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Income-Tax Officer v. Chandmull Batia
Structured Summary of the Opinion (Ghose, J.)
Factual and Procedural Background
Punam Chand Batia and Padam Chand Banthia were registered shareholders of several private tea companies (Kalinagar Khoreel Tea Co. Ltd., Bullion Tea Co. Ltd., Burdwar Tea Timber Co. Ltd., and Sarugaon Tea Co. Ltd.). At all material times those two persons were partners in the respondent firm Messrs. Chandmull Batia. In the respondent firm's balance-sheet the shares in the said companies were shown as stock-in-trade or assets of the firm and moneys received from the tea companies were shown as deposits made by those companies in the books of the firm.
The revenue issued notices seeking to reopen assessment proceedings for the assessment years 1955-56, 1957-58 and 1958-59 by three notices dated 15 January 1968, and for 1959-60 by a notice dated 25 October 1967. The basis for reopening was the contention that the deposits or loans received by the two partners (each holding a 50% share in the firm) should be deemed dividends in the hands of the firm under s.2(22)(e) of the Income-tax Act, 1961 (corresponding to s.2(6A)(e) of the I.T. Act, 1922).
The learned judge below followed the Supreme Court decision in CIT v. C.P. Sarathy Mudaliar ([1972] 83 ITR 170) and held that the statutory provision must receive a strict construction and that the term "shareholder" in the provision refers to the registered shareholder (and not to the beneficial owner). The present appeal arises from that judgment and order dated 31 January 1973 passed by T.K. Basu, J.
Legal Issues Presented
- Whether payments (advances/loans/deposits) by private companies to persons who are registered shareholders but who are partners in a firm can be treated as "dividend" in the hands of the firm under s.2(22)(e) of the Income-tax Act, 1961 (corresponding to s.2(6A)(e) of the I.T. Act, 1922).
- Whether the word "shareholder" in s.2(22)(e) (and corresponding earlier provision) must be strictly construed to mean the registered shareholder (as recorded in the company's register) rather than the beneficial owner.
- Whether reassessment action under s.147, taken by the ITO on a legal view later disapproved by the Supreme Court, can be supported on the basis of an intermediate Supreme Court decision relied upon by the revenue.
Arguments of the Parties
Revenue (Mr. Sen)
- It was unfortunate that, in the Supreme Court decision in CIT v. C.P. Sarathy Mudaliar, the earlier decision in CIT v. Rameshwarlal Sanwarmal (1971) was not cited; the latter decision was given only a few days before Sarathy and could have influenced their Lordships.
- The partners (who were the registered shareholders) effectively made the partnership the beneficial recipient; partnership is a compendious way of describing partners, so s.2(22)(e) should apply and the loans/deposits must be deemed dividends in the hands of the firm.
- Relying on a Gujarat High Court decision (CIT v. Maneklal Harilal Spg. & Mfg. Co. Ltd., [1977] 106 ITR 24), Mr. Sen argued that if the ITO validly initiated action under s.147 on the basis of the law as it stood at the relevant time, a later Supreme Court pronouncement to the contrary would not invalidate that action.
Respondent (Mr. Saraf)
- The appeal must fail because the companies which advanced the loans were public limited companies and therefore not within the scope of s.2(22)(e) (which applies to companies "not being a company in which the public are substantially interested").
- A "shareholder" must be construed strictly, following the Supreme Court in CIT v. C.P. Sarathy Mudaliar; a shareholder is the person whose name is registered as owner in the company's register of shares.
- Companies Act, 1956 s.153 does not recognize any trust or beneficial interest in shares; since the respondent firm was not a registered shareholder (the two partners were registered in their individual names), the loans were not advances to the firm as a shareholder and cannot be deemed dividends in the hands of the firm under s.2(22)(e).
