Rajes Kumar, J. - (1.) The Income Tax Appellate Tribunal, Allahabad has referred the following four questions under Section 256 (1) of the Income-tax Act (hereinafter referred to as "Act") relating to the assessment year 1986-87 for opinion to this Court: "(i). Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in cancelling the order passed by the CIT Under Section 263 of the I.T. Act, 1961, when the facts of the case clearly indicated that the A.O. had not applied his mind to certain aspects of the case and when had merely set aside the assessment and a conclusive finding on the issues involved was yet to be given by the Assessing Officer? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was, in law justified in holding that the interest free advances received by the assessee firm from M/S Jai Prakash Associated (P) Ltd. could not be treated as deemed dividend within the meaning of Section 2(22) (e) of the I.T. Act, 1961? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was, in law, justified in holding that the assessee firm was only a beneficial owner of the shares of M/S Jai Prakash Accociates (p) Ltd., when the partners were holding these shares for and on behalf of the firm, acting in the course of business of the partnership, and thus the firm was not the beneficial owner but the legal owner of the shares in its own right? (iv) Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in holding that the interest paid to Smt. Rekha Dixit was disallowable Under Section 40 (b) of the I.T. Act, 1961 only to the extent to which it related to the period from 1.11.1985 to 31.3.1986, despite the fact that as per the terms of the partnership Deed dated 4.11.1985 the said Rekha Dixit was entitled to share the profits of the assessee firm for the entire accounting year ending on 31.3.1986?"
(2.) The brief facts of the case are that the assessee-opposite party (hereinafter referred to as "assessee") was a contractor and was working as sub-contractor with M/S Jai Prakash Associates (P) Ltd. It filed a return for the assessment year 1986-87 on 31,7.1986. The said return, was revised on 3 1.6.1988 showing an income of Rs.6,99.000/-, An assessment was completed on 21.2. 1989 at Rs 72,16,000/- after full scrutiny of the case. Thereafter, on 3.12.1990, the Commissioner of Income-tax, after scrutinizing the assessment order, came to the conclusion that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue. Consequently, he issued a notice on 3.12.1990 and after hearing the assessee and its objection raised against the notice, passed an order on 22.2.1991 under Section 263 of the Act, setting aside the assessment order with certain directions to the Assessing Officer to re-frame the same on the basis of those directions. It is against this order that the assessee filed an appeal before the Tribunal,
(3.) The first and the main point for passing an order Under Section 263 was that the assessee firm held 1,83,940 shares of Rs.100/- each of M/s Jai Prakash Associates (P) Ltd. and the firm received interest free advances from the said company amounting to Rs.3,64,36,043/- as on 31.12.1985. The surplus out of profit as on 31.12.1985 in the case of M/S Jai Prakash Associates (P) Ltd. is alleged to be Rs.3.65,33,900/-. The Commissioner of Income-tax was of the opinion that this interest free advance of Rs.3.64,36,046/- was taxable in the hands of the assessee firm by way of dividend income within the meaning of Section 2 (22) (e) of the Income Tax Act, 1961 and accordingly, directed the Assessing Officer to levy the tax on the amount in the hands of the assessee firm. The Tribunal allowed the appeal and held as follows. "We have heard the parties at length and we are of the opinion that the arguments advanced by the learned counsel for the assessee have force. In the case of Howrah Trading Co.(supra), the Hon'ble Supreme Court had held that the term 'shareholder' means the person whose name and address are entered in the register of shareholders maintained by the company. The brief facts of the case were that a person who has purchased shares in a company under a blank transfer and in whose name the shares has not been registered in the books of the company, such purchaser who had paid the price of the shares wanted to have a set off of the tax deducted at source to the dividends by the company against his liability of income-tax towards the income of the said dividends, the said income was not allowed by the department. Finally the Hon'ble Supreme Court has held that notwithstanding the equitable right of the purchaser to the dividend on such