income-tax Officer Vs. Smt. S. Parvathavardhini Ammal - Court Judgment

Excerpt:
1. the appeal is preferred by the revenue and the cross-objection by the assessee. they relate to the assessment year 1979-80.2. we will first take up the appeal by the revenue. the assessee held shares in m/s kanthimathi plantations pvt. ltd. she took a loan of rs. 6,25,000 from the said company. the income-tax officer was of the view that the assessee was a person having substantial interest in the company having 40,600 shares out of total shares of 1,50,100. thus, the loan should be taken as deemed dividend under section 2(22)(e) and should be treated as assessee's income. the assessee objected to the above proposal stating that she was not a person having substantial interest in the company and she has gifted rs. 11,000 to her daughter's minor children on 20-11-1978. the income-tax.....

Judgment:
1. The appeal is preferred by the revenue and the cross-objection by the assessee. They relate to the assessment year 1979-80.

2. We will first take up the appeal by the revenue. The assessee held shares in M/s Kanthimathi Plantations Pvt. Ltd. She took a loan of Rs. 6,25,000 from the said company. The Income-tax Officer was of the view that the assessee was a person having substantial interest in the company having 40,600 shares out of total shares of 1,50,100. Thus, the loan should be taken as deemed dividend under Section 2(22)(e) and should be treated as assessee's income. The assessee objected to the above proposal stating that she was not a person having substantial interest in the company and she has gifted Rs. 11,000 to her daughter's minor children on 20-11-1978. The Income-tax Officer rejected the assessee's objection. He held that the shares were registered by the company only on 25-10-1980. In the original return filed on 27-8-1979, the dividend income from the shares was included and the value of it was also included in the wealth-tax assessment for 1979-80 though in the revised return both for income tax and wealth-tax it was excluded.

An affidavit of Shri K. Ramaswamy Iyer, director of the company was filed to explain the reasons for the delay in registering the shares on 20-11-1978. The Income-tax Officer examined him who explained that there was some doubt whether the shares could be registered in the names of minors and thus there was delay in registering the shares.

Legal opinion of Shri J.T. Moraes, advocate was also filed who stated that the shares could not be registered in the names of the minors. But subsequently another advocate by name Shri G. Krishnan Nair gave opinion on 28-2-1980 favouring registration of the shares in the names of minors. Thereafter on 25-10-1980 the Board of Directors resolved to register the shares in the names of the minors. The above evidence was placed before the Income-tax Officer. The Income-tax Officer did not accept the above evidence. He held that the assessee was the owner of 40,600 shares till the shares were actually registered in the names of the donees. Thus he treated Rs. 6,25,000 as deemed dividend and included the same as assessee's income from other sources. On appeal, the Commissioner of Income-tax (Appeals) held that as far as the assessee is concerned, she has done everything in her power to make the transfer complete and effective as on 1-12-1978. From that date till the shares were registered in the names of the minors she was not the beneficial owner of the shares but was only a trustee. Therefore the assessee was not the owner of not less than 20% of the shares of the company and, therefore, was not a person substantially interested in the company within the meaning of Section 2(32). Thus, he deleted the sum of Rs. 6,25,000.

3. The learned departmental representative strongly urged that transfer was effected in the company's books only on 25-10-1980 and the gift if any should be from that date. He urged that there is no genuine gift on 20-11-1978 as no transfer has taken place on that date. In the original income-tax return as well as in the wealth-tax return for the assessment year 1979-80 the assessee has included the income and the wealth in respect of the transferred shares though in the revised return they were excluded. In the cash flow statement the entire dividend received from 40,600 shares was shown. These facts would show that there was no genuine gift. In respect of minors, in the past the company had registered shares in their names. So the plea that the company was in doubt whether the shares were registrable in the names of the minors was not correct. A beneficial shareholder cannot be said to be a registered shareholder. Hence, the assessee is the shareholder of the entire 40,600 shares. He placed reliance on the decisions reported in Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 (SC) and Sri Krishna v. CIT [1983] 142 ITR 618 (All.).

4. The learned counsel for the assessee strongly urged that as per the procedure prescribed in the Companies Act the assessee has to obtain share transfer form from the Registrar of Companies and accordingly on 13-11-1978 four such forms were obtained and they were submitted to the company on 26-11-1978 and 1-12-1978. This would prove the genuineness of the gift. The affidavit of Shri Ramaswami Iyer, director was filed explaining the reasons for the delay in registering the shares of the company. The Income-tax Officer examined him. Thus the assessee has discharged the onus of proving the gift. In the revised return filed under the Income-tax Act as well as the Wealth-tax Act the income and wealth relating to the transferred shares were excluded. Since the dividend warrants were in the name of the assessee the amount was shown in the cash flow statement. He referred to the letter dated 10-3-1982 wherein the entire facts have been clarified. He submitted that there was controversy as to whether the shares in the names of the minors could be registered. In this connection he referred to Shri A.Ramaiya's Guide to the Companies Act, 10th Edition, page 128. He then submitted that once shares are transferred by the company it relates back to the date of the execution of the transfer application. For this proposition he relied on case reported in CIT v. Smt. Suraj Bai [1972] 84 ITR 774 (Raj.) the observations in Shri A. Ramaiya's Guide to Companies Act and Killick Nixon Ltd. v. Bank of India 1982 Tax LR 2547 (Bom.). He submitted that the shares are movable property. They can be transferred without any formality. Registration under the Companies Act is a rule of evidence. He submitted that after the transfer application is filed it takes sufficient time for the company to register the shares. On account of the delay the genuineness of the transfer cannot be doubted. He also submitted that before any enquiry was made by the Income-tax Officer the gift-tax return was filed. Thus, he supported the order of the Commissioner of Income-tax (Appeals).

