MRS. MINNIE R. CAMA v. INCOME TAX OFFICER
[Citation -1984-LL-1111]

Citation 1984-LL-1111
Appellant Name MRS. MINNIE R. CAMA
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 11/11/1984
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags proprietary concern • deed of dissolution • individual capacity • accrued interest • deemed dividend • sole proprietor • family trust • voting power
Bot Summary: The material facts are: The assessee owns 202 shares out of 2,000 shares of Cama Motors Ltd. The assessee is one of the three trustees of R. J. Cama Family Trust, which holds 400 shares of Cama Motors. The assessee along with Shri J. R. Cama holds 13 shares of Cama Motors. In the books of the company the assessee became the debtor for the first time with effect from 1-1-1977 it could be from the assessee only. The learned counsel for the assessee submitted that since the assessee owned only 202 shares out of 2,000 shares of Cama Motors, s h e cannot be held to be a 'person who has a substantial interest in the company' within the meaning of section 2(22) read with section 2(32). 13 shares of Cama Motors held in the joint names of the assessee and J. R. J. Cama should not be considered for the purposes of the applicability of the provisions of section 2(22). The learned counsel for the assessee further submitted that the AAC was not justified in considering 50 shares of Cama Motors held by minor Aiyesha Jahangir Cama by her father and guardian J. R. J. Cama, in deciding the issue whether the provisions of section 2(22) , were applicable to the assessee's case. In view of my decision on the first two submissions made on behalf of the assessee and accepted by me, it is not necessary to discuss any thing further on the alternative submissions made by the learned counsel for the assessee.


1. only point involved in this appeal pertains to applicability of provisions of section 2(22) (e) of Income-tax Act, 1961 ('the Act'). 2. assessee is individual. assessment year is 1978-79, and relevant previous year is financial year ended on 31-3-1978. 3. material facts are: (a) assessee owns 202 shares out of 2,000 shares of Cama Motors (P.) Ltd. ('Cama Motors'). (b) assessee is one of three trustees of R. J. Cama Family Trust, which holds 400 shares of Cama Motors. (c) assessee along with Shri J. R. Cama holds 13 shares of Cama Motors. (d) assessee along with Shri B. D. Rawal was partner in firm of Victory Wood Works, to which Miss Aiyesha Jahangir Cama was admitted to benefits of partnership. (e) Cama Motors had given loan of Rs. 20,000 to Victory Wood Works on 26-12-1975. (f) With effect from 1-1-1977, assessee became sole proprietor of Victory Wood Works vide deed of dissolution of partnership dated 11-7-1977. (g) As on 31-3-1977 loan account in name of Victory Wood Works stood at Rs. 23,037.80 (along with interest) in books of Cama Motors and as on 31-3-1978, it was Rs. 25,437.80 (along with interest). 4. On basis of intimation received from ITO Companies Circle-II, Ahmedabad assessing Cama Motors, ITO assessing assessee enquired of her as to why amount of Rs. 25,437.80 outstanding in name of Victory Wood Works in books of Cama Motors should not able treated as deemed divided in her hands by virtue of provisions of section 2(22) (e) . assessee, vide her reply dated 3-3-1981, inter alia, stated before ITO that this amount should not be treated as deemed dividend within meaning of said section because Victory Wood Works was not registered shareholder of Cama Motors and that when amount was originally advanced in December 1975, it was given to said firm and not to her in her individual capacity. In support of her stand, assessee relied on decision of Hon'ble Supreme Court in cases of Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1, CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 and Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345. ITO, however, treated Rs. 25,438 as deemed dividend under section 2(22) (e) , as under: "9. It is true that deemed dividend can be taxed only in hands of registered shareholder. To that extend assessee who became proprietor of Victory Wood Works with effect from 1-1-1977 was registered shareholder of company for and from assessment year 1978-79. next question is that as to at what point of time amount should be taxed. facts before Supreme Court in smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 were different. In that case amount was advanced in beginning of year but loan was returned before end of accounting year. In spite of that Supreme Court held that this amount should be taxed under section 2(22) (e). In case before us, amount was advanced to firm in which assessee was 8 annas partner during year 1975. firm was dissolved with