Rameshwar Lal Sanwarmal v. Commissioner of Income-Tax, Assam

BHAGWATI, J.-This appea1 by special leave raises a question of law relating to the interpretation of section 2(6A) (e) of the Indian Income-Tax Act, 1922. The question is in fact concluded by a deci-sion of this Caurt in Commissioner of Income-tax v. C. P. Sarathy Mudaliar( 1) but, it has been. argued on behalf of the Revenue that this decision is in conflict with an earlier decision given by this Court in Commissio"1er of Income-tux v. Rameshwadal Sanwarmal(') and hence tre question should be :referred to a larger Bench. We shall presently consider these two decisions, but we may point out straight· away that, in our opinion, there is no conflict between these two deci· sions and the question is completely covef'od by the decision in Com-missioner of Income-tax v. C. P. Sarathy Mudaliar (supra). The facts giving rise to the appeal are not in dispute and we may briefly T state th.e same in order to appreciate how the question arises for deter-

mination.

The assessee is the Hindu lndivided Family of M/s. Rameshwar-lal Sanwarmal consisting of S. M. Saharia as manager and karta and

(1) 83 l.T.R. 170. (2) 82 I.T.R. 628.

his wife and a minor son. The asseo;sment year with which we are con-rerned in the appeal is 1956-57, the relevant accounting year being the year ending Ramanavami Samba! 2012, that is, 18th April, 1956. During this ~ssessment year, the assessee was the beneficial owner of certain shares in a private limited company called Shyam Sunder Tea Co. (P) Limited. These shares though beneficially owned by the assessee stood in the name of S. M. Saharia in the register of share-holders of the Company. The asscssee also owned 3 business con-cerns, namely, Nilmony Shop, Saharia & Co. and Saharia Industrial Corporation. The Company advanced loans to th•.:se 3 business con-cerns during the relevant assessment year and since it was a company in which public we.re not substantially interested, a question arose .in the assessment of thz asscssee to income-tax, whether the loans ad-vanced to these 3 business concerns could be regarded as "deemed dividend" of the asses·,ee under section 2(6A) (e) of the Act? The Income-tax Officer took the view that the loans advanced to the 3 business concerns were attributable to the accumulated profits of the n company to the extent of Rs. 4,48,045 and since the asses,ee which

owned the 3 business concerns was the beneficial owner of the slrnres standing in the name of S. M. Saharia, the conditions of section 2(6A) ( e) were satisfied and the loans were liable to be regarded as "deemed dividend" taxable in the hands of the assessee under section 2( 6A) ( e). The assessee preferred an appeal against the order of assess-ment but the Appellate Assistant Commissionw agreed with the view taken by the Income-tax Officer and held that since S. M. Saharia held shares in the company as representing the assessee and the loans were advanced to the three business concerns belonging to the assessec, out of the accmµula!ed profits of the company, the Income-tax Offirer was justified in treating the loans as "deemed dividend" under section 2 ( 6A) ( e); and taxing them in the hands of the assessee. The matter was can:ied in further appeal to the Tribunal and several arguments were advanced on behalf of the assessee resisting the applicability of section 2( 6A) ( e), but of them, there are two which are material for our purpose and they are : first, that since the assessee was not a regis-tered holder of shares in the company, the loans advanced to the three business concerns of the assessee could not be regarded as loans advanced to a share-holder so as to attract the applicability of section 2 ( 6A) ( e) ; and secondly, even if the loans could be treated as "deemed dividend" under section 2 ( 6A) ( e), they could be taxed only in the hands of S. M. Saharia, the registered shareholder and not in the hands of the . assessee. Both these arguments were negatived by the Tribunal and so a:so were the other subordinate arguments and the appeal was rejec'.ed and the assessment confirmed. This led to a reference application by tr.e asscssee and on the application, five qu-~stions of law were referred by the Tribunal to the High Court. There were. in fact, six questions but for the purpose of the present appeal, it is not necessary to refer to the first question, since it related to the assessment year 1955-56 and it raised a point · of limitation which was ultimately decided in favour of the assessee and there is no dispute about it. The other five questions related to the taxability of the loans advanced to the three business cono~rns of the assessee as "deemed dividend" under section 2(GA)(e) and each of tkse ques-tions brought in issue different aspect of taxabi!ity. It is the first of these questions which is material and we may re-produce it as follows:

"Whether on the facts and in the circumstances of the case, and on a true interp relation of the terms of section 2(6A) (e) of the Income-tax Act, 1922, the Tribunal was right in holding that the amounts of Rs. 2,21,702 (gross) and Rs. 3,43,505 (net) vvere taxable as dividehds in the hands of the applicant H.U.F. for the asse•sment years 1955·56 and 1956-57 respectively, when th~ shares were registered ii) the name of Sri S. M. Saharia, the karta of the family?"

This q~stion referred to beth the assessment years 1955-56 and 1956-57, but we are not concerned in this appeal with the controversy relating to the assessmeht year 1955-56 and hence we shall confine onrselves only to the assessment year 1956-57.

Now two distinct aspects were comprised in this question and both were argued before the High Court. One was whether the loans advanced to the three business concerns of .the. assessee. could be regarded as "deemed dividend"' within the meaning of s.ec(ion 2( 6A) ( e) , ahd the other was whet~cr these .loans, eyen if ; regarded . as "deemed divide'nd" could be taxed in the .hands of ;the ~essi:e ... The High :Court decided both these aspects of the question in.favour of !hi' a~see and he)d that the word "share-holder" in section 2(6A) .(e) m()jlllt a registered share-holder or in. other words,. a. shax<;)lo\der whos11:-name is reco•ded in the}legister of .the comp&ny as. the.holder G; l of ;the sh;lres ·a11d since the advance )n the prese11t c.a.~e. WjlJUl].ade )o tll!~ 1&ss!'Ss.ee which. wai; hot a registered share-holdl\\,,tlt ~quid .110t .be re!m'qe\I; a~ .'.'.QeemN dividen<:I'' within the .meaning~oC~e~ti!i1Il ~(6A) (e). a.nd ,th,at ev~n if j,t be assurr~i,l thatr the advanq~,w'l!l)i~pl~,,\o,be rew<:\ed ,a; :•aeem~q. dividewl" under; section Z(6A) ,(f(), it .l'Qulcj be 1 ta~ ~s, divid,nd. inoqme only .o(:the regis\ef"\( sJw.re"hpJ4.er .a11d1,not Hu of 11he assessee. This view t~keo by tl\e. High .~our~ ~~rrA il \Ilk necessary to decide the other four questions and ;lJJ~p.:I.:Jigl.1,.~~'µrt A accordingly declired to consider them. The result of this decision

was that the assessment made by the Revenue Authorities was set aside in so far as it included the loans advanced by the company to the three business conocr'ns of the assessee as deemed dividend and taxed it in the hands of the assessee.

The Revenue, bejng aggrieved by the decision of the High Court, preferred an appeal after obtaining special leave of this Court. Now it seems that through some inadvertence which is difficult to understand, the Revenue attacked only that part of the order of the High Court which held that the "deemed dividend" could be assessed to tax only in the hands of S. M. Saharia, the registered share-holder and not in the hands of the assessee which was merely the beneficial owner cf the shares. Neither in the statement of case filed on its behalf nor in the course of the arguments the Revenue assailed the correctness of the view takeri by the High Court that since the assessee was not a registered shar~ holder, loans advanced to the assessee could not be regarded as "deemed dividend" under section 2(6A)(e). The result was that the only question that came to be considered by this Court was wi1ether the "deemed dividend" under section 2 ( 6A) ( e) could be taxed in the hands of the beneficial owner of the shares or it could be brought to tax only in the assessment of the registered share-holder and the vfew taken was that where the shares acquired with the funds of one person are held in the name of another, it is the fom1er who is assessable to tax on the dividend on those shares and this principle would apply equally on the 'deemed dividend' under section 2(6A) (e). This Court did not consider whether the loans granted to the three business concerns of the assessee could at all be regarded as 'deemed dividend' withiri the meaning of section 2(6A) (e) when the assessee was not a regi>tered share-holder and the decision of the High Court to the effect that the assessee not bei•~ a registered share-holder, the loan advanced to it could not be regarded as 'deemed dividend' under section 2(6A) (e) remained undistw·bed. Now obviously, so long as the decision of the High Court on this point was not over-ruled, the question whether the JG amount of the loans was taxable as "deemed dividend" in the hands

of the assessee could not be answered.in favour of the Revenue. But sometimes even Homer nods and through some unfortunate inadver-tence for which the counsel appearing on behalf of the assessee in that case must accept full responsibility. this Court discharged the answer given by the High Court in favour of the assessee and in iis place sub-stituted an answe,r in favour of the Revenue. This decision of the Court is reported in Co111111issio11er of Income-tax v. Rameshwar Lal Sanwarmal (supra).

