COMMISSIONER OF INCOME TAX Vs. VIMALAN A

JUDGEMENT

(1.) THE assessee, late P. Appavoo Pillai, whose legal representative is the respondent herein, held 160 shares of Rs. 100 each in M/s. S.D.U.M.S. Private Ltd., Dharmapuri, a private limited company in which the public is not substantially interested within the meaning of Section 23A of the Indian Income-tax Act, 1922 (hereinafter called "the Act"). THE assessee transferred 20 shares to his minor son, Vimalan, the respondent herein, for cash consideration some years ago. Out of the remaining 140 shares he transferred to his wife and five minor children 20 shares each, totalling 120 shares without receiving any consideration. THE Income-tax Officer included the dividend income of these 120 shares in the income of the assessee for the assessment year 1958-59, relying on the provisions of Section 16(3) and this is not now in dispute. THE Income-tax Officer also treated the loans to the extent of Rs. 26,065 advanced by M/s. S.D.U.M.S. Private Ltd. (hereinafter referred to as "the company") to the assessee's wife and minor children as dividend under Section 2(6A)(e) and assessed it in the hands of the assessee by invoking Section 16(3) of the Act. THE company charged interest on the loan advanced to the minor children and this amount which came to Rs. 1,201 was not allowed as a deduction from the income by the Income-tax Officer. THE assessee preferred an appeal to the Appellate Assistant Commissioner and contended that the legal fiction of considering the income of the wife and minor children as that of the assessee cannot be extended to the loan taken by the wife and minor children from the company and that when the assessee himself had not taken any loan from the company the question of assessment of the loins taken by his wife and minor children does not arise. THE Appellate Assistant Commissioner did not agree with the assessee in these contentions and held that the Income-tax Officer was right in treating the loans taken by the assessee's wife and minor children as dividend income of the assessee under Sections 2(6A)(e) and 16(3) of the Act. He also held that the interest paid on the loans availed of by the wife and minor children cannot be said to have been incurred solely for the purpose of earning the income and as such he is not entitled to claim any set off of the interest against the income treated as dividend under Section 2(6A)(e). On a further appeal, the Tribunal held that the loans taken by the wife and minor children as such have no relationship to the shares held by them and that the loan was not an income arising directly or indirectly from the shares held; the fact that under Section 2(6A)(e) such loan will be deemed to be dividend cannot be used for the purpose of holding that the loan would be deemed as income arising from the shares; and the expression "arising directly or indirectly" in Section 16(3) cannot be construed as "deemed arising directly or indirectly". On these reasonings the Tribunal held that the said sum of Rs. 26,065 was not includible under Section 16(3) of the Act in the total income of the assessee. In support of this view the Tribunal also relied on the decision in Commissioner of Income-tax v. Phirozshaw Pallonji Mistry, 1959 36 ITR 582 and the Privy Council decision in George N. Houry v. Commissioner of Income-tax, 1960 40 ITR 413. At the instance of the revenue the following question of law has been referred :

(2.) THE relevant portion of Section 2(6A)(e) and Section 16(3)(a)(iii) and (iv) read as follows:

(3.) A similar question came up for consideration before the Privy Council in George N. Houry v. Commissioner of Income-tax. Section 22 of the East African Income-tax (Management) Act, 1952, which was similar to Section 23A of the Indian Income-tax Act, 1922, as it stood prior to its amendment by the Finance Act of 1955, provided that the undistributed portion of the total income of certain companies subject to a limit of 50 per cent. of such income is deemed to have been distributed as dividend among the shareholders of the company if the Commissioner of Income-tax makes an order to that effect and the proportionate share thereof of each shareholder shall be included in the total income of such shareholder for the purpose of the Act. Section 24 of the East African Income-tax (Management) Act, 1952, which is similar to Section 16(3) of the Indian Income-tax Act, 1922, reads as follows: