Income Tax Appellate Tribunal - Bangalore
M/S Bagmane Leasing And Financing Pvt. ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE GEORGE GEORGE K., JUDICIAL MEMBER
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA Nos. 442 to 444/Bang/2010
Assessment years : 2004-05 to 2006-07
M/s. Bagmane Leasing &
Finance Pvt. Ltd.,
A Block, 8th Floor,
Bagmane Tech Park,
C.V. Raman Nagar,
Bangalore - 560 093. : APPELLANT
Vs.
The Asst. Commissioner of
Income Tax,
Central Circle 2(3),
Bangalore. : RESPONDENT
Appellant by : Shri B.P. Sachin Kumar, C.A.
Respondent by : Smt. Swathi 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: 269, 270 & 253/ ACIT CC 2(3)/ CIT (A)-VI/ 2008-09 dated: 2.2.2010 for the assessment years 2004-05, 2005-06 and 2006-07 respectively.
2. The assessee company ['the assessee' in short] has raised identical five grounds in a narrative manner for all the AYs under challenge.
ITA Nos.442 to 444/B/10 Page 2 of 33 For the sake of proper appreciation of facts and clarity, they 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 the transaction between the assessee and Bagmane Developers (P) Ltd were in the course of business activities and that the amount received was 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, 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 for the all the AYs under dispute which was 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 in the assessee's case since nothing incriminating documents relating to the assessee have been found during the course of search, that only the regular books of accounts found were 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 also grossly erred in out-rightly rejecting the case laws on which the assessee had placed strong reliance. It was, ITA Nos.442 to 444/B/10 Page 3 of 33 therefore, 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 urge that the AO was within his domain 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 that of the block assessment (search and seizure) proceedings u/s 158BD of the Act. 5.1. In the instant case, the issue, in brief, was that there was an action u/s 132 of the Act in the case of Bagmane Developers Pvt. Ltd. [BDPL] on 14.9.2006 wherein certain documents belonging to its groups were unearthed. Consequently, a Notice u/s 153A r.w.s.153C of the Act was issued by invoking the provisions of s.153C of the Act. This action of the AO has been hotly contested by the assessee.
5.2. We shall have a glance of what section 153C of the Act precisely 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 ITA Nos.442 to 444/B/10 Page 4 of 33 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 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."
5.3. As rightly highlighted by the ld. CIT (A), the requirement of handing over 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 also 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'.
5.4. In view of the above, we are of the considered view that the AO was well within his realm to resort to issue of notice u/s 153C of the Act and, accordingly, the assessee's objection is not sustainable for all the AYs under dispute and, accordingly, this ground of the assessee for all the AYs under dispute is dismissed.
ITA Nos.442 to 444/B/10 Page 5 of 33
6. With regard to the applicability of s.2 (22)(e) of the Act, the AO, after due consideration of various contentions put-forth by the assessee and for the reasons set-out in his impugned orders coupled with a number of judicial pronouncements, had observed thus -
"3.10. The provisions of sec.2 (22)(e) are squarely applicable to any 'loans and advances'. The only exception being advances made in course of business by a company substantially engaged in money lending. This not being the case the payments made would fall in the deeming provisions of s.2(22)(e). The provisions of s.2 (22)(e) are for the purpose of countering avoidance of tax by closely held companies even when the amounts are either given as an advance or loans to the shareholders. There is no exceptional clause stating that the trade advance or loans will not suffer deemed dividend. The provisions cover all kinds of loans and advances. What has been given to the assessee is only covered by way of an advance or loan and for which the benefit has also been enjoyed by the assessee. Section 2 (22) (e) does not distinguish financial loans and advances and non-financial loans and advances made to shareholders.
3.11. From the discussions above, it is clear that the loans received by the assessee company from M/s. Bagmane Developers Pvt. Ltd comes under the purview of section 2(22)(e) of the Income-tax Act. Therefore, the loans received by the assessee during the relevant period from M/s. Bagmane Developers Pvt. Ltd. is treated as 'deemed dividend' under section 2(22)(e) of the Income-tax Act, 1961 and taxed accordingly."
6.1. The AO, for similar reasons, assessed the unsecured loans given by [BDPL] to the assessee to the extent of Rs.5,55,48,334/-, Rs.2,07,10,359/- and Rs.1,75,81,391/- respectively for the AYS under challenge.