5. We have considered the rival submissions. The share transfer forms were obtained by the assessee from the Registrar of Companies on 13-11-1978. After filling up the particulars and affixing the signature of the transferor and the guardian of the transferee minors the four share transfer forms were filed on 26-11-1978 and on 1-12-1978. The affidavit of Shri Ramaswami Iyer, director of the company, has been filed stating the reasons for the delay in registering the transfer of shares in the company's books. In fact he was examined by the Income-tax Officer before whom also he explained that as the company initially was of the opinion that the shares cannot be transferred in the names of the minors and after the position was clarified by the advocates they were registered. The above affidavit and his deposition would clearly prove the genuineness of the gift of the 11,000 shares by the assessee in favour of her daughter's minor children. The assessee had filed initially the opinion of Shri J.T. Moraes who was of the view that the shares cannot be registered in the names of minors.

Subsequently another advocate by name Shri G. Krishnan Nair in his letter dated 28-2-1980 was of the view that the shares can be registered in the names of minors. It is thereafter the shares were registered in the names of the minors. With regard to the controversy whether a Company can register the shares in the names of minors there are certain observations at page 128 in A. Ramaiya's Guide to the Companies Act, 10th Edn. There is reference to an order of the Company Law Board favouring registration. The learned author was of the view that that order requires reconsideration. Thus from the above, it is clear that there was some controversy whether the company can register the shares in the name of minors. This is also evident from the opinions of the two advocates filed by the company. Those facts have been explained in the affidavit of Shri Ramaswami Iyer. He also explained the same before the Income-tax Officer when he was examined.

In view of the above evidence, we are of the view that the genuineness of the gift cannot be doubted merely because there was delay on the part of the company in registering the shares in favour of the minors.

In our view the assessee has gifted the shares on 20-11-1978. That has been proved. No doubt, the company has registered the shares in the names of the minors on 25-10-1980 for the reasons explained above.

6. Though the company had registered the shares on 25-10-1980 they relate back to the date of execution of the transfer forms. For this proposition we refer to the decision of the Rajasthan High Court in Smt. Suraj Bai's case (supra). It was held therein that the gifts of shares of companies are complete for the purpose of Gift-tax Act on the date of delivery of the share certificates along with transfer deeds to the donees though the dates of registration of shares in the names of the donees in the register of the company is later. The gift is complete when the beneficial interest in the shares is transferred from the donor to the donee. In A. Ramaiya's Guide to the Companies Act, 10th Edition at page 276 it is observed that a transfer when executed relates back to the date of execution of the instrument. For this proposition reference is made to the decision in Killick Nixon Ltd. v.Dhanraj Mills (P.) Ltd. [1983] 54 Comp. Cas. 432 (Bom.).

7. Thus in our view, though the company has registered the shares on 25-10-1980 they relate back to '20-11-1978 when the transfer of shares was executed. Thus 11,000 shares gifted by the assessee to his daughter's minor children do not belong to the assessee as they were gifted on 20-11-1978 and they have to be excluded from the assessee's shareholding. If they are excluded then the balance of the shareholding held by the assessee would be less than 20% of the voting power and the assessee would not come within the meaning of Section 2(32) as a person who has substantial interest in the company. Hence, the loan of Rs. 6,25,000 cannot be treated as deemed dividend under Section 2(22)(e) as the assessee is not a person who has substantial interest in the company within the meaning of Section 2(32). Thus, the Commissioner of Income-tax (Appeals) was justified in deleting Rs. 6,25,000.

8. The decision relied on by the learned departmental representative in Sri Krishna's case (supra) is clearly distinguishable as in that case except affidavit there was no other evidence but in the instant case apart from the affidavit of Shri K. Ramaswami Iyer, he was examined by the Income-tax Officer. Hence that case is not applicable. The decision of the Supreme Court in Rameshwarlal Sanwarma's case (supra) has no application as that was a case of loans advanced to three concerns owned by the assessee-HUF which was not the registered holder of the shares, but was only a beneficial owner. That decision was rendered on different facts and has no application to the instant case. Thus we uphold the order of the Commissioner of Income-tax (Appeals).

9. We will now take up the cross-objection. In this cross-objection the dispute is against the disallowance of interest of Rs. 7,909. The assessee has not produced any evidence to show how the borrowings were utilised and against which head of income deduction is claimed. Thus the assessee is not entitled to the deduction. We agree with the reasons given by the Commissioner of Income-tax (Appeals) in sustaining the disallowance of Rs. 7,909.

10. In the result, the appeal and the cross-objection fail and are dismissed.