1. The Income-tax Appellate Tribunal, Jaipur Bench, at the instance of the assessee has referred the following two questions, for the opinion of this court, arising out of its consolidated order, dated October 7, 1972, in Income-tax Appeals Nos. 248, 1546 and 989 of 1969-70 and cross-objection No. 42 of 1969-70 :
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts transferred from the general reserves of the two companies for writing off a part of their respective goodwills, continued to be accumulated profits in the hands of those companies ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts of Rs. 1,75,810 and Rs. 19,675, being loans advanced to the assessee by M/s. Jaipur Mineral Development Syndicate Pvt. Ltd. and M/s. Udaipur Mineral Development Syndicate Pvt. Ltd., were liable to be assessed in the hands of the assessee as dividends under section 2(6a)(e) of the Indian Income-tax Act, 1922 ? "
2. The facts in a nutshell necessary for the decision of this reference Shri Harish Chandra Golecha is a shareholder and director of M/s. Jaipur Mineral Development Syndicate Pvt. Ltd. and of M/s. Udaipur Mineral Development Syndicate Pvt. Ltd., hereinafter referred to as "JMDS" and " UMDS ", respectively. Harish Chandra Golecha is also the karta of the joint Hindu family-assessee. The assessment years are 1960-61 and 1963-64. The assessee owed under the following accounts to the above-noted corporations for the assessment year 1960-61.
1. JMDS Pvt. Ltd. Rs. 1.75,810.
2. UMDS Pvt. Ltd. Rs. 19.675.
3. The authority assessing the petitioner was of the opinion that the companies possessed sufficient amounts by way of accumulated profits for the assessment year 1960-61, though they were not shown in their respective balance-sheets and both the companies created secret reserves by writing off a part of their goodwill by transferring amounts from their general reserve account, that apart from the accumulated profits, they also made provision for taxation as well as for reserves and surpluses, and, thus, the loans advanced by the companies to the HUF represented dividends within the meaning of s, 2(6A)(e) of the Indian I.T. Act, 1922, and proceeded to include these amounts in the total income of the assessee. He assessed the HUF on the total income of Rs. 3 63 591.
4. On an appeal having been filed, the AAC accepted The plea of the assessee and held that the companies were justified in reducing the value of their respective goodwill by transferring the amounts from their reserves and surpluses and the surpluses were no longer available as arcumulated profits for distribution. He also held that the provision for taxation were made on proper basis, considering the approximate tax liability of the company and as such the amount was not available for distribution and, therefore, the provisions of Section 2(6A)(e) were not applicable. He accepted the appeal and directed the deletion of the amounts of Rs. 1,75,810 and Rs. 19,675 from the total incomes of the assessee.
5. Aggrieved by the above-noted order the ITO filed an appeal before the Income-tax Appellate Tribunal and the assessee also filed cross-objection No. 42 of 1969-70 as well as Appeal No. 1546 of 1969-70 against the same order.
6. While accepting the appeal filed by the ITO, the Tribunal held that the two companies were possessed of accumulated profits far in excess of the amount of loans advanced by them to the assessee and the ITO had rightly treated this amount as income of the assessee by applying the provisions of Section 2(6A)(e) of the Indian I.T. Act, 1922. While dealing with the cross-objection, the Tribunal held that the ITO had no intention of changing the status of the assessee from an HUF to an individual. It was also held that the I.T. authority had valid jurisdiction in proceeding to assess the assessee for the assessment year 1960-61 under Section 23(3) of the Indian I.T. Act, 1922, and the mere misdescription in the assessment order as under Section 143(3) does not take away its legal validity. With these observations the cross-objection was dismissed and the appeal No. 1546 of 1969-70 was also dismissed as being barred by limitation.
7. For the assessment year 1963-64, the ITO, C.C. II, Jaipur, held that JMDS Pvt. Ltd. possessed accumulated profits and as such Rs. 1,63,140 received by the HUF could be deemed a dividend within the meaning of Section 2(6A)(e) of the Indian I.T. Act, 1922. He further held that the house situated at Bhagwandas Road, C-Scheme, Jaipur, standing in the name of Chandrakanta Devi also belonged to the HUF and assessed the assessee on a total income of Rs. 2,85,923. Vide order dated March 28, 1968, the appeal filed by the assessee before the AAC succeeded and, thereafter, the ITO filed Appeal No. 989/1969-70. As regards the house property, the Appellate Tribunal held that by a separate consolidated order I.T. Appeals Nos. 249 and 250 of 1969-70 dated September 20, 1971, the Tribunal had already held that the income from the house should be included in the, total income of the assessee.
