Deemed dividend under income tax law does not preserve agricultural character in shareholder's hands, challenge to competence failing

Parliament had legislative competence to enact a deeming provision treating advances or loans by a closely held company as dividend income, so the constitutional challenge failed. The statutory fiction under section 2(6A)(e) operated on the receipt in the shareholder's hands and did not preserve the company's underlying character of income. Accordingly, even if the company's profits were claimed to be agricultural income, the amount borrowed by the shareholder was not agricultural income in his hands and fell within the provision.

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Issues: (i) Whether section 2(6A)(e) of the Income-tax Act was beyond the legislative competence of Parliament and therefore invalid. (ii) Whether money received by a shareholder as a loan from a company, where the company's profits were claimed to be agricultural income, retained the character of agricultural income and was outside section 2(6A)(e).

Issue (i): Whether section 2(6A)(e) of the Income-tax Act was beyond the legislative competence of Parliament and therefore invalid.

Analysis: The challenge to legislative competence was covered by binding authority holding that Parliament could enact a deeming provision treating such advances or loans as dividend income. The source of power was the constitutional entry relating to taxes on income, and the provision was upheld as a measure connected with the taxation of income and prevention of tax evasion.

Conclusion: The challenge to the constitutional validity of section 2(6A)(e) failed.

Issue (ii): Whether money received by a shareholder as a loan from a company, where the company's profits were claimed to be agricultural income, retained the character of agricultural income and was outside section 2(6A)(e).

Analysis: Section 2(6A)(e) created a statutory fiction that such payments by a closely held company were dividend in the hands of the shareholder. The provision did not treat the payment as continuing to be part of the company's accumulated profits, and the character of the amount in the hands of the shareholder was therefore different from its character in the hands of the company. On that footing, even if the company's underlying profits were agricultural and exempt, the loan received by the shareholder did not remain agricultural income.

Conclusion: The amounts borrowed from the company were not agricultural income in the hands of the shareholder and fell within section 2(6A)(e).

Final Conclusion: The two substantive challenges failed, and the writ petitions were not maintainable for interference with the assessments.

Ratio Decidendi: A statutory fiction deeming advances or loans by a closely held company to be dividend operates on the receipt in the shareholder's hands and does not preserve the company's underlying character of income, including agricultural income, for the shareholder's benefit.

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