# TARULATA SYAM AND ORS v. COMMISSIONER OF INCOME-TAX, WEST BENGA1"

- **Citation:** [1977] 3 S.C.R. 697
- **Court:** Supreme Court of India
- **Decided:** 1977-04-28
- **Case number:** c. A. No. 147 of 1972
- **Bench:** P. N. Bhagwati, R. S. Sarkaria, S. Murtaza Fazal Ali
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/tarulata-syam-and-ors-v-commissioner-of-income-tax-west-benga1-7239
- **Pages:** 14

## Headnote

B
Indian Income Tax Act, 1922-S. 2(6A)(e)-Scope of.
Co1npany a s. 23A Co111pany in which public are not substantiq/.ly intertsted
-Had accunut!ated profits-Gave loan/ to a shareholder-Loan repaid before
!he end of tlir financial year-Loun if dividend withiln s. 2(6A)(e).
Under section 2(W\) (e) of the Indian Income-tax Act, 1922, the term dividend includes any payment by a compa·ny not being a company in v,;hich
the public are substantially interested \Vithin the meaning of s. 23A of any
sum (whether as represcntirw: a part of the assets of the company or otherwise) by way of advance or Joan to a shareholder or a•ny payment by any
such company on behalf or for the individual benefit of a shareholder to the
extent to \Vhich the company in either case possesses accumulated profits.
According to s. 12(IA) of the Act, income from other sources include'>
dividends.
Sub-section (1B) of s. 12 provides any payment by a conl.pany
to a shareholder by way of advance or loan which would have been treated
.as dividend within the meaning of s. 2(6A)(e) in any previous year relevant
io any assessment year prior to the assessment year ending on the 31st day
-Of March, 1956 had that clause been in force in that vear, shall be treated
a<S a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of MarCb, 1956, if such loan or advance
remained outstanding on the first day of such previous year.
The provisions
of s. 2(6A) (e) and s. 12(1B) had been borrowed and adopted with certain
.alterations from s. 108(1) of the Commonwealth Income Tax Assessment
Act of Australia the last limb of which provided that payment to a shareholder by \Vay of advance or loan was to be treated as dividend paid by
the company on the last day of the year of income of the company in \Yhich
payment \Vas n1ade.
The appellant-assessce waG a shareholder and Managing Director
of
a
Private Ltd. Company.
In the calendar year 1956 (assessment year 195758), the assessee \vithdrew in cash from the con1pany n• sum of Rs. 4.97
lakhs, \vhich was less· than the accumula-ted profits of the company.
Before
the end of the year, the assessec repaid the whole amount. Deducting a sun1
of Rs. 1.59 lakhs \Vhich was credited to the assessee's account by way of
dividend in the company's books, the Income-tax Officer treated the balance
of Rs. 2.72 lakhs as dividend income in the assessee's hands and grossed up:
the amount under s. 16(2).
On appeal, the Accountant Member Of the Appellate Tribunal ·held that
any payment made as envisaged in s. 2(6A)(e) became dividend and must
be treated as the assessee's income and no subsequent repayment could take
it out of the mischief pf the provision.
The Judicial Member on the otMr
hand held that since total income of the assessee during the relevant previous
year could be comput~d and assessed only at the end of that year any ad\·~nce
or loan taken during the interim periods of the previous year would have to
be ignored.
On reference the President agreed \vith the Accountant Member.
The J-Iigh Court ans\vered the reference in favour of the Revenue.
,
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'698
SUPREME COURT REPORTS
(1977] 3 S.C.R.
A
were taken and (ii) the last limb of s. I 08 (I ) of the Australian Act should
be read into the Indian Act because what was explicit in. s.
108(1) of the
'
Australian Act is implicit in s. 2(6A) (e) and s. 12(1B) of the Indian Act.
B
c
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Distnissing the appeal.
HELD: The fiction created by s. 2(6A)(e) read with s. 12(1B) of the
Act is attracted as soon as all the conditions necessary for its application
exist in a case.
[707' C]
1. In Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Co1n1nissivner
!11co11ie-tax [1965] 1 SCR 909, this Court he1d that the combined effect of
these two ·provisions is that three kinds of payments made to a shareholder
of a company are treated as taxable dividend to the extent of the accumulated
profits held by· the company, namely, payments made to the shareholder by
\Vay

## Text

_Characters 0–39,989 of 40,912. This is a partial read: ask again with offset=39989 for what follows._

TARULATA SYAM AND ORS.
v.
COMMISSIONER OF INCOME-TAX, WEST BENGA1"
April 28, 1977
697
A
,
{P. N. BHAGWATI, R. S. SARKARIA AND S. MURTAZA FAZAL ALI, JJ.]
B
Indian Income Tax Act, 1922-S. 2(6A)(e)-Scope of.
Co1npany a s. 23A Co111pany in which public are not substantiq/.ly intertsted
-Had accunut!ated profits-Gave loan/ to a shareholder-Loan repaid before
!he end of tlir financial year-Loun if dividend withiln s. 2(6A)(e).
