The Judgment of the Court was delivered by

Jagadisan, J.:— These two reference applications under the Indian Income-tax Act may be dealt with together as they raise a common question as to the interpretation of section 12(1B) of the Act.

2. The facts giving rise to Tax Case No. 185 of 1959 are as follows: One Visalakshi Achi, a shareholder in a company called Panchanayaki Limited incorporated under the Indian Companies Act, borrowed from the company a sum of Rs. 70,000 on August 30, 1945. On her death in the year 1947, Sundaram Chettiar, her son, inherited her estate and became the owner of her shares in the company. It appears that he undertook the liability of his mother to the company and made himself indebted to it for the amount of principal and interest due by her. But he failed to discharge the debt and of course continued to be the shareholder of the company. It is in this state of affairs that sections 2(6A)(e) and 12(1B) of the Act came into the statute book under the Finance Act, 1955, with effect from 1st April, 1955. A reference to the section will be made later. In the assessment of Sundaram Chettiar under the Income-tax Act for the assessment year 1955-56 relevant to the accounting year ended March 31, 1955, the Income-tax Officer treated the loan outstanding from him to the company as his dividend income and brought that amount to tax. The assessee unsuccessfully preferred appeals to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal. These appellate authorities also took the view, in agreement with that of the Income-tax Officer, that under section 12(1B) of the Act the outstanding loan due to the company was taxable. On an application filed by the assessee for reference under section 66(1) of the Act, the following question has been referred to us by the Tribunal:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,924 was liable to be treated as dividend within the meaning of section 2(6A)(e) read with section 12(1B) of the Income-tax Act?”

3. The amount of Rs. 42,924 treated by the Income-tax Officer as dividend was arrived at in the fallowing manner, the Income-tax Officer observing thus in his order:

“Inasmuch as he (assessee) has not discharged the loan before the extended time limit of June 30, 1955, it has to be treated as a loan within the meaning of section 12(1B) of the Act to the extent of the accumulated profits. The computation of accumulated profits will be as under:

“As on March 31, 1953 Rs. General and taxation reserve 42,202 Balance in the profit and loss account 2,107 Total 44,309 Less: Rs. Taxes paid 741 Dividends declared 644 1,385 Net Total 42,924

Balance to be treated as dividends. This will be treated as dividends under section 12(1B)”.

4. In Tax Case No. 186 of 1959, the facts are as follows: Visalakshi Achi was a shareholder of a company called Maragathavalli Ltd and incorporated under the Indian Companies Act. She borrowed a sum of Rs. 70,000 on August 30, 1945, from the company. On her death in 1947, her son, Manickavasagam Chettiar, inherited her shares in that company. He also undertook to discharge her liability to the company and made himself indebted for the amount of loan still due and outstanding to it. In the income-tax assessment proceedings for the year 1955-56, Manickavasagam Chettiar was assessed to tax on this loan amount on the footing that it represented dividend income in his hands taxable under section 12(1B) of the Act. His plea that the section was inapplicable was overruled by the Income-tax Officer, and this decision was affirmed both by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. At the instance of the assessee, the Tribunal has referred the following question to this court under section 66(1) of the Act:

“Whether on the facts and in the circumstances of the case the sum of Rs. 12,842 was liable to be treated as dividend within the meaning of section 2(6A)(e) read with section 12(1B) of the Indian Income-tax Act?”

5. The amount of Rs. 12,842 has been arrived at by the Income-tax Officer in the following manner. He observed in his assessment order:

“Inasmuch as he (assessee) has not discharged the loan before the extended time limit of June 30, 1955, it has to be treated as a loan within the meaning of section 12(1B) of the Act, to the extent of the accumulated profits. The accumulated profits will be as under;

“As on June 30 1954- Rs. Taxation and general reserve 38,388 Balance in the profit and loss account 2,175 Total 40,563 Less: Rs. Income-tax paid 816-00 S. 23A applied for the years 1947-48 to 1950-51 26,905.00 27,721 Balance available for distribution 12,842”

6. The question raised is whether section 12(1B) of the Act can be invoked by the assessing authorities on the facts and circumstances set forth above.

7. Section 2(6A) defines “dividend”. It is an artificial definition adopted by the legislature for the purpose of the taxing statute and strangely many things, which may not obviously be called dividend in the popular sense in which the expression is understood, receive the stamp of dividend under the Act. What is relevant for our purpose is only the following definition:

“2(6A) ‘dividend’ includes……

(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.”

8. Sub-clause (ii) reads:

“but ‘dividend’ does not include…………

(ii) any advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company.”

9. It is common ground that the companies with which we are concerned in this case were not bankers or were not doing business in money-lending. The assessees have not relied upon section 2(6A)(e)(ii) quite properly. Section 12(1B) is in these terms:

“Any payment by a company to a shareholder by way of advance or loan which would have been treated as a dividend within the meaning of clause (e) of sub-section (6A) of section 2 in any previous year relevant to any assessment year prior to the assessment year ending on the 31st day of March, 1956, had that clause been in force in that year, shall be treated as a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of March, 1956, if such a loan or advance remained outstanding on the first day of such previous year.”

