Full Judgment Text
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PETITIONER:
RAMESHWAR LAL SANWARMAL
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, ASSAM
DATE OF JUDGMENT05/12/1979
BENCH:
BHAGWATI, P.N.
BENCH:
BHAGWATI, P.N.
PATHAK, R.S.
CITATION:
1980 AIR 372 1980 SCR (2) 369
1980 SCC (2) 371
ACT:
Indian Income Tax Act 1922-Section 2(Income) (e)-Scope
of-Shares in a company registered in the name of Karta of
HUF-Company advanced loans to business concerns of HUF-
loans-if "deemed dividend".
HEADNOTE:
The assessee, a Hindu Undivided Family, owned certain
shares in a private limited company in which the public were
not substantially interested. Though the shares were
beneficially owned by the Hindu Undivided Family, they stood
registered in the name of its Karta. From out of its
accumulated profits the company gave loans, in the
assessment year 1956-57. to three business concerns which
were owned by The assessee. Section 2(6! (e) of the Indian
Income Tax Act, 1922 provided that where a private company
in which public were not substantially interested gave loans
to its shareholders from out of its accumulated profits such
loan would be treated as "deemed dividend" in the hands of
the shareholders.
The Income Tax officer treated the loans as "deemed
dividend" in the hands of the assessee on The ground that
though the shares stood in the name of the Karta, the
assessee being the beneficial owner, the conditions of
section 2(6A)-(e) were satisfied. This view of the Income
Tax officer was upheld by the Appellate Assistant
Commissioner.
The Appellate Tribunal rejected the contentions of the
assessee that the loans could not be taxed as "deemed
dividend" in its hands because it was not the registered
owner of the shares; and (2) assuming that they could be
treated as "deemed dividend" they could be taxed only in the
hands of the karta. The Tribunal referred six questions to
the High Court.
Answering two out of the si questions, the High Court
held that (1) the loans could not be treated aS "deemed
dividend" in the assessee’s hands because the term
shareholder used in the section meant only a person whose
name is recorded in the company’s register of shareholders
and (2) even assuming that the loans were "deemed dividend"
they could be taxed only in the hands of the registered
shareholder (the Karta). The assessment made by the Income
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Tax officer was accordingly set aside.
In appeal to this Court, instead of questioning the
correctness of the answers returned by the High Court the
Revenue attacked only that part of the High Court’s order
which held that "deemed dividend" could be taxed only in
the hands of the registered shareholder. Therefore the
question before this Court was whether "deemed dividend"
could be taxed in the hands of the beneficial owner of
shares or could be brought to tax only in the hands of the
registered shareholder. This Court answered that where
shares are acquired with the funds of one person but are
registered in the name of another it is the beneficial owner
who should be taxed on the dividend on the shares and that
this
370
principle applies equally to "deemed dividend" under the
section. Even so, this Court discharged the answer given by
the High Court in favour of the assessee and substituted an
answer in favour of the Revenue.
Placing reliance on the decision of this Court in
C.I.T.. v. Sarathy Mudaliar (83 I.T.R. 170) where it was
held that a loan advanced by a company to a beneficial owner
did not fall within the mischief of section 2(6A)(e) the
assessee contended that loans in this case could not be
taxed as "deemed dividend" in its hands.
The Revenue on the other hand contended that (I) since
in the earlier case of Rameswarlal Sanwarmal (82 I.T.R. 628)
this Court had answered the reference in favour of the
Revenue and that decision was final the later decision in
Sarathy Mudaliar’s case would not be available to the
assessee; (2) although the present question was not
specifically considered by this Court on the earlier
occasion it must be held to have been impliedly decided
against the assessee and (3) that the decision in Sarathy
Mudaliar’s case was incorrect and should be referred to a
larger bench.