Under section 2(W\) (e) of the Indian Income-tax Act, 1922, the term dividend includes any payment by a compa·ny not being a company in v,;hich
the public are substantially interested \Vithin the meaning of s. 23A of any
sum (whether as represcntirw: a part of the assets of the company or otherwise) by way of advance or Joan to a shareholder or a•ny payment by any
such company on behalf or for the individual benefit of a shareholder to the
extent to \Vhich the company in either case possesses accumulated profits.
According to s. 12(IA) of the Act, income from other sources include'>
dividends.
Sub-section (1B) of s. 12 provides any payment by a conl.pany
to a shareholder by way of advance or loan which would have been treated
.as dividend within the meaning of s. 2(6A)(e) in any previous year relevant
io any assessment year prior to the assessment year ending on the 31st day
-Of March, 1956 had that clause been in force in that vear, shall be treated
a<S a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of MarCb, 1956, if such loan or advance
remained outstanding on the first day of such previous year.
The provisions
of s. 2(6A) (e) and s. 12(1B) had been borrowed and adopted with certain
.alterations from s. 108(1) of the Commonwealth Income Tax Assessment
Act of Australia the last limb of which provided that payment to a shareholder by \Vay of advance or loan was to be treated as dividend paid by
the company on the last day of the year of income of the company in \Yhich
payment \Vas n1ade.
The appellant-assessce waG a shareholder and Managing Director
of
a
Private Ltd. Company.
In the calendar year 1956 (assessment year 195758), the assessee \vithdrew in cash from the con1pany n• sum of Rs. 4.97
lakhs, \vhich was less· than the accumula-ted profits of the company.
Before
the end of the year, the assessec repaid the whole amount. Deducting a sun1
of Rs. 1.59 lakhs \Vhich was credited to the assessee's account by way of
dividend in the company's books, the Income-tax Officer treated the balance
of Rs. 2.72 lakhs as dividend income in the assessee's hands and grossed up:
the amount under s. 16(2).
On appeal, the Accountant Member Of the Appellate Tribunal ·held that
any payment made as envisaged in s. 2(6A)(e) became dividend and must
be treated as the assessee's income and no subsequent repayment could take
it out of the mischief pf the provision.
The Judicial Member on the otMr
hand held that since total income of the assessee during the relevant previous
year could be comput~d and assessed only at the end of that year any ad\·~nce
or loan taken during the interim periods of the previous year would have to
be ignored.
On reference the President agreed \vith the Accountant Member.
The J-Iigh Court ans\vered the reference in favour of the Revenue.
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SUPREME COURT REPORTS
(1977] 3 S.C.R.
A
were taken and (ii) the last limb of s. I 08 (I ) of the Australian Act should
be read into the Indian Act because what was explicit in. s.
108(1) of the
'
Australian Act is implicit in s. 2(6A) (e) and s. 12(1B) of the Indian Act.
B
c
D
Distnissing the appeal.
HELD: The fiction created by s. 2(6A)(e) read with s. 12(1B) of the
Act is attracted as soon as all the conditions necessary for its application
exist in a case.
[707' C]
1. In Navnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Co1n1nissivner
!11co11ie-tax [1965] 1 SCR 909, this Court he1d that the combined effect of
these two ·provisions is that three kinds of payments made to a shareholder
of a company are treated as taxable dividend to the extent of the accumulated
profits held by· the company, namely, payments made to the shareholder by
\Vay of advance or Jo~·n. payments made on his behalf and payments made·
for his individual benefit.
The five conditions to he satisfied are : (i) The
company n1ust be one in which the public are not substantially interested
within the meaning of s. 23A; (ii) The bQrrower must be a shareholder at
the date v.;hen the loa-n \Vas advanced; (iii) The loan advanced can be deemed
to be dividend only to the extent of the accun1ulated pro'fit on the date of
the Joan: (iv) The loan must not have been advanced by, the company in
1he ordinsiry course of its business and (v) The loan
must
have
remained
outstanding at the comn1encement of the shareholder's previous year in re!a ...
tion to the assessment year 1955-56. [707 D-GJ
In the instant case the con1pany was a controlled con1pany \Vithin the·
meaning of s. 23A; the assessee was its shareholder; the company possessed
"accumulated profits" in excess of the a•mount paid to the assessee during
the previous years; and the company's business \Vas not money lending. 1'he·
last condition was not applicable because it was a transitory provision ap_plicable to the assessment year
1955~56 only \Vhile the assessment yea<r in this.
case was 1957-58. f708 Al
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2. (a) The language of ss. 2(6A)(e) and 12(1B) is clear
and
unambiguous.
There is no scope for importing into the statute \VOrds \Vhich
)<.
are not there. Such importation would be not to construe it but to amend the
statute.
Even if there be ai casus 01nissus, the defect can be remedied only
by legislation and not by judicial interpretation. [708 HJ
(b) No justification to
depart from the normal
rule
of
construction
according to which the intention of the legislature is prin1arily to be gathered
F
from the won.l:; used in the statute h~s been made out.