10. Section 2(6A)(e) has introduced a fiction that loans advanced by a company to a shareholder should be held to be dividends. Section 12 provides that tax shall be payable by an assessee on dividends earned by shareholders holding shares in companies. Section 12(1B) enables loans advanced by companies to shareholders prior to April 1, 1955, being brought to tax. The scheme of the Income-tax Act is only to tax the income of one year, that is, “the previous year” relating to the “assessment year”, which has been denned in the Act. Though the loans might have been advanced long prior to April 1, 1955, this section treats them as dividends under section 2(6A) and deems them to have been received by the assessee as such dividends in the previous year relevant to the assessment year ending on March 31, 1956, if such loans remained outstanding on the first day of such previous year. As considerable hardship was created by this statutory provision by bringing to tax loans advanced years ago, the Central Board of Revenue issued a circular to the effect that outstanding past loans would not be taxed as dividends if they are genuinely repaid to the company before June 30, 1955, and the moneys were not again re-lent by the company to any other party. The assessees in these cases did not repay the loans in spite of the circular of the Central Board of Revenue for reasons best known to themselves.

11. Now the conjoint application of section 2(6A)(e) and section 12(1B) requires the following elements to be present: 1. Payment by a company (not being a company in which the public are substantially interested within the meaning of section 23A). 2. The payment must be to a shareholder of the company by way of advance or loan or it must be on behalf of or for the individual benefit of a shareholder. 3. The loan should have been advanced by the company not in the ordinary course of its business and when the company was not carrying on money-lending business substantially. 4. The loan must have remained outstanding in the beginning of the previous year relevant to the assessment year 1955-56 in relation to the shareholder. 5. The loan can be treated as dividend income only to the extent to which the company possessed accumulated profiis at the time when the loan or advance was made. These provisions are intended to act retrospectively enabling the department to bring to tax loans or advances made by the companies of the description contained in the section to shareholders long before the artificial and extended definition of the term “dividend” was conceived of by the legislature. A locus poenitentiae was however offered to the shareholders who obtained such loans to discharge them on or before June 30, 1955, so that tax on that amount can be avoided. The object of these provisions is to prevent companies from distributing dividends under the guise of loans. A safeguard has therefore been enacted that the loans should be treated as dividends only to the extent of accumulated profits of the company as under the law dividends cannot be paid except out of profits.

12. It is urged on behalf of the assessees that the loans were advanced by the companies only to Visalakshi Achi and that there was no payment “by the companies to the assessees” and that section 12(1B) is therefore inapplicable. It is not disputed—and indeed it cannot be disputed—that had Visalakshi Achi been alive in the year of assessment and if she was the assessee in that year, transactions between her and the companies would fall quite clearly within the ambit of the taxing provision. The crucial question, therefore, is was there a payment “by the companies to the assessees”? As stated already the assessees themselves undertook to discharge the loans due by their mother to the two companies. It is not necessary that payment should have been made by the company to the shareholder in the current coins of the realm. Earl Jowitt points out in his Dictionary of English Law under the caption “payment” as follows, at page 1318: “Payment in fact is an actual payment from the payer to the payee; payment in law is a transaction equivalent to actual payment.” We are unable to agree with the contention urged on behalf of the assessees that inasmuch as no sum of money was received in cash or in specie by the assessees from the companies, there can be no payment within the meaning of section 12(1B) of the Act. The substantial requirement to attract the applicability of section 12(1B) is that there should be the jural relationship of debtor and creditor between the shareholder and the company.

13. The Income-tax Officer has proceeded on the basis that the relevant date to ascertain the accumulated profits of the company would be the commencement of the previous year relating to the assessment year 1955-1956. This however is not the correct view of the matter. It is the date of payment by the company to the shareholder of the loan or advance that should be taken into account for the purpose of ascertaining the extent of its taxability in relation to the accumulated profits of the company. If the amount paid is far in excess of such accumulated profits the excess cannot be treated as dividend. The question that has now to be determined is whether the date of payment in these cases should be taken as the date when Visalakshi Achi first obtained the loan from the two companies or the date when the assessees themselves undertook to discharge that debt to the company after her demise. This question is not free from difficulty. The assessees are the sons of Visalakshi but it is not known whether she had Other sons entitled to rank as co-heirs with them. It cannot be said that the assessee in each case became liable to the companies to discharge the obligation of the deceased Visalakshi as her legal representative. Under what circumstances and how they substituted themselves in the place of their mother are not known. The only fact disclosed by the records is that each of the assessees undertook to discharge the debt and made himself personally liable to the company no doubt in substitution of the liability of the deceased to the companies. We would therefore hold on the specinl features of this case that the relevant date, the date of payment, to be taken into account for the purpose of ascertaining the accumulation of the profits of the companies is the date on which each of the assessees made himself personally liable to the companies.

14. The questions are therefore answered in the following manner: The department is entitled to treat as dividend within the meaning of section 2(6A)(e) read along with section 12(1B) of the Income-tax Act the amount of loan due by the assessee to the company on the date when he undertook to discharge that loan to the company to the extent of the accumulated profits of the company of that date. As the assessees have partly failed and partly succeeded there will be no order as to costs.

15. Order accordingly.