AJIT KUMAR SENGUPTA, J. - (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: "Letter dated January 21, 1971: THE materials worth Rs. 90,223.23 sold to me cannot be considered as deemed dividend within the meaning of sub-cl. (e) of cl. (22) s. 2 of the IT Act, 1961, for the following reasons : (i) THE value of materials sold to me cannot be considered as pay ment by the company of any sum by way of advance or loan to me as no cash has gone out of the company. (ii) THE cost of materials sold to me was adjusted against the consideration money due to me from the company. THE company was under contractual obligation to pay me the consideration money in instal ments against the sale of flats. It acquired right, title and interest in the six flats sold to it." "Letter dated February 17, 1971: `This provision (meaning of s. 2(22)(e) of the IT Act, 1961) legislates in respect of any payment by way of advance or loan to a share-holder. THE original transaction should be a loan or advance so that the company is a creditor and the shareholder is a debtor and the assessee is under obligation to pay it along with the interest, if any, payable thereon. In my case, Machino Techno Sales (P) Ltd. sold to me materials worth Rs. 90,223 which was adjusted against the consideration money due to me for the flats sold to it. THE company was under contractual obligation to pay me the consideration money in instalments against the sale of flats. I was under no obligation to repay Rs. 90,223 to the company with or without interest. I was under obligation to deliver the possession of the flats sold to the company. In fact, I delivered the possession of the flats to the company on May 27, 1968. It is, therefore, submitted that the sum of Rs. 90,223 cannot be considered as loan or advance within the meaning of sub-cl. (e) of cl. (22) of s. 2 of the IT Act, 1961. If, however, I was unable to deliver the possession of the flats to the company as agreed upon, then I would have been under obligation to refund Rs. 90,223. On the happening of such a contingency, the company would have become creditor and I debtor and I would have been under obligation to repay Rs. 90,223. This has not happened." The ITO, however, in his order dated April 26, 1971, held that the agreement dated April 21, 1965, was an "arranged affair "on the grounds that (i) the agreement was signed by the assessee in dual capacity, viz., as a seller as well as the managing director, on behalf of the company ; (ii) the agreement was entered into in April, 1965, while the building was ready only in May, 1968; (iii) there was no provision in the agreement as to what will happen to the earnest money, if the assessee did not build or abandoned the construction of the flats. He, there fore, concluded that the advance received by the assessee by way of iron rods would fall within the mischief of s. 2(22) (e) of the 1961 Act. How ever, he added one half of Rs. 1,80,446, i.e., Rs. 90,223, as deemed dividend within the meaning of s. 2(22)(e) of the 1961 Act, in the hands of the assessee as the iron rods were supplied to the assessee and his wife jointly. The assessee preferred an appeal before the AAC. The AAC, in his order dated December 20, 1971, arrived at the following findings: "(a) The company had sufficient accumulated profits; (b) Jindal House, the property under consideration, actually belonged to the appellant and his wife; (c) Though the so called agreement was entered into on April 21, 1965, the flats were delivered is late as May 27, 1968. The amount received in the form of iron rods stated to be worth Rs. 1,80,446 was, therefore, nothing but advance since the actual sale took place much later as per the conveyance dated May 27, 1968 ; (d) As the advance was adjusted towards the cost of the flats, the appellant's contention that cash was not received, and so, s. 2(22)(e) did not apply, does not hold water. It is nowhere indicated that the pay ments should be only in cash as such; (e) The theory of contractual obligation cannot be accepted, particularly when the same person acted at both ends. He held substantial and controlling interest as shareholder and the agreement was not registered; (f) The series of events arranged leave no doubt that a shareholder took advance from a company whose business was not that of money lending. This conclusion is reinforced by the fact that the flats were delivered much later. In case of nondelivery, the amount would certainly have had to be refunded and with interest, if real business principles were intended to be followed. This is also as per cl. 12 of the agreement ; (g) The rate for these flats was much lower than that charged for others." He concluded that the ITO was justified in treating one half of the value of the iron rods as deemed dividend under s. 2(22)(e) of the 1961 Act, in the hands of the assessee.
(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. The Tribunal, in its order dated January 7, 1974, after considering the contentions as well as the provisions of s. 2(22)(e) of the 1961 Act, held that it is no doubt true that the company had not given any advance or loan to the assessee in cash. However, the iron rods supplied by the company to the assessee and his wife, definitely benefited the assessee who was contemplating constructing a house known as "Jindal House" . As the iron rods were scarce material, the company, which was carrying on business in iron materials, came forward and gave iron rods to the assessee and his wife. If the assessee had got these iron rods before entering into an agreement for sale of flats to the company, there would not have been any dispute that provisions of s. 2(22)(e) of the 1961 Act would have been clearly applicable. But, instead of doing that, the assessee and his wife, controlling the company, thought of a device to circumvent the provisions of s. 2(22)(e) of the 1961 Act and made an agreement with the company by which the company was made a debtor to the assessee and his wife to the extent of Rs. 3,95,000. The Tribunal, however, did not agree with certain observations of the ITO regarding the provisions for repayment of earnest money, etc., in the event of default on either side. But the Tribunal was in agreement with the submissions made on behalf of the Department that the assessee's case is one in which the IT authorities would be fully justified in going behind the agreement for sale of the flats as well as the sale agreement which was subsequently entered into on May 29, 1968. As regards the quantum of dividend to be included in the assessee's hands, the Tribunal accepted the assessee's contention that he should be given credit to the extent of the amount standing to his credit in the company's books. The ITO was, therefore, directed to give necessary relief to the assessee.;