(c) The Indian Legislature has deliberately omitted to use in ss. 2(6A) (e)
and 12 (lB) words analogous to those in the last li1nb of s. 108( 1) of the
Australian P..ct.
When ss. 2(6A)(e) and 12(1B) \Vere inserted by Finance
Act. 1955, Parliament must have been aware of the provision contained in
s. 108 of the Australian Act.
Jn spite of such awareness, Parliament has not
thought it fit to borrow the whole hog what is sa.id in s. 108(1) so far as
the last lin1b of that section is concerned.
Our Parliament imported only
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a very restricted version, and incorporated the san1e as the 5th condition in
s. 12(1B) to the effect, that the payment dee1ned as divi<lend shall be treated
as dividend received by him in the previous year relevaont to the assessment
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yea·r ending on the 31st March, 1956 if such loan or advance remained outstandirtg on the last day of such previous year
The word "such" prefixed to
the previous year shows that t·he application of this clause is confined to the
assessment year ending on 31st ~.farch, 1956. (709 C~D]
In the instanl case the assessment year did not end on 31st March, 1956
lvhich showed th~t the Legislature has deliberately not made the subsistence
of the loaQ or advance or its being outstanding on the last, date of the
previous year relevant to the asse_ssment year, a pre-requisite for raising the
statutory fiction.
In other \Vords, even if the loan or ndvance cCased to be
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T. SYAM v. c. I. T. (Sarkaria, J.)
699
outstanding at the end of the previous year, it could still be deemed as dividend if the other four conditions factually existed to the extent of -the accumulated profits possessed by the company. (709 E·Fl
(.d) Under s. 3 which is the charging section, the previo~~ year. is the
unit of tiine on which the assessment is based.
As the taxab1hty of income
is related to its receipt or accrual -in the previous year, the mom~nt dividend
is received whether actual or deemed, income taxable under the residuary head,
"income from oth~r sources", arises. The charge being on accrual or rec~ipt.
the statutory fiction created by ss. 2(6A)(e) and s. 12(1B) would c~me mto
operation at the time of payment by \vay of advance or loan prov1Jed the
other conditions are satisfied. [709 G-H]
CIVIL APPELLATE JURISDICTION: c. A. No. 147 of 1972.
(Appeal by Special Leave from the Judgment a~d Order dated
19.2.1971 of the Calcutta High Court in Income Tax Ref. No.
98/67)
G. C. Shanna, D. N. Mukherjee, A. K. Ganguly and G. S. Chatteriee, for the appellants.
B. B. Ahuja and R. N. Sachthey, for respondent.
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G. C. Shanna, D. K. Jain, A11111> Sharma, S. P. Nayar and.Miss K.
Jaiswal for the Intervener.
D
The Judgment of the Court was 'delivered by
SARKARIA J. Whether any payment by a Company, not being a
Company in which the public are subsantially interested within the
meaning of s. 23A, of any sum by way of advance or loan to a shareholder, not exceeding the accumulated profits possessed by the Company, is to be deemed as his dividend under Section 2(6A) (e) read
with Section)2(1B) of the Income~tax Act, 1922, even if that advance
or loan is subsequently repaid in its entirely during the relevant prev>'ous year in which it was taken, is the only question that falls to be
determined in thls appeal by special leave.
The assessment year is 1957-58, and the corresponding previous
year is 'the calendar year 1956. The assessee is a shareholder and
the Managing Director of M/s. Dolaguri Tea Co. (P) Ltd.
The
Company is admittedly one in which the public are not substantially
interesteJ within the meaning of s. 23A of the Indian Income-tax
Act, 1922 (for short, the Act). At the commencement of the previous
year, there was in the books of the Company a credit balance of
Rs. 65,246/- in the assessee's account, which had been brought forward from the earlier year. Between the 11th January and the 12\h
November, 1956, the assesscc withdrew in cash from time to time
from the Company, amounts,
aggregating Rs. 4,97,442/-.
The
first two cash amounts of Rs. 3,50,000/- and Rs. 40,400/-, were
'.aken by the assessee on 11.1.1966. Deducting therefrom the opening balance of Rs. 65,246/-
and two more items,
namely,
Rs.
1,40,000/- being outstanding dividends declared on 31.12.1955 of
his major son, and transferred ·to his account, and a further dividend
of Rs. 19,493/- credited to his account from Kathoni Tea ·Estate,
there remained a sum of Rs. 2,72,7°'3/- to the debit of the nssessce
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SUPREME COURT REPORTS
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in the books of the Company as on the 12th November, 1956. On
December 29, 1956, the assessee paid back to the Company a sum
of Rs. 1,90,000/-. On December 31, 1956, his account was credited
with another sum of Rs. 80,000/- in respect of the dividend due to
him and his wife, and with a further sum of Rs. 29,326/- for liypotecation. In this manner before the end of the previous year, the
asscssee'& :tccount was credited with an aggregated amount oi
Rs.
