Kerala High Court
Commissioner Of Income-Tax vs Smt. S. Parvathavarthini Ammal on 22 January, 1996
Equivalent citations: [1996]219ITR661(KER)
Author: G. Sivarajan
Bench: G. Sivarajan
JUDGMENT V.V. Kamat, J.
1. The following three questions are referred by the Income-tax Appellate Tribunal, Cochin Bench :
" (i) Whether the loans aggregating to Rs. 6,25,000 received by the assessee from Messrs. Kanthimathi Plantations Pvt. Ltd., between December 19, 1978, and February 16, 1979, could be treated as deemed dividend within the meaning of Section 2(22)(e) of the Income-tax Act, 1961 ?
(ii) Whether the Tribunal was right in holding that the transfer of the shares had taken place on the date the transfer forms were executed by the assessee and not the date (October 25, 1980) on which the company registered the shares in the names of the minors ?
(iii) Whether, on the facts and circumstances of this case, the assessee could be treated as a person having substantial interest in the company within the meaning of Section 2(32) ?"
2. In fact after hearing learned counsel for the parties the crucial question is as to whether the registration in the matter of transfer of share certificate would relate to the date of the submission of the application form for the said purpose and the question whether, as is now sought to be contended, the transfer on the basis of the application would be considered to be proper and legal, would be the only aspect that would require consideration and consequential decision. In fact, during the course of hearing of the reference before us, the first question that the registration relates back to the date of the application in question was not in serious dispute in view of the settled position in regard thereto.
3. The facts are in a narrow compass. The assessee is a shareholder of Kanthimathi Plantations Pvt. Ltd. The year of assessment in question is 1979-80. At the commencement of the year in question the assessee was the owner of 40,600 shares out of a total of Rs. 1,50,100 shares of the company. It is seen that the assessee had borrowed a sum of Rs. 6,25,000 from the company. In this connection, the question that came up before the Income-tax Officer was whether this loan amount of Rs. 6,25,000 taken by the assessee is to be treated as deemed dividend under Section 2(22)(e) of the Income-tax Act ? In answer thereto, the assessee submitted that she had gifted 11,000 shares to her grandchildren on November 20, 1978, and, therefore, consequently with regard to the above amount covered by the shares, having gifted them to the grandchildren she Was not the beneficial owner of 20 per cent. of the shares of the company. It is in this connection that this question of gift of November 20, 1978, placed on record of the company in accordance with the provisions of the Companies Act immediately thereafter, which was registered by the company thereafter on October 25, 1980, that came up for consideration with regard to the determination as to when this transfer could be considered to have been effected.
4. There is no dispute that a person who has a substantial interest in the company would have to be understood as a person who is the beneficial owner of shares carrying not less than 20 per cent. of the voting power. This position is clear by the statutory provision of Section 2(32) of the Income-tax Act. There is also no dispute that the term "dividend" includes any payment by a company by way of advance or loan to the shareholder being a person who has a substantial interest in the company to the extent to which the company possesses accumulated profits. As stated above this position is also more than settled by way of the concerned statutory provision referred to above. As a logical corollary thereto, if the transfer of the shares--11,000 shares-alleged to have been gifted on November 20, 1978, and thereafter applied for in regard thereto in accordance with the provisions of the Companies Act, is not accepted, the inevitable consequence would be, the assessee being the beneficial owner of the shares carrying not less than 20 per cent. of the voting power, the payment would have to be termed as deemed dividend and in regard thereto the assessee would not get a benefit in the result. The Income-tax Officer took such a view that the assessee would not be entitled to any benefit. The Income-tax Officer doubted the genuineness of the transaction as urged by the assessee.
5. The matter was taken up before the appellate authority constituted by the Commissioner of Income-tax (Appeals), Ernakulam. The appellate authority considered the material on record to find out as to whether the material is acceptable in support of the contention of genuineness of the transaction and observed that there is no clear evidence brought on record to doubt the evidence of Mr. Moraes, an advocate of the company, who is also the director thereof, to doubt the transaction in any manner. In fact, the appellate authority has observed that the deponent, not only deposed but also filed an affidavit in support thereof has not been cross-examined in any manner. The appellate authority has considered this aspect by referring to certain peculiarities of the company to the effect that none of the shareholders of the company was the director thereof.
