The Judgment of the Court was delivered by

K.A Nayar, J.:— A substantial shareholder in a closely held company is the assessee-respondent in both the income-tax reference cases. The other shareholders in the company are the assessee's wife and father. Seventy-five per cent, of the shares in the company are held by the asses-see.

2. Income-tax Reference No. 267 of 1985 relates to the assessment year 1976–77 for which the previous year ended on August 16, 1975, and Income-tax Reference No. 428 of 1985 relates to the assessment year 1975–76 for which the previous year ended on August 16, 1974. During the previous year relevant to the assessment year under consideration in Income-tax Reference No. 267 of 1985, the company gifted to Sri P.J Ranjit, son of the assessee, a sum of Rs. 1 lakh and during the relevant previous year under consideration in Income-tax Reference No. 428 of 1985, the company made a gift of Rs. 34,000 to P.J George, Rs. 33,000 to P.J Eappen and Rs. 33,000 to P.J Ranjit, the three sons of the assessee. Two of the sons of the assessee were minors during the relevant previous year. The Income-tax Officer, while completing the assessment of the assessee, treated these amounts as payments made on behalf of, or for the benefit of, the assessee and, therefore, considered them, under section 2(22)(e) of the Income-tax Act, 1961, as deemed dividend in the hands of the assessee. On appeal, the Commissioner of Income-tax (Appeals) found that the payments were not made either to the assessee or on his behalf or for his individual benefit and, therefore, held that the amount paid to the sons cannot be considered as dividend in the hands of the assessee. The Revenue took up the matter in appeal before the Tribunal and the Tribunal held that the conclusion of the Income-tax Officer that the cash gifts paid by the company to the sons of the assessee were payments made on behalf of or for the individual benefit of the assessee rests on a mere assumption and not on facts brought on record. The Tribunal, therefore, dismissed the appeals.

3. Aggrieved by the orders of the Appellate Tribunal, the Revenue filed petitions to refer the questions of law which were refused to be referred by the Tribunal. Thereafter, as directed by this court, the Income-tax Appellate Tribunal, Cochin Bench, referred the following questions of law at the instance of the assessee:

For the assessment year 1976–77 (relating to Income-tax Reference No. 267 of 1985).

“(a) Whether, on the facts and in the circumstances of the case, section 2(22)(e) of the Income-tax Act is applicable to the facts of the case?

(b) Did the assessee discharge the burden?”

For the assessment year 1975–76 (relating to Income-tax Reference No. 428 of 1985):

“1. Whether, on the facts and in the circumstances of the case,—

(i) did the Revenue have any burden to discharge?

(ii) did the assessee discharge the burden?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law, facts, substance and reality in holding that the provisions of section 2(22)(e) of the Act were not attracted in this case?”

4. We heard counsel. Any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be (see section 8) and this dividend income shall be chargeable to income-tax under the head “Income from other sources” by virtue of section 56(2). The question for consideration, therefore, is whether the payments made by the company to the sons of the assessee could be considered as dividend in the hands of the assessee. It is certainly not dividend as understood in general law or under section 205 of the Companies Act. In the decision in Kantilal Mani-lal v. CIT, [1961] 41 ITR 275, the Supreme Court observed that (at p. 278):

“‘Dividend’ in its ordinary meaning is a distributive share of the profits or income of a company given to its shareholders. When the Legislature, by section 2(6A), sought to define the expression ‘dividend’, it added to the normal meaning of the expression several other categories of receipts which may not otherwise be included therein. By the definition in section 2(6A), ‘dividend’ means dividend as normally understood and includes in its connotation several other receipts set out in the definition.”

5. Section 2(6A) of the 1922 Act corresponds to section 2(22) of the 1961 Act with which we are concerned here which reads as under:

“‘dividend’ includes—

(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company;

(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares, by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not;

(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;

(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not;

(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.”

(The rest of the portions are omitted)

6. In the above “inclusive” definition of dividend, it will be seen that the Legislature had used the expressions “distribution” as well as “payment”. By enacting section 2(22)(e), the Legislature has created a fiction and has made the payments referred to in sub-clause (e) as dividend for the purpose of the Act. The expression “distribution” and “payment” cannote 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. Sub-clauses (a) to (d) refer to distribution by a company and sub-clause (e) includes in the definition of “dividend” any payment by a company in which the public are not substantially interested. This sub-clause creates a fiction bringing in certain payments in the net of dividend and, therefore, it will have to be given a strict construction, nevertheless, a construction to suppress the mischief which it sought to suppress (see CIT v. Jamnadas Sriniwas Pvt. Ltd., [1970] 76 ITR 656 (Cal)). To attract sub-clause (e) of section 2(22), three conditions have to be fulfilled, viz., (1) the company should not be a company in which the public are substantially interested within the meaning of section 2(18), (2) the shareholder should be a person who has a substantial interest in the company within the meaning of section 2(32), i.e, the shareholder should own benefit of at least 20% of the equity capital, and (3) the company should possess accumulated profits (to the extent of the payment) at the time it makes a payment.