2,99,326/- which exceeded the debit balance of Rs. 2,72,703/- as
on November 12, 1956.
Thus at the end of the relevant previous ·
year, no advance or loan was due to the Company by the assessee.
The Income-tax Officer found that the accumulated profits of the
Company as on January 1, 1956, amounted to Rs. 6,83,005.
He,
therefore, deducted the two aforesaid items of Rs. 1,40,000/- and
Rs. 19,493/-, aggregating Rs. 1,59,493/-, from the amount paid in
cash to the assessee and treated the balance of Rs. 2,72,703/- as the
net 'dividend' income in the hands of the assessee within the meaning
of Section 2 ( 6A)( e). The Income-tax Officer grossed up that amount
under Section 16(2) and gave credit for tax in accordance with that
Section to the assessee.
D
The asscssee's appeal to the Appellate Assistant Commissioner
having failed, he preferred a further appeal to the Income-tax Appellate Tribunal. There was a divergence of opinion between the Members of the Tribunal. The Accountant Member took the view that the
moment a payment is made as envisaged in Section 2 ( 6A) ( e) it becomes clothed with the character-of a dividend and has to be treated
as such income of the assessee, and no subsequent action or repayment
"E · by the share-holder can take it out of the mischief of this provision.
He therefore held that the sum of Rs. 2,72,703/-
was taxable
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dividend under Section 2 ( 6A)( e).
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The Judicial Member expressed a contrary opinion.
In his view,
the total income of the assessec during the relevant previous year could
be computed and assessed only at the end of that year; it could not be
computed at interim periods during the previous year. "If it is found
that although the shareholder had taken by way of advance or loan
an amount from the Company during the course of a previous year but.
had returned the same to the Company before the close of that previous year, it can only be said while computing the shareholder's total
income at the end of that previous year that no advance or loan from
the 23A Company of which he was a shareholder stood for his benefit
at the time relevant for computation of his total income. The advances
or loans taken during the interim periods of the previous year would
just have to be ignored." On these premises, the Judicial Member
crune to the conclusion that the sum of Rs. 2, 72, 703 /- grossed up to
Rs. 3,19,245/-, was not a dividend within the fiction under Section
2(6A)(e) of the Act.
On account of this difference of opinion, the following question \vas
referred to ·the President of the Tribunal :
"Whether on the facts and in the circumstances of the
case, the sum of Rs. 2,72,703/- net (Rs. 3,19,245/- gross)
T. sYAM v. c. I. T. (Sarkaria, J.)
701
is to be treated as dividend income in the hands of the assesA
see within the meaning of Section 2 ( 6A)( e) ?"
The President agreed with the Accountant Member and held that
an "advance or Joan received by the shareholder of a Private Company
forthwith assumes the character of a dividend and becomes his income
by virtue of the fiction created by Section 2(6A) (e) and it ceases to be
a liability for the purpose of taxation, although the assessee may, in
B
fact or in law, remain liable to the Company . to repay it. If the
assessee repays the loan subsequently, such repayment would not
liquidate or reduce the quantum of the income which had already accrued, as such repayment is not be ~llowed as a permissible deduction
under Section 12(2) ." On these premises, he answered the question
in the affirmative.
In accordance. with the majority opinion, the Tribunal dismissed
the as~essee's appeal, but, at his instance, referred the same question
for opinion to the High Court under Section 66(1) of the Act.
The High Court held that the tax was attracted at the point of time
when the said Joan was borrowed by the shareholder and it was immaterial whether the loan was repaid before the end of the accounting year
or not. On this reasoning it answered the question in favour of the
Revenue and against the assessee.
Hence this appeal by the assessee.
Before dealing with the contentions canvassed, it is necessary tcr
have a look at the general scheme and the relevant provisions of the
Act, Section 2(6A) (e) of the Act reads as follows :
"2 (6A) "dividend" includes-
(a) to (d)
(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;
but "'dividend" does not includc-
( i) a distribution made in accordance with sub-clause
(c) or sub-clause (d) in respect of any share issued
for full cash consideration where the holder of the
share is not entitled in the event of liquidation to
participate in the surplus assets;
(ii) any advance or loan made to a shareholder by a company in the ordinary course of its busmess where the
lending of money is a substantial part of the business of the company;
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(iii) any dividend paid by a company which is set off by
the company against the whole or any part of any
sum previously paid by it and treated as a dividend
within the meaning of clause ( e), to the extent to
which it is so set off;
·
Explanation.-The expression
"accumulated
profits",
wherever it occurs in this clause, shall not include
capital gains arising before the 1st day of April,
1946, or after the 31st day of March, 1948, and before the !st day of April, 1956;
Sub-section (15) defines 'total income' as meaning "total amount
of income, profits and gains referred to in sub-section (!) of Section
c
4 computed in the manner laid down in this Act."