^
HELD: The arguments of the Revenue are fallacious. When
the Revenue came in appeal to this Court in the earlier case
of Rameswarlal Sanwarmal it challenged only the second part
of the High Court’s decision ignoring the first part. The
result was that the first part of the High Court’s decision
that loans advanced to The business concerns of a beneficial
owner of shares could not be regarded as ’deemed dividend"
in his hands and that the loans in the sent case did not
fall within the meaning of section 2(6A)(e) remained intact
and unaffected by the decision of this Court. This Court
could not have answered the first question against the
assessee without over-ruling the first part of the High
Court’s decision. However, through inadvertence, this Court
set aside the High Court’s answer without considering
whether this part of tile decision was right or wrong. When
no contention was raised on behalf of the Revenue that even
if the assessee was not a registered shareholder loans
advanced to its business concerns would be "deemed dividend"
in its hands and there was no occasion for this Court to
consider the question, from the mere fact that an answer was
given in favour of the Revenue, it cannot be said that this
contention was impliedly decided in its favour. [376 C-H]
2. The proper Way of looking at the decision of this
Court in Rameswarlal Sanwarmal would be to regard the answer
given in favour of the Revenue to be confined only to the
aspect considered and decided by this Court, namely, that
"deemed dividend" did not stand on any different tooting
from actual dividend and just as actual dividend is liable
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to be taxed in the hands of the beneficial 6 owner of the
shares. so too "deemed dividend" must be held liable to be
taxed ill the hands of the beneficial owner. This Court did
not consider whether a loan to a beneficial owner could be
regarded as "deemed dividend". Therefore, this aspect of the
question still remained to be answered and it was open to
the assessee to contend that the loans advanced to its
business concerns could not be regarded as "deemed dividend"
within the meaning of the section since the assessee was not
a! registered shareholder. [377 A-D]
3 (1) The decision of this Court in Sarathy Mudaliar’s
case laid down the law correctly and there is no need to
refer the case to a larger bench. The
371
question whether a loan advanced to beneficial owner of
shares would be liable to be regarded as "deemed dividend"
was neither raised nor considered by this Court in
Rameswarlal Sanwarmal’s case but came up for consideration
for the first time in Sarathy Mudaliar’s case only. There is
thus no conflict between the two decisions, [77 E-l]
(b) It is only where a loan is advanced by a company to
a registered shareholder the other conditions set out in
the section are satisfied that the amount of the loan would
be liable to be regarded as "deemed dividend". The amount of
loan would not fall within The mischief of the section if it
is granted to a beneficial owner of the shares. [378 E-F]
In the instant case the loans were advanced not to the
registered shareholder but to the business concerns of the
beneficial owner. Hence they could not be regarded loans
advanced to a shareholder of the company within the meaning
of the section. [378 H
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 133 or
1979.
Appeal by Special Leave from the Judgment and order
dated 13-6-1972 of the Assam High Court in Income Tax
Reference No. 2/64.
H. M. Verma and N. R. Choudhary for the Appellant.
S.C. Manchanda, S.P. Nayar and Miss A. Subhashini for
the Respondent.
The Judgment of the Court was delivered by
BHAGWATI, J.-This appeal by special leave raises a
question of law relating to the interpretation of section
2(6A) (e) of the Indian Income-Tax Act, 1922. The question
is in fact concluded by a decision of this Court in
Commissioner of Income-tax v. C.P. Sarathy Mudaliar but, it
has been argued on behalf of the Revenue that this decision
is in conflict with an earlier decision given by this Court
in Commissioner of Income-tax v. Rameshwarlal Sanwarmal and
hence the question should be referred to a larger Bench. We
shall presently consider these two decisions, but we may
point out straight-away that, in our opinion, there is no
conflict between these two decisions and the question is
completely cover d by the decision in Commissioner of
Income-tax- v. C. P. Sarathy Mudaliar (supra)). The facts
giving rise to the appeal are not in dispute and we may
briefly state the same in order to appreciate how the
question arises for determination.
The assessee is the Hindu Undivided Family of M/s.
