Income Tax Appellate Tribunal - Mumbai
Shri Jhamu U. Sughand vs The Dy. Cit on 23 June, 2005
Equivalent citations: [2006]284ITR82(MUM), (2006)100TTJ(MUM)1034
ORDER
G.E. Veerabhadrappa, Vice-President
1. This appeal by the assessee arises out of the order of the CIT(A) Central VII, Mumbai dated 11.10.04 for the A.Y. 2000-01. The only dispute pressed during the course of hearing relates to the addition of Rs. 2,02,07,515 as deemed dividend under the provisions of Section 2(22)(e) of the Income-tax Act, 1961.
2. The assessee is an individual having a proprietory business in the name of M/s. Friends India, whose business was to act as producers, distributors and exporters of feature films. During the assessment year under appeal the assessee was also a substantial share holder of M/s. Sughand Productions Pvt. Ltd. (SPPL), a company in which public are not substantially interested. M/s. Friends India has taken a loan of Rs. 3,13,50,776 from SPPL. The Assessing Officer went through the balance-sheet of SPPL and found that it had accumulated profits to the extent of Rs. 2,02,01,515. The assessee submitted that the main business of SPPL was advancing of money and the money was advanced to M/s. Friends India in the ordinary Course of its business and, therefore, it does not fall within the purview of Section 2(22)(e) of the Act. The Assessing Officer did not accept this contention. According to him, the transaction is clearly hit by the provisions of Section 2(22)(e) of the Act and restricted the addition to the extent of the accumulated profits in the hands of the assessee. However, in the computation of income the Assessing Officer had made the addition on the sum of Rs. 2,02,07,515. The assessee was unsuccessful before the CIT(A) and has come up in appeal before the Tribunal.
3. The learned Counsel for the assessee explained the nature of assessee's business as well as that of SPPL. According to him M/s, Friends India is the proprietory concern of the assessee. It ventured into production of feature film and the first film produced was "Rangeela". This film was produced under the banner of M/s. Verma Creations Basically the activity was that of financing M/s. Verma Creations and sharing the profit on the same on an equal ratio. This activity was termed as production. The idea behind these kind of ventures were that Shri Ram Gopal Verma, the proprietor of M/s. Verma Creations, would direct the film without charging his professional fees and the assessee would finance the film without charging interest. Instead both would get the share of profit to the sale of the film. Encouraged by the success of the film 'Rangeela' the assessee launched another film "Daud" on the similar terms except that the banner was M/s. Verma Creations Ltd. and the finance was from SPPL. In this case also Shri Ram Gopal Verma did not charge his professional fees for direction and SSPL also did not charge interest on the amount financed. In the return of income filed for A.Y. 1998-99, 1 the line of business of SSPL was mentioned as producers and distributors of film. According to him the main purpose of lending money is to earn income, it does not matter whether the money earned is called interest or profit. SPPL had not carried all the projects in the similar terms and conditions as mentioned above. There was no other business activity carried out by SPPL except that of financing films and earning certain return out of the same. Thus, it is very obvious that lending of money was a substantial part of business of SPPL. The interest for the money lent by SPPL has come in the form of share of profit from M/s. Bhansali Productions and the income from the film '_Daud' is credited to the income of the year. The Assessing Officer has indirectly admittedly that the financing for profit and not interest is a part of the production and distribution activity. The learned Counsel for the assessee further pointed out that the provisions of Section 2(22)(e) were not attracted as the advance given is in the nature of business transaction. According to him, an advance in lieu of business venture or a commercial obligation does not fall within the purview of Section 2(22)(e) of the Act The learned Counsel for the assessee pleaded that the term "Dividend" does not include any advance or loan made to a share holder in the ordinary course of its business where the lending of money is the substantial part of the business of the company. According to him, such loans and advances were made by the company in the ordinary course of its business of financing the film production and the lending of money is the only part of its business activity. Therefore, according to him it will fall under the exception carved out to Section 2(22)(e) of the Act Reliance was placed on the decision of the Bombay High Court in CIT v. Nagindas N. Kapadia 177 ITR 393. The assessee has also filed copies of the agreement dated 01.11.96 entered by the company with M/s. Bhansali Productions and also the agreement entered into by the assessee with SPPL as a part of the paper-book. The learned Departmental Representative, on the other hand, strongly supported the impugned order. According to him the SPPL does not have any money lending license and the very fact that it has not received any interest incomes shows that the accumulated profits of the company have been utilized for giving the so called advances. According to the learned Departmental Representative it is only a distribution of dividend and the case falls under Section 2(22)(e) of the Act as has been discussed by the CIT(A) in detail. He relied upon the decision in CIT v. Taj Mahal Hotel 82 ITR 44-SC and CIT v. Kwality Ice Creams 245 ITR 252 (Cal).