effect from 1-1-1977 and as per deed of dissolution reported above, assessee became sole proprietor of entire concern with all its assets and liabilities with effect from 1-1-1977. Therefore, in books of company assessee became debtor for first time with effect from 1-1-1977 it could be from assessee only. company thus got enforceable right against assessee alone with effect from 1-1-1977 only and on 31-3-1978 assessee registered shareholder was debtor to company to extent of Rs. 25,438. It is, therefore, clear that money was advanced by company to assessee with effect from 1-1-1977 and, therefore, it is liable to be taxed in hands of assessee during assessment year 1978-79. Accordingly, amount of Rs. 25,438 is added in assessee's hands as deemed dividend under section 2(22) (e)." 5. In appeal, after considering submissions made on behalf of 5. In appeal, after considering submissions made on behalf of assessee, AAC upheld action of lTO in following manner: "It is held that said position as adopted by ITO is legal and valid in view of fact that loan is deemed to have been taken by appellant during year under appeal. transaction falls within definition deemed dividend under section 2(22) (e) as conditions laid down therein are satisfied. appellant has placed reliance on certain judicial decisions which have been duly discussed by ITO in assessment order and rejected. main reliance placed is on Supreme Court's decision in Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1, wherein it is held that shareholder would mean registered holder of shares and not beneficial holder. This decision does not help appellant's case because it is admitted in letter dated 5-7-1983 that appellant is shareholder of 202 shares as also 50 equity shares in name of minor out of 2,000 equity shares of company. position of share holdings of other family members is not indicated but is clear that appellant being person who has substantial interest in company, advance or loan to her is deemed dividend. ITO was, therefore, justified in including loan together with accrued interest thereon as income under section 2(22) (e) of Act." 6. Being aggrieved by order of AAC, assessee came up in appeal before Tribunal. learned counsel for assessee submitted that since assessee owned only 202 shares out of 2,000 shares of Cama Motors, s h e cannot be held to be 'person who has substantial interest in company' within meaning of section 2(22) (e) read with section 2(32). In this connection, he invited attention of Tribunal to list of persons holding shares of Cama Motors (Pages 9 to 11 of paper book). He further submitted that shares of Cama Motors held in name of R. J. Cama Family Trust of which assessee was one of three trustees, could not be considered for purposes of applicability of provisions of section 2(22) (e) , as assessee cannot be held to be 'beneficial owner' of such shares within meaning of section 2(32). Similarly, 13 shares of Cama Motors held in joint names of assessee and J. R. J. Cama should not be considered for purposes of applicability of provisions of section 2(22) (e). learned counsel for assessee further submitted that AAC was not justified in considering 50 shares of Cama Motors held by minor Aiyesha Jahangir Cama by her father and guardian J. R. J. Cama, in deciding issue whether provisions of section 2(22) (e) , were applicable to assessee's case. In other words, he wanted to impress upon Tribunal that AAC has wrongly held that assessee was 'person who has substantial interest' in Cama Motors. His other line of argument was that since original loan of Rs. 20,000 was given to firm of Victory Wood Works on 26-12-1975 and not to assessee in her individual capacity, fact that on 1-1-1977 assessee became sole proprietor of said firm would not justify income-tax authorities to hold that said loan was advanced to assessee and that too on 1-1-1977. He emphasised point that same amount should not be held to have been advanced to two different entitles on two different dates. Again, according to learned counsel for assessee, applicability of provisions of section 2(22) (e) , could have been considered, if at all, when loan was first given to Victory Wood Works on 26-12-1975 and not on any other subsequent date. His third line of attack was that even assuming for sake of arguments that provisions of section 2(22) (e) , were applicable in assessee's case, since conversion of partnership concern into proprietary concern took place on 1- 1-1977, relevant previous year would be financial year ended on 31-3- 1977 and, therefore, deemed dividend could not be brought to tax in assessment year under consideration, viz., 1978-79. Finally he submitted that even assuming for sake of arguments provisions of section 2(22) (e) were applicable in assessee's case, Rs. 20,638 (being balance as on 31- 3-1976) could be brought to tax, if at all, and not Rs. 25,438 (being balance as in 31-3-1978). He, therefore, urged that Rs. 25,438 included in total income of assessee should be deleted. learned representative for department, on other hand, kly supported action of income-tax authorities. According to him, since assessee became debtor in previous year relevant to assessment year under consideration, loan amount plus interest thereon was rightly treated as deemed dividend by invoking provisions of section 2(22) (e). 