COMMISSIONER OF INCOME TAX, ASSAM, TRIPURA, MANIPUR & NAGALAND vs. M/S. RAMESHWARI LAL SANWARMAL

CIVIL APPEAL No. 1956/1969Supreme Court[1972] 1 S.C.R. 85422 September 1971Bench: 2 JudgesAuthor: K.S. HEGDE, A.N. GROVER COMMISSIONER OF7 pages
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What were the facts?

The Income-tax Officer (ITO) issued a notice under section 22(2) of the Income-tax Act, 1922, to S as an individual for assessment year 1955-56. S filed a return as the karta of his Hindu Undivided Family (HUF). The ITO passed an ex-parte assessment order under section 23(4) against S as an individual. This assessment was set aside on S's application under section 27. A fresh assessment was then made on the HUF on February 6, 1961, based on the return filed by S as karta. This assessment was made after the four-year period stipulated in section 34(3). Separately, loans were advanced to the HUF by a company in which S held shares as karta. The issue was whether these loans, advanced by a company where the public were not substantially interested, could be treated as 'dividend' under section 2(6A) to S.

What did the Supreme Court hold?

The Tribunal held that the assessment made on the HUF on February 6, 1961, was not an assessment under section 27. The initial assessment was on S as an individual, and it was this individual assessment that was set aside. The HUF was assessed for the first time on February 6, 1961. Since this assessment was made after the period prescribed by section 34(3), it was barred by limitation. Therefore, the High Court was justified in answering the first question against the Department. Regarding the second issue, the Court proceeded on the finding that S held the shares as the karta of his HUF. Citing its decision in Kishanchand Lunidasing Bajaj v. C.I.T., the Court held that when shares acquired with HUF funds are held in the karta's name, the HUF can be assessed to tax on dividends from those shares. Consequently, the loans in question must be held to be dividends within the meaning of section 2(6A)(e). However, the Court clarified that loans granted in the account year previous to AY 1955-56 could not be taxed as the assessment for that year was not made within the prescribed time. The appeal for AY 1955-56 was dismissed, and the appeal for AY 1956-57 was allowed, remitting the case for answering remaining questions.

What were the issues?

1. Whether the assessment for AY 1955-56 on the HUF, made on February 6, 1961, pursuant to an order under section 27 setting aside the assessment of S as an individual, was barred by limitation under the second proviso to section 34(3) of the Income-tax Act, 1922? - Assessee's contention: The assessment on the HUF was a fresh assessment and not one under section 27, thus barred by limitation. - Revenue's contention: The assessment was made under section 27 and therefore protected by the proviso to section 34(3). 2. Whether, on a true interpretation of section 2(6A)(e), loans advanced by a company (in which the public are not substantially interested) to the HUF, where shares were held in the name of the karta (S) as HUF property, were taxable as 'dividends' in the hands of the HUF for AY 1955-56 and 1956-57? - Assessee's contention: The loans were not taxable as dividends because the shares were registered in the name of S as an individual, and the HUF was not a shareholder. - Revenue's contention: The loans were taxable as dividends as the shares were beneficially held by the HUF, and the company was not one in which the public were substantially interested.

Which sections of the Income-tax Act were involved?

Section 22(2),Section 23(4),Section 27,Section 34(3),Section 2(6A)(e),Section 66(1)

AI-generated summary — verify with the full judgment below

·ss4 COMMISSIONER OF INCOME TAX, ASSAM, TRIPURA, MANIPUR & NAGALAND v. M/S. RAMESHWARI LAL SANWARMAL September ll2, 1971 ' [K. s., HEGDE AND A. N. GROVER, JJ.] Jnco1ne-tax Act, 1922, ss. 27 and 34(3 )-Assess111enr on S as indivi- .dual set aside under s. 27 and fresh assessl'Yzent 1nacle on S as karta of H.U.F.--Fresh assessnient is on a differe11t assessee and not one under s. 27--Cannot claim protection of s. 34(3) 2nd pro_viso.

Jnco111e-tax Act, 1922, s. 2(6A)-Shares of co111pany in which ,public .are not substantially interested-Held in na1ne of ka1ra in H.U.F.-Loan to karta by conipany Jvliether liable to be treated as 'dividend' under .s. 2(6A).

In connection with the assessment year 1955-56 the lncomc-tax Offi- cer issued notice under s. 22(2) of the Income-lax Act, 1922 to S in the status of an individual.

He submitted a return in the stattL'i of kirta of :his H.U.F.

The Income-tax Officer passed an. ex-parte assessn1ent ·order ·on him as individual under s. 23(4).

The assessment was however set aside on S's application under s. 27 of the Act. A fresh assessment was made on the H.U.F. on February 6, 1961 on the basis of the return sub- mitted by S

The order continues below.

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