Rameshwarlal Sanwarmal consisting of S. M. Saharia as
manager and karta and
372
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his wife and a minor son. The assessment year with which we
are concerned in the appeal is 1956-57, the relevant
accounting year being the year ending Ramanavami Sambat
2012, that is, 18th April, 1956. During this assessment
year, the assessee was the beneficial owner of certain
shares in a private limited company called Shyam Sunder Tea
Co. (P) Limited. These shares though beneficially owned by
the assessee stood in the name of S.M. Saharia in the
register of shareholders of the Company. The assessee also
owned 3 business concerns, namely, Nilmony Shop, Saharia &
Co. and Saharia Industrial Corporation. The Company advanced
loans to these 3 business concerns during the relevant
assessment year and since it was a company in which public
were not substantially interested, a question arose in the
assessment of the assessee to income-tax, whether the loans
advanced to these 3 business concerns could be regarded as
"deemed dividend" of the assessee under section 2(6A)(e) of
the Act? ’he Income-tax officer took the view that the loans
advanced to the 3 business concerns were attributable to the
accumulated profits of the company to the extent of Rs.
4,48,045 and since the assessee which owned the 3 business
concerns was the beneficial owner of the shares standing in
the name of S. M. Saharia, the conditions of section 2(6A)
(e) were satisfied and the loans were liable to be regarded
as "deemed dividend" taxable in the hands of the assessee
under section 2(6A) (e). The assessee preferred an appeal
against the order of assessment but the Appellate Assistant
Commissioner agreed with the view taken by the Income-tax
officer and held that since S. M. Saharia held shares in the
company as representing the assessee and the loans were
advanced to the three business concerns belonging the
assessee out of the accumulated profits of the company, the
Income-tax officer was justified in treating the loans as
"deemed dividend" under section 2(6A) (e); and taxing them
in the hands of the assessee. The matter was carried in
further appeal to the Tribunal and several arguments were
advanced on behalf of the assessee resisting the
applicability of section 2(6A) (e), but of them, there are
two which are material for our purpose and they are: first,
that since the assessee was not a registered holder of
shares in the company, the loans advanced to the three
business concerns of the assessee could not be regarded aS
loans advanced to a share-holder so as to attract the
applicability of section 2(6A) (e); and secondly, even if
the loans could be treated as "deemed dividend" under
section 2(6A) (e), they could be taxed only ill the hands of
S. M. Saharia, the registered shareholder and not : in the
hands of the, assessee. Both these arguments were negatived
by the Tribunal and so also were the other subordinate
arguments and the appeal was rejected and the assessment
confirmed. This led
373
to a reference application by the assessee and on the
application, five A. questions of law were referred by the
Tribunal to the High Court. There were, in fact, six
questions but for the purpose of the present appeal, it is
not necessary to refer to the first question, since it
related to the assessment year 1955-56 and it raised a point
of limitation which was ultimately decided in favour of the
assessee and there is no dispute about it. The other five
questions related to the taxability of the loans advanced to
the three business concerns of the assessee as "deemed
dividend" under section 2((A)(e) and each of these questions
brought in issue different aspect of taxability. It is the
first of these questions which is material and we may re-
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produce it as follows:
"Whether on the facts and in the circumstances of
the case, and on a true interpretation of the terms of
section 2(6A) (e) of the Income-tax Act, 1922, the
Tribunal was right ill holding that the amounts of Rs.
2,21,702 (gross) and Rs. 3,43,505 (net) were taxable as
dividends in the hands of the applicant H.U.F. for the
assessment year 1955-56 and 1956-57 respectively, when
the shares were registered in the name of Sri S. M.
Saharia, the karta of the family ?"
This question referred to both the assessment years
1955-56 and 1956-57, but we are not concerned in this appeal
with the controversy relating to the assessment year 1955-56
and hence we shall confine ourselves only to the assessment
year 1956-57.
Now two distinct aspects were comprised in this
question and both were argued before the High Court. One was
whether the loans advanced to the three business concerns of
the assessee could be regarded as "deemed dividend" within
the meaning of section 2(6A) (e) and the other was whether
these loans, even if regarded as "deemed dividend" could be
taxed in the hands of the assessee. The High Court decided
both these aspects of the question in favour of the assessee
and held that the word "share-holder" in section 2(6A) (e)
meant registered share-holder or in other words, a
shareholder whose name is recorded in the Register of the
company as the holder of the shares and since the advance in
the present case was made to the assessee which was not a
registered share-holder, it could not be regarded as "deemed
dividend" within the meaning of section 2(6A) (e) and that
even if it be assumed that the advance was liable to be
regarded as "deemed dividend" under section 2(6A) (e), it
could be taxed as dividend income only of the registered
share-holder and not Only of the assessee. This view taken
by the High Court rendered it unnecessary to decide the
other four questions and the High Court
374
accordingly declined to consider them. The result of this
decisions was that the assessment made by the Revenue
Authorities was set aside in so far as it included the loans
advanced by the company to the three business concerns of
the assessee as deemed dividend and taxed it in the hands of
the assessee.
