T SUNDARAM CHETTIAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THESE two reference applications under the Indian Income-tax Act may be dealt with together as they raise a common question as to the interpretation of section 12(1B) of the Act The facts giving rise to Tax Case No. 185 of 1959 are as follows : One Visalakshi Achi, a shareholder in a company called Panchanayaki Limited incorporated under the Indian Companies Act, borrowed from the company a sum of Rs. 70, 000 on August 30, 1945. On her death in the year 1947, Sundaram Chettiar, her son, inherited her estate and became the owner of her shares in the company. It appears that he undertook the liability of his mother to the company and made himself indebted to it for the amount of principal and interest due by her. But he failed to discharge the debt and of course continued to be the shareholder of the company. It is in this state of affairs that sections 2(6A)(e) and 12(1B) of the Act came into the statute book under the Finance Act, 1955, with effect from 1st April, 1955. A reference to the section will be made later. In the assessment of Sundaram Chettiar under the Income-tax Act for the assessment year 1955-56 relevant to the accounting year ended March 31, 1955, the Income-tax Officer treated the loan outstanding from him to the company as his dividend income and, brought that amount to tax. The assessee unsuccessfully preferred appeals to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal. THESE appellate authorities also took the view, in agreement with that of the Income-tax Officer, that under section 12(1B) of the Act the outstanding loan due to the company was taxable. On an application filed by the assessee for reference under section 66(1) of the Act, the following question has been referred to us by the Tribunal

(2.) THE payment must be to a shareholder of the company by way of advance or loan or it must be on behalf of or for the individual benefit of a shareholder.

(3.) THE loan must have remained outstanding in the beginning of the previous year relevant to the assessment year 1955-56 in relation to the shareholder.