Bombay High Court
Sadhana Textiles Mills Pvt. Ltd. vs Commissioner Of Income-Tax on 18 November, 1988
Equivalent citations: [1991]188ITR319(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT S.P. Bharucha, J.
1. The questions that arise in this reference made at the instance of the assessee read thus :
" (1) Whether the provisions of section 2(22)(e) of the Income-tax Act, 1961, are applicable to the advance or loan made to a corporate entity?
(2) If the answer to question No. 1 above is in the affirmative, whether, on the facts and in the circumstances of the case, the provisions of section 2(22)(e) are applicable in respect of the credit balance appearing in the books of the assessee?"
2. The reference relates to the assessment year 1969-70, the corresponding previous year having ended on March 31, 1969. The assessee is a private limited company. It holds 10,940 shares (out of 11,000 shares) of Harshad Textiles Mills Pvt. Ltd. (now referred to "Harshad"). Harshad is thus the assessee's subsidiary company. Harshad had accumulated profits to the extent of Rs. 86,988 on March 31, 1969. It was a creditor of the assessee during the relevant previous year in amounts larger than the amount of the accumulated profits. The Income-tax Officer, therefore, treated the accumulated profits as dividend in the assessee's hands under section 2(22)(e) of the Income-tax Act, 1961.
3. The assessee contended in appeal before the Appellate Assistant Commissioner that the credit balance due to Harshad arose due to day-to-day transactions of purchase and sale and the like and it would not be covered by section 2(22)(e). It was also contended that this provision would not apply to intercorporate shareholders. The Appellate Assistant Commissioner rejected the contention, as did the Tribunal in further appeal.
4. Dividend, by reason of sub-clause (e) of clause (22) of section 2, includes :
"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 but 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."
5. Mr. Rajagopal argued on behalf of the assessee that a shareholder, payment to whom would be covered by this provision, has to be an individual, and he relied in this context upon the phrase "for the individual benefit" in sub-clause (e).
6. Analysed, the provision of sub-clause (e) is that dividend includes (i) a payment by a company of the nature covered by the provision by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or (ii) a payment by such company on behalf, or for the individual benefit, of such shareholder, to the extent to which the company in either case possesses accumulated profits. Under clause(31) of section 2, "person" includes a company. This case is, therefore, squarely covered in the first instance by the provision of sub-clause (e) i.e., "of an advance or loan to a shareholder who has a substantial interest in the company". The phrase referred to by Mr. Rajagopal is used in respect of the second instance and has no application.
7. In the result, the first question must be answered in the affirmative and in favour of the Revenue.
8. It is agreed by counsel that the answer to the second question must be in the affirmative and in favour of the Revenue, having regard to the judgment of this court in CIT v. P. K. Badiani [1970] 76 ITR 369.
9. Accordingly, both questions are answered in the affirmative and in favour of the Revenue.
10. The assessee shall pay to the Revenue the costs of the reference.