The Revenue, being aggrieved by the decision of the
High Court, preferred an appeal after obtaining special
leave of this Court. Now it seems that through some
inadvertence which is difficult to understand, the Revenue
attacked only that part of the order of the High Court which
held that the "deemed dividend" could be assessed to tax
only in the hands of S.M. Saharia, the registered share-
holder and no in the hands of the assessee which was merely
the beneficial owner cf the shares. Neither in the statement
of case filed on its behalf nor in the course of the
arguments the Revenue assailed the correctness of the view
taken by the High Court that since the assessee was not a
registered shale holder, loans advanced to the assessee
could not be regarded as "deemed dividend" under section
2(6) (e). The result was that the only question that came to
be considered by this Court was whether the "deemed dividend
under section 2(6A)(e) could be taxed in the hands of the
beneficial owner of the shares or it could be brought to tax
only in the assessment of the registered share-holder and
the view taken was that where the shares acquired with the
funds of one person are held ill the name of another, it is
the former who is assessable to tax on the dividend on those
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shares and this principle would apply equally on the ’deemed
dividend’ under section 2(6A)(e). This Court did not
consider whether the loans granted to the three business
concerns o the assessee could at all be regarded as ’deemed
dividend’ within the meaning of section 2(6A)(e) when the
assessee was not a registered share-holder and the decision
of the High Court to the effect that the assessee not being
a registered share-holder, the loan advanced to it advanced
not be regarded as ’deemed dividend’ under section 2(6A)(e)
remained undisturbed. Now obviously, so long as the decision
of the High Court on this point was not over-ruled, the
question whether the amount of the loans was taxable as
"deemed dividend" in the hands of the assessee could not be
answered in favour of the Revenue. But sometimes even Homer
nods and through same unfortunate inadvertence for which the
counsel appearing on behalf of the assessee in that case
must accept full responsibility, this Court discharged the
answer given by the High Court in favour of the assessee and
in its place substituted an answer, in favour o the,
Revenue. This decision of the Court is reported in
Commissioner of Income-tax v. Rameshwar Lal Sanwarlal
(supra).
375
Since the first question relating to the assessment
year 1956-57 was answered by this Court in favour of the
Revenue, the Reference went to the High Court for
consideration of the remaining questions that had not been
answered by the High Court. It appears that at the hearing
of the Reference the first two out of the remaining four
questions were not pressed on behalf of the assessees and
only the last two questions were argued before the High
Court. Both these questions were considered by the High
Court and they were answered in favour of the Revenue and
against the assessee. The assessee thereupon preferred the
present appeal after obtaining special leave from this
Court.
There is only one contention advanced on behalf of the
assessee in support or the appeal, namely, that the amounts
of the loans advanced to the three business concerns of the
assessee could not be regarded was ’deemed dividend’ within
The meaning of section 2(6A)(e) since the assessee was not a
registered share-holder of the company. This contention was
sought to be supported by the decision of this Court in
Commissioner of Income-tax v. C.P. Sarathy Mudaliar (supra).
