Income Tax Appellate Tribunal - Agra
Prem Prakash Agarwal, Agra vs Department Of Income Tax on 7 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
AGRA BENCH, AGRA
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI A.L. GEHLOT, ACCOUNTANT MEMBER
ITA No.37/Agr/2012
Assessment Year: 2008-09
Shri Prem Prakash Agarwal, vs. Asstt. Commissioner of Income Tax,
C/o. Prem Ford, Circle-1, Agra.
3/22 Near Tulsi Cinema,
Bye Pass Road,
Agra.
(PAN: AAUPA 2486 N)
ITA No.86/Agr/2012
Assessment Year: 2008-09
Asstt. Commissioner of Income Tax-1, vs. Shri Prem Prakash Agarwal,
Agra. C/o. M/s. Prem Ford,
3/22, Nagla Padi,
Near Tulsi Cinema, Bye Pass
Road, Agra.
(PAN: AAUPA 2486 N)
(Appellants) (Respondents)
Assessee by : Shri Mahesh Agarwal, C.A.
Revenue by : Shri Waseem Arshad, Sr. D.R.
Date of Hearing : 07.01.2013
Date of Pronouncement of order : 22.02.2013
ORDER
PER A.L. GEHLOT, ACCOUNTANT MEMBER:
2 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09 These are cross appeals filed by the Assessee and the Revenue against the order dated 29.08.2011 passed by the ld. CIT(A)-I, Agra for the Assessment Year 2008-09.
2. The assessee has raised as many as four grounds of appeal which are pertaining to the addition of Rs.7,85,961/- in relation to advance given by M/s.
Malwa Vehicles Pvt. Ltd. to the proprietary concern of the assessee and Rs.52,583/- given by the said company to M/s. Prem Motors, a partnership firm in which the assessee is a partner, sustained by the CIT(A).
3. The Revenue has raised four grounds of appeal. The first ground of appeal is in respect deletion of addition of Rs.12,50,322/- and Rs.1,32,496/- made by the A.O. on account of loan/advance taken by the assessee from Prakash Vehicles (P) Ltd. The 2nd ground is in respect of deletion of addition of Rs.67,137/- made by the A.O. under section 40A(3) of the Act. Grounds no.3 & 4 are general in nature.
4. The brief facts of the case are that the assessee is engaged in the business of trading of vehicles and spare parts. The assessee is proprietor of M/s. Prem Motors from 01.04.2007 to 30.09.2007 and partner of M/s. Prem Motors from 01.10.2007 to 31.03.2008. The assessee is also Director of M/s. Malwa Vehicles (P) Ltd. and M/s. Prakash Vehicles (P) Ltd. During the assessment proceedings, the A.O. 3 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 noticed that the assessee and assessee's partnership firm has taken loans and advances from M/s. Malwa Vehicles (P) Ltd. and M/s. Prakash Vehicles (P) Ltd.
The details of accounts have been reproduced by the CIT(A) in his order at pages Nos. 6 to 8. The summary of the same is as under :
M/s. Prem Motors Proprietor Partner 01.04.07 to 30.09.07 01.10.07 to 31.03.08 Malwa Vehicles (P) Ltd. 29,45,583/- 52,583/-
Prakash Vehicles (P) Ltd. 39,87,517/- 21,13,143/-
Interest paid :
Malwa Vehicles (P) Ltd. 2,24,077/- 12,479/- Prakash Vehciles (P) Ltd. Nil Nil Accumulated Profits : Malwa Vehicles (P) Ltd. 7,85,961/- 94,613/- Prakash Vehicles (P) Ltd. 12,50,332/- 1,32,496/- Addition Made by the AO: Malwa Vehicles (P) Ltd. 7,85,961/- 52,583/- Prakash Vehicles (P) Ltd. 12,50,332/- 1,32,496/-
5. The A.O. made above additions u/s.2(22)(e) as the assessee holding not less than 10% shares in M/s. Malwa Vehicles (P) Ltd. and M/s. Prakash Vehicles (P) Ltd. The assessee is holding 20% share in partnership firm - substantial interest.
6. The CIT(A) confirmed the addition of Rs.7,85,961/- and Rs.52,583/- on account of M/s. Malwa Vehicles (P) Ltd. However, addition of Rs.12,50,332/- & Rs.1,32,496/- has been deleted. Since the CIT(A) partly allowed the appeal of the 4 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 assessee, therefore, both the assessee and the Revenue are in cross appeals before us.
7. The findings of the ld. CIT(A) are as under :
"5.4 I have carefully considered all the arguments taken before me by the Ld. AR as well as the AO with respect to the addition made u/s 2(22)(e) in the written submission and the remand report respectively filed during the course of appeal proceeding and also, I have gone through the assessment records as well as assessment order. A bare perusal of section 2(22) (e) would show that a payment would acquire the attributes of a dividend within the meaning of the said provision, if the following conditions are fulfilled:-
1. The company making the payment is one in which public are not substantially interested.
2. Money should be paid by the company to a shareholder holding not less than 10 per cent of the voting power of the said company.
It would make no difference, if the payment was out of the assets of the company or otherwise.
3. The money should be paid either by way of an advance or loan or it may be 'any payment' which the company may make on behalf of or for the individual benefit of any shareholder or also to any concern in which such shareholder is a member or a partner and in which he is substantially interested.
4. Such loans or advances should be out of the accumulated profits, possessed by such company as on the date of loan or advance.
5. Such loan should not have been advanced by such company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company and lastly
6. The limiting factor being that these payments must be to the extent of accumulated profits, possessed by such a company.
5.5. The amount taken by the assessee in the capacity of his proprietorship concern as well as after getting it converted into 5 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 partnership firm named as M/s Prem Motors from both the companies i.e. M/s Malwa Vehicles Pvt. Ltd. & M/s Prakash Vehicles Pvt. Ltd., have been examined after taking into account the above provisions relating to deemed dividend as provided u/s 2(22)(e). As regards to loan taken from M/s Malwa Vehicles Pvt. Ltd. is concerned, on examination of the account being maintained by the appellant with this company, it has been found that it is purely in the nature of a loan account and the same is clear looking to the type of entries made in this account as reproduced by the AO in the assessment order and the same has been shown in this order in para no.3.3 on page no.4 to 9. Looking to the type of entries in this account, it can been seen that in this account money is coming from M/s Malwa Vehicles Pvt. Ltd. from time to time and repayment are also being made from time to time and on the balance appearing in this account, the appellant is also paying interest. 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 and it generally carries an interest and here is an obligation of repayment. All these features are present in the account maintained with M/s Malwa Vehicles Pvt. Ltd. by the appellant when M/s Prem Motor was its proprietorship concern as well as when it got converted to partnership firm. Since the nature of account maintained with M/s Malwa Vehicles Pvt. Ltd. is of a loan account, the Ld. AR has not disputed about the nature of account as it has been argued about the nature of this account being maintained with M/s Prakash Vehicles Pvt. Ltd. being in the nature of advances taken for the purpose of business transaction of the appellant. Therefore, it is undisputed fact that the nature of account maintained by the appellant in the books of M/s Prem Motors both in the status of proprietorship concern and in the status of firm with M/s Malwa Vehicles Pvt. Ltd. is a loan account. The Ld. AR has disputed the addition u/s 2(22)(e) for loan shown by the appellant from M/s Malwa Vehicles Pvt. Ltd. on two major arguments. In the first argument, the Ld. AR has tried to analyze the term, the accumulated profit possessed by the company for making payment of loan. It has been stressed by the Ld. AR that M/s Malwa Vehicles Pvt. Ltd. has not given loan out of its accumulated profits in as much as the company was not in possession of the same. In the second argument, it has also been stated that this loan given by M/s Malwa Vehicles Pvt., Ltd. was under its normal business activities of money lending. With regard to first argument of not possessing the accumulated profit for the purpose of giving loan, the Ld. AR has given following computation:-
6 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09 "Position of reserves & surplus in M/s Malwa Vehicles Pvt. Ltd.