6.2. Taking into account the reasoning of the AO in his impugned orders, the forceful contentions put forth by the Ld. A R during the course of appellate proceedings and also various judicial pronouncements on the issue, the Ld. CIT (A) was of the view that -
"2.2.3.(iv)(On Page 12)........................................................
ITA Nos.442 to 444/B/10 Page 6 of 33 From the facts brought on record by the assessing officer and the judicial pronouncements on which the reliance has been placed by the assessing officer, it is clear that the provisions under section 2 (22)(e) are clearly applicable to the case of the appellant in respect of the loan and advances taken by the appellant from BDPL. Accordingly, the assessing officer was right in invoking the provisions of section 2(22)(e) of the Income-tax Act for the above assessment years...."
7. During the course of the hearing before us, the Ld. A R came up with a stout rebuttal of the authorities' stand of invoking the provisions of s.2 (22)(e) of the Act on the grounds that -
(i) the amounts paid by BDPL in the normal course of business were neither loans nor advances. BDPL engaged in development of tech. park was looking for prospective tenants in the stature who could comply with STPI formation. Motorola was looking for space with suitable fit-outs at its terms in tech. park. To meet the requirements of the giant tenant - Motorola, BDPL worked out a formula to reduce the fit-out cost by floating a leasing company which would facilitate the BDPL to avail the benefit of customs and excise duty thereby reducing the cost of fit-outs. Due to such business exigencies, BDPL had given money to the assessee to make investment which was treated as security deposit in the hands of the assessee which subsequently enabled BDPL to strike a deal with Motorola. The deposits paid by BDPL for its benefit and business exigency only fund not to individual benefits of share-holder and, thus, the question of deemed dividend philosophy has no application;
(ii) the amounts so funded by BDPL were utilized for acquiring the fit-outs as prescribed by Motorola such as (i) Plant and machinery Rs.12.78 crores; (ii) furniture and fixtures Rs.11.09 crores and (iii) office equipment Rs.9.52 lakhs, aggregating to Rs.23.97 crores;
- in the balance sheet o the assessee as at 31.3.04, the value of leased assets has been recorded at Rs.23.97 crores and the assessee was in receipt of lease rentals of Rs.13.16 lakhs, Rs.1.77 crores and Rs.2.03 crores for the AYs 04.05, 05.06 and 06.07 respectively;
- BDPL had received a whopping sum of Rs.45.03 crores upto the AY 07-08 from Motorola for the occupation of a portion of property at STPI developed by BDPL, but, the assessee was not benefited in any way by the receipt of amounts by BDPL. However, BDPL was the ITA Nos.442 to 444/B/10 Page 7 of 33 beneficiary by the transfer as more tenants ventured to occupy the BDPL's property after Motorola. This clearly exhibits that the transaction entered into between the assessee and BDPL was at arms length basis with a sole intention of earning profits from this venture on a commercial expediency. The transaction had taken place during the course of business and for the purposes of business only and this was well outside the ambit of deemed dividends;
- It was not for the AO to diktat as to how a businessman to conduct his business as it was rather a prerogative of the assessee as to how to run his/its business based on the ground realities;
- Rely on the case laws:
(a) S.A. Builders v. CIT 288 ITR 1 (SC);
(b) CIT v. Sassoon David 118 ITR 261 (SC);
(iii) the AO's novel 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 cannot be found fault with the assessee;
- 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;
- an agreement need not 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 with a long term policy of securing reputed tenants to occupy the ITA Nos.442 to 444/B/10 Page 8 of 33 STPI which was evident from its efforts in this direction and not for any non-business purposes as alleged by the AO;
- the AO's presumption that the advance 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 fit outs on behalf of BDPL and as such there was no question of paying any interest;
- 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.