Now there can be no doubt that the decision of this Court in
C.I.T. v. C.P. Sarathy Mudaliar (supra) lays down that it
isl only where a loan is advanced by a company to a
registered share-holder out of its accumulate(i profits that
it would be liable to be regarded as ’deemed dividend’ under
sec. 2(6A)(e) and a loan to a beneficial owner of the share
docs not come within the mischief of that section and if
this decision represents the correct law on the subject, the
amounts of loans advanced to the three business concerns o
the assessee would not possibly be brought within the net o
taxation as ’deemed dividend’. But the argument urged on
behalf of the Revenue was that it was not open to the
assessee to raise this contention based on the decision in
Commissioner of Income-tax v. C. P. Sarathy Mudaliar
(supra), since it was covered by the first question which
had already been answered in favour of the Revenue by this
Court. The Revenue conceded That this contention was not
specifically raised before the Court when the first question
came to be considered but it must be held to have been
impliedly decided against the assessee, since the first
question could not be answered ill favour of the Revenue on
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any other hypothesis. This argument of the Revenue does
appear to be very plausible It first blush, but if it is
scrutinised closely it will be apparent that it is
fallacious and cannot be accepted. The most important
circumstance which it ignores is that when the Reference was
first heard by the High Court, the first question was
decided in favour of the assessee on two counts, one was
that since the assessee was not a registered share-holder of
the company, the loans advanced to the three business
376
concerns of the assessee could not be regarded as ’deemed
dividend’ within the meaning of section 2(6A) (e) and the
other was that even if they could be treated as ’deemed
dividend’ under section 2(5A) (e), they could be taxed only
in the hands of S. M. Saharya, the registered share-holder
and not in the hands of the assessee who was merely a
beneficial owner of the shares. When the Revenue preferred
an appeal against the judgment of the High Court, the
Revenue should have assailed the decision of the High Court
in both its limbs, but through some inadvertence which is
difficult to understand, the Revenue challenged by the
second limb of the decision ignoring completely the first.
The result was that the decision of the High Court that the
amounts of loans advanced to the three business concerns of
the assessee did not fall within the definition of ’deemed
dividend’ in section 2(6A)(e) remained intact and unaffected
by the decision of this Court in the appeal. Now, it is true
that this Court could not have answered the first question
against the assessee without over-ruling this part of the
decision or the High Court, but through some unfortunate
error, this Court set aside the answer given by the High
Court in favour of the assessee without considering whether
this part of the decision of the High Court was right o
wrong. When no contention was raised on behalf of the
Revenue before this Court that the decision of the High
Court on this point was wrong and that even though the
assessee was not a registered shareholder, the amounts of
loans advanced to the three business concerns of the
assessee were still liable to be regarded as "deemed
dividend" under section 2(6A) (e) and no such contention
formed the subject-matter of discussion before this Court
and this Court had, therefore, no occasion to consider this
question, it is difficult to see how it can be said merely
from the answer given by this Court in favour of the Revenue
that this contention was impliedly decided in favour of the
Revenue. It would be straining logic to an absurd limit to
say that though this contention was not raised, not argued,
not discussed and not decided, yet it must be held to have
been impliedly decided because through an error committed by
this Court, an answer was given in favour of the Revenue in
ignorance of the true position. lt would also not be right
to hold that merely because this Court erroneously answered
the first question against the assessee without considering
whether the view taken by the High Court on this point was
incorrect, the assessee must be precluded from raisin the
contention that the assessee not being a registered share-
holder, the amounts of loans advanced to the three business
concerns of the assessee did not fall within the definition
of "deemed dividend" under section 2(6A)(e). Why should the
assessee, which had the decision of the High Court of this
point in its favour and
377
which decision was not assailed by the Revenue in the appeal
and which remained undisturbed by this Court, be prejudiced
on account of an obvious error committed by the court. The
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proper way of looking at the decision of this Court would be
to regard the answer given in favour of the Revenue to be
confined only to the aspect considered and decided by this
Court. The only aspect considered by this Court was whether
the "deemed dividend" under section 2(6A) (e) could be taxed
in the hands of the beneficial owner of the shares or it
could be assessed to only in the hands of the registered
shareholder, and this Court held that "deemed dividend" did
not stand on any different footing from actual dividend and
just as actual dividend was liable to be taxed in the hands
of the beneficial owner of the shares, so also "deemed
dividend" must be held liable to be taxed in the assessment
of the beneficial owner. This Court did not decided the
question whether a loan advanced to a beneficial owner of
the shares can be regarded as "deemed dividend" within the
meaning of section 2(6A) (e) an the answer given by this
Court in favour of the Revenue cannot be said to extend to
this aspect of the question. We would, therefore, hold that
the first question still remains to be answered so far as
this aspect of the question is concerned and it is open to
the, assessee to contend that the amounts of loans advanced
to the three business concerns of the assessee could not be
regarded as "deemed dividend" under section-, 2(6A)(e),
since the assessee was not a registered shareholder.