The appellate authority also observed that there is no material to the effect that the affidavit of the director who is also an advocate is not reliable. The fact-finding authority has also pinpointed that no attempt has been made to find out any material in regard to the evidence on record. It appears that initially there was a legal advice to the effect that the shares could not be registered in the name of minor children. After considering the facets of such legal advice, it appears that ultimately a decision was taken and the share application for transfer of shares was granted and the shares came to be registered on the basis of the application subsequently in 1980. The fact-finding authority has accepted the position that the shares were actually gifted on November 20, 1978, and were handed over by the assessee to the donees. This fact-finding is specifically recorded when the authority found that there is no contrary material to show that the positive assertion of the assessee in regard thereto could be said to be false or otherwise unacceptable. The appellate authority has proceeded further, relying on the affidavit of the director of the company that such application for transfer came to be lodged with the company some time in December 1, 1978, and as a result thereof the assessee had done everything in her power to make the transfer complete and effective as far back as on December 1, 1978.
6. It is on the basis of this factual situation, the appellate authority proceeded further. This was on the basis that the shares came to be gifted on November 20, 1978, and application for transfer was placed on the record of the company with effect from December 1, 1978, on the basis of which dividends were declared thereafter. Naturally, as a consequence, the appellate authority directed that this amount of Rs. 6,25,000 should be excluded from the total income of the assessee.
7. The Department took up the matter further in appeal before the Income-tax Appellate Tribunal, joined by the cross-objections of the assessee and they were taken up for joint consideration. There is no dispute that in this reference, we are concerned with the contentions taken up in appeal by the Department only. The Tribunal again in appeal considered the question in satisfactory details. It is observed that the assessee obtained share transfer forms from the Registrar of Companies on November 13, 1978. Relying on the affidavit of Shri Ramaswami Iyer, director of the company, it is further observed that the transfer forms bear the signature of the transferor as well as the transferees through their natural guardian --the mother. It is also observed that there were four forms altogether, the first two were filled and submitted on November 26, 1978, and the other two on December 1, 1978. It is already stated that this transaction of transfer by gift came to be registered subsequently and in regard to this period, the Tribunal has considered the reasons for the delay in registering the transfer of shares in the company's books, and it is emphasised in regard thereto that in addition to the affidavit, Shri Ramaswami Iyer, the director of the company, was also examined before the Income-tax Officer and he explained that this was because of the initial opinion that the shares cannot be transferred in the name of the minors, which position was required to be clarified. It is on the basis of these materials, the Tribunal observed that all these aspects that are placed on record would clearly point out the genuineness of the gift of 11,000 shares of the assessee in favour of her daughter's minor children. The Tribunal has also referred to the correspondence of the advocate, Shri C. Krishnan Nair, dated February 20, 1980, giving an opinion in the nature of legal advice that the shares could be legally transferred in the name of the minors who are looked after by a proper legal guardian. In fact, it will have to be observed that this is one of the first elementary principles of the law of contract settled years ago by the judgment of the Privy Council in Mohori Bibee v. Dharmodas Ghose [1903] ILR 30 Cal 538 ; 30 IA 114 to the effect that there is no prohibition for the parties to enter into a contract for the benefit of minors. This is also a settled position and there cannot be any dispute in regard thereto. Factually, the Tribunal has also referred to the factual endorsement of the Company Law Board favouring registration referring to the leading commentary Guide to the Companies Act by Shri A. Ramaiya. The Tribunal has re-emphasised the factual finding that the genuineness of the gift cannot be doubted, on a second count merely because there was a delay on the part of the company in registering the shares in favour of the minors.
8. It is thereafter the Tribunal relying on the decision reported in CIT v. Smt. Suraj Bai [1972] 84 ITR 774 (Raj) held that the gift of shares would have to be understood as complete for the purpose of the Gift-tax Act, 1958, on the date of the delivery of the share certificates along with the transfer deeds to the donees, irrespective of delay in the matter of registration in regard thereto. It is also observed by the Tribunal that the gift is complete when the beneficial interest is transferred by the donor to the donee. In this connection, the Tribunal has again placed reliance on the well-known commentary Guide to the Companies Act by Shri A. Ramaiya. The Tribunal holding that the delayed registration on October 25, 1980, would have to be understood as relating back to the date on which the properly complied application forms were submitted to the Registrar of Companies on November 20, 1978. Accordingly, the Tribunal endorsed the view of the first appellate authority that the amount of Rs. 6,25,000 could not be treated as deemed dividend in view of the fact that the assessee is not a person who had substantial interest in the company within the meaning of the provisions of the Act.