Since the first question relating to the assessmen~ year 1956-57 was answered by this Court in favour of the Revenue, the Reference went back ti" the High Court for consideration of the remaining questions that had not been answered by the High Court. It appears that at the hearin)! of the I<eferencc the first two' out of the remaining four ques-tions were not pressed on behalf of the assessees and only, the last two questions were argued before the High Court. Both these questions were ccnsiderc·,! by the High Court and they were answered in favour of the Revenue and against the asscssee. Th!l assessee thereupon µre-ferred the present appeal '1fter obtaining special leave. from this Court.

There was only one contention advanced on behalf of the assessee in support of the appeal, namely, that the amounts of the loans advanced to the three business concerns of the assessee could n~t be regarded as 'deemed dividend' within the meaning of section 2(6A) (e) since lhe '1sse5'ee was not a registered share-holder of the company. This contention was sought to be supported by the decision of this Court in Commissioner of lncome-111x v. C. P. Sarathy !Httdaliar (supra). Now there can be no doubt that the decision, of this Court in C.l.T. v. C. P. Sarathy Mudaliar (supra) lays down that it i& only where a loan is advanced by a company to a registered share-holder out of its accu-mulated profits that it would be liable to· be regarded as 'deemed dividend' under sec. 2(6A)(e) and a loan to a beneficial owner of the shares does not come within the mischief of that section and if this decision represents the conect law on the subject, the amounts of loans advonced to the three business concerns of the assessee would not possibly be brought withifl the net of taxation as 'deemed dividend'. But the argument urged on behalf of the Revenue was that it w.as not open to the assessee to raise this contention based on the decision in Commissioner of lncm!le·tax v. C. P. Sarathy Mudaliar (supra), since it was covered by the first question which had already been answered in favour of the Revenue by this Court. Tho Revneue con-ceded that this contention was not specifically raised before the Court when the first question came to be considered but it must be held to have been impliedly decided against the assessee, since the first question could Rot be answere<l in favour of th~ Revenue on any other hypo-thesis. This argument of the Revenue docs appear to be very plausible at first blush, but if it is scrutinised closely it will be apparent that it is fallacious and cannot be accepted. The most important circum, stance which it ignores is that when the Reference was first heard by the High Court, the first question was decided in favour of the assessee on two counts, one was that since the assessee was not a registered share-holder of the company, the loons advanced to the three business concerns of the assessee could not be regarded as 'deemed dividend' within the meaning of section 2(6A)(e) and the other was that even if they could be treated as 'deemed dividend' under section 2(6A) (e), they could be taxed only in the hands of S. M. Saharya, the reghtcrcd share-holder and not in the hands of the assessee who was merely a beneficial owner of the shares. When the Revenue preferred an appeal against the judgment of the High Court, the Revenue should have assailed the decision of the High Court in both its limbs, but through some inadvertence which is difficult to understand, the Revenue challenged only the second limb of the decision ignoring completely the first. The result was that the decision of the High Court that the amounts of loans advanced to the three business concerns of the assessee did not fall within the definition of 'deemed dividend' in section 2(6A) (e) remained intact and unaffected by the decision of this Court in the appeal. Now, it is true that this Court could not have answered the1 first question against the assessee without over-ruling this part of the decision of the High Court, but through some unfor-p tunate error, this Court set aside the answer given by the High Court