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Section 3 is the charging section. Two of the principles deducible
from the Section are :
(I ) That the tax is levied on the total income of the assessable
entity;
(2) That each previous year is a distinct unit of time for the
purpose of assessment, and the profits made or liabilities
or ·losses incurred before or after the relevant previous
year are wholly immaterial in assessing the profits of that
year unless there is a statutory provision to the contrary.
Section 4 ( 1) so far as it is material reads as fo1Iows :
"Section 4 (!) : Subject to the provisions of this Act,
the total
income of any previous year of any person includes all income,
profits and gains from whatever source derived which-
( a) are received or are deemed to be received in the taxable
territories in such year by or on behalf of such person, or
(b) if such person is resident in the taxable territories during
such year,-
(i) accrue or arise or any deemed to accrue or arise to him in
the taxable territories during such year, or
(ii) accrue or arise to him without the taxable territories during such year, or
(iii)
(c) if such person is not resident in the taxable territories
during such year, accrue or arise or are deemed to accrue
or arise to him in the taxable territories during such year :
(emphasis supplied)
"Provided that ..
,,
The principles .deducible from Sec. 4(1) are :
(l ) The charge is on accrual or receipt basis. Such receipt or
accrual may be actual or statutory, i.e. the result of any
statutory fiction created by the Act.
(2)
(3)
T. SYAM v. c. I. T. (Sarkaria, !.)
703
If a particular amount of income is taxed under any of
the clauses (a), (b) or (c) of the sulrsection the same
amount cannot be taxed under any other clause either in
the same year or in a different year. That is to say, income which is taxed on accrual under clause (b) (ii) cannot be taxed again on receipt under clause (a) or on remittance under Clause (b) (iii) (see Kanga and Palkhiwala, Vol. I; 1959 Edition, page 153).
The receipt spoken of in this clause is the first receipt
after the accrual of the income l See the decision of this
Court in Keshav Mills v. Commissioner of lncome-t(lx(')).
Sub-section (I) of Sec. 4 also highlights the basic principle emboA
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died in the charging section 3, that the accrual or receipt of income
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(actual or deemed) is taxed with regard to the relevant previous year.
Section 12 deals with the residuary head : "Income from other
sources".
Its sub-section (JA) says that:
"Income from other sources shall include 'dividends'.
Sub-section (!Bl in crucial.
It provides :
"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 loan or advance remained outstanding
on the first day of snch previous year".
Sub-section (2), inter alia lays down that in computing any income
by way of dividend, allowance shall be given for any reasonable sum
paid by way of commission or remuneration to a banker or any other
person realising suc.h dividend on behalf of the assessee.
It is to be noted that sub-section (6A) of section 2 and subsections (!A) and (lB) u/s 12 were inserted in the Act by the Finance
Act, 1955, with effect from the 1st April, 1956.
t·
In the relevant assessment year, Section 16(2) of the Act was
operative and ran as follows :
"16(2) For the purpose of inclusion in the total income of an
assessee any dividend shall be deemed to be income
of the previous year in which it is paid, credited or
distributed or deemed to have been paid, credited or
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(!) [1953] 23 I.T.R. 230.
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[1977) 3 S.C.R.
distributed to bim, and shall be increased to such
amount as would, if income-tax (but not super-tax)
at the rate applicable to the total income of the company. . . . . for the financial year in which the dividend is paid, credited or distributed or deemed to have
been paid, credited or distributed were deducted therefrom, be equal to the amount 'of the dividend."
Mr. G. C. Sham1a, Counsel for the appellants c011tends that the
scope of the fiction created by Sec. 2( 6A)( e) should be confined to
those advances and loans only, which are not repaid but remain subsisting at the end of the previous year in which they were taken. It is
argued that the sole object of this provision is to curb the evil of distributing profits under the guise of loaru; or advances; that if an advance
or loan is repaid in the same accounting year, it cannot be said that it
\Vas a device for distribution of profits. It is submitted that only in the
case of an advance or loan which remains outstanding at the end of
the accounting year, Sec. 2(6A) (e) raises an irrebutablc presumption
that it was a payment of dividend under the cloak of a loan. It is
maintained that if this construction of Sec. 2(6A) (e) is not adopted,
it will lead to extremely oppressive, unreasonable and anamolous results, including double taxation.. To illustrate bis point Couasel compares and contrasts the position of a shareholder who promptly, after
a short period, repays the loan in the same year, with one who does
not do so but allows it to remain outstanding and be carried over to the
next year, and thereafter a dividend is declared. If the interpretation
adopted by the High Court is correct-says Mr. Sharma-the shareholder in the prior case who had promptly repaid the loan would not
be entitled under sub-clause (iii) of Clause (e) of s. 2(6A) to set
off any part of the subsequently declared dividend against the loan
which he had repaid earlier, but will have to pay double tax on the
same item, once on it as deemed dividend and then on it as declared
dividend.
His liability cannot be reduced to the extent of the dividend; because at .the date on which the dividend was declared, no
loan was outstanding against which it could be set off.
As against the
fOl'lller, the latter shareholder who makes full use of the' loan and
. does not repay any part of the loan in the same year, but leaves it
unpaid till a dividend is declared ne~t year, will get rellef by set olt
of the subsequently declared dividend. in whole or in part against the
loan outstanding against him.