Reserve & surplus as on 01.04.2007 5,77,356/- Add-Profit upto the date of advance 2,08,605/- (as worked out by AO) 7,85,961/- Less; Investment in Fixed Assets as on 1.4.07 40,67,838/- Investment in Fixed Asses upto the date of 15,35,335/- Advance 56,03,173/- Reserve & Surplus after investment in Fixed ( -) 48,17,212/- Assets Less : Share capital 35,00,000/-
Balance of Reserve & Surplus in possession of the -----------------
Company (-) 13,17,212/-
5.6 By showing the above computation, it has been argued by the Ld. AR that entire capital of the company as well as its reserves and surplus had been invested in fixed assets and as such the company did not have actual physical possession of any amount of the surplus reflected in the balance sheet. He has further argued that the advances of loan, to classify as "deemed dividend", should be made out of the accumulated profits possessed by the company and in view of the Ld. AR, here the emphasis is on "possession" which has to be real, actual and physical and in view of his interpretation of the term "possession" as used along with the word "accumulated profits" in the provisions of section 2(22)(e), the Ld. AR argued that the company was not in actual physical possession of any accumulated profit and hence, the loan advanced by the company to the appellant cannot be deemed as dividend. In support of his argument, the Ld. AR has referred to a decision of Hon'ble ITAT, Jaipur Bench in the case of Bhim Singh Vs ACIT (ITA No.89/JP/2008) decided on 19.09.2008.
Copy of this order was also enclosed. Against this argument of Ld. AR, the AO in his remand report dated 29.06.2011 stated that the contention of the assessee(appellant) is not supported by the reading of the section itself. He referred to the manner in which accumulated profits is to be calculated as it was discussed in the assessment order in detail and relied on the Explanation (2) of section 2(22)(e) giving 7 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 the definition of accumulated profit which says that accumulated profit includes all profits of the company upto the date of distribution or payment and therefore, in view of the AO, this definition leaves no scope for confusion. As per the AO, such definition of accumulated profit does not talk about actual, real and physical possession. The AO also referred that the assessee(appellant) also had net current assets of Rs.2,59,68,685/- comprising of cash and bank balances, sundry debtors, other current assets, loans and advances etc and therefore, in view of the AO, the contention of the Ld. AR that the appellant is not in possession of the accumulated profit is without merit and also factually incorrect. In the rejoinder filed by the Ld. AR, vide his letter dated 24.08.2011, he has further stressed the importance of the word "possesses" used in the section. The Ld. AR has argued that as a matter of fact the AO has not appreciated that the legislature deliberately and purposely used the words "to the extent to which the company, in either case, possesses accumulated profits". He further argued that if the intention of the legislature was to consider the accumulated profit alone, whether actually possessed or not, this word would not have been used in the section and in his view, by simply mentioning "to the extent the company, in either case, has accumulated profits" would have served the purpose and therefore, it has been further argued by him that the emphasis laid on the word "possesses", in the section, could not be without any meaning and purpose. In view of the above interpretation the word 'possesses' by the Ld. AR and further supported by the view taken by the Hon'ble ITAT Jaipur Bench in the decision of the case of Bhim Singh Vs. ACIT (supra), it has been again argued by the Ld. AR that the correct reading of the section would suggest that the possession of the accumulated profits has to be actual, real and physical, which the company M/s Malwa Vehicles Pvt. Ltd. did not have. With regard to the fact referred by the AO that the company had net current asset to the extent of Rs.2,59,68,685/-, it has been argued that for the purpose of considering whether the company possessed accumulated profits, position of net current funds owned (total current assets-total outside liabilities) should have been considered, which in view of the Ld. AR has not been considered by the AO and the correct position of the net current fund owned by the company were shown by the Ld. AR as below:-
8 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09 Total current assets 3,20,79,372/-
Total outside liabilities- 61,10,686/-
Current liabilities
Loan funds 2,72,58,935/-
3,33,69,620/-
Net debts owed (Negative) 12,90,248
By showing the above calculation, it has been argued by the Ld. AR that the company actually had net liability and did not possess any fund to the extent of accumulated profits.
