JUDGMENT 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.
4. The next point taken up by the CIT was regarding the interest paid to Smt. Rekha Dixit from 31.3.1981 to 1.11 1985. The brief facts on this point are that Smt. Rekha Dixit became partner of that firm with effect from 1.11.1985 on the basis of partnership deed. The firm was re-constituted from 1.11.1985. Some old partners were deleted and some new partners were added. Smt. Rekha Dixit had some credit balances in the firm even before 1.11.1985. The Assessing Officer, while framing the assessment, disallowed the interest paid to her from 11.11.1985, but allowed the interest payable to her upto 31.10.1985. The CIT while scrutinizing the order, was of the opinion that when Smt. Rekha Dixit was allowed to share the profits in the firm for the whole year, then any interest paid to her even for a period earlier than 1.11.1985 was liable to be disallowed Under Section 40(b) of the Income-tax Act. He accordingly directed the Assessing Officer to disallow the interest paid for the period from 1.4.1985 to 31.10.1985. The Tribunal, however, disagreed with the view of CIT (Appeals); and while discussing the whole issue, gave its finding in the following words:-
We have heard the parties at length and we are not convinced with the argument advanced by the learned G.A. The facts in this case are that Smt. Rekha Dixit was admitted the partner from 1.11.1985 and this by no stretch of imagination or by any implication of law, she can be said to be a partner before 1.11.1985. Section 40(b) of the Income Tax Act is very clear on the point and it provides as under:-
"40 (b). Notwithstanding anything to the contrary in Section 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession".
(a)...
(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm....
The very section provides that it is only an interest to a partner which is inadmissible under Section 40(b). Here in this case Smt. Rekha Dixit was not a partner upto 11.11.1985. The sharing of the profit was according to the partnership deed duly executed by the partners and agreed upon by them and, thus, that sharing of profit will not make Smt. Rekha Dixit a partner before 1.11.1985. This fact find support even from the assessment order made by the Assessing Officer disallowing the interest paid to these partners upto the period when they ceased to be partner i.e. from 1.11.1985 onwards. We are, therefore; of the opinion that the interest paid to Smt. Rekha Dixit upto 30.10.1985 was not disallowable under Section 40(b) and the order passed to the contrary by the learned CIT under Section 263 was not correct in the eyes of law."
5. Heard Sri R.K.Upadhyaya, learned Standing Counsel for the Revenue, No one appears on behalf of the assesses.
6. Learned Standing Counsel reiterated the submission made on behalf of the ' Revenue before the Tribunal. He submitted that in fact it is the assessee's firm who was the share holder in the Company of M/S Jai Prakash Associates (P) Ltd. being the real beneficiary and even though the shares were in the name of the partners, the assessee who is the real owner of the share be treated as the share holder and, accordingly, the interest from loan given by M/S Jai Prakash Associates (P) Ltd. to the assessee Company be treated deemed dividend within the meaning of Section 2(22)(e) of the Act. In support of his contention, he relied upon the following decisions,
1. Ram Narain and brothers v. CIT reported in 73 ITR 423.
2. CIT v. R.M. Chidambaran Pillai reported in 106 ITR 292.
3. Malabar Fisheries Co. v. CIT reported in 120 ITR 49.
4. Pandit Kishori Ram v. CIT reported in 272 ITR 309 and
5. CIT v. Shri Bhagwan Das reported in 272 ITR 367.
7. He further submitted that Smt. Rekha Dixit in view of the clause of the partnership deed was entitled for the share from 1.4.1985 to 31.10.1985, therefore, she is deemed to be the partner in the partnership firm and the interest paid by her was liable to be disallowed under Section 40(b) of the Act and the Tribunal has illegally held to the contrary.
(e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits."
10. The aforesaid clause (e) of the Act has been amended w.e.f. 1.4.1983 the amended clause (e) of the Act reads as follows:
"(e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which lie has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits."
11. Clause (e) of Section 2(22) of the Act as it existed clearly provide that if the loan is received by the shareholder, it is only then the said loan can be deemed to be dividend in his hand. In the present case, admittedly, the assessee firm was lot the shareholder of the Company M./S Jai Prakash Associates (P) Ltd. and the partners of the firm were the shareholders in the books of the Company, therefore, the loan advanced by the Company to the firm cannot be deemed to be dividend inasmuch as loan was not to the shareholder but to the partnership firm which was not the shareholder in the books of the Company. It is settled principle of law that the deeming provision has to be construed strictly.