in favour of the asscssee without considering whether this part of the decision of the High Court was right or wrong. When no contention was raised on behalf of the Revenue before this Court that the decision of the High Court on this point was wrong and that even though the assessee was not a registered shareholder, the amounts of loans advanced to the three business concerns of the assessee were still liable to be regarded as "deemed dividend" under section 2(6A)(e) and no such contention formed the subject-matter of discussion before this Court and this Court had, therefore, no occasion to consider this question, it is difficult to see how it can be said merely from the Fi answer given by. this Court in favour of the Revenue that this contention

was impliedly decicled ,ln favoµi:,of the Revenue. It would be straining logic to an ~1?f ii)P limit Jr>, Sj!~ that }))ou1!4, this contention was not raj~ed, not,. ar~p<J,. ~o!, disc~ss"'1 and n?t decided,. yet it l)l~st. be held to have been!ll!R!tedl~.d~.S1P.~Jl,becaiµ;e, 1 .thr?ugh 'fn eJ,"or cornnutted by this Co11rt, an .answer was given in)avour ofthe Rev~/l~ in igno-G•' ranee of ~11.e, t~1.'e ~?si;!?r.·,,~i S<;i;n. .~011!~ a)&o nc;>t 1'~ right to,h9ld th~t

mer5ly beca'!s~ iljis, pr!f>,%0!/~ly al!Swerep the . first, question, a~amst the a~~.~s~~. 1v\\??.uf, cRB~,1~~rHlll i ~~efher, the \'iew ,taken: by .the Hr.gh C".•urt "'\:th~~ PD1!1t.was, :mcor.re\;~· the assessee n:ust, be pre~h1ded 1 fron,:t raising )he conte?!J.91.'".tlfat,,,the .,a,s~es~ee not )i1e1ng , a registereii HI c~~~s of,,.t?e ~~.~sse~,, d.~d, .1J9!. r.;», 'l'~t,ji\µ : tlW 4~~ajtiqn9,~, '.'.cjeeme<l ..

chv1den.d,,. m,iilrr ,;,\'d)o1\ 2.(~A),,( e ~r, ,,,W,\W ~))qUW,, f~e r17'~essF~,, ~hi,ch :, had the del:iSWn of lhe•1'11g& Court on this pomt m its favour and I which decision was not assailed by the Revenue in the appeal and which remained undisturbed by this Court, be prejudiced on account of an obvious erro.r committed by the court. The proper way of looking at the decision of this Court would be to regard the answer given in favour of the Revenue to1 be confined only to the aspect considered and decided by this Court. The only aspect considered by this Court was whether the "deemed dividend" under section: 2 ( 6A) ( e) could be taxed in the hands of the beneficial owner of the shares or it could be assessed to tax ooly in the hands of the registered shareholder, and this Court held that , "deemed dividend" did not stand on any different footing from actual dividend and just as .actual dividend was liable to be taice<:l in the• bands of the beneficial owner of the shares, so also "deemed· c' dividend" must be held liable to be taxed ii~ the assessment o:f the benefi9i.al ·. owner. This Court did .µot decide the question whether. 11 loaq.,.aP,~illlC.ed to a .beneficial owner of the,S')lares ca)l be reg'll"derl as "deein¢ cjiyidend" within the meaning of:slletion 2(6A)(e) ·and the answ~r-&iv~ by this,Court in,favour of lhe~R_evenue cannot be said to eJf~nfl .to this aspect of the question. We would, therefore, hold that•f!!f f\rst question still~emains to be ans:wered-sc;> far ru, this aspec• of lh,e:!il_\lystjon is concerned and it is. opeu t 0 the assessee· to contend that. QJr <1mounts of}OOJtS a\lvanced to the, three business concerns. of! the. ,q.ssei;see could .. l)ot be regarded a~ "deemed dividend" under seetionv Z<-04l~(e), ~ince the assessee was not a registered shareholder. .J E'

tds ·also obvious from what ~·e have s~il above that i11~r~ is ~'a·: cooftitt ·betW6en the deeislons of this Court· in C.l.T. v. Rmnesw~rl~l·