7. If these conditions are satisfied, sub-clause (e) has the effect of bringing to tax the dividend in the hands of the shareholders, three types of payments made by the company. They are: (a) any payment of any sum by way of advance or loan to a shareholder; (b) any payment on behalf of a shareholder; and (c) any payment for the individual benefit of a shareholder. All the conditions for attracting section 2(22)(e) have been satisfied, admittedly, except conditions (b) and (c) mentioned above in this case. If the gifts made to the sons of the assessee by the company are payments on behalf of the assessee or payments for the individual benefit of the assessee, then those gifts could be treated as deemed dividend in the hands of the assessee. Since an artificial definition has been given and a fiction has been introduced by the Legislature in enacting section 2(22)(e) to bring into the net of dividend any payments made on behalf of or for the individual benefit of the shareholder, we are directed to interpret it strictly. In the decision in Smt. Tarulata Shyam v. CIT, [1977] 108 ITR 345, the Supreme Court observed, referring to the language of sections 2(6A)(e) and 12(1B) of the 1922 Act, as under (at p. 357):

“To us, there appears no justification to depart from the normal rule of construction according to which the intention of the Legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J. in Cape Brandy Syndicate v. IRC, [1921] 1 KB 64 (KB) at page 71, that:

“… in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in; nothing is to be implied. One can only look fairly at the language used.”

Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be.”

8. The purpose of enacting section 2(22)(e) is considered by the Supreme Court in the decision reported in Navnit Lal C. Javeri v. K.K Sen, AAC, [1965] 56 ITR 198 and held that the declaration of dividend in a closely-held company, normally, will be within the discretion of that group. When the Legislature realised that though the money was reasonably available with the company in the form of profits, those in charge of the company deliberately may refuse to distribute it as dividends to the shareholders, but adopt the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, to evade the payment of tax on accumulated profits. Therefore, it is provided that if a closely-held company adopts a device of making an advance to one of its shareholders, such shareholder will be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he has received the said loan by way of dividend. So also is the case of payments on behalf of the shareholder or payments to his benefit. It is this kind of well-planned device which the section intends to reach for the purpose of taxation. The fiction created for a particular purpose cannot be extended beyond the purpose for which it is intended. Legal fictions are created for definite purposes and are limited for the purposes for which they are created and should not be extended. (See M.D Jindal v. CIT, [1987] 164 ITR 28 (Cal), Rajputana Trading Co. Ltd. v. CIT, [1969] 72 ITR 286 (SC), CIT v. Bai Vina, [1965] 58 ITR 100 (Guj), CIT v. Elphinstone Spinning and Weaving Mills Co. Ltd., [1960] 40 ITR 142 (SC), Bengal Immunity Co. Ltd. v. State of Bihar, [1955] 6 STC 446 (SC) and CIT v. P.K Badiani, [1970] 76 ITR 369 (Bom)). Since a fiction has been introduced to bring amounts paid otherwise than as dividend, as generally understood, into the net of dividend for the purpose of taxation, it has been held that the language of section 2(22)(e) should be given a strict construction (See Smt. Tarulata Shyam v. CIT, [1977] 108 ITR 345 (SC), CIT v. C.P Sarathy Mudaliar, [1972] 83 ITR 170 (SC), Commissioner Of Income Tax, Gujarat v. Keshavlal Lallubhai Patel ., [1965] 55 ITR 637 (SC), Philip John Plasket Thomas v. Commissioner Of Income Tax, Calcutta, [1963] 49 ITR 97 (SC), CIT v. Prem Bhai Parekh, [1970] 77 ITR 27 (SC), Bhogilal Laherchand v. CIT, [1954] 25 ITR 523 (Bom) and B.M Desai v. V. Ramamurthy*, [1958] 34 ITR 409 (Bom)).