7. I have carefully considered rival submissions of parties and I find considerable force in submissions made on behalf of assessee. Hon'ble Supreme Court has, time and again, held that deeming provisions contained in Act, should be strictly construed. It is not in dispute that section 2(22) (e) , is one such section. Sub-clause (e) of clause (22) of section 2 reads as under: "'dividend' includes - (e) any payment by company, not being company in which public are substantially interested, of any sum (whether as representing part of assets of company or otherwise) by way of advance or loan to shareholder, being person who has substantial interest in company, or any payment b y any such company on behalf, or for individual benefit, of any such shareholder, to extent to which company in either case possesses accumulated profits;" As rightly pointed out on behalf of assessee that these provisions have to be read along with provisions of clause (32) of section 2 , which reads as under: "'person who has substantial interest in company', in relation to company, means person who is beneficial owner of shares, not being shares entitled to fixed rate of dividend whether with or without right to participate in profits, carrying not less than twenty per cent of voting power;" On proper reading of aforesaid provisions of Act, it is quite clear that any payment by company by way of advance or loan to shareholder has to be considered in year in which such payment is made by company. In instant case, it is not in dispute that Rs. 20,000 was advanced to Victory Wood Works (a partnership concern) on 26-12-1975. Therefore, in my view determination of applicability of provisions of section 2(22) (e), could be considered, if at all, in respect of assessment year 1976-77 and that too in case of said firm. Since said firm was not holding any shares in Cama Motors, provisions of that section could not be attracted on date on which loan of Rs. 20,000 was advanced to said firm. Almost after one year of advance of Rs. 20,000, said firm became proprietary concern of assessee on 1-1-1977. As per deed of dissolution dated 11-7-1977, assessee took over all assets and liabilities of said firm. At this stage Cama Motors was not at all in picture and, therefore, I fail to appreciate how provisions of section 2(22) (e) could be applicable in assessee's case when Cama Motors had not advanced any loan to her. Further, I find from list of shareholders of Cama Motors that assessee was not holding shares 'carrying not less than twenty per cent of voting power' and, therefore, she cannot be treated to be 'person who has substantial interest in company' (viz., Cama Motors) within meaning of provisions of section 2(32). In this view of matter, I am of opinion that first two submissions made on behalf of assessee are well founded and should be accepted. Apart from this, I also find considerable force in other two submissions made on behalf of assessee. It is pertinent to note that assessee's previous year for year under consideration started from 1-4-1977 and ended on 31-3-1978. Since conversion of Victory Wood Works from partnership to proprietary concern took place on 1-1-1977, i.e., three months before starting of relevant previous year, Rs. 25,438 could not be brought to tax in year under consideration. Further, I entirely agree with submissions made on behalf of assessee that amount which, if at all, could be brought to tax would be Rs. 23,038 and not Rs. 25,438 as has been held by income-tax authorities. However, in view of my decision on first two submissions made on behalf of assessee and accepted by me, it is not necessary to discuss any thing further on alternative submissions made by learned counsel for assessee. For all these reasons, I hold that income-tax authorities were not justified in invoking provisions of section 2(22) (e) , and in including Rs. 25,438 in total income of assessee for year under consideration. same is, therefore, deleted from total income of assessee. 8. In result, appeal is allowed. *** MRS. MINNIE R. CAMA v. INCOME TAX OFFICER
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