shares, being not registered in the books of the company cannot be said to be shareholder and, this was not allowed the set off of the tax deducted at source under Section 18(5) of the Act. The Hon'ble Supreme Court in the case of C.P. Sarathy Mudaliar (supra) had held as under: "Held, that only loans advanced to shareholders could be deemed to be dividends under Section 1(6A) (e). The Hindu Undivided Family could not be considered to be a "shareholder" under Section 2 (6A) (e) and hence the loans given to the Hindu Undivided Family could not be considered as loans advanced to a shareholder of the company and could not, therefore, be deemed to be its income." The brief facts of the case were that members of a Hindu Undivided Family acquired shares in a company with the Funds of the family. Loans were granted to the HUF and the question was whether the loans could be treated as dividend income of the family falling within Section 2(6A) (e) of the Income Tax Act, 1922. The Hon'ble Supreme Court while deciding the case had opined that Section 2 (6A) (e) gives an artificial definition of dividend. It does not take in dividend actually declared or received. The dividend taken note of by the said provision is a deemed dividend and not a real dividend for certain purposes the Legislature has deemed a loan granted to a shareholder as 'dividend'. Hence Section 2 (6A) (e) must necessarily receive a strict construction. When Section 2 (6A) (e) speaks of shareholder it refers to the registered shareholder and not to the beneficial owner. The Hon'ble Supreme Court while deciding this case had followed the decision of How rah Trading Co. (supra). The Hon'ble Supreme Court had further followed the same decision in the case of Rameshwarlal Sanwarmal (supra) in which too the Hon'ble Supreme Court had held that where the assessee HUF was the beneficial owner of certain shares in a private company which stood in the name of its Karta in the register of shareholders and the company advanced loans to three concerns owned by the HUF, the loans could not be regarded as loans advanced to a shareholder with the meaning of Section 2 (6A) (e) and the loans could not be taxed in the names of the HUF as deemed dividend under Section 2 (6A) (e). The Hon'ble Calcutta High Court in while following 83 ITR 178 (SC)in the case of Chandmull Batia (supra) held likewise that Income-tax being a taxing statute, for the purpose of charging tax. the expression contained in the Act must be strictly construed. A shareholder, for the purpose of Section 2 (22) (e) of the Income-tax Act, 1961, is one those names is registered as the owner or holder of the share in the register of share of the Company. The Companies Act, 1956, by Section 153 does not recognize any trust or beneficial interest of any person in any share. The brief facts of this case were that a public limited company gave loans to two of its shareholder, who were partners of a firm. The shares of the partners were shown as stock-in-trade of the firm and the amounts received were shown as deposits made by the company in the books of the firm. The question was as to whether the loans could be deemed to be extended in the hands of the firm under Section 2 (22) (e), it was held that the firm was not a interest shareholder of the company. Hence, the amounts advanced could not be deemed to be dividends in the hands of the firm within the meaning of Section 2 (22) (e). Admittedly, the provisions of Section 2 (6A) (e) of the Act of 1922 and of Section 2(22) (e) of the Act, 1961 are similar. It appears that even the Legislature in its wisdom relied this lacuna in the eyes of law and amended the provisions of Section 2 (22) (e) w.e.f. 1.4.1988. As it is substantive law which gives rise to charging of tax under certain circumstances, it cannot be taken to be procedural amended and, thus, it being a substantive amendment cannot be given effect retrospectively. The salary paid to a partner by a firm which grows and sells tea was exempt from tax under Rule 24 of the Income-tax Rules, 1922 to the extent of 60 % thereof representing agricultural income and the rest was liable to tax only to the extent of 40 %. The principle enunciated by the Hon'ble Supreme Court was that the partner being employed by the firm in which he was a partner cannot be said to be different than the firm employing him. There was no question of any interpretation of the word shareholder. The only point involved was that relationship of a partner shown as an employee of the firm vis-a-vis the said firm, hence this ruling has no application to the present case.;