- 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 -
(a) CIT v. Creative Dyeing and Printing Pvt. Ltd. 318 ITR 476 (Del);
(b) NH Securities Ltd. v. DCIT 11 SOT 302 (Mum)
(v) 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) ITA Nos.442 to 444/B/10 Page 9 of 33
(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)
(vi) 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)
(vii) 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.22.86 crores as on 13.10.2004 and by excluding the opening balance of Rs.21.51 crores, the difference being Rs.1.34 crores. If the deemed dividend concept were to be applicable Rs.1.34 crores ought to have been treated as 'deemed dividend'. Whatever received by the assessee thereafter was only the amounts paid back to BDPL and received again when occasion arose. The cases relied by the AO have no application to the facts of the present case. In those cases decided by the Hon'ble Supreme Court, the loan or advance was a one time disbursement whereas in the case on hand the ledger account clearly demonstrates otherwise. By fiction, a particular amount was treated as deemed dividend, it got the character of dividend in the hands of the recipient and became his own money. If the same money was given back to the company and received once again in a number of times, it was treated as deemed dividend every time when it was received which would lead to an anomalous position whereby the same amount gets taxed repeatedly;
relies on CIT v. C.P.Sarathy Mudaloiar 83 ITR 170
(viii) the AO appears to have taken into consideration the amounts received by the assessee during the whole financial year from BDPL as deemed dividend. It was evident from the ledger account that there were many journal entries in BDPL a/c in the books of the assessee. It was a common knowledge that in journal entries there would be neither flow out or flow in of funds;
relies on - G.R.Govindarajulu Naidu v. CIT 90 ITR 13 (Mad);
ITA Nos.442 to 444/B/10 Page 10 of 33
(ix) 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;
(x) 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 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;
- In Explanation 3(b) to s.2 (22)(e) of the Act, the word 'concern other than a company' and also 'at any time during the previous year'. Wherever the Legislature wanted to rope in concerns which at any time held substantial interest, the Legislature has done so. 7.1. On the other hand, the Ld. D.R. was very unambiguous in her submission that the issue in dispute has been extensively analyzed by the AO and also drawing strength from judicial pronouncements arrived at a conclusion that the entire amounts received from BDPL as loans for the ITA Nos.442 to 444/B/10 Page 11 of 33 AYs under challenge and was rightly treated as deemed dividends in the hands of the assessee and bringing 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 stand of the authorities below requires to be upheld.
8. We have carefully considered the rival submissions, attentively perused the relevant records, various judicial pronouncements on which the either party had placed their faith and also the voluminous paper books in volumes [I, II, III & IV running into hundreds of pages] furnished by the Ld. AR during the course of hearing proceedings.
8.1. The reasoning of the AO, in brief, was that the provisions of sec.2 (22)(e) are squarely applicable to any 'loans and advances'. The only exception being advances made in course of business by a company substantially engaged in money lending. This not being the case, the payments made would fall in the deeming provisions of s. 2(22)(e). The provisions of s.2 (22)(e) are for the purpose of countering avoidance of tax by closely held companies even when the amounts are either given as advance or loans to the shareholders. There is no exceptional clause stating that the trade advance or loans will not suffer deemed dividend. The provisions cover all kinds of loans and advances. What has been given to the assessee was only covered by way of an advance or loan and for which the benefit has also been enjoyed by the assessee. Section 2 (22) (e) does not distinguish financial loans and advances and non-financial ITA Nos.442 to 444/B/10 Page 12 of 33 loans and advances made to shareholders. Thus, the loans received by the assessee company from BDPL come under the purview of section 2(22)(e) of the Act and, accordingly treated as 'deemed dividend' under section 2(22)(e) of the Act.
8.2. The Ld. CIT (A) had, more or less reiterated what was narrated in the impugned assessment orders and sheltering himself in the finding of the Hon'ble Supreme court in the case of Ms. P. Sharada v. CIT reported in 229 ITR 445, upheld the action of the AO in invoking the provisions of s.2(22) (e) of the Act for the AYs under dispute.
8.3. In taking into consideration of the reasoning of the AO as well as the first appellate authority in invoking the provisions of s.2 (22) (e) of the Act which has been hotly contested by the assessee through its Ld. A R referred supra, we are of the considered view that - (1). The assessee came into existence at the behest of BDPL to provide fit-outs in Tech. park of BDPL as per the requirements of Motorola, a prime prospective tenant of BDPL, according to which; due to business exigencies and contingency, BDPL had agreed to provide the required funds to the assessee to go ahead with the furnishing of Tech Park with fit- outs. A Memorandum of understanding was reduced in writing and executed on 16.4.2003 on a stamp paper between BDPL and the assessee [source: P179 of PB AR] consist of some important clauses -
(i) BDPL shall place funds with the assessee from time to time;
(ii) the assessee provide fittings and office equipments as required by Motorola at the schedule premises and receive lease rentals from Motorola for the fittings and office equipments so provided by the assessee;
ITA Nos.442 to 444/B/10 Page 13 of 33
(iii) the assessee shall execute a standard lease agreement for the fittings & equipments with the lessee; &
(iv) at the end of 7 years term or the premises falling vacant whichever is earlier, the assessee shall sell the leased fittings and office equipments to BDPL at ed with mutually agreed consideration arrived with help of approved valuator.