12. In the case of Howrah Trading Co. Ltd. v. CIT (Calcutta) reported in 36 ITR 215, the Apex Court held that a person who has purchased shares in a company under a blank transfer and in whose name the shares have not been registered in the books of the company is not a "shareholder" in respect of such shares within the meaning of Section 18(5) of the Income Tax Act, notwithstanding his equitable right to the dividend on such shares, and is not, therefore, entitled to have this dividend income grossed up under Section 16(2) of the Act by the addition of the income-tax paid by the company in respect of those shares, and claim credit for the tax deducted at source, under Section 18(5) of the Act. The Apex Court held as follows:
"The word "holder of a share" are really equal to the word "shareholder", and the expression " holder of a share" denotes, in so far as the company is concerned, only a person who, as a shareholder, has his name entered on the register of members.
The position, therefore, under the Indian Companies Act, 1913, is quite clear that the expression "shareholder" or "holder of a share" in so far as that Act is concerned, denotes no other person except a "member".
The question that falls for consideration is whether the meaning given to the expression "shareholder" used in Section 18(5) of the Act by these cases is correct. No valid reason exists why "shareholder" as used in Section 18(5) should mean a person other than the one denoted by the same expression in the Indian Companies Act, 1913. In In re Wala Wynaad Indian Gold Mining Company Chitty, J., observed:
"I use now myself the term which is common in the courts, 'a shareholder', that means the holder of the shares. It is the common term used, and only means the person who holds the shares by having his name on the register."
Section 19A makes it clear, if any doubt existed, that by the term "shareholder" is meant the person whose name and address are entered in the register of "shareholders" maintained by the company. There is but one register maintained by the company. There is no separate register of "shareholders" such as the assessee claims to be but only a register of "members". This takes us immediately to the register of members, and demonstrates that evens for the purpose of the Indian Income-tax Act, the words "member" and "shareholder" can be read as synonymous.
The words of Section 18(5) must accordingly be read in the light in which the word "shareholder" has been used in the subsequent sections, and read in that manner, the present assessee, notwithstanding the equitable right to the dividend, was not entitled to be regarded as a "shareholder" for the purpose of Section 18(5) of the Act. That benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares and between whom and the company exists the bond of membership and ownership of a share in the share capital of the company."
14. Similar question came up for consideration before the Apex Court in the Case of CIT v. C.P. Sarathy Mudallar reported in 83 ITR 170. In the said case, Section 2(6-A) (e) of the Act, 1922 was under consideration, which was synonymous to Section 2(22)(e) of the Income Tax Act, 1961. In the said case, members of HUF acquired shares in a company with the fund of the family. Loans were granted to HUF and the question was whether the loans could be treated as dividend income of the family falling within Section 2 (6-A) (e) of the Act, 1922. The Apex Court held that only loans advanced to shareholders could be deemed to be dividends under Section 2(6-A)(e) of the Act, the HUF could not be considered to be a "shareholder " under Section 2(6-A)(e) of the Act and hence, loans given to the HUF will not be considered as loans advanced to "shareholder" of the company and could not, therefore, be deemed to be its income. The Apex Court further held that when the Act speaks of shareholder it refers to the registered shareholder. We are of the opinion that the issue involved in the present case is squarely covered by the aforesaid decision of the Apex Court.
15. The aforesaid decision of the Apex court in the case of CIT v. C.P. Sarathy Mudallar (supra) has been followed by the Apex Court in the case of Rameshwarlal Sanwarmal v. CIT reported in 122 ITR 1. In this case, the company advanced the loans to the assessee Hindu Undivided Family who was the ' beneficial owners of the shares in the company, but the shares were registered in the name of the individual karta, who hold the shares for and on behalf of the Hindu Undivided Family, on such fact, the question before the Supreme Court was whether the loans advanced to the Hindu Undivided Family - beneficial owner of the shares- would be taxed as deemed dividend in the hands of the Hindu Undivided Family, The Supreme Court held that the Hindu Undivided Family being only the beneficial share holder and not a registered share holder would not fall within the purview of Section 2(22)(e) of the Act. The Apex Court observed as follows:
"What Section 2(6-A)(e) is designed to strike at is advance or loan to a "shareholder" and the word "shareholder" can mean only a registered shareholder. It is difficult to sec how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a "shareholder. He may be beneficially entitled to the share but he is certainly not a "shareholder". It is only the person whose name is entered in the register of the shareholders of the company and not the person beneficially entitled to the shares. It is the former who is a "shareholder" within the matrix and scheme of the company law and not the latter. We are, therefore, of the view that it is only where a loan is advanced by the company to a registered shareholder and the other conditions as set out in Section 2(6-A)(e) are satisfied that the amount of the loan would be liable to be regarded as "deemed dividend" within the meaning of Section 2(6-A)(e)."