5.7 The above argument with regard to accumulated profits possessed by M/s Malwa Vehicles Pvt. Ltd., has been considered by me in the light of the decision of Hon'ble ITAT Jaipur Bench as referred by the Ld. AR. In this decision, I find that though the Hon'ble Jaipur Bench of the ITAT, after relying on a decision of Hon'ble Delhi High Court in the case of R. Dalmia Vs. CIT 133 ITR 169, has held that a company can be said to have profits or to be possessed of profits, when it actually possesses the amount in its control or possession. It has been seen that the facts presented before me by the Ld. AR to show that M/s Malwa Vehicles Pvt. Ltd. did not possess the accumulated profits was not as per the facts shown in the case of Shri Bhim Singh Vs ACIT (supra) wherein the assessee has taken loan from a company M/s Rajasthan Tour Pvt. Ltd.. In this cited case, from the balance sheet of M/s Rajashan Tour Pvt. Ltd., the closing balance of accumulated profits was computed from the AY 1999-2000 to till AY 2005-06, after taking into account the opening balance of accumulated profits, net loan availed by the said company and assets procured by the said company during the respective years and then, the closing balance of accumulated profits on year to year basis of the company was computed. It has been shown that the said company had negative balance of accumulated profits till the end of the year in which loan was given to the assessee. For the sake of convenience, the chart presented in the above cited case showing negative closing balance of accumulated profits is reproduced as under:-9 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09 A.Y. Pre. Accumulated Net loans Assets Assets Profit/(Lo Accumulated Dividend/ Yr. profits availed procured procured ss) during profits closing D tax opening bal. during the during from the year bal.(31.03) include in (01.04) year the year accumulated profit and profits loss balance account (3+4-5) 1 2 3 4 5 6 7 8(6+7) 9 1999- 1998- 7158793 854355 3789099 4224049 1129343 5353392 35000 2000 99 1999- 1999- 5353392 1028959 4910658 1471693 1888802 3360495 35000 2001 2000 2001- 2000- 3360495 1705458 4670342 395611 1315209 1710820 285000 2002 2001 Bonus Issue 2002- 2001- 1710820 -1109241 2794849 -2193270 -5091206 -7284476 285570 2003 2002 2003- 2002- -7284476 412067 122544 -6994953 -1803498 -8798451 26163 2004 2003 2004- 2003- -8798451 422206 4375157 -12751402 5249276 -7502126 0 2005 2004 2005- 2004- -7502126 4844349 8616176 -11273953 2973720 -8300233 321337 2006 2005 After considering the above chart, the Hon'ble Members of Jaipur Bench of ITAT held that they are of the view that the assessee was not having accumulated profit on the date of giving advances to share holders and therefore, the provision of section 2(22)(e) of the Act cannot be attracted. In case of the appellant, no such detailed chart showing the closing balance of accumulated profits on year to year basis was provided. The Ld. AR has only provided the closing figure for the year under consideration and while computing the figure of closing balance of reserve and surplus in possession of the company, he has also ignored to take into account the loan funds of M/s Malwa Vehicles Pvt. Ltd. as it has been taken in case of Shri Bhim Singh for computing the closing balance of accumulated profit of Rajasthan Tours (P) Ltd. shown in the above chart . As per the balance sheet of M/s Malwa Vehicles Pvt. Ltd. as on 31.03.2008, I find that the following figures of loan fund are given-
Particulars Sch Current year (In Rs.) Previous Year (In Rs.) Loan Funds:
Secured loans 2 17,503,419.89 18,162,935.75
10 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
Unsecured 3 9,755,515.32 3,306,955.90
loans
5.8 If the above loan funds are also considered, it can be seen that they are far in excess of the total fixed assets of Rs.85,43,852/- of M/s Malwa Vehicles Pvt. Ltd. Therefore, if the total amount of share capital and loan funds are considered together, it can be seen that all the fixed assets of M/s Malwa Vehicles Pvt. Ltd. are found to be acquired out of its share capital fund as well as loan fund and hence, I find that the Ld. AR is not correct in his argument that the company M/s Malwa Vehicles Pvt. Ltd. did not have actual physical possession of any amount of surplus reflected in the balance sheet. On examination of the balance sheet of M/s Malwa Vehicles Pvt. Ltd., it is very clear that its fixed asset has been acquired out of share capital and loan funds and the reserve and surplus which has been created only out of profits earned by this company, cannot be said to be invested in fixed assets and the same is clear looking to the current asset of Rs.2,59,68,685/- available with the company as pointed out by the AO, while computing the net current asset owned by the company.
In the rejoinder for computing net current asset of the company, the Ld. AR has taken into account loan fund but for showing the purchase of fixed asset, he has not taken into account the loan fund as it was done in the case of Bhim Singh referred by the Ld. AR. Thus, I find that the Ld. AR has tried to present before me a distorted picture about the accumulated profits possessed by the company by not taking into account the loan fund, while showing investment in fixed assets. After taking into account the entire balance sheet of M/s Malwa Vehicles Pvt. Ltd. and the manner of computation of closing balance of accumulated profit provided in the decision of Shri Bhim Singh (supra) I find that M/s Malwa Vehicles Pvt. Ltd. is very much in possession of the accumulated profits which is shown in the form of reserve and surplus and hence, it is clear that the loan given to the appellant, which remained outstanding on the dates as shown by the AO in the assessment order are out of accumulated profits and hence, the AO is correct in making addition u/s 2(22)(e) for the loan taken from M/s Malwa Vehicles Pvt. Ltd. as on 30.09.2007 to the extent of Rs.7,85,961/- and as on 22.12.2007 to the extent of Rs.52,583/-. Accordingly, the first argument taken by the Ld. AR in Ground no. 1(c) is no found to be correct and hence rejected.
11 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09 5.9 With regard to the second argument about the loan given to the company being in the normal course of business of the money lending, the Ld. AR has relied on clause (B) (18) of the objects of the company which authorizes the company to invest and deal with the funds of the company, not immediately required for the purpose of the business of the company in such manner as may be deemed expedient. It has also been shown by the Ld. AR that interest income earned by the company constitutes more than 20% of the income and therefore, in view of the Ld. AR the substantial business of the company is money lending and the advances of loans to the appellant was part of such activity and therefore, in his view, no addition u/s 2(22)(e) can be made. Against this argument of the Ld. AR, the AO has reported in his remand report dated 29.06.2011 that the company is engaged only in sale and purchase of Ford Vehicles, registering total sales of Rs.19,08,31,940/- and as per main objects of the company, as provided in Memorandum of Association, is to carry on the business of manufacturing, buying, selling, reselling, exchanging, altering, importing etc. and dealing in trucks, tractors, cars , auto rickshaws, three wheeler transporters, motorcycles, mopeds etc. He has further pointed out that all the debtors and creditors, stock etc. are directly linked to sale of vehicles only. He has also pointed out that the company also earnes some interest income while deploying unused funds temporarily and in view of the AO, this is the prudent business practice and it did not make money lending as substantial part of the assessee's business. He has also pointed out that this loan was not given by M/s Malwa Vehicles Pvt. Ltd. in ordinary course of its business, which I have already discussed at the initial stage of this para that the account being maintained with M/s Malwa Vehicles Pvt. Ltd. is a purely loan account and not related to the business of the appellant. In the rejoinder filed by the Ld. AR vide his letter dated 24.08.2011, he tried to import the definition of the word "substantial" from Explanation 3(b) as provided in the provision of section 2(22)(e) and stated that "substantial" means more than 20% and to support his view point, the Ld. AR referred to a judgment of Hon'ble Supreme Court in the case of CIT Vs. Venkateshwara Hatcheries (237 ITR 174) wherein it was held that the definition in one section can be used for understanding the meaning of the word in another section, if the context justifies it and therefore, he argued that it can be concluded that definition of term "substantial" used in the aforesaid section means 20% or more of the income of a concern. By interpreting the word 'substantial' in above manner, the Ld. AR has argued that the 12 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 interest income constituted more than 20% of the income of the company M/s Malwa Vehicles Pvt. Ltd. and hence, the loan given by it to appellant is covered by the exception clause and could not be deemed as "dividend" within meaning of section 2(22)(e) of the Act. I find that this interpretation of Ld. AR is totally misplaced and for such interpretation, he has relied