._, and - - ' v. ' C. < ' ' , ' '' (supra). ' The ' question • ,?. Sanwlirmal' C.l.T. P. Sarathy Mudaliaf wheth~, 'Ott a proper conitruction of section 2(6A) (e), a loan advance f to a . beneficial ownet of the shares would be· liable to be regarded ~? "dee!Ited dividend" was not raised or argued Jiefore this Court in c.t:t. v. Rameswarlal Sanwarmal and this Court was not called upon to decide it and hence there is no discussion abont it m the judgment of this Court nor is there any decision on it. It is only in the subsequeri! decision. in C.l.T. v. C. P. Sarathy Mudaliar (supra) that this question came up fo.r the first time before this Court for consideration and this G" Court held that when sec. 2(6A) (e) speaks oil a "shareholder" it refers to ih~ registered shareholder and not to the beneficial owner and hence I a Joan' granted tO a beneficial OWner Of the Shares WhO is not a fegiSfered shareholder cannot be regarded as a loan advanced to a "sha!eholder" of ltte compan}'. so as to be within the mischief of section 2 ( 6A) ( e) . There is thus no coµJlict at all between the decisions in C.l.T. v. c. p, R Sarathy, ,Mudaliar (supra) and C.I.T. v. Rameswarlal Sanwannal. In fa9t, Mr. 'sci, so Justice He~e was a. ·· common · · Member · of · the Bench in both· the cases and the subsequent decision in C.l.T. v. C. P. Sarathy Muaaliar was given within Jess than a month after the decision in C.l. T. v. Rameshwarlal Sanwarmal. It is impossible to believe that Mr. Justice Hegde was oblivious of the decision in C.l.T. v. Rameswarlal Sanwarmiil when he delivered the judgment in C.I.T. v. C. P. Sarathy Mudaliar.

The Revenue lastly contended that the decision in C.l.T. v. C. P. Sarathy Mudaliar is incorrect and we must refer the present case to a larger Bench. Now it is obvious that before wei can be persuaded to accede to this request, we must be satisfied that the decision in Com-missioner of Income Tax v. C. P. Sarathy Mudaliar is wrong. But having given our most anxious consideration, we find onrselves llllllble to disa~ee with the view taken in that decision. What section 2(6A) (e) is designed to strike at is advance or Joan to a "shareholder" and the word "shareholder" can mean only aj registered shareholder. It is diffi-cult to see how a beneficial owner of shares whose name does not apPeiir in the register of shareholders of the company can be said to be a "shareholder". He may be beneficially entitled to the shares but; he is certainly not a "shareholder". It is only the person whose name i~ entered in the register of shareholders of the company as the holder of the shares who can be said to be a shareholder qua the company. and not the person beneficially entitled to the shares. It is the former who is a "shareholder" within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered shareholder and the other conditions set ont in section 2(6A) {e) are sati&fied that the amount of the loan would be liable to be regarded as 'd~emed dividend' within the meanjng of section 2 ( 6A) ( e). The amount ol the loan would not fall within thei mischief of this section if it is gra.ated to a beneficial owner of the shares who is not the registered shareholder. The decision in C.l.T. v. C. P. Sarathy Mudaliar does, in our opinion, lay down the correct interpretation of section 2(6A)(e).

Now in the present case it was common ground that the loons were advanced to the three business concerns of the assessee which was a Hindu Undivided Family and this Hindu Undvided Family was not the registered holder of any shares in the com-pany but it was the beneficial owner of certain shares which stood in the name of the Manager and Karta, Shri) S. M. Saharya. The loans were thus advanced to thei beneficial ownet of the shares and not to the registered shareholder and hence they conld not be regarded as loans advanced to a "shareholder" of the company within the meaning of section 2 ( 6A) ( e). Section 2 ( 6A) ( e) was accordingly not attracted and the amounts of the loans could not be taxed as deemed dividends _, in the hands of the assessee. We accqrdingly answer the first question

in favour of the assessee so far as this aspect is concerned. In view -0f this answer to the first question, it is not necessary to consider the -other two questions decided by the High Court on remand. The learned .counsel appearing on behalf of the assessee, in fact, did not press them.

There will he 10 order as to costs of the appeal.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 133 of i979. Appeal by Special Leave from the Judgment and Order dated 13-6-1972 of the Assam High Court in Income Tax Reference No. UM.

H. M. Verma and N. R. Choudhary for the Appellant.

S. C. Manchanda, S. P. Nayar and Mis.• A. Subhashini for the Respondent.