This argument was considered by the first respondent and found that the investment was on July 6, 1983, while the withdrawal from the company was on July 23, 1983. The explanation, therefore, cannot be accepted. For the first time, it was contended before me that the withdrawal on July 23, 1983, was a mistake for July 6, 1983. It is stated to be a clerical mistake. Such a contention cannot be raised for the first time in this writ petition as there was no such contention before the Income-tax Officer or even before the revisional authority, the first respondent. Therefore, exhibit P-2 in so far as rejecting the contention of the petitioner under the unexplained investment and directing the addition of Rs. 10,000 as income from other sources is not liable to be interfered with.

4. The other main contention relates to the addition of deemed dividend under section 2(22)(e) of the Income-tax Act. Under section 2(22)(e), any payment by a private limited company, not being a company in which the public are substantially interested by way of advance or loan to a shareholder who is also substantially interested will be deemed as a dividend. Therefore, the question is whether the amount of Rs. 1,20,000 received by the petitioner on March 26, 1984, from the company is a loan or advance, coming within the definition of deemed dividend. The petitioner is the managing director and the company is a private limited company and section 2(22)(e) is admittedly attracted in a case provided what is paid to the managing director by the company on March 26, 1984, to be characterised as a loan or advance. The petitioner is contention was that he has not taken any loan or advance from the company. He had availed of a loan of Rs. 2,57,250 from Syndicate Bank on March 2, 1984, which was paid to the company on the same day and the company acknowledged the receipt of the said amount. That was a loan from the managing director to the company. That loan was partly repaid on March 26, 1984. The amount of Rs. 1,20,000 received on March 26, 1984, by the petitioner is in repayment of the said loan of Rs. 2,57,250 earlier advanced by the petitioner to the company. That contention may be right or incorrect. I am concerned only with the decision-making process evidenced by exhibit P-2. The revisional authority says that, on verification,) it was noticed that the amount of Rs. 1,20,000 was actually an advance given by the company and, thereafter, he further added that the assessee was asked to produce a copy of the bank account from where loan was availed and advanced to the company. Thereafter, he extracted a portion from the letter dated February 15, 1988, sent by the assessee to the officer by way of clarification which reads as under : “the amount of Rs. 1,20,000 was returned by Sreedharan and Co. Ltd., on March 26, 1984, to me which was then paid to K. Sreedharan and Co., on the same day, which was in turn utilised to pay income-tax payment of Rs. 1,00,000 for the assessment year 1979–80 in my personal case, and Rs. 20,000 was paid to Cannanore Central Oil Mills, another sister concern.” Thereafter, the first respondent concluded that it is clear that the amount of Rs. 1,20,000 received from Sreedharan and Co. Ltd. was only for the purpose of income-tax payment. The purpose for which the money has been spent by the assessee is not the main concern. The question before the first respondent was whether the amount of Rs. 1,20,000 was a loan or advance. The explanation of the assessee was that it was not a loan or advance, but only a repayment of part-payment of the loan earlier advanced by the assessee to the company. In order to verify that the respondents would have called for the bank account of the assessee and the assessee may not have furnished the bank account. There is no statement that the bank account has not been produced and it is also not stated that there is no evidence before the first respondent, or the revisional authority to come to the conclusion that the petitioner availed of a loan from any bank and that the amount has been given by way of loan to the private limited company. Therefore, exhibit P-2 in so far as it rejects the claim of the petitioner called for interference. I, therefore, quash exhibit P-2 in so far as it rejects the contention of the petitioner in respect of Rs. 1,20,000 added by the Income-tax Officer as deemed dividend in the income of the petitioner for the year 1984–85. The first respondent will take on file the revision petition of the petitioner, No. RP. 25.S. 264/87-88.CIT(C) and dispose of the claim of the petitioner for exclusion of the income, namely, Rs. 1,20,000 after giving an opportunity of being heard to the petitioner.

5. Original petition is allowed as above.