on the judgment of Hon'ble Supreme Court in the case of CIT Vs. Venkateshwara Hacheries in wrong manner because firstly of the definition provided in Explanation 3 is not about the word "substantial" but it is to define "substantial interest" in a concern as provided in section 2(22)(e) with reference to any concern in which such share holder is a member or a partner and in which he has substantial interest. It has been provided that if such share holder at any time during the previous year is beneficially entitled to not less than 20% income of such concern shall be deemed to have a substantial interest in such concern. Therefore, this definition relates to define a substantial interest of a share holder in a concern providing that he should have beneficial entitlement of more than 20% of income of such concern. Secondly, this definition is nowhere related to substantial part of the business of the company. The business of the company is determined by its activity and volume of such activity. It may be possible that a company may be engaged in manufacturing activity on a large scale having huge amount of turnover but from such activities, it may incur loss or nominal profit and because of its funds invested, it might have earned interest income but just by earning interest income which may be more than 20% of is nominal profit or in case of loss, the net income of the company may be only because of its interest income, it would not mean that the company is in money lending business only because of its interest income. The nature of the company would be decided by the volume of its business. In the present case, it can be seen from the P & L A/c of M/s Malwa Vehicles Pvt. Ltd., though the company is mainly engaged in selling of vehicles and by these activities, it has achieved a turnover of Rs.15,32,54,219/- apart from its other income of Rs.66,75,937/- which includes interest income also as pointed out by the appellant in his written submission, however, because of low margin on sale of vehicle, it has earned nominal net profit of Rs.7,24,976/-. Because of earning of nominal profit from its vehicles trading activities, this company cannot become being engaged in the business of money lending as it is very clear from the P & L A/c looking to its turnover and trading debtors and creditors as pointed by the AO. Looking to the nature of the business of the company, M/s 13 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 Malwa Vehicles Pvt. Ld. and finding that the interpretation of the Ld. AR about the word 'substantial' as used with respect to substantial part of business of the company is misplaced by wrongly referring to a definition of substantial interest in a concern, I find that the Ld. AR is not correct in his argument that the loan given by M/s Malwa Vehicles Pvt. Ltd. to the appellant was during the ordinary course of the business of money lending. Therefore, the second argument taken by the Ld. AR to oppose the addition u/s 2(22)(e) on account of loan taken from M/s Malwa Vehicles Pvt. Ltd. as per Ground no.1(d) is also rejected.
5.10 After findings that both the argumens taken by the Ld. AR for opposing the addition made u/s 2(22)(e) on account of loan shown from M/s Malwa Vehicles Pvt. Ltd. have not been found to be correct because this loan was given out of accumulated profit possessed by the company and the substantial part of the business of the company is not the money lending, I hold that the AO is correct in making addition of Rs.7,85,961/- for the loan taken by the appellant in his capacity as proprietorship concern as on 30.09.2007 and addition of Rs.52,583/- in his capacity as firm. Accordingly, Ground no.1 is dismissed.
6.1 Regarding addition of Rs.12,50,332/- and Rs.1,32,496/- treating these two amounts as deemed dividend u/s 2(22)(e) on account of loan /advances taken by the appellant from M/s Prakash Vehicles Pvt. Ltd. in the books of M/s Prem Motors in the capacity of his proprietorship concern and partnership firm respectively as raised in Ground no.2(a) & (b). The main dispute raised before me is regarding nature of the advances taken from M/s Prem Vehicles Pvt. Ltd. In his written submission dated 09.06.2011, the Ld. AR explaining the nature of transaction carried out by the appellant with M/s Prakash Vehicles Pvt. Ltd., has explained that this account includes all the funds received from M/s Prakash Vehicles Pvt. Ltd. as advances for supply of tractors. He also explained that funds received from other dealers, served by M/s Prakash Vehicles Pvt. Ltd. as distributor, are also credited in this account. As explained by the Ld. AR, in the account maintained with M/s Prakash Vehicles Pvt. Ltd., many a times funds directly were remitted to M/s Escorts Ltd. but are routed through this account. Subsequently, cheques are issued from this account by the proprietary concern /partnership firm of the appellant, M/s Prem Motors to M/s Prakash Vehicles Pvt. Ltd. who in 14 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 turn issue cheque to Prem Motors to be credited in distributorship or dealership accounts as and when necessary for which it has been explained that an account no.DB1837300 or DC1045 is being maintained with M/s Prakash Vehicles Pvt. Ltd. as distributorship and dealership account respectively. It has also been explained that many a times funds out of this accounts are remitted to M/s Escorts Ltd. to be placed with them as deposit with a view to ensure sufficient regular supplies. With these explanations about the nature of account being maintained by the appellant in the name of M/s Prem Motors with M/s Prakash Vehicles Pvt. Ld., it has been explained by the Ld. AR that all these transactions are in the nature of trading transaction related to the business of the appellant. At no point of time funds from this account are utilized for the personal benefit of the appellant. By referring to the copy of the account maintained in the books of M/s Prem Motor with M/s Prakash Vehicles Pvt. Ltd, the Ld. AR has explained that apart from the fund received from M/s Prakash Vehicles Pvt. Ltd. as advances, other entries of debit and credit in this account are on account of commercial activities. He further explained that the AO has wrongly assumed that these activities in the account of M/s Prakash Vehicles Pvt. Ltd. referred as O.T. account are not of commercial nature but are of the nature of loan and advance. It has been shown that number of entries were on account of the sub dealers of M/s Prakash Vehicles Pvt. Ltd. and the same cannot be given as loan to M/s Prem Motors. After discussion during the hearing of appeal in which the AO was also present, the Ld. AR has shown that the account of M/s Prakash Vehicles Pvt. Ltd. maintained with Prem Motors which was a proprietorship concern of the appellant till 30.09.2007 and subsequently it became partnership firm in which the appellant was major share holder, are in the nature of trading transaction relating to the business of the appellant. Against the submission of the Ld. AR made before me as discussed above, the AO submitted in he remand report dated 29.06.2011 that during the course of assessment proceeding, the assessee (appellant) produced ledger accounts which revealed that the assessee(appellant) maintains three separate accounts with the said company. In one separate ledger account, there were lumpsum credit and debit balances and on the outstanding credit balance, the interest was duly paid and TDS was deducted thereon. The contention of the AO in the remand report is that since the appellant is paying interest on the money taken from M/s Prakash Vehicles Pvt. Ltd., it is in the nature of loan and in view of the AO, as per section 2(22)(e), even the advances are covered 15 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 to be considered as deemed dividend along with the loans. By referring to the definition of interest as provided in Oxford dictionary as money paid regularly at a particular rate for the use of money lent or for delaying the repayment of proper debt, the AO concluded that when the assessee himself is paying interest and deducting TDS, the nature of the transaction cannot be doubted i.e. it is a advance or loan. As regards to the nature of money shown to have been taken from M/s Prakash Vehicles Pvt. Ltd., the Ld. AR in rejoinder to the comment of the AO in remand report, has further submitted vide his letter dated 24.8.2011 that the word 'advance' has been used in section 2(22)(e) in conjunction with the word 'loan'. While analyzing the meaning of word used in statute, the Hon'ble Supreme Court, in the case of LIC of India Vs. Retd. LIC Officers Association (3 SCC 321-2008) observed "each word employed in a statute must take colour from the purport and object for which it is used. The principle of purposive interpretation, therefore, should be taken recourse to. By relying on this decision of the Hon'ble Supreme Court , the Ld. AR argued that if the purpose for which section 2(22)(e) was made is kept in mind then , the word 'advance' has to be read in conjunction with he word 'loan'. Thus, in view of the Ld. AR the word 'advance' which appears in the company of the word 'loan' could only mean such advance which is in the nature of loan and therefore, trade advance which is in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provisions of section 2(22)(e).