Another example cited by Mr. Sharma is of a case where the accumulated profit, say is Rs. 9,000/- and the shareholder takes an
advance or loan of Rs. 3,000/- and he repays it after a week, and
again gets the same amount (Rs. 3,000/-) back as a loan, and again
repays it after a week, and again retakes the same amount as loan-all
the three loans being taken and repaid, in the same year. If the unrestricted interpretation of the provision, sought by the Revenue were
to be adopted, the same amount of loan in all the three transactions of
loan would be subjected to triple taxation. Such an absurd and oppressive result, says the Counsel, would be against the intendmcnt of the
provision and inconsistent with the scheme of the Act which generally
aillls avoids double taxation.
The upshot of the arguments of
Mr.
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T. SYAM v. c. I. T. (Sarkaria, !.)
705
Sharma is that under the Act, only that item or entity is taxable which
is rationally capable of being considered as the income of the
asscssee; that an advance or ~oan which is genuine and not a subterfuge for payment of dividend and is not subsisting or outstanding at the
end of the previous year on· account of its repayment by the sh.areholder cannot reasonably be deemed to be his dividend income w1thm
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the contemplation of s. 2(6A) (e) read with s. 12 of the Act.. Mr·
Sharma has taken us through various decisions having a bearing on the
problem. The cases referred to, discussed or sought to be distinguished by him are : K. M. S. Lakshman Aiyar v. Assistant Income-tax
Officer,(') N.avnit Lal C. Javeri v. K. K. Sen, Appellate Assistant Commissioner, Income-tax, Bombay;(')
Commissioner. of Income-tax,
i\fadras v. K. Srinivasan;(•) JValclzand & Co. Ltd. v. Commissioner of
Incon1e-tax, IJ01nbay;(') Comn1issioner, Inco1ne-tax Bo1nbay. v. R. K. . C
Badiani.( 5 )
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Mr. Sharma also has referred to Sec. I 08 of the Comnionwealih ·
Income-tax Act as ·in force in Australia, and submitted that since the
substance of Sec. 2(6A)(e) and s. 12(!B) has been borrowed from
s. 108 ·of the said Act and the object of these provisions in the two
enactments is the same, it will not be illegitimate to determine ana . D
circumscribe the scope of the fiction created by the provision in question
in the light of the principles indicated in Sec. 108 of the Commonwealth
Act.
On the other hand. Mr. Ahuja appearing for the Revenue, submits
that sub-clause (iii) . which permits a set off against a loan deemed as
dividend, docs not apply in cases where the dividend is not declared
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in the same accounting year because to hold otherwise would be against
the basic scheme ingrained in ss. 3 and 4 of the Act, according to which
the unit of time for the purpose of assessment is the previous year of
th" assessce. Mr. Ahuja further maintains that even if during the same
accounting year after repayment' of the loan, a dividend is declared,
sub-clause (iii) will apply, and the Income-tax Officer -will'not be aebarred from reducing, in an appropriate case, the amount treated by
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him as 'dividend' under clause ( e) of s. 2 ( 6A) to the extent of the subsequently declared dividend, on the principle of notional set off underlying sub-clause (iii). The point sought to be made out is that since
the treatment of the loan to the assessee shareholder as his dividend
rests on a legal fiction, it will not be an· illegitimate use of sub-clause
(iii) to allow ·a notional set off to meet such a situation.
Thus construed, says the Counsel, there would be no anomaly.
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Mr. Ahuja further submitted that s. 2(6A) (e) was
enacted
to
•uppress the evil of receiving profits or dividends nnder the guise of
!?ans by the shareholders of a controlled Company, as such a malpracltce resulted in evasion of tax. This provision, it is urged should be construed in .a manner which suppresses the mischief and advances the ·
remedy. It is maintained that the language of the provisions in question
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(I)
[t96~) XL I.T.R. 469 (M1d.)
(3) (1963) 50, !TR 788 (Mid).
(5) [1970)76 l.T.R. 369 (Born).
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(2) [1965] I, SCR 909-56 I.T.R.19.8.
(4) too I.T.R. 598(Bom).
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SUPREME COURT REPORTS
[1977] 3 S.C.R.·
is plain and unambiguous and no question of seeking external aid tor
its interpretation arises; the Court must give effect to it regardless of the
hardship, if any, resulting therefrom. The sum and substance of his
arguments is. that since all the factual ingredients necessary for raising
. the fiction contemplated bys. 2(6A)(e) ands. 12(JB) have been found
to exist by the Income-tax al!thorities and the Tribunal, the loan. had
to be treated as the assessee's dividend income, the moment it was
received, and the subsequent repayment of the loan cou:d not neutralise
or take it out of that category of 'incdme'.
Counsel has drawn our
attention to the ooocrvations of this Court in Navnit Lal C. Javeri· v.