It is also obvious from what we have said above that
there is no conflict between the decisions of this Court in
C.I.T. v. Rameswarlal Sanwarmal and C.I.T. v. C.P. Sarathy
Mudaliar (supra). The question whether, on a proper
construction of section 2(6A) (e), a loan advance to a
beneficial owner of the shares would be liable to be
regarded Ll; "deemed dividend" was not raised or argued
before this Court in C.I.T.. v. Rameswarlal Sanwarmal and
this Court was not called upon to decide it and hence there
is no discussion about it in the judgment of this Court nor
is there any decision on it. It is only in the subsequent
decision in C.I.T.. v. C. P. Sarathy Mudaliar (supra) that
this question came up for the first time before this Court
for consideration and this Court held that when sec. 2(6A)
(e) speaks of a "shareholder" it refers to the registered
shareholder and not to the beneficial owner and hence a loan
granted to a beneficial owner of the shares who is not a
registered shareholder cannot be regarded as a loan advanced
to a "shareholder" of he company so as to be within the
mischief of section 2(6A(e). There is thus no conflict at
all between the decisions in. C.I.T. v. C. P Sarathy
Mudaliar (supra and C.I.T. v. Rameswarlal Sanwarlal. In
fact, Mr. Justice Hegde was, a common Member of the Bench in
both
378
the cases and the subsequent decision in C.l.T. v. C. P.
Sarathy Mudaliar was given within less than a month after
the decision in C.l.T. v. Rameshwarlal Sanwarmal. lt is
impossible to believe that Mr. Justice Hegde was oblivious
of the decision in C.I.T.. v. Rameswarlal Sanwarmal when he
delivered the judgment in C.l.T. v. C. P. Sarathy Mudaliar.
The Revenue lastly contended that the decision in
C.I.T. v. C.P. Sarathy Mudaliar is incorrect and we must
refer the present case to a larger Bench. Now it is obvious
that before we can be persuaded to accede to this request,
we must be satisfied that the decision in Com missioner of
Income Tax v. C. P. Sarathy Mudaliar is wrong. But having
given our most anxious consideration, we find ourselves
unable to disagree with the view taken in that decision.
What section 2(6A) (e) is designed to strike at is advance
or loan to a "shareholder" and the t word "shareholder" can
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mean only a! registered shareholder. It is difficult to see
how a beneficial owner of shares whose name does not appear
in the register of shareholders of the company can be said o
be a "shareholder". He may be beneficially entitled to the
shares but he is certainly not a "shareholder". It is only
the person whose name is entered in the register of
shareholders of the company as the holder of the shares who
can be said to be a shareholder qua 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 set out
in section 2(6A) (e) are satisfied that the amount of the
loan would be liable to be regarded as ’deemed dividend’
within the meaning of section 2(6A) (e). The amount of the
loan would not fall within the mischief of this section if
it is granted to a beneficial owner of the shares who is not
the registered shareholder. The decision in C.I.T.. v. C. P.
Sarathy Mudaliar does, in our opinion, lay down the correct
interpretation of section 2(6A) (e).
Now in the present case it was common ground that the
loans were advanced to the three business concerns of the
assessee which was a Hindu Undivided Family and this Hindu
Undivided Family was not the registered holder of any shares
in the company but it was the beneficial owner of certain
shares which stood in the name OF the Manager and Karta,
Shri S. M. Saharya. The loans were thus advanced to the
beneficial owner of the shares and not to the registered
shareholder and hence they could not be regarded as loans
advanced to a "shareholder" of the company within the
meaning of section 2(6A) (e). Section 2(6A) (e) was
accordingly not attracted and the amounts of the loans could
not be taxed as deemed dividends
379
in the hands of the assessee. We accordingly answer the
first question A in favour of the assessee so far as this
aspect is concerned. In view of this answer to the first
question, it is not necessary to consider the other two
questions decided by the High Court on remand. The learned
counsel appearing on behalf of the assesses, in fact, did
not press them.
There will he lo order as to costs of the appeal.
B.B.A..
380