The funds so provided by BDPL, according to the assessee, were utilized for acquiring the fit-outs at aggregate cost of Rs.23.97 crores which has been mentioned in its balance sheet as on 31.3.2004 as 'value of leased assets at Rs.23.97 crores and lease rental of Rs.13.16 lakhs for the AY.2004.05. In this transaction, as rightly urged by the Ld. A.R, the ultimate beneficiary was none other than BDPL which got tenants for its Tech Park and NOT the assessee by receiving the amounts from BDPL for furnishing the fit-outs in BDPL's Tech Park. The entire events, to put it in a nut-shell, make explicitly clear that the intention of the assessee was to earn profits from the above venture and basically on a commercial exigency.
(2). With regard to the bona fide and authenticity of the MOU, it was reasoned by the AO that the seized/impounded materials of the group of cases did not indicate the existence of any such agreement between BDPL and the assessee and so on so forth, it appears, according to the AO, that the agreement was an 'afterthought' and a camouflage for the actual nature of transaction with the assessee. In this connection, we would like to emphasis that the sweeping allegation of the AO that the document never existed [just because the agreement was not one of the seized documents] and it was an afterthought etc doesn't hold water, as rightly highlighted by ITA Nos.442 to 444/B/10 Page 14 of 33 the assessee, either the searching party would have thought it otherwise or at worst it would have lost sight of them. Unless the Revenue had brought any credible documentary evidence on record to suggest that the said MOU was an 'afterthought' or planted etc., it cannot be subjected to scanning. There would be no takers of the assessing officer's another theory that the agreement produced had no evidentiary value unless it was registered. In this connection, we would like to point out that no agreement needs to be registered to prove its sanctity unless it is proved otherwise with documentary evidence. . Even a verbal agreement between the parties (not even reduced in writing on a plain paper) has its holiness as vouched by judiciary. Simply because the MOU executed on a stamp paper not registered with the authorities concerned cannot, in our considered view, be a sole reason to suspect its very bona fide or its legitimacy.
(3). The advance received from BDPL by the assessee without any interest or end date was one of the reasons for the AO to arrive at a conclusion that it was nothing but an advance or loan. This perception of the AO was totally misconceived and without any basis as the MOU had made it amply clears that "BDPL shall place funds with BLFPL from time to time' and that these funds have been earmarked for specific purpose of executing/furnishing fit-outs in the Tech. Park of BDPL on its behalf which, in our considered view, cannot be attributed as 'advance' or 'loan'. To substantiate its claim, the assessee had shown in its respective Balance Sheets, the lease rentals of Rs.13.16 lakhs, Rs.1.77 crores, Rs.2.03 crores for the AYs 2004-05, 2005-06 and 2006-07 respectively.
ITA Nos.442 to 444/B/10 Page 15 of 33 (4). Let us have a quick perusal of judicial pronouncements as to whether the AO was within his realm to invoke the provisions of s.2 (22)(e) of the Act to term the amounts received from BDPL was a deemed dividend.
(i) The Hon'ble highest judiciary of the land in S.A. Builders v. CIT reported in 288 ITR 1(SC) in its wisdom had ruled that -
"The expression "commercial expediency" is an expression 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 a business expenditure if it was incurred on grounds of commercial expediency.
The Hon'ble Court went further to put its seal on the view of the Hon'ble Delhi Court, thus -
We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income- tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own 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.
With highest regards, we concur with the ratio laid down by the Hon'ble Court which directly applicable to the issue on hand.
(ii) 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 ITA Nos.442 to 444/B/10 Page 16 of 33 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 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 herebelow reproduce the relevant portion of the case 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] 318 ITR 462 (Delhi); [200]) 181 Taxman 155 and CIT v. Ambassador Travels (P.) Ltd. [2009] 318 ITR 376 (Delhi); [2009] 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).
