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Commissioner Of Income Tax v. Jamnadas Sriniwas Private Ltd.

Calcutta High Court

Jun 25, 1969

Judgment

Subsequent
References

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Structured Summary of the Opinion

Factual and Procedural Background

The assessee is a private limited company. During the financial year 1905-56 (the opinion also refers to the financial year 1955-56 in other places), which was the assessee's accounting year for the assessment year 1956-57, the assessee advanced a sum of Rs. 27,506 to Sri Sriniwas Fatehpuria, a shareholder and a director of the company.

The original assessment for 1956-57 was made on 13 February 1958. While assessing the following year (1957-58) the Income-tax Officer discovered the loan/advance to the shareholder and, invoking Section 34 of the Indian Income-tax Act, 1922, treated the sum of Rs. 27,506 as a dividend paid during the financial year 1955-56 because accumulated profits were found sufficient to cover the advance. On that basis the Income-tax Officer reduced the corporation tax rebate and charged additional corporation tax for the assessment year 1956-57.

On appeal the Appellate Assistant Commissioner upheld the Income-tax Officer's treatment under Section 2(6A)(e) and Section 34, concluding that the advances represented excess credits over debits in the shareholder's account and therefore amounted to dividend. The Tribunal thereafter allowed the assessee's appeal: it held that the second proviso to paragraph D of Part II of the Finance Act, 1956 (which withdraws rebate where a company has "distributed to its shareholders during the previous year dividends in excess of six per cent. of its paid-up capital") applies to distributions to shareholders generally and does not cover a loan or advance to a solitary shareholder as a "distribution".

The Commissioner of Income-tax, by application under Section 66(1) of the Indian Income-tax Act, referred two questions to the court. The Tribunal also included a second question at the instance of the assessee.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956, did not authorise the withdrawal of a part of the rebate granted to the assessee in respect of any sum advanced by the assessee to any of its shareholders by way of a loan?
Whether, on the facts and in the circumstances of the case and on a correct interpretation of section 2(6A)(e), the amount of the loan taken by a shareholder to the extent of the accumulated profits of the company could be deemed to be dividend paid to that shareholder to the exclusion of the other shareholders?

Arguments of the Parties

Revenue's Arguments (as advanced by Mr. B. L. Pal)

Sub-clause (e) of Section 2(6A) was introduced to counter devices by privately controlled companies to evade tax by making advances or loans to shareholders. Therefore, the expression "distributed" in Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956 should be read to include the payments described in Section 2(6A)(e).
Unless loans/advances to shareholders are treated as distributions for the purpose of withdrawing rebate, privately controlled companies could improperly retain rebates the legislature did not intend them to have.
Mr. Pal relied on the Supreme Court decision in Navnit Lal C. Javeri v. K. K. Sen and on this Court's decision in Moore Avenue Properties Private Ltd. v. Commissioner of Income-tax to show why such loans or advances were included in the definition of "dividend" under Section 2(6A).

Assessee's Arguments (as recorded in the opinion)

The assessee (before the Tribunal) alternatively argued that at most the amount that could be deemed to be dividend out of the loan would be the shareholder's share in accumulated profits. It was asserted that total accumulated profits were Rs. 64,800 and the shareholder held 250 of 1,051 shares, so his share of accumulated profits (250/1,051 of Rs. 64,800) should limit any deemed dividend and therefore the rebate could only be reduced to the extent of that share.
The Tribunal did not accept this alternative contention on behalf of the assessee; in the court the assessee did not press the second referred question and the court declined to answer it as academic.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax (Supreme Court)	Referred to by counsel for the revenue to show why loans/advances to shareholders were included in the definition of "dividend" under Section 2(6A).	The court observed that this decision did not deal with the specific controversy before it and therefore it was unnecessary to consider the case for the disposition of the present questions.
Moore Avenue Properties Private Ltd. v. Commissioner of Income-tax, [1966] 59 I.T.R. 466 (this Court)	Referred to by counsel for the revenue in support of the argument about inclusion of certain payments within the definition of "dividend".	The court held that this decision did not address the precise issue under consideration and concluded it was unnecessary to deal with it for deciding the referred questions.

Court's Reasoning and Analysis

The court's analysis proceeded by close statutory interpretation of Section 2(6A) of the Indian Income-tax Act, 1922 and the second proviso to paragraph D of Part II of the Finance Act, 1956 (particularly Clause (b)).