6.2 With the above presentation made before me with regard to the nature of account maintained in the books of M/s Prem Motors (in both capacities proprietary concern as well as partnership firm) with M/s Prakash Vehicles Pvt. Ltd., I find that this account was maintained in connection with trading of tractors of M/s Escorts Ltd. as being the main stockist of this company and supplying these tractors to other dealers of the area of Agra through Prakash Vehicles Pvt. Ltd. In this regard, it has been shown by the Ld. AR to me that M/s Prem Motors was receiving advances from M/s Prakash Vehicles Pvt. Ltd., either as main distributor on behalf of other dealers which was being utilized for paying to Escorts Ltd. for supply of tractors. Therefore, I find that the nature of account being maintained with M/s Prakash Vehicles Pvt. Ltd. is relating to business transaction of the appellant and the advances received from M/s Prakash Vehicles Pvt. Ltd. were in the nature of trading advances which were paid by M/s 16 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 Prakash Vehicles Pvt. Ltd. to M/s Prem Motors, either on its own behalf or on the behalf of other sub dealer and hence, such advance cannot be termed as being in the nature of loan. The AO has also not controverted in his remand report about the nature of business transaction being carried out by the appellant through its business concern M/s Prem Motors with M/s Prakash Vehicles Pvt. Ltd. The AO has only pointed out that with regard to the account maintained with M/s Prakash Vehicles Pvt. Ltd. it has been found by him during the assessment proceeding that three separate accounts were maintained and in one separate account which is shown as O.T. account lump sum credit and debit balance are shown. However, he has not given any details about these lump sum credit and debit entries in O.T. account, whether they are pure taking and repaying of money or related to any business transaction. The Ld. AR has shown to me that all these debited and credit balance were relating to advances taken from M/s Prakash Vehicles Pvt. Ltd. on its own behalf or on behalf of other sub dealer for supply of tractors and they were further paid to M/s Escorts Ltd. for supply of tractors and hence these entries are related to business transactions. Therefore, these money transactions shown by the appellant through his business concern M/s Prem Motors with M/s Prakash Vehicles Pvt. Ltd. is in the nature of business transaction and the advance taken from M/s Prakash Vehicles Pvt. Ltd. is in the nature of trading advance. In my considered opinion, I find that only those advances can be covered in the provisions of section 2(22)(e), which are in the nature of loan. I agree with the Ld. AR that simply because interest is paid on this account, it does not become a loan account. Even the dictionary meaning of the word 'interest' as mentioned by the AO, specify it to be for delaying the repayment of proper debt. The literal meaning of term 'debt' is money owed, but that does not mean that each debt is a 'loan'. Therefore, as pointed out by the Ld. AR, I agree with him that the contention of the AO that this account which is on account of trading transactions, falls under the ambit of section 2(22)(e) simply because interest is paid on it, is not correct. This view finds support from a recent decision of Hon'ble Delhi High Court in the case of CIT Vs. Raj Kumar reported in (2009) 318 ITR 462 (Del). In this decision, the word "advance" has been analyzed and it has been held that trade advance are not covered by the provisions of section 2(22)(e) . The relevant portion of this decision reproduced as under:-
17 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09 "If the history and purpose with which the said provision was brought on to the statute book is kept in mind, it is clear that sub-clause(e) of section 2(22) which is pari materia with clause
(e) of section 2(6A) of the Indian Income tax Act, 1922, 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 heir 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 the word 'advance' has to be read in conjunction with 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, there arises the conundrum as to what meaning one would attribute to the term 'advance'. The rule of construction which answers this conundrum is noscitur a sociis.
The broad principles, which emerge from the judgments of the Supreme Court with regard to the applicability of the said rule of construction, are as follows:-
(i) Does he term in issue have more than one meaning attributed to it, i.e. based on the setting or the context, one could apply the narrower or wider meaning.
(ii) Are words or terms used found in a group totally 'dissimilar' or is there a 'common thread' running through them, and
(iii) The purpose behind insertion of the term Then, one should examine as to whether based on the aforesaid tests the said rule of construction 'noscitur a sociis' ought to be applied in the instant case.18 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
(i) He term 'advance' has undoubtedly more than one meaning, depending on the contest in which it is used
(ii) Both the terms, that is, 'advance' or 'loan' are related to the 'accumulated profits' of the company
(iii) And last but not the least, the purpose behind insertion of the term 'advance' was to bring within the tax net payments made in guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders.
Keeping the aforesaid rule in mind, the word 'advance', which appears in the company of the word 'loan', can only mean such advance which carries with it an obligation of repayment. Trade advance, which is in the nature of money transacted to give effect to a commercial transaction, would not fall within the ambit of the provision of section 2(22)(e). This interpretation would alloy the rule of purposive construction with noscitur a sociis. Therefore, the trade advance does not fall within the ambit of provisions of section 2(22)(e). Therefore, the appeal of the revenue was liable to be dismissed."
6.3 On the basis of the above decision, now it is clear that trade advance does not fall within the ambit of section 2(22)(e). Since on examination of account of M/s Prakash Vehicles Pvt. Ltd. maintained with the appellant, it has been found that this account is relating to business transaction between the appellant and M/s Prakash Vehicles Pvt. Ltd. relating to supply of tractor being the main stockiest of Escorts Ltd. and M/s Prakash Vehicles Pvt. Ltd. being distributor and dealer, the amount received from M/s Prakash Vehicles Pvt. Ltd. is in the nature of trade advance and it has also been found that at no point of time all funds of this account are utilized for the personal benefit of the appellant. The AO could also not show any personal benefit derived by the appellant by the amount received from M/s Prakash Vehicles Pvt. Ltd. in this account. Therefore, after considering the facts relating to the nature of transaction between the appellant and M/s Prakash Vehicles Pvt. Ltd., I find that the money taken from M/s Prakash Vehicles Pvt. Ltd., is in the nature of trade advance and on account of such trade advances taken from this company, no addition can be made u/s 2(22)(e) on account of any outstanding balance 19 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 remained in this account and therefore, the addition of Rs.12,50,332/- on account of balance appearing in the account of M/s Prakash Vehicles Pvt. Ltd. with Prem Motors in the capacity of proprietary concern and Rs.1,32,496/- appearing with Prem Motors in the capacity of partnership firm are hereby deleted. Therefore, Ground no.2 is allowed.