- Because the Income-tax Act is a taxing statute, the expressions used must be strictly construed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. C.P. Sarathy Mudaliar, [1972] 83 ITR 170 (SC) | The Supreme Court held that loans and advances to shareholders could be deemed dividends under s.2(6A)(e) of the repealed Act, but when the purported recipient is a HUF the HUF cannot be treated as a "shareholder"; furthermore, when the section speaks of "shareholder" it refers to the registered shareholder and not to the beneficial owner. | The learned judge below followed this decision. The appellate court applied its strict construction of "shareholder" (registered shareholder only) and relied on its reasoning to hold that the respondent firm (not a registered shareholder) could not be treated as having received deemed dividends under s.2(22)(e). |
| CIT v. Rameshwarlal Sanwarmal, [1971] 82 ITR 628 (SC) | Held that shares held by a karta could be considered as held by the HUF and loans made to the family could fall within clause (e) of s.2(6A) (i.e., could be treated as deemed dividends), following Kishanchand Bajaj. | Relied on by the revenue to support reopening and the view that beneficial ownership could attract the deeming provision. The court observed that this decision was given long after the impugned notices were issued and therefore could not validate the ITO's action under s.147 in the instant case. |
| Kishanchand Lunidasing Bajaj v. CIT, [1966] 60 ITR 500 (SC) | Held that shares acquired with HUF funds but held in the name of the karta gave rise to dividend income assessable in the hands of the HUF (in the context of actual dividends). | Followed by the Supreme Court in Rameshwarlal. The Sarathy decision distinguished Kishanchand because Kishanchand dealt with actual receipt of dividends by shareholders, whereas s.2(6A)(e) concerns deemed dividends (where no real income accrues to the family). |
| CIT v. Maneklal Harilal Spg. & Mfg. Co. Ltd., [1977] 106 ITR 24 (Gujarat HC) | Applied the proposition that if the ITO validly initiated reassessment under s.147 on the legal view prevailing at the relevant time, a subsequent contrary Supreme Court decision would not necessarily make the earlier action bad. | The revenue relied on this decision to defend the reopening. The appellate court observed that the Gujarat decision was based on the peculiar facts of that case and was not sufficient to support the reopening here, especially since the Rameshwarlal decision relied upon by the revenue post-dated the impugned notices. |
| Shakuntala's case, [1961] 43 ITR 352 (Mys) | Referenced by the Supreme Court in Sarathy to support the view that when the Act speaks of "shareholder" it refers to the registered shareholder. | The appellate court relied on the Sarathy Court's reference to Shakuntala's case to support the conclusion that at the relevant time the statutory meaning of "shareholder" was the registered shareholder. |
Court's Reasoning and Analysis
The court began by reproducing the language of the relevant statutory provision, s.2(22)(e) of the Income-tax Act, 1961, and the corresponding earlier provision s.2(6A)(e) of the I.T. Act, 1922. Both provisions deal with payments by a private company by way of advance or loan to a shareholder (or payments on behalf of or for the individual benefit of a shareholder) to the extent of accumulated profits and treats such sums as "dividend" (deemed dividends).
The court analyzed competing authorities. The revenue relied on the Supreme Court's decision in CIT v. Rameshwarlal Sanwarmal (1971), where the Court treated shares held by a karta as shares of the HUF and held loans to the family could fall within clause (e). That decision had followed Kishanchand Lunidasing Bajaj (1966), which dealt with actual dividends where the HUF received dividend income in substance.
However, the court emphasized the later (and antecedent-of-relevance) Supreme Court decision in CIT v. C.P. Sarathy Mudaliar (1972), which held that:
- While advances/loans to shareholders may be deemed dividends under the provision, a HUF could not be a shareholder for the purposes of the provision, and thus loans to a HUF could not be deemed dividends under that clause; and
- When the section speaks of "shareholder" it refers to the registered shareholder, not to the beneficial owner.
The court accepted the strict-construction approach for the taxing provision: the terms of the Income-tax Act must be strictly construed. It noted that Companies Act, 1956 s.153 does not recognize any trust or beneficial interest in shares for purposes of the register of members. The court further observed that the Rameshwarlal decision, relied upon by the revenue, was given after the dates of the impugned notices (which were in 1967–1968), so it could not be used to support the ITO's action under s.147 taken at that earlier time.
Applying these legal principles to the facts, the court concluded that the respondent firm itself was not a registered shareholder of the tea companies—the two partners were registered in their individual names. Because the statute's deeming provision applies to advances or loans made to a "shareholder" in the sense of the registered shareholder, the loans/deposits in question could not be treated as deemed dividends in the hands of the respondent firm.
Holding and Implications
Holding: The appeal is DISMISSED.
Direct consequences and orders made by the court:
- The appeal is dismissed for lack of merit.
- There shall be no order as to costs.
- There is a stay of operation of the order for eight weeks; all interim orders made by the court of first instance in favour of the petitioner shall continue for eight weeks.
Implications: The decision directly resolves the dispute between the parties by affirming that, on the facts before the court, the loans/deposits could not be deemed dividends in the hands of the respondent firm under s.2(22)(e) because the firm was not the registered shareholder. The opinion follows and applies the Supreme Court's restrictive construction of "shareholder" from CIT v. C.P. Sarathy Mudaliar. The court did not purport to set a new broader legal principle beyond applying the cited precedents and the statutory text; its effect is to confirm the result on the present facts rather than to announce a novel rule of law.
Judge Pyne agreed with the judgment.
