PRABHUDAS RAMJI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference arises out of assessment made on the assessee in the status of an individual for the assessment year 1955 -1956, of which to the relevant previous year is Samvat year 2010 (November 7, 1963, to October 26, 1954). In view of the contentions urged before us by Mr. Mehta on behalf of the assessee and the learned Advocate -General on behalf of the Commissioner, it becomes necessary to set out the facts involved in this reference in some detail.

(2.) AT the material time, the assessee was carrying on multifarious business activities at various places and in various names. These activities were mainly money -lending, dealings in iron, timber, vegetable ghee, plying of country crafts for transport of goods, running cotton ginning and pressing factory, etc. These different businesses were at Bhavnagar, Mehsana, Palitana, Khambhala, Veraval, Porbandar and other places. Besides his income from these business activities, the assessee also derived income from securities and immovable property and used to receive dividends from shares held by him. For all these sources of income, the relevant approves year was common, namely, Samvat year 2010. Besides these concerns run by the assessee in different names, there were two other concerns in which the assessee was interested and which appear to have been practically run by him. These were Messrs. C. Prabhudas & Co. (Private) Ltd. and Saurashtra Iron Foundry and Steel Works Ltd. The first company, i.e., C. Prabhudas & Co. (Private) Ltd., with which we are concerned in this reference, was started in or about 1940 and all the one hundred and twenty shares in the company were, until July 5, 1947, held by the assessee, his brother, Harilal Ramji, and one Ramji Amarshi. However, though he was shown as a shareholder, Harilal had not shown in his returns these shares as his investments. According to the Income -tax Officer, Ramji Amarshi also was not shown as having been capable of contributing shares standing in his name or of having actually contributed for them. These shares were subsequently transferred in the name of the assessees wife and his son. Thus, all the one hundred and twenty shares in the company were under the control of the assessee. The Income -tax Officer also found that the business of the company was run by the assessee alone. From February 5, 1947, to June 1, 1950, he was the only director. By a resolution dated July 5, 1947, signed by him as the sole director of the company, the assessee was also invested with all powers of management of the company. No share account was maintained in the companys books and minute book as such was maintained, the minutes being noted on loose sheets. The other company, i.e., Saurashtra Iron Foundry and Steel Works Ltd., was formed on May 1, 1951, and thirty -four shares which were originally issued were held by the assessee, his wife, his said brother, Harilal, and his son, Jashwantrai. The shares said to have been purchased by the assessees brother and son were purchased from loans said to have been advanced by the assessee to them and on which no interest was charged. Messrs. C. Prabhudas & Co. (Private) Limited had at all material times its head office at Bhavnagar and a branch office at Mehsana. As already stated, the relevant previous year of the assessee -company for all the businesses carried on by him as proprietary concerns and of this company was the same, namely, Samvat year 2010. It appears that the company had never declared or paid any dividend to its shareholders, but instead had allowed its profits to accumulate a in reserve fund to the credit of which was an amount of Rs. 9,50,334. These accumulated profits, if distributed as dividends to shareholders, would have been taxable in the hands of the shareholders, in the present case the assessee and his son. What the assessee appears to have done, therefore, was to utilise this accumulated fund in his proprietary concerns by taking loans in the difference names of his business. The assessee has accounts with the company both at Bhavnagar and Mehsana in various names. Thus, at the commencement of Samvat year 2010, the companys office at Bhavnagar showed loans given by the company to two concerns of the assessee, namely, C. Prabhudas & Co. (Private) Ltd., Bhavnagar, and Messrs. Jashwantrai & Co., of the aggregate amount of Rs. 5,81,676. The companys office at Mehsana showed loans to amount of Rs. 2,73,221 to the assessee and to C. Prabhudas & Co. (Private) Ltd., Mehsana. The aggregate of these loans came to Rs. 8,54,896 out of reserve funds of Rs. 9,50,334. We are not concerned with the other company in the present reference and, therefore, it is not necessary to set out the facts concerning that company.

(3.) AGGRIEVED by this inclusion, the assessee filed an appeal before the Appellate Assistant Commissioner. During the hearing of that appeal, the Income -tax Officer conceded that the company and the assessee being distinct entities in law, the companys income could not be included in the total income of the assessee, but as the Appellate Assistant Commissioner had before him the facts regarding the use of the companys accumulate profits by the assessee as loans to his proprietary concerns, the Appellate Assistant Commissioner came to the conclusion that section 12 (1B) read with clause (e) of section 2(6A) would be attracted and on the basis that the outstanding loans would be dividends in the hands of the assessee as a shareholder in the company, he included an amount of Rs. 2,37,150 in the total income of the assessee. But as he could not enhance the assessees assessment without a notice, he issued such notice on the assessee. There is no dispute that the notice was served on the assessee. At the hearing of the appeal after the notice was so served, the assessees representative conceded that the said amount of Rs. 2,37,150 would be liable to be taxed as divided in the hands of the assessee. No objection was taken at the time as to the competence of the Appellate Assistant Commissioner under the section 31(3) to enhance the assessment. The only question raised before that officer was that the assessee was entitled to the benefit of the concession granted by the Central Board of Revenue under a circular issued to the Income -tax Officer dated May 10, 1955. The Appellate Assistant Commissioner examined this contention in the light of the said circular and on the conclusion hi came to, namely, that the assessee had not genuinely returned the loans by the date prescribed in the circular, namely, June 30, 1955, he rejected that contention and held that the assessee was not entitled to get the benefit of that concession.