Income Tax Appellate Tribunal - Mumbai
Smt. Gunvanti R. Mehta vs Income-Tax Officer on 23 February, 1993
Equivalent citations: [1993]45ITD382(MUM)
ORDER
R.P. Garg, Member
1. This is an appeal by the assessee against the order of the DCIT(A), for the assessment year 1982-83. The main dispute in this appeal is against the assessment of Rs. 66,930 as income of the assessee under Section 2(22)(e) of the Income-tax Act, 1961.
2. The facts are that the assessee is a director in M/s. Suraj Diamond Industries Pvt. Ltd. She held 100 shares out of 14,700 shares of the company. Her husband and son both held 2,600 shares each. The total holding of the family was 5,300 equity shares. The ITO noticed that in assessee's accounts, the company had shown an advance of loan of Rs. 66,931 at the end of the year. He also noticed that the company had a reserve and surplus of Rs. 1,17,700. The assessee being a director of the company and the reserves and surplus being more than the amount advanced to the company, the ITO applied the provisions of Section 2(22)(e) of the Act and treated the amount of Rs. 66,931 as deemed dividend received by the assessee and added the same to her income.
3. Before the DCIT(A), the assessee submitted that she was not substantially interested share-holder; that the amount represented the interest outstanding on the earlier loan of Rs. 7,80,000 repaid during the year and that she had another loan account showing a credit balance of Rs. 46,846 and, therefore, only the balance amount of Rs. 20,085 alone, if at all, could be added to her income. The DCIT(A) did not agree with the contention of the assessee and held as under:
3. I have considered carefully the submissions of the assessee. The outstanding amount of Rs. 66,931 on the loan account from the company to the assecsee is in the nature of loan and, therefore, provisions of Section 2(22)(e) would be attracted to the said amount. This loan is a separate one and no set off is permissible in respect of another loan from the appellant to the company. The Section 2(22)(e) speaks of loan from the company to the shareholder and in my opinion and to my knowledge by no accountancy principle, such set off can, as claimed by the assessee, be permissible. Furthermore, from the list of shareholders obtained it is seen that the assessee has 100 equity shares, 2,600 shares are owned by her husband Sh. R.C. Mehta and 2,600 shares by her son Shri J.R. Mehta. Thus, out of 14,700 equity shares of the company, 5,300 shares are owned by the appellant and her husband and son. Therefore, appellant is having substantial interest in the company within the meaning of Explanation '3' to Section 2(22). The addition of Rs. 66,930 is, therefore, considered to be legally tenable. The same is upheld.
4. The learned counsel for the assessee, Sri D.G. Thakkar and the learned Departmental Representative, Sri N.A. Kazi were heard and their rival submissions considered. Section 2(22)(e) deems the following as dividend:
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.
This clause apparently applies only to a shareholder who has a substantial interest in the company. In other words, it deems the payment of a sum by way of advance or loan or any sum on behalf of or for the benefit of a shareholder as income by way of dividend only if such shareholder has a substantial interest in the company. A person who has "substantial interest" is defined in Section 2(32) of the Act, to mean a person beneficially owning at least 20 per cent of its voting power. It reads as under:
2(32) 'person who has a substantial interest in the company in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power.
The assessee held 100 equity shares out of 14,700, which is a very small holding much less than twenty per cent, as required under Section 2(32) for the purposes of the application of the provisions of Section 2(22)(e) of the Act.
5. The ITO states in his order that the assessee is a director and, therefore, Section 2(22)(e) of the Act applies. On a bare reading of this section, which is extracted above, it is clear that this section nowhere says that it applies to a director. It applies to a share-holder who has substantial interest in the company. The fact that a person is a director has no relevance for the purpose of this section. The DCIT(A) upholds the applicability of this section because the assessee, along with her husband and son, own 5,300 equity shares which, in his opinion, is sufficient to treat her as a person having substantial interest. The total share holding of the three (5,300) being more than 20 per cent of the entire equity of the company (14,700). Here again, I find that there is nothing in Section 2(22)(e) of the Act or Section 2(32) of the Act to suggest that the holding or ownership of voting rights of the shares held by the family can be taken into consideration for determining the question as to whether a person is substantially interested in the company or not. The words are "shareholder, being a person who has a substantial interest in the company" as appearing in Section 2(22)(e) of the Act and "a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent of the voting power" as appearing in Section 2(32) of the Act. It is the ownership of the shareholder alone, to whom the loan/advance is made by the company and not his or her relative or family member which is the determinative factor. Income-tax; is a personal tax and is levied on a person in respect of his total income, i.e. the income which has arisen, accrued or received or deemed to have arisen, accrued or received by him and the amount is the computation as per the provisions of the Act. Husband and son of the assessee are different assessee, independent and distinct persons and entities under the Act and unless the law prescribes the transactions to be looked into together while computing the income of the assessee, no cognizance of the shareholdings or other transactions thereof could be taken into consideration while computing the income of the assessee. No provision has been brought to my notice which authorises the revenue authorities to consider the share holding or ownership of the husband or son as the holding or ownership of the assessee or to include the same for determining the assessee's interest in the company. The assessee having held only 100 out of 14700 shares of the company could not be a person having not less than twenty per cent voting right so as to invoke the provisions of Section 2(22)(e) of the Act. This provision, in my opinion, is not applicable in the present case and the addition made therefor requires deletion. As the section itself is not applicable, I need not go into the other aspects of the matter as to whether the amount of Rs. 66,931 was a loan or advance to the assesses, or whether only the net amount of Rs. 20,085, after setting off the credit balance of the assessee alone, could be added as the income of the assessee under Section 2(22)(e) of the Act.
6. The other ground regarding levy of interest under Section 217 of the Act is stated to be consequential and requires no discussion.
7. In the result, the appeal is allowed.