ITA Nos.442 to 444/B/10 Page 17 of 33 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 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 AAC [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 :--
ITA Nos.442 to 444/B/10 Page 18 of 33 "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 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 amongst 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 ITA Nos.442 to 444/B/10 Page 19 of 33 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 393 (Bom) 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 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 ITA Nos.442 to 444/B/10 Page 20 of 33 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 a bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions do 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); [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) :
ITA Nos.442 to 444/B/10 Page 21 of 33 " 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."
ITA Nos.442 to 444/B/10 Page 22 of 33 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."
(iii) A similar view has been reiterated in the case of NH Securities Limited v. DCIT - 11 SOT 302 (Mum).
(iv) The entries made in the books of account cannot go to decide the ambit of taxation. In this regard, the Hon'ble Apex Court in the case of Kedarnath Jute Manufacturing Co., Ltd v. CIT (Central) Calcutta reported in 82 ITR 363 (SC) had ruled that -
"Whether the assessee is entitled to the deduction or not will depend on the provision of law relating to it and not in the view which the assessee might take of his rights; nor can the existence or absence of entries in the account books be decisive or conclusive in this matter. The assessee was entitled to claim the deduction towards the sales tax liability which it was liable under law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the assessee's completion did not prevail."
(v) The Hon'ble ITAT (SB) in the case of ACIT v. Bhaumik Colour (P) Ltd. reported in 120 TTJ 865 (Mum), after due consideration of the rival submissions and also the finding of the earlier Bench, the Hon'ble Special Bench was pleased to observe thus -
"41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows:
ITA Nos.442 to 444/B/10 Page 23 of 33 On the first question: Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder.
On the second question: The expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder then the provisions of s. 2(22)(e) will not apply. Similarly, if a person is a beneficial shareholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply."
(vi) In the case of CIT v. C.P Sarathy Mudaliar reported in 83 ITR 170 (SC), the Hon'ble Apex Court was emphatic in its wisdom that the burden was squarely placed on the shoulders of the Revenue to prove that the case falls within the deeming provision.
Concurring with the ruling of the Hon'ble Court, we are of the firm view that the Revenue had failed to bring on record with any conclusive evidence to prove that the amounts so received from BDPL by the assessee was advance or loan so as to bring it under the ambit of s.2 (22) (e) of the Act.
(vii) With regard to the accumulated profits of BDPL as computed by the AO, the assessee had placed strong reliance on the finding of the Hon'ble Madras High Court in the case of G.R.Govindarajulu Naidu v. CIT reported in 90 ITR 13 (Mad). With due respects we have perused the ruling of the Hon'ble Court wherein it had posed questions that - Whether accumulated profits for the purpose of paying deemed dividends includes initial depreciation? Whether payment by way of loan or advance includes notional payment by book entries? When call monies due from the shareholders were adjusted by book entries and shares were fully paid up, whether it amounts to payment of dividend? Hindu undivided family was the beneficial owner of shares. The karta was registered holder. Whether the ITA Nos.442 to 444/B/10 Page 24 of 33 loan to the family and not to the shareholder can be treated as dividend paid to the family?
After analyzing the issue in various angles, the Hon'ble Court held that - The amounts due by the assessee to the company towards call money on shares which were treated as having been speed up by making book entries cannot be treated as a payment of loan by the company for the purpose of s. 2(6A)(e). Further, to apply the provisions of s. 2(6A), the loan must have been to its registered shareholder. This section does not empower the company to pay dividends to any one other than its registered shareholders. The fact that the family was the beneficial owner would not make it a registered shareholder. S. 133 of Companies Act prohibits recognition of trusts as a shareholder and there is a specific provision for HUF being a shareholder. Therefore, s. 2(6A)(e) cannot be applied unless the legislature introduces a further deeming provision to the effect that the joint family which is the beneficial owner of the shares shall be deemed to be the registered shareholder of the company.