Ghose, J.:— This appeal arises out of a judgment and order dated 31st January, 1973, passed by T.K Basu J. The facts of the case are as follows: One Punam Chand Batia and Padam Chand Banthia held substantial shares in Messrs. Kalinagar Khoreel Tea Co. Ltd., Bullion Tea Co. Ltd., Burdwar Tea Timber Co. Ltd., and Sarugaon Tea Co. Ltd. (hereinafter referred to as the “said companies”). The said Punam Chand Batia and Padam Chand Banthia were at all material times partners of the respondent-firm, Messrs. Chandmull Batia. Although the abovenamed two persons of the respondent-firm were the registered shareholders in the abovementioned tea companies, in the balance-sheet of the respondent-firm the shares, inter alia, in the said companies were shown as stock-in-trade or assets of the said firm and moneys received from the said tea companies were shown as deposits made by the said companies in the books of the firm. The revenue sought to reopen the assessment proceedings of the firm in regard to the assessment years 1955-56, 1957-58 and 1958-59, by three notices dated 15th January, 1968, and the assessment for the year 1959-60, by a notice dated 25th October, 1967, on the ground that these deposits or loans received by the above-mentioned partners who held 50% share each in the said firm shall be deemed to be dividend received by the said firm from the above-mentioned tea companies within the meaning of s. 2(22)(e) of the I.T Act, 1961, corresponding to s. 2(6A)(e) of the I.T Act, 1922, since repealed. The learned judge followed the decision of the Supreme Court in the case of CIT v. C.P Sarathy Mudaliar, [1972] 83 ITR 170 and was pleased to hold that s. 2(6A)(e) of the I.T Act, 1922, or s. 2(22J (e) of the present Act must receive a strict construction and a shareholder mentioned in the sections would refer to a registered shareholder and not a beneficial owner of the shares.
2. For the purpose of this appeal, it is necessary for us to reproduce s. 2(22)(e) of the new Act corresponding substantially to s. 2(6A)(e) of the repealed Act.
“2. In this Act, unless the context otherwise requires,—…
(22) ‘dividend’ includes—…
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.”
“2. (6A)(e) 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 as 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 or for the individual benefit of a shareholder, to the extent to which the company in either case possesses accumulated profits.”
3. Mr. Sen, appearing on behalf of the revenue in this appeal, submitted that it was unfortunate that before the learned judges deciding the case of CIT v. C.P Sarathy Mudaliar, [1972] 83 ITR 170 (SC), the case of CIT v. Rameshwarlal Sanwarmal, [1971] 82 ITR 628 (SC), decided by the Supreme Court only a few days before the above-mentioned case, was not cited and their Lordships did not have the benefit of looking at the decision in CIT v. Rameshwarlal Sanwarmal, [1971] 82 ITR 628 (SC).
4. Mr. Sen submitted further that in the instant case the shareholders are partners of the respondent-firm and partnership is only a compendious way of describing partners and as such, in the instant case, s. 2(22)(e) applies and the loans and/or deposits must be deemed to be dividends in the hands of the firm.
5. In the case of CIT v. Rameshwarlal Sanwarmal, [1971] 82 ITR 628 (SC), a karta of a HUF held certain shares in a private company. The Tribunal found that the karta held those shares as the karta of his HUF. In previous years, relevant to the assessment years 1955-56 and 1956-57, certain loans were advanced by the company to the HUF. It was held by the Supreme Court that the shares held by the karta could be considered to be the shares held by the HUF and the loans made to the family could fall within the definition of dividend in clause (e) of s. 2(6A) of the I.T Act, 1922. The said decision was arrived at by following a decision of Kishanchand Lunidasing Bajaj v. CIT, [1966] 60 ITR 500 (SC). In the said case, it was held that shares which were acquired with the money belonging to a HUF, though held in the name of the karta of the family, the HUF would be assessed to tax under the I.T Act, 1922, on the dividend received on those shares. It should be noted here that in the said case there was no occasion for the construction of s. 2(6A)(e) of the repealed Act and the money received were actual dividends. Their Lordships of the Supreme Court in the case of CIT v. Rameshwarlal Sanwarmal, [1971] 82 ITR 628 followed the ratio of the above-mentioned case of Kishanchand Lunidasing Bajaj v. CIT, [1966] 60 ITR 500 (SC) and came to the conclusion as mentioned hereinabove.