7. As regards to two Grounds nos.3 & 4 for setting off the deposits given by the appellant to both companies as well as entitlement of rent and interest, I find that no such set off is envisaged in the provisions of section 2(22)(e) and also no details has been provided by the Ld. AR for the entitlement of rent and interest which is due to the appellant from these companies showing that the loan/advances given by these two companies were to be set off against rent and interest. As regards to two advances taken from M/s Prakash Vehicles Pvt. Ltd., I have already held that these advances are in the nature of trade advance and hence, would not fall within the ambit of provision of section 2(22)(e) and therefore, for the advances taken from M/s Prakash Vehicles Pvt. Ltd., the question of any such set off would not arise as claimed in Ground no.3 & 4. As regards to loan taken from M/s Malwa Vehicles Pvt. Ltd., I have held that these loans are in the nature of deemed dividend and the addition made by the AO has been confirmed by me and in my considered opinion, no such set off as claimed by the appellant in Ground no.3 & 4 would be allowable in view of my findings given in the beginning of this para. Therefore, both grounds nos.3 & 4 are dismissed.
8. As regards to ground no.5 in which total additions of Rs.22,21,372/- (Rs.7,85,961 +Rs.52,583+Rs.12,50,332 +1,32,496) as deemed dividend has been disputed. As per my decision for Ground no.1 & 2, I have already held confirming the addition of Rs.7,85,961 & 52,583/- added as deemed dividend on account of loan taken from M/s Malwa Vehicles Pvt. Ltd. and deleted the addition of Rs.12,50,332/- and Rs.1,32,496/- on account of loan/advance taken from M/s Prakash Vehicles Pvt. Ltd., therefore, this ground is partly allowed."
20 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09
8. We have heard ld. Representatives of the parties and records perused. The issue under consideration is in respect of deemed dividend under section 2(22)(e) of the Act. The said relevant section is reproduced as under:-
"Definitions.
2. In this Act, unless the context otherwise requires,--
(1) to (21) .............................................................................................
(22) "dividend" includes--
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ;
(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ;
(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;21 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;
but "dividend" does not include--
(i) a distribution made in accordance with sub-clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
[(ia) a distribution made in accordance with sub-clause (c) or sub-
clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;]
(ii) any advance or loan made to a shareholder [or the said concern] 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 ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;
[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
22 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).] Explanation 1.--The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.
Explanation 2.--The expression "accumulated profits" in sub-clauses
(a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place].
[Explanation 3.--For the purposes of this clause,--
(a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;
(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 ;]"
8.1 Following conditions are required to be satisfied for application of section 2(22)(e) of the act :-
(1) any payment by a company, not being a company in which the public are substantially interested, (2) of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan 23 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 (3) to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or (4) to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or (5) any payment by any such company on behalf, or for the individual benefit, of any such shareholder, (6) to the extent to which the company in either case possesses accumulated profits ;
8.2 Exception -- Following are the exceptions where "dividend" does not include--
(i) a distribution made in accordance with sub-clause (c) or sub-clause
(d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
[(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;]
(ii) any advance or loan made to a shareholder [or the said concern] 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 ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;
24 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09 [(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).]
9. Now let us see the scheme of the Act in this regard. Dividend as ordinarily understood under the Companies Act has always been chargeable to tax as income from other sources. However, tendency on the part of certain companies, particularly closely held companies, to take shelter under the corporate personality and evade tax necessitated framing of a scheme to bring certain distributions and payments, which may be termed as notional dividend or deemed dividend, within the purview of chargeability to tax. Clause (22) of section 2 provides that "dividend" includes certain distribution and payment made by the company to the shareholder specified in sub-clause (a) to (e). The definition is thus inclusive and not exhaustive. The definition given in this clause contains certain exceptions.
Those exceptions are enumerated in sub-clause (i), (ia), (ii) and (iii). Explanations 1 & 2 deal with scope of "accumulated profits", an expression used in all the sub-
clause (a) to (e). Explanation 3 defines certain terms used in sub-cl. (e). Dividends relevant for taxation under the IT Act, 1961 fall, broadly, in three categories, viz (i) dividend declared by the general meeting of the shareholders, which may be termed as "real" dividend. Such declaration, by itself, creates enforceable right in 25 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 favour of shareholder against the company and is income of the assessee of the year in which declaration is made; (ii) distribution and payment made by the company out of the accumulated profits of the nature specified in sub-clause (a) to
(e) of section 2(22). Such dividend becomes the income of the assessee of the year in which distribution or payment is made; (iii) Interim dividend, i.e. interim dividend declared at the meeting of board of directors. Such dividend does not become the income of the shareholder of the year in which it is declared because the directors have right to rescind the declaration. It becomes income of the shareholder of the year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it. Section 2(22) creates a fiction by which certain receipts or parts thereof are treated as dividend for the purpose of levy of income-tax. A deeming provision is intended to enlarge the meaning of particular word which includes matters which otherwise may or may not fall within the provision. Section 2(22) give an artificial and extended meaning of the term "dividend". The definition is an inclusive definition and a receipt by a shareholder which does not fall within the definition may also be regarded as dividend within the meaning of the Act if the context permits taking that view. The principle is that where loan given by the company exceeds the accumulated profits, deemed dividend would be to the extent of accumulated profits and balance of loan amount would not be deemed dividend. If the accumulated profits exceed the loan amount, entire loan amount would be deemed 26 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 dividend and not the amount proportionate to shareholder's interest in the shareholding of the company. If there are no accumulated profits, there would not by any question of loan being treated as deemed profits (CIT vs. Mayur Madhukant Mehta (1972) 85 ITR 230 (Guj.)
10. In the light of the above discussion, if we consider the facts of the case under consideration, the issues to be decided in these appeals have four aspects which are as under:
(i) Whether M/s. Malwa Vehicles (P) Ltd. possesses accumulated profits?
(ii) Whether transactions with M/s. Malwa Vehicles (P) Ltd. were covered under exceptional circumstances provided in section 2(22)(e)(ii), any advance or loan made to a shareholder [or the said concern] 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 ;
(iii) Whether transactions with M/s. Prakash Vehicles (P) Ltd. are business transactions or advances or loan?27 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
(iv) Whether loan & advances given to partnership firm wherein the assessee is partner is subject to section 2(22)(e) of the Act.
11. The aspect-wise discussions are as under:-
(i) Whether M/s. Malwa Vehicles (P) Ltd. possesses accumulated profits?:
12. The contention of the assessee that loan given by M/s. Malwa Vehicles (P) Ltd. was not out of its accumulated profits in as much as the company was not in possession of the same. Because whatever profits accumulated in earlier years were utilized in investment made in fixed assets. In this regard, the assessee furnished working which have been reproduced by the ld. CIT(A) at page no.22 of his order. To appreciate the relevant provisions and the scheme of the Act, what is accumulated profits, we would like to refer certain judicial pronouncements which are as under:-
(a) Commissioner of Income-tax v. Roshan Lal [1975] 98 ITR 349 (ALL.).
In this case, the assessee was a shareholder in the Company. The company advanced to him a sum of Rs.74,642/- between 01-11-1955 and 23-11-1966.
The net income of the company after taking into account the losses of the earlier years for the relevant accounting year was Rs.1,52,827. After providing for income-tax liability the amount available with the company in 28 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 the form of profits was Rs.82,642/-. 31-10-1955 was the date on which the previous year of the company ended. Subsequently, at the annual general meeting of the company Rs.74,560/- was declared as dividend. The ITO held that the entire amount paid by way of loan to the assessee would be dividend income, within the meaning of section 2(6A)(e) of the Indian Income-tax Act, 1922. The AAC held that as it was only in the year 1954- 55, that the company had for the first time earned profits, the amount advanced to the assessee by the company, could not be deemed to be out of the accumulated profits of the company. The Tribunal allowed the revenue's appeal in part holding that out of the total amount of Rs.82,642/- the accumulated profit would be deemed to be only that part, which would be left over after deducting the sum of Rs.74,560/- declared as dividend by the company at its annual general meeting. On reference, the Court held as under:-
"Accumulated profits within the meaning of clause (e) will necessarily be comprised of the amount available for being distributed as profits. The word "accumulated" means the profit earned bit by bit and accumulated. It does not mean that it should be carried forward from year to year. Profits can accumulate even within a single year. The entire amount which is available for distribution as profits on a particular date would be the accumulated profit and any amount paid as advance or loan to the shareholder to the extent of this amount of accumulated profits will be dividend within the meaning of section 2(6A)(e) of the Act. In the case of First Income-tax Officer v. Short Brothers (P.) Ltd. [1966] 60 ITR 83 the Supreme Court had the occasion of interpreting the words "accumulated profits" as used in clause (e) of section 2(6A) in the light of the 29 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 Explanation added to the section. The Explanation makes applicable the same definition of accumulated profits to the expression wherever used in section 2(6A). In that case the Supreme Court held that the profits earned till the date of liquidation even in the middle of a year can be accumulated profits. This decision also leads to the inference that accumulated profits within the meaning of section 2(6A)(e) will consist of the entire distributable profits available to a company till a particular date, which would, in the present case, be the date on which the payments were made to the assessee.
For the reasons given above, we are of opinion that the Tribunal was wrong in holding that only Rs. 8,082 and not the entire amount paid to the assessee by the company was dividend within the meaning of section 2(6A)(e) of the Act. We, accordingly, answer the question referred to us in the negative and in favour of the department. As no one has appeared for the respondents, there will be no order as to costs."
(b) Commissioner of Income-tax v. Urmila Ramesh 96 Taxman 533 (SC) (230 ITR 423). In this case the assessees were shareholders of the company which went on voluntary liquidation on 28-3-1970. After the sale of its assets the liquidator distributed dividend. The Assessing Officer for the assessment years 1970-71 to 1972-73 determined accumulated profits of the company on date of liquidation at Rs.6,61,065/-. A sum of Rs.7,28,760/-
which was the profit assessed under section 41(2) in the preceding years, had been taken into consideration by the ITO in determining the accumulated profit at the aforesaid figure of Rs.6,61,065/-, and calculated the dividends as the income of respective shareholders under section 2(22)(e). The assessee's case was that the amount, which was realized by the liquidator on 30 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 the sale of the assets, was admittedly less than the purchase price. The amount, so realized, only represented the return of capital and the excess of realisation over the written down value could not be regarded as profit under section 2(22)(e) because the company had suffered a capital loss, as the amount realized by it on the sale of the assets was less than the purchase price thereof. The revenue's case was that if the amount for which the assets were sold, exceeded the written down value, then the amount which was assessed under section 41(2) of the Act represented accumulated profits and on its distribution amongst the shareholders it should be assessed as dividend. The AAC and the Tribunal accepted the assessee's case. The High Court upheld the Tribunal's decision. On appeal to Supreme Court, the Apex Court held as under:-
"13. [Section 2(22) has used the expression 'accumulated profits' 'whether capitalised not'. This expression tends to show that under section 2(22), it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression 'whether capitalised or not' the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalised. The amounts should, in other words, be in the nature of profits which the company could have distributed to its shareholders. This would clearly exclude return of part of a capital to the company, as the same cannot be regarded as profit capable of being capitalised, the return being of capital itself. In this connection, it is important to examine the decision of this Court in Bipinchandra Maganlal & Co. Ltd. 's case (supra) that where this Court had the occasion to deal with the concept of balancing charge. That company was one in which the public was not substantially interested within the meaning of section 23 A of the 1922 Act. It computed its trading profits at Rs. 33,245 in the year of account 1946-47, and distributed dividend 31 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 accordingly. The ITO was, however, of the view that a sum of Rs. 15,608, being the amount realised by the company on the sale of machinery in excess of its written down value, which had been included in computing its assessable income, should also be taken into consideration and on that basis, the ITO passed an order under section 23A of the 1922 Act, to the effect that the sum of Rs. 15,529 being the undistributed portion of the assessable income of the company, shall be deemed to have been distributed as dividend. The assessee had contended that this amount of Rs. 15,529 not being in the nature of commercial profit, but being a balancing charge includible in the assessable income by virtue of second proviso to section 10(2)(vii) of the 1922 Act could not be taken into account in considering whether in view of smallness of the profits a larger dividend would be unreasonable. In this context, while considering section 2(6Q and the second proviso to clause (vii) of section 10(2) of the 1922 Act, this Court observed as follows:
"..... In computing the profits and gains of the company under section 10 of the Act, for the purpose of assessing the taxable income, the difference between the written down value of the machinery in the year of account and the price at which it was sold (the price not being in excess of the original cost) was to be deemed to be profit in the year of account, and being such profit, it was liable to be included in the assessable income in the year of assessment. But this is the result of a fiction introduced by the Act. What is truth is a capital return is by a ficition regarded for the purposes of the Act as income. Because this difference between the price realized and the written down value is made chargeable to income-tax, its character is not altered, and it is not converted into the assessee's business profits. It does not reach the assessee as his profits: it reaches him as part of the capital invested by him, the fiction created by section 10(2)( vii), second proviso, notwithstanding. The reason for introducing this ficition appears to be this.