Having regard to the words "payment by way of loan or advance" employed in section 2(6A)(e), we are of the view that there should be an outgoing or flow of money from the company to the shareholder so as to attract the said provision. Some light is thrown by the provision in section 205(5) of the Companies Act, 1956, which provides that no dividend shall be payable except in cash, the only exception being the issue of fully paid up bonus shares or the payment towards unpaid call monies on any shares held by the members. In this case, there cannot be any dispute that the sum of Rs. 1,65,000 cannot be treated as an advance, for it is not an amount paid towards any other amount due by the company to the assessee-family. The only question then is whether the said sum represents the payment by way of loan by the company to the assessee-family. Having regard lo the setting in which the said clause (e) of section 2(6A) occurs, it is not possible to say that the payment contemplated will include a notional payment by way of book entries."
(viii) Yet another case, the Hon'ble ITAT, Ahmedabad 'B' Bench in its finding in the case of M.B.Stock Holdings Private Limited v. ACIT reported in 75I TTJ 898 (Ahd) dated: 27.12.2001 had observed thus -
"30. On analysis of the aforementioned discussion, in our view, the following principles emerge:--
(i) That for purposes of section 2(22)(e), the accumulated profits are to be worked out up to the date of each payment/advancement of the loan.
ITA Nos.442 to 444/B/10 Page 25 of 33
(ii) That there is a distinction between the "accumulated profits" of business and the current year's profits of business.
(iii) That the profits of business accrue at the end of the previous year.
(iv) That loan or advance treated as deemed income up-to the date of fresh loan is to be reduced from accumulated profits.
(v) That the repayment of loan during the same year is not to be deducted from the accumulated profits.
31. When one keeps all the above four principles of law in mind, it will not be difficult to appreciate that the Explanation 2 to section 2(22)(e) does not have the effect of inclusion of current year's business profits. These are certain examples to show that Explanation 2 to section 2(22)(e) does not become redundant in the light of the decision of Hon'ble Supreme Court in the case of V. Damodaran.
32. Therefore, whereas the aforementioned adjustments and other adjustments as may be permissible in law are to be made and, accordingly, accumulated profits worked out on each day of loan or advance is made to the shareholder, we are of the firm view that all the profits that have not accrued to the company advancing the loan up-to the each day of advance/loan have to be taken into account in working the accumulated profits within the meaning of section 2(22)(e). But since the business profits of the company accrue only at the end of the year, the current year's business profits are not to be included. We would, therefore, in the interest of justice, restore this issue to the file of the Assessing Officer for the purpose of working out the accumulated profits on each day of advancing the loan to the appellant and apply section 2(22)(e) to Such loans subject to the maximum of accumulated profits up to the date of advancement of the loan.
(5) In respect of the assessee's plea that there was reduction in the share-holding of Raja Bagmane in the assessee's company, the AO, after analyzing the assessee's contentions, had observed in his impugned order for the assessment year 2006-07 thus -
"3.18. On careful consideration of the above, it appears that Smt Vasundhara Raja is not in a position to pay off Rs.4,91,94,263/- for the shares transferred by her husband. As already discussed above, there was ITA Nos.442 to 444/B/10 Page 26 of 33 no transfer of funds either by way of cash or cheque for transfer of the shares and it was made by book entries only. It therefore appears that the intention of Shri Raja Bagmane of transferring the shares to his wife is not real and is only arrangement or a colourable device to circumvent the provisions of section 2(22)(e) of the Income-tax Act, 1961. A careful examination of the facts of the case indicates that there was not a real transfer of share and it was only a colourable device to reduce the number of shares by Raja Bagmane so that he is not treated as a shareholder having a substantial interest in the company and, thereby, avoid the taxability of deemed dividend. But in reality, he was still having substantial interest in the company and had total control over the company. In view of the above, it is held that even if Raja Bagmane had transferred his shares during this year and reduced it to 9%, he was still having substantial interest in M/s.Bagmane Leasing & Finance Pvt. Ltd. and the provisions of section 2(22)(e) is applicable in the case of the assessee for this assessment year also...."
To belie the AO's reasoning, it was contended by the assessee that the sale of shares had been disclosed in the Balance sheets of Raja Bagmane and Mrs. Vasundhara Raja as on 31.3.06. Even an immovable property can be transferred for a consideration paid, part paid and part promised as per s.54 of the Transfer of Property Act. It was further contended that there was a running account of Mrs. Vasundhara Raja in the 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 Mrs. Vasundhara Raja credit entries were passed.
Copy of Annual return for the year 2005-06 furnished before the Registrar of Companies, detailing the transfer of shares by Raja Bagmane to Mrs. Vasundhara Raja was produced [source: P 103 - 110 of PB AR]. A copy of such annual return furnished was authenticated by the Asst. Registrar of Companies confirming the details of shares transferred [P 103 of PB AR].
ITA Nos.442 to 444/B/10 Page 27 of 33 (6) A clinching evidence was that Raja Bagmane was not having 10% share-holding in the assessee company through out the year. Even for invoking or the applicability of the provisions of s.2 (22)(e) of the Act, it was essential that the shareholder should have 10% equity share capital in both the companies - the concern which lent the money and the concern to whom money had been lent. According to the assessee, though Raja Bagmane was holding more than 10% share in BDPL throughout the year, he did not perhaps hold 10% share in the assessee company throughout the year. Thus, the provisions of s.2 (22)(e) of the Act can be invoked if the concerned person was not only a registered shareholder but also a beneficial shareholder holding not less than 10% of the share. To illustrate further let us have glance at Explanation 3(b) to s. 2(22)(e) of the Act:
S.2 (22)(e): Explanation 3 - For the purposes of this clause,-
(a) 'concern' means ..........................................................
(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;"
From the above wordings, two important aspects are to be noticed, namely, (i) concern other than company; and (ii) at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern. Thus, in the present case, none of these two aspects are attracted.
ITA Nos.442 to 444/B/10 Page 28 of 33 (7) Turning our attention to the case laws on which the AO had placed strong reliance which has been ratified by the Ld. CIT (A) in his impugned order.
(i) in the case of Ms.P Sarada v. CIT reported in 229 ITR 445 (sic) 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 of fit-outs in the Tech. Park on behalf of BDPL. Thus, in our considered view, the case law cited by the authorities below is distinguishable.
(ii) Yet another case law on which the authorities below have placed reliance to drive home their point was in the case of Smt Tarulata Shysam ITA Nos.442 to 444/B/10 Page 29 of 33 And Other v. CIT, West Bengal reported in 108 ITR 357 (sic) 345 (SC) wherein the issue before the Hon'ble Apex Court was - When loan or advance made to shareholder are repaid before the end of the accounting year, whether the loan or advance could be treated as being dividend? The provisions of s. 2(6A)(e) of 1922 Act, would be attracted at the time of advance of loan being made to the shareholder except for the specific provisions in s. 12(1B) for the assessment year 1955-56, the legislature has deliberately not made the subsistence of the loan on the date of the previous year a prerequisite for raising or applying the statutory provisions. After much deliberation of the issue, extensively quoting various judicial findings, the Hon'ble Court ruled that "... the combined effect of these two provisions is that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. There three kinds of payments are (1) payments made to the shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before section 12(1B) can be invoked against a shareholder. The first condition is that the company in question must be one in which the public are not substantially interested within the meaning of section 23A as it stood in the year in which the loan was advanced. The second condition is that the borrower must be a shareholder at the date when the loan was advanced; it is immaterial what the extent of his shareholding is. The third condition is ITA Nos.442 to 444/B/10 Page 30 of 33 that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit at the date of the loan. This is an important limit prescribed by the relevant section. The fourth condition is that the loan must not have been advanced by the company in the ordinary course of its business. In other words, this provision would not apply to cases where the company which advances a loan to its shareholder carries on the business of money-lending itself; and the last condition is that the loan must have remained outstanding at the commencement of the shareholder's previous year in relation to the assessment year 1955-56." 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 of fit- outs 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, the question of applicability of the provisions of s.2 (22)(e) of the Act doesn't arise. 8.4. 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.
ITA Nos.442 to 444/B/10 Page 31 of 33 8.5 Section 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 ITA Nos.442 to 444/B/10 Page 32 of 33 projects have sprung up and many are in the pipeline. Multi-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.
8.6. Taking into account the rival submissions, the 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 is also not justifiable for the reasons recorded supra. It is ordered accordingly.
9. 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 ITA Nos.442 to 444/B/10 Page 33 of 33 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.
10. 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.
11. In the result, the assessee's appeal for the assessment years 2004-05, 2005-06, and 2006-07 are partly allowed.
Pronounced in the open court on this 4th day of November, 2010.
Sd/- Sd/-
( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Bangalore,
Dated, the 4th 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.