Key points in the court's reasoning:

Section 2(6A) is an "all-inclusive" definition of "dividend" and contains five categories: the first four sub-clauses (a)–(d) refer to "distributions by a company" (each beginning with the words "any distribution by a company"), while sub-clause (c) and especially sub-clause (e) encompass certain payments by a company (including advances or loans to shareholders) to the extent of accumulated profits.
The Finance Act, 1956 provided explanations for paragraph D. Explanation (ii) to paragraph D of Part II of the Finance Act, 1956 states that the expression "dividend" shall be deemed to include any distribution included in the expression "dividend" in Clause (6A) of Section 2 of the Income-tax Act.
The court emphasized the linguistic and legal distinction between "distribution" and "payment": "distribution" implies division among several persons (an idea of apportionment among more than one person), whereas "payment" may be to a single person. Both terms were used in the earlier statute and retain different meanings unless there is a clear indication to equate them.
Because Explanation (ii) refers to "any distribution included in the expression 'dividend' in Clause (6A)" the court concluded that the Finance Act extended the meaning of "dividend" to include those items of Clause (6A) which are distributions, but it did not convert payments (such as loans to a single shareholder under Clause (e)) into "dividend distributed by a company" for the purposes of Clause (b) of the second proviso to paragraph D.
Consequently, although the loan/advance to Sri Sriniwas Fatehpuria is a "dividend" in terms of Section 2(6A)(e), it was not a "distribution" to shareholders within the meaning of Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956. Therefore the mechanism for reducing rebate set out in that proviso could not be applied to the single-shareholder loan in question.
The court expressly noted that the earlier-cited judicial decisions relied upon by the revenue did not address the specific controversy and thus were not necessary to decide the current matter.

Holding and Implications

Holding:

The court answered the first question in the affirmative and against the revenue. That is, the Tribunal was right in holding that Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956 did not authorise withdrawal of part of the rebate in respect of the sum advanced by the assessee to its shareholder by way of a loan.

The court declined to answer the second question (referred at the instance of the assessee) as it was academic in view of the answer to the first question and because the assessee's counsel did not press for an answer.

Implications / Consequences:

Direct effect on the parties: The order that reduced the corporation tax rebate on the basis that the loan constituted a distribution for the purposes of Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956 was not justified. The Tribunal's decision allowing the assessee's appeal (on that point) is affirmed.
Procedural consequence: The Commissioner of Income-tax is ordered to pay the costs of the reference.
The court indicated that it was not necessary to decide or to rely upon the two prior judicial decisions cited by the revenue for resolving the question; the opinion does not purport to lay down a broader precedent beyond the statutory construction applied in this case.

Judge: Sankar Prasad Mitra, J. (with agreement recorded at the end of the opinion).

Show all summary ...

1. The assessee is a private limited company. During the financial year 1905-56, which is the assessee's accounting year for the assessment year 1956-57, the assessee advanced a sum of Rs. 27,506 to Sri Sriniwas Fatehpuria, a shareholder and a director of the company. The original assessment for the year 1956-57 on the asscssee-company was made on the 13th February, 1958. Subsequently, in the course of the assessment for the year 1957-58, the Income-tax Officer discovered that the assessee had made the aforesaid loan to one of its shareholders and directors. Action was, therefore, taken by the Income-tax Officer under Section 34 of the Indian Income-tax Act, 1922, and as the Income-tax Officer found that the assessee-company had sufficient accumulated profits on the first day of the financial year 1955-56, to cover the advance of Rs. 27,506 aforesaid, he treated the aforesaid sum of Rs. 27,506 as dividend paid to Sri Sriniwas Fatchpuria during the financial year 1955-56. As a consequence of treating the sum of Rs. 27,506 as dividend paid by the assessee during the financial year 1955-56, the corporation tax rebate granted for the aforesaid year became liable to be further reduced, according to the Income-tax Officer. Therefore, the Income-tax Officer charged additional corporation tax on Rs. 5,157 in the order passed under Section 23(3)/34 for the assessment year 1956-57.