9. Counsel for the Revenue referred to the decisions in CIT v. Sri Meenakshi Mills Ltd., [1967] 63 ITR 609 (SC), Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd., [1986] 157 ITR 77 (SC) and Life Insurance Corporation of India v. Escorts Ltd., [1986] 59 Comp Cas 548 (SC) : (1986) 1 SCC 264 : AIR 1986 SC 1370 and submitted that the entire transaction formed part of a basic arrangement or scheme between the assessee and the company and that the device adopted by the assessee is an obvious device to avoid tax liability and that it requires no further evidence, direct or circumstantial, to come to the conclusion that the device was adopted for avoidance of tax liability. In such circumstances, it is submitted that the court should lift the corporate veil to discern the fraud or improper conduct. In other words, it is submitted that this court should take into account the reality of the situation. These propositions are well-established and the Supreme Court itself observed that it is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect of parties who may be affected, etc.

10. During the previous year relevant to the assessment year 1975–76, the company, admittedly, made a gift of Rs. 1 lakh to the three sons of the assessee. In the assessment order for the year 1975–76, the Income-tax Officer added this amount stating that the transfer is only on behalf of, or for the benefit of, the assessee. The Commissioner stated that the gifts were made to the assessee's sons one of whom was a minor and it was contended that the amounts were invested by them in their own names and also included in their wealth-tax returns. It is noted that the Income-tax Officer did not doubt the genuineness of the alleged gift, but merely included the amount as deemed dividend. The Commissioner of Income-tax (Appeals) found that the payment was not made either to the appellant or on his behalf or for his individual benefit. The Income-tax Officer only assumes that the benefit to the son is the benefit to the assessee. Such an interpretation cannot be given to section 2(22)(e). In the appeal before the Tribunal for the assessment year 1975–76, the Tribunal held that it was not established that the cash gifts by the company to the sons of the assessee were sham and that the ownership, control and enjoyment of the funds so gifted by the company really vested in the assessee and not in his sons. There was absolutely no material before the Income-tax Officer to come to the conclusion that the gift was made on behalf of, or for the benefit of, the assessee. In that view of the matter, the Tribunal held that the conclusion of the Income-tax Officer was based only on assumptions and not on facts brought on record. Since there was no finding to this effect based on concrete facts, the Tribunal also did not interfere with the order of the Commissioner of Income-tax (Appeals).

11. For the year 1976–77, the amount gifted by the company to the son of the assessee was Rs. 1 lakh. That also was treated by the Income-tax Officer as deemed dividend on the assumption that such transfer is only on behalf of, or for the benefit of, the assessee. On first appeal, the Commissioner of Income-tax (Appeals) found that the Income-tax Officer had to prove strictly, expressly and explicitly that the payment was made on behalf of the shareholder and that no attempts have been made to show that the gift was made by the company to the son on behalf of the shareholder or for the benefit of the shareholder. The Revenue could have led evidence to show that the payment was made by the company to the sons of the shareholder, but, in reality, the amounts were received by the shareholder. There was no evidence to that effect. The Revenue could have proved that the ultimate destination of the amount is the father. But the facts adduced will show that the amount has been utilised by the donees for investment for their benefit. It is in that context that the reality of the gift has not been doubted by the Income-tax Officer. There is no case that the payments have been made to discharge any liability of the assessee to the company.-Apart from the assessee, his wife and father are also shareholders. Therefore, there is no material to show that the payments in question were made to the sons of the assessee on behalf of or for his benefit. From the relationship alone, a conclusion cannot be drawn to the effect that the payments are made on behalf of, or for the benefit of, the assessee, a shareholder. The other shareholders are the mother and grandfather of the payees. In the circumstances, we hold that section 2(22)(e) of the Act is not applicable to the facts of the case and that the burden is on the Revenue to prove that the payment was made on behalf of, or for the benefit of, the assessee only. The assessee has discharged its burden of proving that the gifts were made to the assessee's sons and they have invested the amounts in their own names and also included the same in their wealth-tax returns. In fact, the Income-tax Officer did not doubt the genuineness of the transaction.

12. In the circumstances, we answer question No. (a) in Income-tax Reference No. 267 of 1985 in the negative, that is, in favour of the assessee and against the Revenue and question No. (b) in the affirmative, that is, in favour of the assessee and against the Revenue. We also answer question No. 1(i) and (ii) in Income-tax Reference No. 428 of 1985 in the affirmative, that is, in favour of the assessee and against the Revenue and question No. 2 is also answered in the affirmative, that is, in favour of the assessee and against the Revenue.

13. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.