K. K. Sen. Appellate Assistant Commissioner of Income-tax (sμpra).
He has further adopted the reasoning of the Bombay High Court m
Walchand & Co.'s v. Commissioner of Income-tax, Bombay (supra).
Section 2(6A)(e) ands. 12(1B) were inserted in the Act by the
Finance Act 1955 which came into operation on 1-4-1955.
These
provisions seem to have been adapted, and borrowed with alterations,
from s. 108 of the Commonwealth Income-tax Assessment Act in force '
in Australia. Section 108 reads as follows:
"Loans to shareholders, (1) If amounts are paid or assets
distributed by a private company to any of its shareholders
by way of advances or loans, or payments are made by the
company on behalf of or for the individual benefit of, any of
its shareholders, so much, if any, of the amount or value of
those advances, loans or payments, as, in the opinion of the
Commissioner, represents distributions of income shall, for the
proposes of this Act other than the purposes of Division
llA of Part III and Division 4 of Part VI be deemed to be
dividends paid by the company on the last day of the year
of income of the company in which the payment 0r distributio"n is made.
(2) Where the amount or value of an advance, loan or
payment is deemed, under the last preceding sub-section, to
be a dividend paid by a company to a shareholder, and the
company subsequently sets off the whole or a part of a dividend distributed by it in satisfaction in whole or in part of
that advance, loan or payment, that dividend shall, to the
extent to which it is so set off, be deemed, not to be a dividend
for any purpose of this Act."
It will be seen that under s. 108 (1) formation of "the opinion of
the Commissioner" is the sine qua non for bringing this provision into
provision into operation. It has been held be the Australian Board of
Review that the mere fact that a shareholder in a private Company has
become indebted to it, does not justify the formation of the opinion by
the Commissioner such as is indicated in sub-section (1) of s. 108.
"There must be something that goes beyond a mere debt automatically
arising upon a taking of accounts and which points to a subterfuge
whereby a payment which, upon examination, is found to relate to tne
income of the Company and to represent the distribution thereof, is
made to appear to be a loan or advance" (J.C.T.B.R. (N.S.) Case
No. 80.)
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T. SYAM v. c. I. T. (Sarkaria, J.)
707
It is noteworthy that at least in one material aspect the Indian Jaw
;s different from that under s. I 08 (I) of the Commonwealth Act as
explained and interpreted by the Board in the case mentioned above.
Under s. 108, the raising of the fiction is dependent upon a positive
finding recorded by the Commissioner of Income-tax that the payment
represents distribution of the Company's income. Buts. 2(6A){e) and
5. 12 of the Act do not leave this question to the adjudication of the
Income-tax authorities. Parliament has itself, in the exercise of its Jegi>-
lative judgment, raised a conclusive presumption, that in all cases where
loans are advanced to a shareholder in a Private Ltd. Company having
accumulated profits, the advances should be deemed to be the dividend
income of the shareholder. It is this presumption juris et de jure which
is the four,dation of the statutory fiction incorporated in s. 2(6A) (e).
Thus s. 108 of the Commonwealth Act appears to be more reasonable
and less harsh than its Indian counterpart.
Frol)l the above discussion it emerges clear that the fiction created
'bys. 2(6A) (e) read withs. J2(1B) of the Act is inexorably attracted
as soon as all the conditions necessary for its application exist in a
case.
In Navnit Lat's case (supra), this Court, after an analysis of
these provisions, listed these conditions, as follows :
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" ... the combined effect of these two provisions is that
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three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable
dividend to the extent of the accumulated profits held by the
company. These three kinds of payments are: (1) payments
made to the shareholder by way of advance or loan, (2)
payments made on his behalf and (3) payments made for his
'individual benefit. There are five conditions which must be
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satisfied before section 12(1B) can be invoked against a
·shareholder.
The first
condition is that the company in
question must be one in which the public are not 'substantially
interested within the meaning of section 23A as it stood in
•the year in which the loan was advanced. The second condition is that the borrower must be a shareholder at the date
when the loan was advanced; it is immaterial what the exF
tent of his shareholding is.
The third condition is that the
loan advanced to a shareholder by such a company can be
.deemed to be dividend only to the extent to which it is shown
that the company possessed accumulated profit at the date of
the loan. This is an important limit prescribed by the relevant section. The fourth condition is that the loan must not
have been advanced by the company in the ordinary course
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of its business.
In other word's, this provision would not
apply to cases where the company which advances a loan to
its shareholder carries on the business of money lending itself; and the last condition is that the loan must have remained
outstanding at the commencement of the shareholder's previous year in relation to the assessment year 1955-56."
(emphasis; supplied)
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The first four conditions factually exist in the instant case.
The
•ast condition is not applicable because it was a transitory provision
6-707 SCT/77
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SUPREME COURT REPORTS
(1977] 3 S.C.R.
applicable to the assessment year 1955-56 only, while we are concerned with the assessment year 1957-58 and the previous year is
the calendar year 1956.
There is no dispute that the company is
a controlled (Private Ltd.) company in which the public are not substantially interested within the
meaning of
s. 23A.