2. There was an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner found that during the relevant accounting year Srini was Fatehpuria held 250 out of the total issued shares of 1,051 of the assessee-company. On examining the account of Sri Sriniwas Fatehpuria with the assessee-company, the Appellate Assistant Commissioner found that an amount of Rs. 27,506 represented the excess of credits over debits in this account. The Appellate Assistant Commissioner, thererfore, held that the advances to Sri Fatehpuria amounting to Rs. 27,506 had been rightly considered by the Income-tax Officer as dividend in the hands of Sri Fatehpuria in view of the provisions of Section 2(6A)(e) of the Indian Income-tax Act, 1922. He, accordingly, upheld the order of the Income-tax Officer under Section 34 reducing the corporation tax rebate granted to the assessee in the original assessment.

3. There was a further appeal before the Tribunal. The Tribunal held that the withdrawal of rebate under the second proviso to paragraph D of Part II of the Finance Act, 1956, was in respect of any dividend distributed by a company to its shareholders in excess of 6% of its paid up capital. The Tribunal was further of the opinion that a loan or advance to a solitary shareholder could not be said to be a distribution by the company of any dividend to its shareholders, as contemplated by the second proviso to paragraph D of Part II of the Finance Act, 195G. The Tribunal, therefore, was of the opinion that the order reducing the corporation tax rebate was improper and allowed the appeal of the assessee.

4. Before the Tribunal an alternative argument was advanced on behalf of the assessee. It was contended that at the most the amount that could be deemed to be dividend out of the loan advanced would be Sri Fatehpuria's share in the accumulated profits. There was no dispute that the total accumulated profits of the company was Rs. 64,800. Sri Fatehpuria held 250 shares out of the total issued shares of 1,051. It was, therefore, contended that Sri Fatehpuria's share in the accumulated profits would be 250 : 1,051 of Rs. 64,800. It was, therefore, urged that the rebate could only be reduced to the extent of about Rs. 16,000. The Tribunal was unable to accept this alternative contention made on behalf of the assessee.

5. Thereafter, on an application being made under Section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred to this court at the instance of the Commissioner of Income-tax :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 195G, did not authorise the withdrawal of a part of the rebate granted to the assessee in respect of any sum advanced by the assessee to any of its shareholders by way of a loan ?"

The Tribunal has also referred a second question at the instance of the assessee, namely :

"(2) Whether, on the facts and in the circumstances of the case and on a correct interpretation of section 2(6a)(e), the amount of the loan taken by a shareholder to the extent of the accumulated profits of the company could be deemed to be dividend paid to that shareholder to the exclusion of the other shareholders ?"

6. Sub-clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956, directs reduction at certain specified rate", mentioned in the said sub-clause, of the rebate granted to an assessee in the following terms :

" (b) in addition, in the case of a company referred to in Clause (ii) of the preceding proviso which has distributed to its shareholders during the previous year dividends in excess of six per cent. of its paid-up capital, not being dividends payable at a fixed rate..."

7. There is no dispute that this is a company referred to in Clause (ii) of the first proviso to paragraph D of Part II of the Finance Act, 1956. The assessee was entitled to a rebate at four annas in the rupee on the total income. But such rebate was liable to be reduced by two annas on that part of the dividend which exceeds six per cent. of its paid-up capital distributed to its shareholders. The question for determination here is whether it can be said that the company has distributed to its shareholders any dividends. Section 2(6A) of the Indian Income-tax Act, 1922, gives an all-inclusive definition of dividend and contains five different sub-clauses. The first four of these sub-clauses, namely, sub-clauses (a) to (d), include in the definition of dividend sums distributed by a company. These Sub-clauses begin with the expressions " any distribution by a company ". Sub-clause (c) includes in the definition of dividend 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 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 of or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits. The payment of Rs. 27,500 to Sri Fatehpuria would be dividend in view of the definition in Section 2(6A)(c) of the Indian Income-tax Act, 1922. But the question is--is such payment of dividend to Sri Fatehpuria, a distribution of dividend, as contemplated under clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956 ? In the Finance Act of 1956, for the purposes of paragraph D, explanations have been provided. Explanation (ii) to paragraph U of Part II of the Finance Act, 1956, states that the expression "dividend" shall be deemed to include any distribution included in the expression "dividend" in Clause (6A) of Section 2 of the Income-tax Act.

