Income Tax Appellate Tribunal - Bangalore
M/S Bagmane Builders Pvt. Ltd.,, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA Nos. 447 to 450/Bang/2010
Assessment years : 2004-05 to 2007-08
M/s. Bagmane Builders Pvt. Ltd.,
'Lake View Building',
No.66/1-4, A Block, 8th Floor,
Bagmane Tech Park,
C.V. Raman Nagar,
Bangalore. : APPELLANT
Vs.
The Assistant Commissioner of
Income Tax,
Central Circle 2(3),
Bangalore. : RESPONDENT
Appellant by : Shri B.P. Sachin Kumar, C.A.
Respondent by : Smt. Swati S. Patil, CIT-II(DR)
ORDER
Per Bench These appeals of the assessee company are directed against the consolidated order of the Ld. CIT (A)-VI, Bangalore, in ITA Nos: 271, 272, 273 & 274/ ACIT CC 2(3)/ CIT (A)-VI/ 2008-09 dated: 2.2.2010 for the assessment years 2004-05, 2005-06, 2006-07 & 2007-08 respectively.
2. The assessee company ['the assessee' in short] has raised identical five grounds in a narrative manner for all the AYs under challenge. For the ITA No.447-450/Bang/10 Page 2 of 30 sake of proper appreciation of facts, the issues are reformulated in a concise manner, as under:
(i) the CIT(A) erred in upholding the stand of the AO in initiating the proceeding u/s 153C of the Act;
(ii) the CIT(A) erred in sustaining the applicability of the provisions of s.2(22)(e) of the Act;
- the CIT(A) ought to have appreciated that the transaction between the assessee and Bagmane Developers (P) Ltd [BDPL] were in the course of business activities and that the amounts received were not in the nature of 'loans and advances';
(iii) the CIT(A) erred in directing the AO to compute the 'current year's profit; &
(iv) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act.
3. As pointed out earlier, the issues raised in these appeals were similar and rather inter-linked; they were heard, considered and disposed off in this common order for the sake of convenience and clarity.
4. With regard to the conclusion of assessments u/s 143(3) r.w.s. 153C of the Act which were sustained by the Ld. CIT(A), it was contended by the ld. A R that the provisions of s.153C of the Act were not attracted to the assessee since nothing incriminating relating to the assessee have been found at the time of search, that only the regular books of accounts were found and seized during the course of search and, therefore, the AO ought not to have proceeded to invoke the provisions of s.153C of the Act and that the ld. CIT (A) had grossly erred in out-rightly rejecting the case laws on which the assessee had placed strong reliance. It was, therefore, ITA No.447-450/Bang/10 Page 3 of 30 pleaded that the orders of the AO were opposed to law which require to be summarily annulled.
4.1. The Ld. D R present during the course of hearing was vehement in her submission that the AO was within his realm to invoke the provisions of s.153C of the Act which has been judiciously ratified by the Ld. CIT (A) and, thus, it was submitted, the assessee should have no grievance on this point.
5. We have carefully considered the rival submissions and also critically perused the relevant records. With due respects, we have perused the ruling of the Hon'ble Apex court in the case of Manish Maheshwari v. ACIT & Anr. reported in (2007) 289 ITR 341 (SC) wherein the issue before the Hon'ble Court was the block assessment (search and seizure) proceedings u/s 158BD of the Act. In the instant case, the issue, in brief, was that there was an action u/s 132 of the Act in the case of BDPL on 14.9.2006 wherein certain documents belonging to its groups were unearthed. Consequently, Notices u/s 153A r.w.s.153C of the Act were issued by invoking the provisions of s.153C of the Act. This action of the AO has been hotly contested by the assessee.
5.1. We shall have a glance of what section 153C of the Act says:
"153C (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the assessing officer having jurisdiction over such other person and that assessing officer shall proceed ITA No.447-450/Bang/10 Page 4 of 30 against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A."
5.2. As rightly pointed out by the Ld. CIT (A), the requirement of handing order the books of account to the AO having jurisdiction over the other person did not arise in the case on hand for a simple reason that the same AO who was having jurisdiction over the person searched u/s 132 of the Act i.e., Bagmane Developers Pvt. Ltd. and the other person i.e., the assessee and as such there was no need of handing over the books of accounts/documents seized to any other AO. The other argument of the assessee that no incriminating documents were unearthed pertaining to the assessee during the search except regular books of account and, thus, the initiation of the proceedings u/s 153C of the Act illegal etc doesn't hold water since the provisions of s.153C (1) of the Act make it explicitly clear that 'where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A'.
5.3. In view of the above, we are of the considered view that the AO was well within his dominion to resort to issue of notices u/s 153C of the Act for all the AYs under challenge and, accordingly, the assessee's objection is not sustainable and the assessee's ground on this count for all the AYs under dispute is dismissed. .
ITA No.447-450/Bang/10 Page 5 of 30
6. With regard to the assessee's grievance in applying the provisions of s.2 (22) (e) of the Act by the AO by treating the amounts received under contractual terms as loans for the AYs under dispute, the issue, in brief, was that during the course of assessment proceedings, the AO noticed that Sri Raja Bagmane who was the beneficial owner of the shares holding 99% shares in the case of BDPL was also holding beneficial interest in the assessee company in terms of s.2 (32) of the Act i.e., the beneficial owner of share in the assessee company carrying not less than 20% voting power - he was holding 90% of equity shares. According to the AO, BDPL who was having accumulated profits in all the above AYs had shown 'unsecured loans' in its books of account in the name of the assessee for the AYs under dispute and, thus, treated the unsecured loans shown by BDPL to the extent of accumulated profits of BDPL - after adjusting the deemed dividends in the case of Raja Bagamane - of the respective AYs in the hands of the assessee as deemed dividends u/s 2(22)(e) of the Act. After adjusting the loans and advances given by BDPL to Raja Bagmane assessed as deemed dividend from accumulated profits (computing the accumulated profits available to the assessee) of BDPL, adjusted the loans and advances given to the assessee, the AO treated the same as deemed dividend u/s 2 (22)(e) of the Act.
6.1. Accordingly, the AO had, after brushing aside the contentions put forth by the assessee during the course of assessment proceedings, assessed the unsecured loans given by BDPL to the assessee of Rs.79.80 lakhs, Rs.2.76 crores, Rs.4.52 crores and Rs.64.63 ITA No.447-450/Bang/10 Page 6 of 30 lakhs for the assessment years 2004.05, 05.06, 2006.07 and 07.08 respectively.
7. Aggrieved, the assessee took up the issue for all the AYs under challenge before the CIT (A) for redressal. Extensively quoting the reasons adduced by the AO in his impugned orders and also mentioning that the AO had elaborately discussed all the arguments and judicial pronouncements which have been reiterated during the course of appellate proceedings, the CIT (A) opined that the conclusion drawn by the AO were logical, considering the facts and circumstances of the case. He, further, recorded that since the arguments of the appellant have already been considered by the AO, the same did not require further elaboration. However, he went on further to uphold the stand of the AO in invoking the provisions of s.2 (22)(e) of the Act on the grounds that -
(i) except the alleged MOU (sic) agreement, the assessee failed to produce any other evidence to prove that the advances given were for the purpose of the business of BDPL;
(ii) MOU was produced only on 15.12.098 and it was neither a registered document nor entered by an independent person because the document was signed by husband and wife and, therefore, self serving document; &
(iii) Even if the MOU was in existence, it did not alter the nature of transactions which have been shown by the assessee in the form of unsecured loan 7.1. By distinguishing the case laws on which the assessee had placed its faith, the Ld. CIT (A) sided with the AO who took sanctuary in ruling of the Hon'ble highest judiciary of the land in the case of Miss. P Sarada v. CIT reported in 229 ITR 445 (sic) 444 (SC) and concluded that ITA No.447-450/Bang/10 Page 7 of 30 the assessing officer was right in invoking provisions of section 2(22)(e) of the Income-tax Act for the above assessment years.
8. Disenchanted with the findings of the Ld. CIT (A) cited supra, the assessee has come up with the present appeals. During the course of hearing, the stand of the authorities below was hotly contested by the Ld. AR with his lengthy submission, the focal point of which, is summarized as under:
(i) the amounts paid by BDPL were in the normal course of business and, therefore, what was taken by the assessee from BDPL was not a loan or advance. Amounts given to sister concerns were for allotment of built-up area in the buildings which they develop;
- the sister concerns were nothing but the Special Purpose Vehicles [SPV] formed by the promoters to arrange funds for different projects being executed by them. Equity partners look or project specific SPV to invest as they would not generally invest in holding company for obvious reasons because of existing loan commitments, tax dues arising out of past transactions, pending legal issues etc., The banks also have per company exposure to fund their projects. By creating more companies, promoters will be in a position to raise more funds from banks. This commercial fitness and business exigency had promoted the assessee to create more companies;
(ii) the moment BDPL decided to allocate funds, it entered into an agreement with the assessee wherein the purpose intended and the terms and conditions have been earmarked;
- BDPL entered into an agreement with the assessee and allocated funds for the purpose of acquiring the property. However, the AO treated the same as not relating to business. BDPL had, in fact, funded the amounts at arms length basis with an intention to make or earn profits from such venture and on a commercial understanding. This commercial understanding has been enacted during the course of business and for the purposes of business alone which was well outside the ambit of deemed dividend;
- The monies taken from BDPL and utilized by the assessee for the intended purpose has not been disputed by the AO. Based on the ITA No.447-450/Bang/10 Page 8 of 30 ground realities, the assessee was free to adopt his/its own method of carrying on the business;
- Relies on - (a) S.A. Builders v. CIT 288 ITR 1 (SC)
(b) CIT v. Sassoon David 118 ITR 261 (SC)
(iii) the AO's reason for rejecting the agreement was that it was not found at the time of search. It was not as if the search party was expected to record/seize every paper on which it lays its hands. This agreement was kept along with the other original belongings of the assessee and the searching party's reasoning in not seizing this agreement cannot now be speculated; and the worst, the assessee cannot be found fault with either;
- just because the said document was not seized by the search party, doesn't mean to conclude (as the AO did) that the document did not exist at all. The AO had not proved with any documentary evidence except alleging that the document was not genuine;
- no agreement needs to be reduced in writing and it can even be oral.
Even if an agreement was reduced in writing, it doesn't require to be registered under s.17 of the Registration Act;
- In fact, all the agreements were reduced in writing on stamp papers, just because they were not registered, there can be no reason to reject them;
- The other reasoning of the AO that as per Specific Relief Act (SRA), the agreements were time-barred. The limitation starts from the day of default and not earlier and even if no remedy was available under SRA, the aggrieved party can have recourse to normal provisions of the Civil Procedure Code;
(iv) The reasoning of the AO that the amounts given by BDPL were profits which the company could have distributed to its shareholders was unfounded as the same was utilized only to make the maximum possible efforts for investments in land and would like to conserve the resources and, thus, distribution of dividends would be its last priority, particularly when there were huge borrowals;
- the AO's presumption that the funds taken with no interest or end date by the assessee was one of the factors which led to prove that it being an advance or loan was unfounded since the amount was held by the assessee for procurement of properties on behalf of the company and as such there was no question of paying any interest;
ITA No.447-450/Bang/10 Page 9 of 30
- according to the AO, the only exception was in respect of money 'advanced' by a company carrying on money lending business. The question of exception will crop up only after considering the vital question as to whether the amount was an 'advance' or a loan or otherwise.
- A number of case laws relied on by the AO were not applicable for the reasons that -
(a) ACIT v. Smt. Lakshmi Kutti Narayanan 112 TTJ 396 (ITAT Kochi) The main issue in that case was that book entries were relating to earlier years. But the principle laid down therein had been lost sight of by the AO.
(b)Nagindas Kapadia 177 ITR 393 (Bom)
(c)Ambassador Travels 173 Taxman 407 (Del)
(d) Ardee Finvest (P) Ltd. 79 ITD 547 (ITAT, Delhi Bench) &
(e) Seasmist Properties Pvt. Ltd. 1 SOT 142 (Mum) were held to be not applicable because the schedule to the Balance sheets reflect those amounts as 'unsecured loans' and, therefore, it was not in the nature of any trade advance or any payment made in connection with business of the company giving the loan;
- case laws relies on (by the assessee) -
(a) CIT v. Creative Dyeing and Printing Pvt. Ltd. 318 ITR 476 (Del);
(b) NH Securities Ltd. v. DCIT 11 SOT 302 (Mum)
- merely because the sum was shown as unsecured loan in the books of accounts cannot be concluded that it was deemed dividend. It was a settled law that in book-keeping, the entries in the books of accounts cannot go to decide the ambit of taxation Relies on -
a. Fort Properties Pvt. Limited 208 ITR 232 (Bom) b. Kedarnath Jute Manufacturing co. Ltd. 82 ITR 363 (SC) c. Kasturi Estates (P) Ltd. 62 ITR 578 (Mad) d. G.Venkataswami Naidu 35 ITR 594 (SC) e. Sultan Brothers 51 ITR 353 (SC) f. CIT v. Express Newspapers 53 ITR 250 (SC) ITA No.447-450/Bang/10 Page 10 of 30
- The question of deemed dividend can arise only in the hands of a share holder having substantial interest in the lending company. The assessee was not a shareholder in BDPL from whom the alleged advance had been received.
Relies on -
ACIT v. Bhaumik Colour (P) Ltd 120 TTJ 865 (Mum)
- the deemed dividends computed for the AY 2005-06 was incorrect. The peak of the amount alleged to have been advanced by BDPL was Rs.3.59 crores as on 13.10.2005. Prior to 31.3.2005, the peak credit never exceeded the opening balance. On 31.3.05 certain credit entries of 2.55 crores which according to AO was funds transferred was not actual transfer of funds. They were mere journal entries. It is common knowledge that in journal entries there is neither flow out or flow in of funds. There was no deemed dividends to be taxed at all in the AY 2005-06. The cases relied by the AO have no application to the facts of the present case. relies on - G.R.Govindarajulu Naidu v. CIT 90 ITR 13 (Mad);
- For AY 2006-07: With regard to the reasoning of the AO for rejecting the plea of reduction in the share holding of Raja Bagmane in the assessee company was that the transfer was not genuine and the reason given for arriving at such a conclusion was that the assessee had not received the consideration for the transfer of share, but, it was only a journal entry, the contention was that -
- The sales of shares have been disclosed in the Balance Sheets of Raja Bagmane and Smt. Vasundhara Raja as on 31.3.2006. Even an immovable property can be transferred for a consideration paid, promised, partly paid and partly promised as per s.54 of the Transfer of Property Act. Further, there was a running account of Smt. Vasundhara Raja in books of Raja Bagmane and, therefore, the consideration due was debited to her account. Similarly, in the account of Raja Bagmane in the books of Smt. Vasundhara Raja, credit entries were passed and thus, there was nothing amiss about it;
- Raja Bagmane was not having 10% shareholding in the assessee company throughout the year. For the applicability of s.2 (22)(e), it was necessary that the share-holder should have 10% equity share capital in both the concerns - the concern which lent the money and the concern to whom money had been lent. Though Raja Bagmane did hold more than 10% share in BDPL throughout the year, he did not hold 10% share in the assessee company throughout the year. It is settled law that the relevant share holder should not only be a ITA No.447-450/Bang/10 Page 11 of 30 registered share holder but a person having beneficial interest. Thus, the provisions of s.2 (22)(e) will get attracted only if the concerned person was not only a registered shareholder but also a beneficial shareholder holding not less than 10% of the share; 8.1. On the other hand, the Ld. D.R. was very categorical in her submission that the issue in dispute has been extensively analyzed by the AO and also drawing strength from various judicial pronouncements arrived at a conclusion that the entire amounts received from BDPL as loans for the AYs under challenge and was rightly treated them as deemed dividends in the hands of the assessee by bringing them to tax net under the head 'income from Other Sources'. The learned first appellate authority had, after due consideration of rival submissions, substantiated the AO's action which vindicated the stand of the AO on this point. It was, therefore, vehemently urged that the action of the authorities below requires to be upheld.
9. We have carefully considered the rival submissions, diligently perused the relevant records, the various judicial pronouncements on which either party had placed their faith and also the voluminous paper books in volumes [I, II, III & IV running into hundreds of pages - in its group of cases] furnished by the Ld. AR during the course of hearing proceedings.
9.1. On a critical examination of the relevant impugned assessment orders, the reasons for having arrived at such a conclusion that those amounts were to be treated as deemed dividends u/s 2 (22)(e) of the Act for the AYs under dispute, can be categorized as under:
ITA No.447-450/Bang/10 Page 12 of 30
(i) the assessee in its Balance Sheets in Schedule 2 had shown those amounts under the head 'unsecured loans';
- in the Balance sheets of BDPL for the AYs under dispute, amounts receivable from the assessee have been shown under the head 'loans and advances';
- the balance sheets of BDPL show the accumulated profits for the relevant assessment years;
(ii) the assessee had failed to substantiate its claim that the funds were received from BDPL for business expediency and were in the nature of contractual payments;
- the Agreement dated: 11.12.2002 produced to substantiate its claim that the funds were flown from BDPL for business exigencies and were in the nature of contractual payments appears to be an after thought since it was not in existence at the time of search operation;
- the evidence produced in the form of an agreement signed by Raja Bagmane and his wife Smt Vasundhara Raja was to be an after thought to go scot-free;
(iii) the journal entries passed in various assessment years in the case of BDPL resulted into the personal benefit to the assessee;
- BDPL who advanced the loan to the assessee was not engaged in the business of money lending and, therefore, the loan given to the assessee comes under the purview of s.2 (22)(e) of the Act; 9.2. The reasoning of the Ld. CIT (A) was that -
(i) Except the alleged MOU (sic) agreement, no other evidence was advanced to prove that the advances given were for the purpose of the business of BDPL;
(ii) The alleged agreement was produced before the AO only on 15.12.2008 which was neither a registered document nor a document entered into by an independent person, but, was between a husband and wife and, therefore, self serving document; & ITA No.447-450/Bang/10 Page 13 of 30
(iii) The case laws relied on by the assessee has not come to its rescue as they were distinguishable.
9.3. On analyzing the reasons attributed by the authorities below, the following crucial points were emerged that -
(1) Both the companies - BDPL and the assessee company governed by the Board of Directors - were in the businesses of (i) real estate of acquiring lands and developing them into buildings; and (ii) other being a developer of developing tech parks etc., Since both the parties were in the same line of business - real estate and developing of tech. park - they have perhaps entered into negotiations and scripted the terms and conditions which were reduced through an agreement entered into on 11.12.2002 [source: P 189 of PB AR], according to which, for procurement of lands and development of the same into commercial use was to be executed by BBPL for which necessary funds were provided to the assessee until such a time BBPL had arranged finance for its projects from other sources such as banks etc.,[clause 10 of the agreement]. As could be seen from the agreement cited supra, the purpose intended and the terms and conditions have been duly earmarked. This has neither been disputed by the AO nor by the first appellate authority. The AO's sole objection was that such amounts have been shown under the head 'unsecured loans' in its balance sheets. In this connection, we would like to point out that the funds flown through from BDPL to the assessee company have not been disputed, but, this dispute revolved only with regard to the 'nomenclature" in the Balance Sheets of the assessee. In the balance- sheets, the funds received could have been shown inadvertently as ITA No.447-450/Bang/10 Page 14 of 30 'unsecured loans' or "advances' by the persons who were at the helm of affairs in the accounting section of the assessee which, in our considered view, doesn't alter the nature and character of the transfer of funds which took place and it cannot be a sole reason to brand them that the funds were unsecured loans and, thus, the provisions of s.2 (22)(e) of the Act have come to play a role.
In this connection, it is more appropriate to have a glimpse of the ruling of the Hon'ble Apex Court in the case of S.A. Builders v. CIT reported in 288 ITR 1 (SC) wherein the Hon'ble Court, in its infinite wisdom, had observed thus -
"The expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.........................................That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of whether the amount was advanced for earning profits...."
With highest regards, we would like to point that the assessee had received funds with an intention to earn profits out of this venture which, in any stretch of imagination, can be termed as either 'advance or loan' as alleged by the Revenue. While deciding the issue in the case of S.A.Builders cited supra, the Hon'ble Supreme Court had puts its seal of approval the ratio laid down by the Hon'ble Delhi High Court in the case of CIT v. Dalmia Cement reported in 254 ITR 377 (Del) wherein the Hon'ble Court held that "The authorities must not look at the matter from their own ITA No.447-450/Bang/10 Page 15 of 30 view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits." (2) The AO's another contention was that the assessee was unable to substantiate its claim that the funds were given for business exigencies and was in the nature of contractual payments. In this connection, we would like to mention here that the balance-sheets, journal entries in the books of account amply make it clear that the funds were provided during the course of business..
(3) The other reasoning of the AO which was ratified by the learned first appellate authority that the alleged non-registered agreement produced before the AO only on 15.12.2008 were signed by husband and wife [Raja Bagmane and Smt. Vasundhara Raja] which was nothing but an after thought and so on and so forth.
With regard to the CIT(A)'s argument that the agreement dt.11.12.2002 was produced by the assessee as a piece of evidence only on 15.12.2008 before the AO even though the hearing was going on and also when the AO contemplated to treat the same as deemed dividend by issuance of show-cause notice etc., it may not be out place to bring on record that the assessee had in fact produced the evidence in the midst of assessment proceedings and, thus, this could not be a sound reason to put the very existence of the agreement itself under the scanner.
ITA No.447-450/Bang/10 Page 16 of 30 In a nut-shell, the authorities below have failed to bring on record any credible documentary evidence to prove that the action of the assessee was an after thought and the document itself was 'self serving' etc., Merely making a sweeping remark on the genuineness of the very existence of an agreement without an indisputable evidence, in our view, is lacking conviction.
Analyzing the other reasoning of the Ld. CIT (A) that the agreement was neither a registered document nor a document entered by an independent person because the document has been authenticated by husband and wife, it was noticed that the fundamental fact has been lost sight of that the agreement was executed not in the status of a wife and a husband as has been projected, but, representing two Limited companies. No doubt, the wife and husband have represented their respective companies in the capacity of 'Managing Director' and 'Authorized Signatory' respectively and, thus, the question of marital relationship should not have been dragged in to doubt the very bona fide of the agreement itself. The agreement has not been entered into by Raja Bagmane and Mrs. Vasundhara Raja in the status of husband and wife, but, in the capacity of Managing Director and Authorized Signatory representing their respective companies governed by the Board of Directors. There was also no legal impediment to suggest that an agreement could not be entered into by the husband and wife when they were representing their respective companies/organizations etc., ITA No.447-450/Bang/10 Page 17 of 30 (4) The other reasoning of the AO was that BDPL which advanced the alleged loans to the assessee not engaged in the business of money lending and, therefore, the loan given to the assessee comes under the purview of s.2 (22)(e) of the Act. We would like to reiterate that the BDPL was not engaged in the business of money lending, but, the funds so allocated to the assessee during the course of business which purely on business exigency and, thus, the amounts so funded do not fall within the sphere of advance or loan, as the case may be, so as to bring it under the purview of s. 2 (22)(e) of the Act.
(5) We are in total disagreement with the Ld. CIT (A)'s perception that the assessee's reliance on the ruling of Hon'ble Supreme Court in the case of S.A.Builders v. CIT cited supra was not applicable. No doubt, the issue was whether interest on borrowed capital allowable or not. However, the Ld. CIT (A) had failed to notice, may be by oversight, the concept [the ratio] laid down by the Hon'ble Court on the issue. For the sake of appreciation of facts, we reproduce the relevant portion of the ruling of the Hon'ble Court that "It was required to be enquired as to whether the interest- free loan was given to the sister concern as a measure of commercial expediency. If it is so, interest on borrowed funds is to be allowed..." It, further, went on to observe that "the authorities should examine the purpose for which the assessee advanced the money to its sister concern and what the sister concern did with this money in order to decide whether it was for commercial expediency...." Thus, the ratio laid down by the Hon'ble Supreme Court in the case cited supra is fit in to the issue on hand. While ITA No.447-450/Bang/10 Page 18 of 30 analyzing the issue, we should keep in view the ratio laid down by the Hon'ble Supreme Court as to whether the funds received was during the course of business or otherwise. As the transaction took place during the course of business and in the business exigency, we are of the firm view that the ratio laid down by the Hon'ble Supreme Court in the case of S.A.Builders cited supra is directly applicable to the facts of the issue on hand.
(6) The AO had placed reliance on the ruling of the Hon'ble Apex Court in the case of CIT v. Mysodet (P) Ltd. (1999) 237 ITR 35 (SC) to drive home his point. We have diligently perused the observation of the Hon'ble Court wherein it was ruled that -
'A perusal of section 2(22)(e) shows that for the purpose of the Act, any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend. Since the Act has not provided for any other definition of the word 'dividend' except the ones enumerated in section 2(22), it should be construed that this definition would be applicable to all provisions which contain the term 'dividend' in the Act.' With respects, we would like to mention here that the Hon'ble Court had observed on a perusal of s.2 (22)(e) 'any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend.' The literally meaning of any sum of money by way of advance or loan to its shareholders, it is deemed to be a 'dividend' whereas in the case on hand, the amounts received were in the normal course of business and for the business exigency and, therefore, it cannot be termed as 'advance or ITA No.447-450/Bang/10 Page 19 of 30 loan' to invoke the provisions of s.2 (22)(e) of the Act. With due regards, we reiterate that the finding of the Hon'ble Supreme Court referred supra has no application to the facts of the issue on hand.
Similarly, the case law [Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC)] relied on the AO has no relevance for the reasons recorded supra.
(7) In the case of Ms. P Sarada v. CIT reported in 229 ITR 444 (SC), the issue before the highest judiciary of the land was that Whether, the withdrawals made by the assessee from Universal Radiators Private Limited totaling Rs. 93,027 can be assessed in the hands of the assessee under section 2(22)(e) of the Act the year 1973-74 ? After due consideration of the facts of the case, the Hon'ble Court was pleased to rule that -
"The withdrawals made by the appellant from the company amounted to grant of loan or advance by the company to the shareholder. The legal fiction came into play as soon as the monies were paid by the company to the appellant. The assessee must be deemed to have received dividends on the dates on which she withdrew the aforesaid amounts of money from the company. The loan or advance taken from the company may have been ultimately repaid or adjusted, but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period."
With highest regards, we would like to point out that the issue before the Hon'ble Apex Court was on the different footing which has no relevance to the issue on hand on the very ground that the assessee had not received any loan or advance for its own benefit, but, the funds were provided for the execution specific purpose on its behalf. Thus, in our ITA No.447-450/Bang/10 Page 20 of 30 considered view, the case law cited by the authorities below is distinguishable.
With due respects, we would like to point out that none of the three conditions prescribed by the Hon'ble Court are applicable to the case on hand, namely, (1) no payments were made to the assessee by way of advance or loan by BDPL, but, funds were allocated for execution work assigned to the assessee on its behalf; (2) no payments were made on its behalf; and (3) payments made were not for anybody's individual benefit. The payments in question were provided due to business exigencies of BDPL and the funds so provided for the sole benefit of BDPL and NOT to individual benefits of a shareholder and, therefore, the question of applicability of the provisions of s.2 (22)(e) of the Act doesn't arise.
We are, therefore, of the considered view that the case laws relied on by the authorities below has no relevance to the issue on hand. 9.4. The Hon'ble Delhi High Court in its recent judgment in the case of CIT v. Creative Dyeing and Printing Pvt. Limited reported in 318 ITR 476 (Del) ruled that section 2 (22) (e) of the Act can be applied to 'loans' or 'advances' simpliciter and not to those transactions carried out in the course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is -what is the purpose of such advance? If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may ITA No.447-450/Bang/10 Page 21 of 30 be treated as 'deemed dividend', but, if it is otherwise, the amount given cannot be branded as 'advances' within the meaning of deemed dividend under section 2 (22) (e).
In rendering this decision, the Hon'ble High Court had placed reliance in the decision of the case of CIT v. Raj Kumar (2009) 318 ITR 462 (Del), CIT v. Ambassador Travels (P.) Ltd. (2009) 318 ITR 376 and CIT v. Nagin Das M. Kapadia (1989) 177 ITR 393)(Bom).
We reproduce the relevant portion of the finding in the case of CIT v. Creative Dyeing and Printing P. Ltd. for reference:
"Before us, the learned counsel for the appellant/revenue has contended that the present case is a case of deemed dividend inasmuch as M/s. Pee Empro Exports Pvt. Ltd. has given a loan to the assessee-company but the lending company, namely, M/s. Pee Empro Exports Pvt. Ltd. is not into the business of money lending as required by section 2(22)(e)(ii). The counsel for the respondent, on the other hand, has referred to two recent Division Bench judgments of this Court reported as CIT v. Raj Kumar [2009] 181 Taxman 155 and CIT v. Ambassador Travels (P.) Ltd. [2008] 173 Taxman 407 to contend that merely because a loan is given by M/s. Pee Empro Exports Pvt. Ltd. to the assessee-company would not mean that the same would become a deemed dividend inasmuch as moneys are paid for transactions which are business transactions/commercial transactions and, therefore such transactions cannot fall under the expression "deemed dividend" within the provision of section 2(22)(e).
Before we refer to the rival contentions of the parties, we would like to reproduce the following finding of facts arrived at by the Tribunal :
"7.5 In the present case the amount paid by M/s. Pee Empro Exports to the appellant-company does not bear the characteristic of loans and advances. The amount has been paid by M/s. Pee Empro Exports in its own interest and that too for the purpose of business because the ultimate beneficiary of the proposed expansion of plant and machinery is M/s. Pee Empro Exports itself. M/s. Pee Empro Exports has not made the payment to the appellant- company for the individual benefit of Mr. R.S. Uppal and Mr. P.M.S. Uppal ITA No.447-450/Bang/10 Page 22 of 30 and on the contrary these two Directors have also provided funds to the appellant-company as owners of the company as also made by M/s. Pee Empro Exports.
The assessee undertook expansion of its capacity, which was in mutual interest of assessee as well Pee Empro Exports. If the assessee has not undertaken such expansion, no advance could have been made to it or that Pee Empro Exports would not have distributed as dividend to its shareholders. Thus, but for the advances, the amount of advances could not have reached assessee at all. We therefore, delete the additions as made by the Assessing Officer as the amount received by assessee is not deemed dividend within the meaning of section 2(22)(e) of the Act."
The counsel for the revenue has also further stated that it is not in dispute that the monies which have been advanced to the assessee-company by M/s. Pee Empro Exports Pvt. Ltd. have not to be repaid but have to be adjusted against the dues payable by M/s. Pee Empro Exports Pvt. Ltd. to the assessee-company in the subsequent years for the job work of printing and dyeing which is done by the assessee-company for M/s. Pee Empro Exports Pvt. Ltd.
We find that the Tribunal in the present case has very extensively dealt with legislative intention of introducing section 2(22)(e) and has referred to such legislative intention by reference to Supreme Court judgment in the case of Navnit Lal C. Javeri v. K.K. Sen [1965] 56 ITR 198 where a similar provision of the Income-tax Act, 1922 i.e., section 2(6A)(e) was in issue by reproducing the relevant para in Navnit Lal C. Javeri's case (supra) as under :--
"In dealing with Mr. Pathak's argument in the present case, let as recall the relevant facts. The companies to which the impugned section applies are companies in which at least 75 per cent of the voting power lies in the hands of other than the public, and that means that the companies are controlled by a group of persons allied together and having the same interest. In the case of such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. When the Legislature realized that though money was reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of ITA No.447-450/Bang/10 Page 23 of 30 the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescribed for companies. This object was defeated by section 23A which provides that in the case of undistributed profits, tax would be levied on the shareholders on the basis that the accumulated profits will be deemed to have been distributed against them. Similarly, section 12(1B) provides that if a controlled company adopts the device of making a loan or advance to one of its shareholders such shareholders will be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he has received the said loan by way of dividend. It is clear that when such a device is adopted by a controlled company, the controlling group consisting of shareholders have deliberately, decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company; but the main object underlying the loan is to avoid payment of tax....." .
The Tribunal has also referred to the judgment of the Bombay High Court in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 3931 in which it was held that business transactions are outside the purview of section 2(22)(e) of the Act. In the said case, the company in which Kapadia was having substantial interest had paid various amount to Kapadia. The Tribunal had found that Kapadia had business transactions with the company and on verification of the accounts, the Tribunal deleted the amounts which were relating to the business transactions and which finding was upheld by the High Court.
In the present case the Tribunal on considering decisions in various cases held as under :
"From the ratio laid down in above cases and on the basis of judicial interpretation of words, 'loans' or 'advances', it can be held that section 2(22)(e) can be applied to 'loans' or 'advances' simpliciter and not to those transactions carried out in course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may be treated is 'deemed dividend', but if it is otherwise, the amount given cannot be branded as 'advances' within the meaning of deemed dividend ITA No.447-450/Bang/10 Page 24 of 30 under section 2(22)(e). Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by a company in the ordinary course of business where the lending of money is a substantial part of the business of the company, advance in the ordinary course of carrying on business cannot be considered as 'dividend' within the meaning of section 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such 'advance' as deemed dividend."
We agree with the aforesaid observations. The finding of facts, arrived at by the Tribunal, in the present case, is that the transaction in question was a business transaction and which transaction would have benefited both the assessee-company and M/s. Pee Empro Exports Pvt. Ltd. In fact, as stated above, the counsel for the appellant has conceded that the amount is in fact not a loan but only an advance because the amount paid to the assessee-company would be adjusted against the entitlement of moneys of the assessee-company payable by M/s. Pee Empro Exports Pvt. Ltd. in the subsequent years.
The counsel for the appellant has very strenuously urged that neither the Tribunal nor the judgment of this Court in Raj Kumar's case (2009) 318 ITR 462 (Delhi); (2009) 181 Taxman 155 deals with that part of the definition of deemed dividend under section 2(22)(e) which states that deemed dividend does not include an advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company [section 2(22)(e)(ii)], i.e., there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money-lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would, therefore, be covered by section 2(22)(e)(ii) and consequently payments even for the business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot, however, have bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions does not fall within section 2(22)(e), we need not to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that is all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar's case [2009] 318 ITR 462 (Delhi);
ITA No.447-450/Bang/10 Page 25 of 30 [2009] 181 Taxman 155. This Court in Raj Kumar's case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under (page
473) :
" A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax.
Therefore, if the said background is kept in mind, it is clear that sub-clause
(e) of section 2(22) of the Act, which is parimateria with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan.
If this purpose is kept in mind then, in our view, the word 'advance' has to be read in conjunction with the word 'loan'. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term 'advance' may or may not include lending. The word 'advance' if not found in the company of or in conjunction with a word 'loan' may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term 'advance'. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The sale rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing 'it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them' and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610." Therefore, we hold that the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assessee- company and M/s. Pee Empro Exports Pvt. Ltd. was not such to fall within the definition of deemed dividend under section 2(22)(e). The present appeal is, therefore, dismissed."
ITA No.447-450/Bang/10 Page 26 of 30 9.5. Further, s. 2(22)(e) brings in a deeming fiction. It provides in certain circumstances an advance or loan is treated as dividend in the hands of the shareholder. Advances and loans have to be interpreted in its true sense. Any payment made out of business expediency does not fall within the ambit of advances and loans, though the accounting entries are passed as such. The true nature of the transaction has to be seen as to whether the transaction is attributable to be a loan or an advance. In construing a deeming fiction, it is not to be extended beyond the purpose for which the deeming fiction is created or beyond the language of the section. In interpreting a deeming fiction, the intention of the Legislature has to be given due importance. The fiction should not be extrapolated beyond the purpose for which the legislation is brought in. On interpretation of a legal fiction, it was held in Controller of Estate Duty v. Krishna Kumari Devi (173 ITR 561) that the Court should ascertain the purpose for which the fiction is created and after doing so, assume all facts which are incidental to give in effect to the fiction. In CIT v. Hindustan Petroleum Corporation Ltd. (187 ITR 1) (Bom), it was held that a legal fiction has to be carried to its logical conclusion, but, only within the parameters of the purpose for which a fiction is created. Moreover, as far as possible, the legal fiction should not be given a meaning so as to cause injustice. Thus, it is obvious that the fiction created in section 2(22)(e) only refers to pure advances or loans. Any amount paid on account of genuine business transaction between the entities falls outside the ambit of section 2(22)(e). As a result of globalization during the recent past, various giant infrastructure projects have sprung up and many are in the pipeline. Multi-
ITA No.447-450/Bang/10 Page 27 of 30 various activities are involved in promoting these giant projects. All these activities collectively strive to complete the projects. Each activity is distinct in character. For each activity, different kinds of commercial agreements and technical agreements are required. The financial structure of every activity differs. The risk and reward involved in every activity also differs. In order to meet such complex constraints, the flagship company/the promoter may create various distinct entities being special utility vehicles (SUV) to deal in each of these activities independently. The promoter along with these SUV jointly works to complete the over-all project. In such situation, funds being the bloodline for all these entities flow from one entity to the other. Such transfer of funds arising out of commercial expediency may not be in the nature of advances or loan in all circumstances.
9.6. With a diligent perusal of the Brief Note - on usage of funds transferred from BDPL to the assessee - furnished by the Ld. AR during the course of hearing, the following details have been culled out and for the appreciation of facts, the relevant facts of which are as under:
AY 2004-05: Rs.79.80 lakhs were received from BDPL to make advances to the land owners for the purposes of development of Tech.
Park.
AY 2005-06 & 06-07: The manner of utilization of funds of Rs.2.76 crores received from BDPL were furnished as under:
ITA No.447-450/Bang/10 Page 28 of 30 Purpose of utilization Amount(in Status Annexure Crores)
1. Paid to N.K. Developers for purchase Rs.1.00 Land is under MOU/3.12.04-
of concord property dispute and Annx.V
in the process
of settlement
Addl. Advance paid for purchase of said Rs.0.25 - do - -do- Annex.VII
property
2. Paid to Subramanya Naga Rs.1.60 - do - Annex.VI
Enterprises for Chalmukunte property
Addl. Advance paid Rs.0.12 - do -
3.Adv. paid to Sampangi - on behalf of Rs.0.10 Regd. In the
Veerappa and transferred to BDPL in name of
AY 2010-11 after conversion Veerappa -do- Annex.X
4. Settlement made to Byanna property - Rs.0.55 Regd. In the
Sy.No.151 name of
Veerappa - -do- Annex.XI
in the process
of conversion
Addl. Consideration Rs.0.30 - do - -do- Annex.XIV
5. Purchase of land from Raman Nair, Rs.1.22 Land regd. In
Usha Shivkumar & regn. Expenses the name of -do- Annex.XII
assessee -
Sale Deed
dt.26.8.2005
6. Pd. to Fathima Rafiq & Md.Rafiq for Rs.0.11 -do- Annex.XIII
settlement of tenancy suit - sy.No.151 &
regn. Expenses
7. Pd. To Krishnakumar - sy.No.151 Rs.0.66 Regd. In the
name of
Veerappa - -do- Annex.XV
in the process
of conversion
8. Cash imprest with land aggregators Rs.0.69 Returned
subsequently
by them.
A.Y. 2007-08:
9. EMD paid for participation in auction Rs.0.10 Returned -do-Annex.XVII
subsequently
10.Adv. for sy.No.16 Rs.0.05 Regd. In AY
2010-11 after
conversion
11.Adv. paid to Akkamma Sy.No.15/1 Rs.0.01 In the
process of
conversion -
commercial
use
ITA No.447-450/Bang/10
Page 29 of 30
12.Land adv. To Jayarammappa Rs.0.02 In the
Sy.No.54 crore process of
conversion -
commercial
use
13. Land adv. To Yashodha Sy.No.17 Rs.0.25 Annex.XIX
crore
14. Pd. To Surya Enterprises for fencing Rs.0.09 In the Annex.XX
the property crore process of
conversion -
commercial
use
9.7. Taking into account the rival submissions, facts and circumstances of the issue as deliberated upon in the fore-going paragraphs and also the various judicial pronouncements cited supra, we are of the unanimous view that the AO was not justified in invoking the provisions of s.2 (22)(e) of the Act in the case of the assessee for the assessment years under dispute. The Ld. CIT(A)'s stand in upholding the findings of the AO was also not justifiable for the reasons recorded supra. It is ordered accordingly.
10. The issue of applicability of s.2 (22)(e) of the Act is not applicable in the case of the assessee for the reasons recorded in the fore-going paragraphs, the assessee's other grievance that the CIT(A) erred in not reducing the actual tax liability of the relevant current year from the profits of that year for the purposes of computation of accumulated profits has not been addressed to.
ITA No.447-450/Bang/10 Page 30 of 30
11. The last ground of the assessee that the CIT(A) erred in upholding the levy of interest u/s 234B of the Act is not maintainable as charging of interest u/s 234B of the Act is mandatory and consequential in nature. This ground is, therefore, dismissed.
12. In the result, The assessee's appeals for the assessment years 2004- 05, 2005-06, 2006-07 & 2007-08 are partly allowed.
Pronounced in the open court on this 12th day of November, 2010.
Sd/- Sd/-
( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Bangalore,
Dated, the 12th November, 2010.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar
ITAT, Bangalore.