4. We have carefully considered the rival contentions and have gone through the impugned order as also the copies of the agreement placed in the paper-book. In our view the contentions of the assessee have some force. There is no dispute as to the fact that the assessee is a share holder of SPPL having substantial interest in it. There is also no dispute that SPPL is a company in which the public are not substantially interested. The main objects of the provisions of Section 2(22)(e) of the Act are to treat the loan granted by a closely held company to any of the share holders in the same manner as it treats dividend distributed by it to them. The justification is that SPPL is a company, there is a group of members controlling its affairs and possessing a block of majority shares, since there are accumulated profits in the company, this group, if they choose can , have distribution arranged on such profit to its share holders in which event the share holders will not be liable to pay any tax. In order to avoid such a tax liability the company may grant loan. When such loan is advanced to share holder who has substantial interest in the company, the inference is irresistible that the loan is a made up affair and there is every reason for treating such loan as dividend. The provisions of Section 2(22)(e) themselves carve out certain exceptions in the same clause. One such exemption is that the term 'dividend' does not include 'any advance or loan made to a share holder or the said concern by a company in the course of its business and the lending of money is a substantial part of the business of the company'. Now we have to see whether the assessee falls within the exception clause extracted above. It is, no doubt, true that the only business of SPPL is advancing of money and it is a part of the business activity of the company. We have seen the agreement entered into by SPPL with Bhansali Productions and also with the assessee. The agreement specifically provides that the consideration for such financial transaction was that they shall not charge any interest on the money advanced to the producer and their consideration for giving the finance shall be finance commission as mentioned in clause No. 3 as well as 50% perpetual share in the future right and negatives of the film as mentioned in the agreement. Such rate of finance commission was to be 10% of the total coverage of the film and the term "coverage" in the agreement means total realization from the sale of different territories of the said film where by way of minimum guarantee or outright basis including the realizations from the sale of music rights and overseas territory at the time of release of the said film. As a part of the agreement itself it is provided that the assessee shall have 50% share in the negative of the film perpetually and, therefore, any income arising from the overflow, re-issue rights or sale of any other rights of the film shall be shared equally between the producers and the assessee. In other words, the loans are made to the assessee by SPPL in its ordinary course of business and its only business activity was lending of money to film producers. The assessee as a producer has borrowed money from SPPL virtually on the same terms and conditions as SPPL has entered into with Bhansali Productions. The agreement entered into by the assessee with SPPL on 31.10.99 has been carefully gone into, wherein it is mentioned that M/s. Friends India represented by its proprietor, have approached SPPL and represented that they have" made arrangement for production of a motion picture in Hindi language in colour tentatively known as "Mehbooba" in collaboration with M/s. Shabbo Arts and to be directed by Shri Afzal Khan. It is also represented that the assessee has not so far entered into any agreement or arrangement in respect of the grant of rights of distribution, exhibition, and exploitation of the said picture for or in any of the territories of the world. Friends India also represented that they have right and title to the said picture and in consideration a finance of Rs. 5 crore was received from SPPL towards cost of production and completion of the said picture upto the preparation of the first positive print in such installment as may be required from rime to time for which it would get 5% finance commission on the total coverage and 25% share in negative of the film perpetually including any income arising from the overflow, re-issue rights or sale of any other rights of the film In other words, these agreements are more or less on the same terms as SPPL has entered into with M/s. Bhansali Productions. Nowhere in Section 2(22)(e)(ii) there is a requirement that assessee should only receive a return in the income or interest for the loan advanced. So what requires is that the loan must have been granted to a share holder in the ordinary course of its business, where the lending of the money is a substantial activity of the company. The material placed before us in the form of agreements and other information, as discussed in the two impugned orders, clearly show that the loans have been lent by the company to the assessee, who is a share holder, in the ordinary course of the business of the former and the lending of the money is only business activity of the company. The fact that the company did not have any valid money lending license, in our view, does not make any difference. The phrase "in the ordinary course of its business" implies that where loans are granted by a company to its share holders not in the ordinary course of its business but are so arranged just to defeat the tax liability, such a loan shall be dividend and would be liable to tax. In our view, on the facts that are stated before us it cannot be said that the loans are arranged just to defeat the tax liability and not in the ordinary course of business of money lending.
5. The case laws relied upon by the learned Departmental Representative are in the realm of interpretation of statutes and, in our view, in the facts and circumstances explained before us, they are of no help to the revenue in this case. When it is manifest and evident that the advance was made in the ordinary course of its business, in our view, the revenue authorities are not justified in treating the loan as dividend. Accordingly, the addition made on this count is deleted
6. The next ground relating to the disallowance of the assessee's claim of loss amounting to Rs. 12,07,797 incurred on sale of flat was not pressed during the course of hearing. It is accordingly rejected.
7. In the result, the appeal is partly allowed.