Further the
assessee is admit.tedly a shareholder and Managing Director of that ·
Company.
It is also beyond. controversy that at all material times,
the company possessed "accumulated profits" in excess of the amount
which the assessee-shareholder was paid during the previous
year.
The Income-tax Officer found that on January 1, 1956, the accunmlated profits of the Company amounted to Rs. 6,83,005/- while from
11.1.1956 to 12.11.1956, th.e assessee received in cash from time to
time from the Company payments
aggregating
Rs. 4,97,449/-.
After deducting the opening credit balance and some other
items
credited to his account, the Income-tax Officer found that in the previous year the assessee share-holder had received a net payment of
Rs. 2, 72, 703 /- by way of loan or advance from the Company. The
Company's business is not money lending and it could not be said
that the loans had been advanced by the company in the ordinary
course of its business.
Thus all the factual conditions for raising
statutory fiction created by ss.2(6A) (e) and 12(IB) appeared
to
have been satisfied in the instant case.
Mr. Sharma, however, contends that in order to attract the statutory fiction one other essential condition is, that the loan or advance
must be outstanding at the end of the previous year, and if the loan
had ceased to exj,5t owing to repayment or otherwise before the end
of the year-as in the present case-the fiction cannot be invoked.
In
this connection, Counsel has again referred to the last limb of s. 108 ( 1)
of the Commonwealth Income-tax Act, according to which, the payment to a shareholder by way of advance or loan. is to be treated as
a dividend paid by the Company on the last day of the year of income of the Company in which the payment is made.
It is urged that the principle in the last limb of sub-section' ( 1)
of s. 108 of the Commonwealth Act should also be read into the
Indian statute.
It is maintained that the omission of such words
from ss. 2(6A) (e) and 12(1B) does not show that the intendment of
the Indian Legislature ·was different.
According to the Counsel
what is implicit in s. 108(1) of the Commonwealth Act, is implicit
in ss. 2(6A) (e) and 12(1B) and the general scheme of. the Act
which requires that the assessment is to be made on the basis of total
income of the whole previous year.
Such a view concludes Mr ..
Sharma, would also be in consonance with reason and justice.
We have given anxious thought to the persuasive arguments o~ Mr.
Sharma.
His arguments, if accepted, will certamly soften the rigour
of this extremely drastic provision and bring it more in conformity
with logic and equity. But the Jangu~ge of ss. 2(6A) (e) a.ml ~2qB)
is clear and unambiguous.
There 1s
no sco~e for
~mportmg mto
the statute words which are not there.
Such 1mportat10n would be,
not to construe but to amend the statute. Even if there be a casu.~
omissus the def~ct can be remedied only by ·1egfslation: and i1ot by judicial interrretation.
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T. SYAM v. c. I. T. (Sarkaria, J.)
709
To us, there appears no justificatiou to depart from the normal
rule of construction according to which the intention of the legislature
is primarily· to be gathered from the words used in the statute. It
will be well to recall the words of Rowlatt J. in Cape Brandy Syndicase v. I. R. C.(1) at p. 71, that "in a taxing Act one has to look merely
at what is clearly said.
There is no room
for any intendment.
There is no equity about a tax.
There is no presumption as to a tax.
nothing is to be read in, nothing is to be implied. One can qnly look
fairly at the langnage used".
Once it is shown that the case of the
assessee comes comes within the letter of the law, he must be taxed,
however great the hardship may appear to the judicial mind to be.
In our opinion, the Indian Legislature has deliberately omitted to
use in ss. 2(6A) (e) and 12(1B) words analogous to those in the last
limb of sub-section ( 1) of s. I 08 of the Commonwealth Act. When
Sections 2(6A) (e) and 12(1B) were inserted by the Finance Act,
1955, Parliament must have been aware of the provision contained
in s. 108 of the Commonwealth Act. In spite of such awareness,
Parliament has· not thought it fit to borrow whole hog what is said in
s. I 08 (I) of the Commonwealth Act.
So far as the last lim.b of
s. 108 (I) is concerned, our Parliament imported only a very restricted version
arid
incorporated the
same as
the 'fifth condition' in sub-s.
( lB) of s. 12 to the effect, 'that the "payment deemed as dividend 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 loan or advance remains outstanding
on the last day of such previous year".
The word "such" prefixed
to the "previous year" shows that the application of this clause is
confined to the assessment year ending on 31-3-1956. In the instant
case we are not concerned with the assessment year ending on 31-3-56.
This highlights the fact that the Legislature has deliberately not made
the subsistence of the loan or advance, or its being outstanding on the
last date of the previous year relevant to the assessment year, a prerequisite for raising the statutory fiction.
In other words, even if
!he loan or advance ceases to be outstanding at the end of the previous
year, it can still be deemed as a 'dividend' if the other four conditions
factually exist, to the extent of the accumulated profits possessed by
the Company.
At the commencement of this judgment we have noticed some general principles, one of which is, that the previous year is the unit of time
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on which the assessment is based
(s.