9. Learned counsel for the Department strenuously urged that it will have to be examined as to whether the transfer of 11,000 shares as sought to be contended satisfies all the requirements not only of the Transfer of Property Act but also of the Indian Companies Act in regard thereto. Learned counsel urged that when the joint stock becomes the subject-matter of transfer, mere resort to the provisions of the Transfer of Property Act are not conclusive and it should be seen whether there is a transfer in accordance with the provisions of the Companies Act. It is urged in this connection that the requirements of both these enactments would show that without ah anterior transfer, anterior in point of time with regard to the submission of the application for transfer before the Registrar of Companies there would be no satisfactory establishment in regard thereto. In other words, learned counsel urged that there should be first a transfer properly made of the shares which should then be presented along with the share certificate to the board of directors either by the transferor or by the transferee for the change of registration in respect of them and until such a change is effected in the books of the company, the transferor will continue to be the holder of the shares. Learned counsel in support of the submission placed reliance on the two decisions R. Subba Naidu v. CGT [1969] 73 ITR 794 (Mad) and CWT v. Babulal Jatia [1982] 137 ITR 540 (Cal). The proposition enunciated by the decisions placed for our consideration would not entertain any dispute whatsoever. Gift will have to be established and on the basis thereof an application for transfer could be considered, and both these aspects would require satisfaction bf both the above enactments.
10. Learned counsel also placed reliance on the decision of the Supreme Court Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar, AIR 1974 SC 1728 ; [1975] 45 Comp Cas 43. The Supreme Court was dealing with the proceedings of an administrative suit based on the will in which certain shares, the rights and title in regard to which became matters of dispute. The material before the Supreme Court related to a document supported by an independent document of gift deed which was properly established on facts therein. The factual matrix shows that the donor delivered the registered gift deed together with the share certificate to the donee and subsequently also the blank transfer forms duly signed by the donor. It is in this connection emphasis was given to the properly registered document creating a transfer and consequently much importance was not given to the blank forms tendered thereafter under the proper signature of the donee. Even then it is observed that it is a well-settled position of law that unless the gift is completed as required by law mere intention to make a gift cannot pass any title to the donee and does not make the donee the owner of the property gifted by the donor. Learned counsel for the Department emphasised this aspect in support of his submission that the gift has to be established and unless the gift is properly established the further step in approaching the Registrar of Companies with an application would not render any validity to the step in approaching the Registrar of Companies, In other words, learned counsel submitted that assuming that all the formalities with regard to the application of transfer form are perfect that would not solve the difficulty of the situation in view of the legal position that it is the gift that has to be validly and legally established. In fact there need not be any quarrel even in regard to this position. In fact, the Supreme Court itself has observed that the questions have tended to become needlessly clouded and this is by introducing doctrines or concepts really operating in separate and distinct fields of their own. It is taken for granted that relevant provisions of the Transfer of Property Act and the Companies Act would have to be understood and interpreted harmoniously, which would certainly not mean that a provision of one Act could be nullified by any provision of the other Act.
11. As far as the requirements of transfer are concerned, in paragraph 9 of the said judgment substantial requirements are succinctly reproduced placing on record the different facets of the situation as provided by sections 122 and 123 of the Transfer of Property Act. It is emphasised by way of a declaration of law that the substantial requirements are :
(1) The donor must transfer property which is the subject-matter of the gift, voluntarily and without consideration ; and (2) the donee must accept it during the lifetime of the donor or while the donor's competence to give exists.
11. It is also observed by reference to the provisions of Section 123 of the Transfer of Property Act that the mode of transfer lays down that the transfer may be effected either by a registered instrument signed by the donor and attested by at least two witnesses or by delivery. It is emphasised that no special mode of delivery is specified, but the delivery may be made in such a way as the goods sold are delivered.
12. Therefore, the position appears to be crystal clear that a registered document is not a must and even so the gift could be properly understood as effective if the delivery of the subject-matter of the gift is understandable.