6. The above-mentioned two sections came to be considered, as mentioned hereinabove, in CIT v. C.P Sarathy Mudaliar, [1972] 83 ITR 170 (SC). In that case facts were that members of a HUF acquired shares in a company with the funds of the family. Loans were granted to the HUF and the question was whether the loans could be treated as dividend income of the family falling within s. 2(6A)(e) of the I.T Act, 1922. The Supreme Court held that loans and advances to shareholders could be deemed to be dividend under s. 2(6A)(e) of the repealed Act, but a HUF could not be a shareholder and as such loans given to a HUF could not be an advance to a shareholder of the company and could not be deemed to be its income. According to the Supreme Court when s. 2(6A)(e) speaks of a “shareholder” it refers to the registered shareholder and not to the beneficial owner. Distinguishing the case of Kishanchand Lunidasing Bajaj v. CIT, [1966] 60 ITR 500, the Supreme Court observed thus ([1972] 83 ITR 170, 174):
“Therein the question was whether a HUF could be charged to tax in respect of dividends received by some of the coparceners of that family in respect of shares held by them, those shares having been purchased from out of the family funds. This court ruled that the dividends paid to the shareholders was the income of the family and, that being so, the same was assessable in the hands of the HUF. We see no conflict between this decision and the decisions earlier referred to. In the case of actual receipt of dividends there is a receipt of income. That income is received on behalf of the family. Hence the same was assessable in the hands of the family. In the case of deemed dividends under s. 2(6A)(e) the family does not get any income at all. The dividend referred to by that provision is only a deemed dividend and not a real dividend. Hence, no income is either received by the family or accrued to it. Therefore, only the person who is deemed to have received that income can be assessed in respect of that income.”
7. Relying on a decision of the Gujarat High Court in the case of CIT v. Maneklal Harilal Spg. & Mfg. Co. Ltd., [1977] 106 ITR 24, Mr. Sen submitted that if action under s. 147 was validly taken by the ITO on the basis of the law which at the relevant time was in force then the subsequent decision of the Supreme Court holding otherwise would not make such action bad. It was further submitted that in the instant case subsequent pronouncement of the Supreme Court in CIT v. C.P Sarathy Mudaliar, [1972] 83 ITR 170 overruling the case in CIT v. Rameshwarlal Sanwarmal, [1971] 82 ITR 628 (SC) would not, therefore, make the action taken for reopening of the assessment under s. 147(a) bad although it may be that in respect of the item regarding which the reassessment proceedings were started, it may ultimately turn out to have been correctly assessed when the reassessment proceedings are considered. It appears that the said Gujarat decision (CIT v. Maneklal Harilal Spg. & Mfg. Co. Ltd., [1977] 106 ITR 24) was based on the peculiar facts of that case. It should also be noted that the decision in CIT v. Rameshwarlal Sanwarmal[1971] 82 ITR 628 upon which reliance was placed by Mr. Sen for supporting the validity of the action taken under s. 147 in the instant case was given long after the date of the impugned notice. Therefore, the ITO's action under s. 147, in the instant case, cannot be supported on the basis of the said decision in CIT v. Rameshwarlal Sanwarmal, [1971] 82 ITR 628 (SC). On the contrary it appears that the position in law at the relevant time was otherwise as would appear from the observation of the Supreme Court in C.P Sarathy's case, [1972] 83 ITR 170 (SC). At page 174 of the report referring to Shakuntala's case, [1961] 43 ITR 352 (Mys), the Supreme Court observed that: “From the above decisions it is clear that when the Act speaks of the ‘shareholder’ it refers to the registered shareholder.” Therefore, we are unable to accept the contention of Mr. Sen.
8. In the instant case before us, it has been urged by Mr. Saraf that the appeal must fail on two grounds: first, the companies which advanced the loans to the shareholders are public limited companies and not companies within the meaning of s. 2(22)(e) of the Act, and secondly, a “shareholder” must be construed strictly as has been done by the Supreme Court in CIT v. C.P Sarathy Mudaliar, [1972] 83 ITR 170. A shareholder is one whose name is registered as the owner or holder of the share in the register of shares of the company. Save and except such a shareholder nobody can be said to be a shareholder of a company. Companies Act, 1956, by s. 153 does not recognise any trust or beneficial interest of any person in any share. The I.T Act being a taxing statute, in our opinion for the purpose of charging tax the expressions contained in the Act must be strictly construed. Admittedly, the respondent-firm is not a registered shareholder in the instant case. Two of the partners of the said firm are the registered shareholders. Thus, no loan was advanced by the companies to the shareholder whose name appeared on the share register of the companies concerned. By reason of the premises, it cannot be contended that the said loans given to the respondent-firm could be deemed to be dividends in the hands of the respondent-firm within the meaning of s. 2(22)(e) of the Act.
9. By reason of the aforesaid, we are of the opinion that there is no merit in this appeal. The appeal, therefore, must fail and is hereby dismissed. There shall be no order as to costs. There shall be a stay of operation of the order for eight weeks. All interim orders made by the court of the first instance in favour of the petitioner shall continue for eight weeks.
Pyne, J.:— I agree.
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