16. The decisions cited by the learned Standing Counsel are not relevant and applicable to the present case. The decisions in the case of Pandit Kishori Ram v. CIT reported in 272 ITR 309 and CIT v. Shri Bhagwan Das reported in 272 ITR 367 are relating to the question of jurisdiction and validity of the order passed under Section 263 of the Act by the Commissioner of Income Tax. On the facts of that case, the Division Bench of this Court upheld the order of the Commissioner of Income Tax by which the assessment order has been revised. In the present case, the Tribunal has decided the issue on merit and the question involved is not of jurisdiction to invoke the provision of Section 263 of the Act on the facts and circumstances of the case, but the question is whether the Tribunal has rightly treated the loan given by the company to the assessee as deemed dividend income within the purview of Section 2(22)(e) of the Act.
17. In the case of Ram Narain and Brothers v. CIT reported in 73 ITR 423, assessee firm purchased immovable property together with super structure thereon. It was claimed that by reason of certain entries in the account of the firm, the cost of the property was debited to the capital gain of the partners and hence the property was no longer was the property of the firm but was that of an individual partners in proportion to their shares. The Assessing Officer included the income from the property being continued to belong to the firm inspite of the adjustment made in the account. The Division Bench of this Court held that an item of immovable property belonging to the firm can be converted into their personal property only by means of an instruction in writing and the entries in the books of account of the firm do not have effect of converting the property of the firm into the personal property of the partners. This case has no relevance to the present case.
18. In the case of CIT v. R.M. Chidambaran Pillai reported in 106 ITR 292, in which the salary paid to a partner by a firm which grow 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 partners 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 the 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.
19. Likewise, the case of Malabar Fisheries Co. v. CIT reported in 120 ITR 49 too has no application to the present facts of the case, as in that case against the position of a partner vis-a-vis the firm was propounded. The facts were that a firm constituting of four partners carried on six different businesses. During the accounting periods relevant to the assessments 1960-61 to 1963-64 it installed various items of machinery in, respect of which development rebate was allowed to it under Section 33. The firm was dissolved on March 31, 1963 and under this deed of dissolution one of the firm's businesses was taken over by one of the partners and the remaining five by two of the other partners and the fourth partner received a sum of Rs.3,81,882/- in lieu of his shares in the assets of the firm. The question was whether the rebate allowed to the firm could be withdrawn on the ground that there was a sale or transfer of the machinery within the meaning of Section 34(3)(b) read with Section 2(47). It was held that Section 34(3)(b) was not applicable to the case and the development rebate to the firm could not be withdrawn.
20. In view of the aforesaid discussions, we are of the opinion that the principle laid down by the Apex Court in the case of CIT v. C.P. Sarathy Mudallar (supra) and Rameshwarlal Sanwarmal v. CIT (Supra) applies to the present case and the order of the Tribunal is in conformity with the decisions of the Apex Court. We accordingly upheld the same.
21. So far as question No. 4 is concerned, the Tribunal has recorded a categorical finding on a consideration of the clause of the partnership deed that Smt. Rekha Dixit became the partner in a partnership firm w.e.f. 1.11.1985 and therefore, the finding of the Tribunal is finding of fact. There is no reason to interfere with such finding. In view of the aforesaid finding, the interest paid to Smt. Rekha Dixit prior to 1.11.1985, the provision of Section 40(b) cannot be invoked. The order of the Tribunal is, accordingly, upheld.
22. In view of our opinion on question Nos. 2 and 3, the question No. 1 has become academic and the same is returned unanswered.
23. In the result, question Nos. 2, 3 and 4 referred to us are answered in the affirmative i.e. in favour of the assessee and against the revenue and question No. 1 is returned unanswered.