8. Mr. B. L. Pal, learned counsel for the revenue, contended before us that the purpose of introducing the definition in Sub-clause (e) of Section 2(6A) of the Income-tax Act was to defeat the devices made by certain privately controlled companies of making advances or giving loans to their shareholders with the object of evading payment of tax. Mr. Pal submitted that unless distribution of dividend in Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956, is so construed as to include payment of a loan made to a shareholder as contemplated under Section 2(6A)(e) of the Indian Income-tax Act 1922, privately controlled companies would get a rebate which the legislature did not intend to give them. If such payment was not included in the expression "distributed" the purpose of withdrawal of rebate of corporation tax as contemplated by the Finance Act, 1956, would be defeated. Mr. Pal drew our attention to the decision of the Supreme Court in the case of Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner of Income-tax, for the purpose of showing why such loans or advances to the shareholders were included in the definition of "dividend" under Section 2(6A) of the Indian Income-tax Act, 1922. Mr. Pal also drew our attention to the decision of this court in the case of Moore Avenue Properties Private Ltd. v. Commissioner of Income-tax, [1966] 59 I.T.R. 466 .

9. We have to bear in mind that under Section 2(6A) of the Indian Income-

tax Act, 1922, which is an all-inclusive definition of dividend, five different categories of sums have been included, four of these are distributions by a company and the fifth one is payment by a company. In that definition of "dividend" the legislature had used the expresions "distribution" as well as "payment" in the Indian Income-tax Act, 1922, as it stood prior to the introduction of the Finance Act, 1956. With that background it is not possible to say that when the legislature has used the expression "distributed" in Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956, it intended to include "paid" or "payment".

By enacting Clause (e) of Section 2(6A) of the Indian Income-tax Act, 1922, the legislature has created a fiction and has made the payments referred to in Clause (e) "dividend" for the purposes of the said Act. But the legislature has not made the further fiction and has made them "dividend distributed by a company". In that context we have to construe Explanation (ii) of the Finance Act, 1956. Explanation (ii) of the Finance Act of 1956 states that the expression "dividend" shall be deemed to include "any distribution" included in the expression "dividend" as defined under Clause (6A) of Section 2 of the Income-tax Act. Therefore, it is clear that it did not include other payments by a company which were not distributions but were still "dividends" within the meaning of Clause (6A) of Section 2 of the Indian Income-tax Act, 1922. In this connection it is necessary to bear in mind that the expressions "distribution" and "payment" connote different meanings. "Distribution" is division amongst several persons. It connotes an idea of apportionment among more than one person. In the case of "distribution " the recipients would be more than one, while in the case of "payment" the recipient may be a single person. Where two different expressions with two different meanings have been used in a statute, unless there is a clear indication to the contrary, such construction should not be made as to make the two expressions synonymous. It is true that certain provisions of a statute may sometimes require to be so construed as will advance the remedy and suppress the mischief which it sought to suppress, yet construction must not be so strained as to include cases plainly omitted from their natural meaning. It is, therefore, not possible to ignore the clear language of the enacting part of Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956, in the background of Explanation (ii) of the said; Act and to say that when the legislature has used the expression "distributed" to its shareholders it wanted to include "payment" made to the, shareholders. In view of the language used and in view of the explanation given to "dividend" in the Finance Act, 1956, it is not possible to accept the contentions made on behalf of the revenue in this case. Therefore, loans obtained by Mr. Fatehpuria in this case would be dividend under Section 2(6A)(e) of the Indian Income-tax Act, 1922. But by payment of these loans there was no distribution of the dividend by the company as contemplated by Clause (b) of the second proviso to paragraph D of Part II of the Finance Act, 1956, in view of the explanation of "dividend" given by that Act. Therefore, the order reducing the corporation tax rebate was not justified.

10. The two decisions relied on by Mr. Pal do not deal with the controversy that we have to decide in this case. In that view of the matter we do not think it necessary to deal with the two decisions referred to us by Mr. Pal. In the premises, the question No. 1 referred to this court at the instance of the Commissioner must be answered in the affirmative and against the revenue.

11. So far as the question No. 2 referred at the instance of the assessee is concerned in view of the answer given to the first question the answer to this question would really be of an atademic nature. Furthermore, Dr. Pal, learned counsel for the assessee, did not press for an answer to this question. In that view of the matter we decline to give any answer to the second question. The Commissioner of Income-tax will pay the costs of this reference.

Sankar Prasad Mitra, J.

12. I agree.