M D JINDAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) : In this reference under s. 256(1) of the IT Act, 1961, the following question of law has been referred to this Court : "Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,80,446, being the value of iron rods supplied by Machino Techno Sales (P) Ltd., during the previous year ended on March 31, 1965, amounted to dividend within the meaning of s. 2(22)(e) of the IT Act, 1961, and 50per cent thereof, as reduced by the balance at his credit in the current account maintained with the company, was assessable in the hands of the assessee as such dividend for the asst. yr. 1966- 67?"

(2.) THE facts leading to this reference are stated hereafter. THE assessee is an individual. He is the managing director of M/s Machino Techno Sales (P) Ltd. (hereinafter referred to as "the company"). THE other director of the said company is the assessee's wife. THE assessment year involved is 1966-67 and the relevant accounting year is the financial year ending on March 31, 1966. On June 20, 1964, the assessee purchased two adjacent plots of land at Alipore Road, Calcutta, one in the joint name of himself and his wife and the other in the names of his two minor sons. THEreafter, in the accounting year relevant to the assessment year under reference, the assessee started constructing a multi storied building known as "Jindal House". Several selfcontained flats were planned to be constructed in this building. THE construction of the building was completed some time in early 1968. THE entire "Jindal House" belonged to the assessee, his wife and his two minor sons, in equal proportion. As the assessee was contemplating selling of some of the flats in future, on April 21, 1965, he and his wife entered into an agree ment with the company to sell six flats for Rs. 3,95,000 to it, which was wholly controlled by the assessee and his wife. As per cl. 4 of the said agreement, the company agreed to pay Rs. 3,50,000 to the assessee and his wife by way of earnest money and further agreed to pay the balance amount of Rs. 45,000 on the completion of the sale of the said six flats. During the accounting year relevant to the assessment year under reference, the company gave iron rods worth Rs. 1,80,446 to the assessee and his wife in order to facilitate them to construct the said building. It may be noted that the company was carrying on business in iron materials. During the course of the assessment proceedings, the ITO asked the assessee as to why the iron rods worth Rs. 1,80,446 given by the company should not be treated as dividend within the meaning of s. 2(22)(e) of the 1961 Act. THE assessee's reply to this was given in his two letters dated January 21, 1971, and February 17, 1971, which are as under:

(3.) THE assessee went in appeal before the Tribunal. Before the Tribunal, it was not disputed by the assessee that the expression "any sum"would not necessarily be money transaction only but could include money value of articles or things advanced by a company. It was contended before the Tribunal that by the agreement for sale entered into between the assessee and his wife with the company, the company became a debtor of the assessee and his wife to the extent of Rs. 3,95,000. He further pointed out that in the company's books of account, the earnest money (iron rods) paid by the company had been debited to "Purchase of Flats Account". It was further submitted that each and every payment made by a com pany to its shareholder cannot be treated as a loan but one has to establish that there was a relation of a creditor and debtor between the company and its shareholder. It was further submitted that in view of the terms contained in the agreement for sale, the value of the iron rods given by the company to the assessee and his wife was not a loan but was a, sort of part payment made by the company towards its indebtedness of Rs. 3,95,000. As regards the agreement for sale, it was submitted on behalf of the assessee that the ITO was not justified in treat ing the agreement as an "arranged affair "in view of the fact that the assessee and the company are two separate entities. It was further sub mitted that the fact that the assessee had substantial interest in the company should not influence the Tribunal's mind in considering the agreement for sale of the six flats. THE representative for the assessee also referred the Tribunal to various clauses of the agreement dated April 21,1965.