8. The Appellate Tribunal held that the company at the relevant time had written off Rs. 12 lakhs out of its reserves and surplus towards the reduction in the value of its goodwill from Rs. 13,25,000 and these amounts were secret reserves. Besides that, the provision for taxation and various other substantial provisions were also created by the company out of its proceeds and as such the company was possessed of sufficient accumulated profits so as to render the advance in question made by the company to the joint Hindu family as dividends under Section 2(6A)(e) of the Indian I.T. Act, 1922. While disposing of the appeal, the Tribunal also observed that the matter required further scrutiny and it would be open to the ITO to consider whether the entire amount or an appropriate amount out of it could be considered as dividends under Section 2(6A)(e) of the Indian I.T. Act, 1922.
9. Aggrieved by the above-noted consolidated order, dated October 7, 1971 of the Income-tax Appellate Tribunal, Jaipur Bench, the assessee, Golecha (HUF), Jaipur, filed two applications before the Tribunal to draw up a statement of the case and refer the questions of law arising out of the joint order of the Tribunal. The Appellate Tribunal prepared the statement of the case and referred the above-noted two questions.
10. Learned counsel for the parties, after arguing the case in detail, urged that if the court ultimately answers question No. 2 in the negative, viz., in favour of the assessee, the above-noted question No. 1 need not be answered because it will be only of academic interest. Mr. Keshote, learned counsel for the assessee, placed reliance on CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC) and urged that the assessee, Golecha (HUF), not being a shareholder of the company, section 2(6a)(e) could not be invoked even if the aforementioned two sums were treated as payment by way of loan by the companies. The word "shareholder" occurring in section 2(6a)(e) would refer only to the registered shareholder and not to the beneficial owner, even though the members of the HUF acquire the shares in a company with the funds of the family and the loans are granted to them. The shareholding is in the individual name of Harish Chandra Golecha and he is a registered shareholder of the companies. The requirement of Section 206 of the Indian Companies Act is that the dividend can be paid by a company only to the registered shareholders of the company and as such the amount of loan advanced by the companies to the joint family cannot be said to be a loan to the registered shareholder so as to deem it as a dividend under section 2(6a)(e).
11. On the other hand, the revenue contends that this point does not arise out of the Tribunal's order as the same was not urged before the Tribunal, that the Tribunal had no opportunity to express its opinion thereon and that, therefore, the assessee cannot raise this question. Learned counsel for the revenue urged that Section 66, which confers jurisdiction upon the High Court, only permits the reference of a question of law arising out of the order of the Tribunal. It does not confer jurisdiction on the High Court to decide a different question of law not arising out of such order. He further urged that as the Tribunal was not called upon to apply its mind to the question raised, it would be unreasonable to characterise the order of the Tribunal as incorrect. In support of the above contention, he placed reliance on Mrs. Kusumben D. Mahadevia v. CIT [1960] 39 ITR 540 (SC), Keshav Mills Co. Ltd. v. CIT [1965] 56 ITR 365 (SC), CIT v. Mewar Textile Mills Ltd. [1966] 60 ITR 423 (SC) and CIT v. Banwari Lal Agarwal [1971] 80 ITR 326 (SC).
12. Learned counsel for the assessee urged that question No. 2 referred by the Tribunal is in general terms and in dealing with it several aspects need to be considered, and, even if one of those aspects has not been appreciated by the Tribunal, it is the duty of this court to consider the same. Learned counsel urged that the main question in the case is whether the above-noted two sums advanced by the two companies as loan to the assessee-HUF attract section 2(6a)(e) of the Act or not. It was argued before the Tribunal that the said sum cannot be treated as a loan by the company to the assessee-family and as such no new point of law was being raised before this court. Only an aspect of the same question is being urged and it falls within the ambit of the question referred. In support of the above contention, learned counsel for the assessee has placed reliance on Sundaram and Co. (P:) Ltd. v. CIT [1967] 66 ITR 604 (SC), Raja Sharda Narain Singh v. CIT [1968] 68 ITR 209 (SC) and Estate of Late A.M.K.M. Karuppan Chettiar v. CIT [1969] 72 ITR 403 (SC).
13. No doubt, it is true that when a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order, notwithstanding that it may arise on the findings given by it. No doubt, no question can be referred to or answered by this court under Section 66 of the Act of 1922 or under Section 256 of the Act of 1961, unless it arises out of the order of the Tribunal.
14. Kanga and Palkhivala in the treatise, The Law and Practice of Income Tax, after reviewing the conflicting case law on the point has summarised the correct position of law as under :
" (a) a question of law can be said to arise out of the Tribunal's order only if it is dealt with by the Tribunal or is raised before it though not decided by the Tribunal;
(b) a question of law not raised before the Tribunal and not dealt with by it in its order cannot be said to arise out of its order even if on the facts of the case stated in the order the question fairly arises; and
(c) where the question itself was under issue, the reference should not be limited to those aspects of the question which had been argued before the Tribunal. "
15. It is correct that a new point or plea which depends for its validity upon questions of fact, which has not been invoked, cannot, generally speaking, be raised for the first time before the High Court. The new point regarding a question in issue is required to be distinguished from a new and different question of law. If a point of law is implicit in or covered by the question referred to by the Tribunal and no additional facts are necessary to support that point, it may be raised for the first time before the court notwithstanding that it was not stated before or considered by the Tribunal. The expression " question of law arising out of such order" in Section 66 cannot be restricted only to those questions which have been argued and decided by the Tribunal. Sometimes a question of law is raised before the Tribunal but an aspect of that question is neither raised nor decided. In those circumstances, other aspects of the same question can be allowed to be urged before the court.
16. In the case on hand, question No. 2 is whether the amount of Rs. 1,75,810 and Rs. 19,675, being loans advanced to the assessee by M/s. JMDS Pvt. Ltd. and M/s. UMDS Pvt. Ltd., were liable to be assessed in the hands of the assessee as dividends under Section 2(6A)(e) of the Indian I.T. Act, 1922. It was argued before the Tribunal that the said sum did not attract the provisions of Section 2(6A)(e), but it was not argued that the loan was not to the registered shareholder but to the HUF. After giving due consideration to the rival contentions of the parties, we consider that the argument that the loan by the companies was not advanced to a registered shareholder as they were advanced to the HUF, is only one aspect of the question of the applicability of section 2(6a)(e) of the Act of 1922. The argument which is being advanced before us falls within the ambit of the question referred to us and can be decided on the existing material. In the facts and circumstances of this case, we are, therefore, of the view that this aspect of the case has to be entertained and dealt with.
17. Significance of the prohibition of a trust being a shareholder of a company, contained in Section 153 of the Companies Act, 1956 (hereinafter referred to as the Act No. 1 of 1956) considered along with Section 206 of the Act leads us to the conclusion that an HUF cannot be a registered shareholder. The loan given to the HUF cannot, therefore, be considered as a loan advanced to a shareholder of a company. section 2(6a)(e) deals with a loan taken by a shareholder from a company as a dividend received by him. For invoking this deeming provision, the loan must be by a company to the registered shareholder, as otherwise, the said section will create a deemed dividend even when there is a loan by a company, to a person other than a shareholder, which the company cannot do under Section 206 of the Act No. 1 of 1956. The mere fact that the HUF is the beneficial owner of the shares, will not make it a registered shareholder. section 2(6a)(e) gives an artificial definition of " dividend ". It does not refer to dividend actually declared or recieved. The dividend taken note of by that provision is a deemed dividend and not a real dividend. The loan granted to a person has to be returned to the company. It does not become the income of the shareholder. For certain purposes, the Legislature has deemed such a loan as " dividend ".
18. Now, the controversy on this point is no more res integra, and stands conclusively settled by a decision of the Supreme Court, delivered in Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1. Their Lordships of the Supreme Court, while explaining the decision of the same court in CIT v. Rameshwarlal Sanwarmal [l97l] 82 ITR 628 (SC) observed (p. 7);
" The only aspect considered by this court was whether the ' deemed dividend' under
section 2(6a)(e) could be taxed in the hands of the beneficial owner of the shares or it could be assessed to tax only in the hands of the registered shareholder, and this court held that deemed dividend ' did not stand on any different footing from actual dividend and just as actual dividend was liable to be taxed in the hands of the beneficial owner of the shares, so also, ' deemed dividend ' must be held liable to be taxed in the assessment of the beneficial owner. This court did not decide the question whether a loan advanced to a beneficial owner of the shares can be regarded as ' deemed dividend' within the meaning of
section 2(6a)(e) and the answer given by this court in favour of the revenue cannot be said to extend to this aspect of the question."
19. In the same case, it was also observed (p. 8);
" It is only the person whose name is entered in the register of shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company, and not the person beneficially entitled to the shares. It is the former who is a ' shareholder ' within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered shareholder and the other conditions set out in
section 2(6a)(e) are satisfied that the amount of the loan would be liable to be regarded as ' deemed dividend ' within the meaning of
section 2(6a)(e). The amount of the loan would not fall within the mischief of this section if it is granted to a beneficial owner of the shares who is not the registered shareholder. The decision in
CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC) does, in our opinion, lay down the correct interpretation of
section 2(6a)(e)."
20. In view of the above authoritative decision of their Lordships of the Supreme Court, our answer to question No. 2 is in the negative, i. e., in favour of the assessee and we hold that section 2(6a)(e) of the Act of 1922 is not applicable to the loans advanced by the above-noted accounts to the HUF. In view of this answer to question No. 2, it is not necessary to consider the other grounds as the main controversy between the parties stands disposed of by the above-noted answer.