Income-tax---

----Dividend---Company---Loan to shareholder---Company carrying on money-lending business---Amount advanced to shareholder from accumulated profit---Not. assessable as dividend---Indian Income-tax Act, 1922, S.2(6A)(e)(iii).

The assessee was one of the shareholders of a private limited company S. The company was incorporated on December 5,1950.There were six shareholders, who were also directors of the company. The assessee was one of the shareholders. Originally, the company was doing business in running a knitting factory, which was closed in the assessment year 1959-60 and the machinery was also sold in the assessment year 1960-61. Thereafter, the company was doing money-lending business with the capital already in existence and the sale proceeds derived out of the sale of the machinery. Assessments had been made in the assessment years 1958-59, 1959-60 and 1960-61 to 1963-64 treating the interest income of the company as business income. In the previous year relevant to the assessment year 1960-61, the assessee took a loan of Rs.95, 570 from the company. The company had an accumulated profit of Rs.52, 617.The assessee claimed that the loan to the extent of Rs.52,617 should be treated as loan advanced to the assessee and it should not be treated as dividend under section 2(6A)(e) of the Indian Income-tax Act, 1922. However, the Income-tax Officer deemed it as dividend and this was confirmed by the Appellate Assistant Commissioner. The Tribunal held that the sum of Rs.52,617 should be treated as a loan. On a reference:

Held, that the Tribunal, considering the facts that during the assessment year under consideration the company was doing only the money -lending business and it had accumulated profit, had held that the sum of Rs.52, 617 advanced to the assessee should be treated as a loan as contemplated under section 2(6A)(e)(iii) of the Act. The Tribunal's conclusion was based on facts available on record. The Tribunal was right in holding that the sum of Rs.52, 617 advanced, to the assessee could not be treated as dividend income in the assessment year under consideration.

C. V. Rajan for the Commissioner.

Nemo for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J.---As per the direction of this Court, dated June 22, 1981, the Tribunal referred the following three questions of the assessment year 1960-61 for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961:

"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that. section 2(6A)(e) of the Indian Income-tax Act, 1922, is not attracted to the advances of Sivasubramaniam (Pvt.) Ltd., to the assessee in the previous year relevant to the assessment year 1960-61?

(2)Whether the Tribunal had any material to hold that the said company was doing any business other' than the money-lending business during the assessment year?

(3)Whether, on the facts and in the circumstances of the case, the Tribunal had any material to hold that the money-lending business constituted a substantial part of the business of the said company?"

The assessee is an individual, who is a shareholder in the company Sivasubramainam (Private) Ltd.; Tirupur. The company was incorporated on December 5, 1950, with six shareholders. The assessee is one of the shareholders. They were also directors. The company was having the business of running a knitting factory, which was closed in the assessment year 1959-60 and the machineries were also sold in, the assessment year 1960-61. Thereafter, the company was advancing its capital as loan, and thus, carried on money-lending business. In the assessment years 1958-59 and 1959-60, assessments were made, treating the interest received in respect of the advances as business income. In the assessment years 1960-61 to 1963 64 also, it was recorded that the business of the company included money -lending business. During the previous year ended on December 31, 1959, the assessee had taken a loan of Rs.95, 570. There was an accumulated profit in the company's account to the extent of Rs.52, 617. The assessee contended that the loan to the extent of Rs.52, 617 should be treated as attributable to accumulated profit and, therefore, it is a loan advanced to the assessee which the assessee claimed that it would not amount to dividend as per the provisions contained in section 2(6A)(e)(iii) of the Indian Income-tax Act, 1922 (hereinafter referred to as the -"Act"). However, the Income-tax Officer deemed it to be dividend under section 2(6A)(e) of the Act. According to the assessee, the sum of Rs.52,617 cannot be deemed to be dividend but it should be considered as a loan advanced out of the accumulated profit. On appeal, the Appellate Assistant Commissioner confirmed the view taken by the Income-tax Officer, holding that the sum of Rs.52,617 advanced to the assessee should be deemed to be dividend income. Aggrieved, the asse9see went in appeal before the Appellate Tribunal. The Appellate Tribunal, considering the facts that during the assessment year under consideration the company was doing only the money-lending business and it had accumulated profits held, therefore, the sum of Rs.52,617 advanced to the assessee should be treated as a loan as contemplated under section 2(6A)(e)(iii) of the Act.

Learned standing counsel for the Department submitted before us that there is no basis for the Tribunal to come to the conclusion that the sum of Rs.52,617 advanced to the assessee is not dividend. No material was brought on record before the Tribunal to establish that the abovesaid advance to the assessee is a loan out of the accumulated profit. According to learned standing counsel, the advance made by the company to the assessee to the extent of Rs.52,617 would stand attracted by the provisions contained in section 2(6A)(e) of the Act, since what was paid to the assessee is only in the nature of dividend.

We have heard learned standing counsel for the Department and perused the records carefully. The assessee is one of the shareholders of the company known as Sivasubramaniam. (Pvt.) Ltd. The company' was incorporated on December 5,1950. There were six shareholders, who were also directors of the company. The assessee is one of the shareholders. Originally, the company was doing business in running a knitting factory, which was closed in the assessment year 1959-60 and the machineries were also sold in the assessment year 1960-61.Thereafter, the assessee-company was doing money-lending business with the capital already in existence and the sale proceeds derived out of the sale of the machineries. Assessments have been made in 'the assessment years 1958-59, 1959-60 and 1960-61 to 1963-64; treating the income to the company as business income. In the assessment year under consideration, the assessee took a loan of Rs.95,570, The company had an accumulated profit of Rs.52.617. The assessee claimed that the loan to the extent of Rs.52,617 should be treated as a loan advanced to the assessee and it should not be treated as dividend under section 2(6A)(e) of the Act. The assessee relied upon the provisions contained section 2(6A)(e)(iii) of the Act, wherein it is stated that any advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company, should not be treated as dividend income.

The Tribunal recorded the facts that the company had accumulated profit to the extent of Rs.52,617 and the substantial part of the business of the company during the assessment year under consideration was money lending business. The company was doing no other business, except money lending business and the company went into liquidation on-June 6, 1966. On these facts, the Tribunal came to the conclusion that the sum of Rs.52,617 advanced to the assessee in the assessment year under consideration cannot be treated as dividend income, but it should be treated as a loan advanced to the assessee as per the provisions contained in section 2(6A)(e)(iii) of the Act. Inasmuch as the Tribunal came to the abovesaid conclusion on the basis of the facts available on record, we answer question No.1 in the affirmative and. against the Department. In so far as question No. 2 is concerned, it does not arise out of the order of the Tribunal as framed and, suggested by the Tribunal at the instance of the department. In so far as question No.3 is concerned, it is also answered in the affirmative and against the Department. No. costs.

M.B.A./3196/FC Reference answered.