13. In the process of reasoning we will have to ascertain as to whether the delivery aspect is established. We make it clear that although the questions that are referred to us do not require answer to these questions, for the completion of the judgment and with an anxiety not to leave anything unturned as has been submitted before us, these questions have been taken up for consideration.
14. Firstly, we have already stated that the fact-finding authorities have accepted the factual material on record with sufficient reasons and satisfactory explanations in support thereof. As stated above, the fact-finding authority has accepted that the gift deed was executed on November 20, 1978. This fact-finding already referred to in detail hereinbefore is supported by reasons and there is no occasion whatsoever to disagree with the said reasoning. Additionally it is also factually recorded that the first two forms were submitted on November 26, 1978, and the remaining two forms were submitted on December 1, 1978, after they were obtained on November 13, 1978, from the office of the Registrar of Companies. Factually, the first appellate authority has accepted the evidence of the execution of the gift deed. Even the Tribunal, in yet another way independent of the first fact-finding authority has confirmed this aspect to the effect that the blank forms were obtained on November 13, 1978, and after completing them the transferor and the minor transferee through their natural guardian, their mother have submitted the forms on November 26, 1978, and December 1, 1978, respectively. Independently itself the Tribunal placed reliance on the affidavit and the oral evidence of Shri Ramaswamy Iyer, the director of the company, reached a conclusion that the gift of 11,000 shares by the assessee in favour of her daughter's minor children is proved to be a genuine transaction. It needs to be noted that the Tribunal has also refused to doubt the genuineness, by accepting the evidentiary material in regard thereto, on the ground that there was a mere delay in the process of registration also.
15. In fact, it will have to be seen that this genuineness of the transaction of gift was really the edifice of the frame of questions under reference. It would be seen that the questions referred if they are scrutinised relate only to a situation as to whether a delayed registration would relate to a situation back to the date of filing of the application form in the matter of determination of the rights of the assessee to get exclusion of the amount of Rs. 6,25,000 and whether as otherwise contended by the Department that the said amount would have to be treated as deemed dividend. We must record that there has been no whisper in the process and at any rate for the purpose of asking for questions to be referred as framed hereinbefore.
16. Apart therefrom the question can be looked at again in another way.
17. It is already settled that an application for transfer can be initiated either by the transferor or by the transferee. The question is as to what are the requirements of the provisions of the Companies Act in regard thereto. Learned counsel for the assessee referred us to the provisions of Section 108 of the Companies Act specifying that the transfer of shares is not to be registered except on production of instrument of transfer. The said statutory provision prohibits the company from registering a transfer of shares, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee as per the particulars stated therein. On facts again there is not even a whisper that the application form which was submitted had any defects and, therefore, it can be safely seen that the applications were submitted in accordance with the statutory provisions. Perhaps, learned counsel for the Department may be right in urging that an inference from this presumptive aspect that the applications could not be said to have been presented contrary to the provisions of Section 108 of the Companies Act should not lead us to presume that there was in fact a gift deed executed legally and properly as on a priori situation in regard thereto. Reference to Section 108 of the Act is not being ma.de in the nature of putting the cart before the horse to lead to a conclusion that because the application was not found to be defective there must have been a proper gift deed. Reference is for the purpose of required satisfaction that the applications would have to be understood as submitted in accordance with the provisions thereof and in the process of consideration of the situation on the basis of probabilities, again in the absence of any material to show that there was any defect in the matter of applications, we will also have to proceed with the steps in the process of transfer without any legal difficulty or impediment in regard thereto.
18. Learned counsel for the Department submitted that factually the execution of the gift deed would be necessary to be ascertained. He prayed for remittance of the matter in regard thereto. We do not think so. The matter is fully established by the factual conclusions in regard thereto and critical observations are made by the fact-finding authorities relating to the absence of cross-examination, relating to the passing of any kind of challenge and. also relating to the sub silentio attitude in the process of challenging the genuineness of the transaction of gift. No remittance is called for in this connection.
19. For the above reasons, we reject the reference. Accordingly, we answer question No. 1 in the negative -- against the Revenue and in favour of the assessee. We answer question No. 2 in the affirmative -- against the Department and in favour of the assessee holding that the Tribunal was right in this connection. Lastly, we answer question No. 3 in the negative --against the Revenue and in favour of the assessee to the effect that she could not be treated as a person having substantive interest in the company within the meaning of Section 2(32) as framed. Order accordingly.