Where in the previous years, by the depreciation allowance, the taxable income is reduced for those years and ultimately the asset fetches on sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the revenue is justified in taking back what it had allowed in recoupment against wear and tear, because in fact the depreciation did not result. But the reason of the rule does not alter the real character of the receipt. Again, it is the accumulated depreciation over a number of years which is regarded as income of the year in which the asset is sold. The difference between the written down value of an asset and the price realized by sale thereof though not profit earned in the conduct of the business of the assessee is notionally regarded as profit in the year in which 32 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 the asset is sold, for the purpose of taking back what had been allowed in the earlier years." (p. 295)
14. We are in respectful agreement with the aforesaid observations and the same will apply even to section 41 (2). There are cases where this Court had to consider situations relating to distribution of dividend by company and it has consistently maintained that profits meant only commercial profits. In CIT v. Gangadhar Banetjee & Co. (P.) Ltd. [1965] 57 ITR 176 , the question arose in connection with the payment of dividend by a company to whom section 23A of the 1922 Act was applicable. While considering the question of smallncss of profit, the Court after referring to the observations in Bipinchandra Magcinilal & Co. Ltd's case (supra) at page 183 observed "that in arriving at the assessable profits, the ITO may disallow many expenses actually incurred by the assessee; and in computing this income, he may include many items on notional basis. But the commercial or accounting profits are the actual profits earned by an assessee calcu lated on commercial principles."
15. Again in P.K. Badiani v. CIT [1976] 105 ITR 642 , a three-Judge Bench of this Court while considering the question of "deemed dividend" observed as follows:
"... We think that the term 'profits' occurring in section 2(6A)(e) of the 1922 Act means profits in the commercial sense, that is to say, the profits made by the company in the real and true sense of the term... (p. 647)
16. When as in the present case, the assets have been sold at price less than the purchase price, the amounts so received, apart from being in the nature of return of capital, cannot represent profits of the company. If the sale proceeds had been more than the original cost, then to the extent of the excess amount received it could have been said that profits had been made by the company on the sale of its assets. But merely because the amount realized by the liquidator is more than the written down value but less than the original cost, it is not possible to hold that the company has made any actual or commercial profits.
17. The decision in the case of Bishop's case (supra) can be of little assistance to the appellant for the reason that the facts in the present case and in Bishop s case ( supra) are entirely different. Here, we are concerned with the sale of capital assets where the amount received is less than the 33 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 original cost and the question is whether the excess over the written down value can, in such circumstance be regarded as profit whereas in Bishop's case (supra ) amount of depreciation had been debited to the revenue account, an entry which was subsequently reversed and it was held that the amount subsequently credited must be treated as income and not capital. More over in Bipinchandra Maganlal& Co. Ltd 's case (supra), this Court has in no uncertain terms stated that the amount so realized, though taxable under the second proviso to section 10(2)(vii) of 1922 Act as deemed income, is nothing else but a return of capital and we see no reason as to why we should take a different view in the present case Express Newspaper Ltd. 's case (supra) again was not concerned with a question which we have to consider in the present case, namely; whether the amount received in excess of written down value can be regarded as accumulated profits under section 2(6A) of the 1922 Act, corresponding to section 2(22). Merely because at page 254 of the report, it is stated in passing that "the second proviso, therefore, in substance, brings to charge an escaped profits or gains of the business carried on by the assessee" cannot persuade us to hold that this Court had considered and decided that the amount received on the sale of the assets does not represent capital but represents profit to the extent that it is in excess of the written down value. This Court, in Express Newspaper Ltd s case (supra) was concerned only with the question whether the amount could be taxed under second proviso to section 10(2)(vii) of the 1922 Act as then stood, if the sale took place after the close of the assessee's business. This Court came to the conclusion that in such a case, the second proviso did not apply. This decision, therefore, has no application to the present case.
Conclusion
18. Examining the relevant statutory provisions, it is clear that the scheme of depreciation, balancing charge under section 32(1)(iii) of the Act and balancing allowance is a composite one. The balancing charge and the balancing allowance are part of the scheme of depreciation allowance granted by the statute and the rules, on percentages not necessarily related to the actual wear and tear and which are not capable of accurate determination. In any year, so long as the asset is in use, the amount of depreciation allowed would not only be correct but also be legitimate and legal and the allowance would be strictly in accordance with the provisions of the Act and the Rules.
19. When the asset is sold, on which depreciation had been allowed in the earlier years as per the Act and the Rules, the actual amount of depreciation 34 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 or appreciation in fact becomes known. That calls for adjustment being made to the depreciation which had earlier been allowed as per the formula contained in the Act and the Rules. This adjustment is made, in the year of sale, by virtue of balancing charge or balancing allowance. If the realisation of the sale proceeds and the capital asset is more than the written down value, it would mean that the assessee had been allowed depreciation in excess of the actual wear and tear of the asset. It is to withdraw the excess depreciation allowed that the balancing charge is provided for by section 41(2). A fiction is created that the excess above the written down value up to the actual cost of the asset is deemed to be profit or income of the year in which the asset is sold. In actual fact this is neither income or profit nor a capital gain. The deeming under section 41(2) is solely for the purpose of withdrawing the excess depreciation allowance which had been allowed to the assessee in the earlier years. Similarly, the Act also provides a corresponding allowance called the balancing allowance where the asset on sale fatches less than the written down value. By this, more allowance or deduction is given to the assessee in the year in which the asset was sold inasmuch as the actual wear and tear was more than the depreciation allowed as per the Act and the Rules.
20. Merely because section 41 (2) and section 32(1)(iii) recognise the extent to which the actual wear and tear of the capital asset had taken place and permit, by a ficition, to make adjustment, it does not mean that in actual fact, in the case of balancing charge, any profit has been made. As far as shareholders are concerned, the company had sold the assets at a price less than the actual cost and the amount taxable under section 41 (2), from their point of view, can never be considered to be profit which is or could be distributed as dividend.
21. The counsel for the appellant also sought to contend that by virtue of section 50 the written down value of assessee became the actual cost of acquisition and the amount realised in excess thereof was capital gain and on its distribution, it could be taxed as deemed dividend. We do not think that the learned counsel can be permitted to raise this contention for the first time in this Court, especially when the questions of law, as referred, do not cover this aspect of the case at all. In any event, as this amount has already been assessed in the hands of the company, obviously the same amount cannot also be regarded as capital gains. In other words, both section 41(2) and section 50 of the Act cannot apply to the same amount.
35 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09
22. For the aforesaid reason, we hold that the amount received by the company, which was taxed under section 41(2) did not represent 'accumulated profits' within the meaning of that expression in section 2(22). This being so, the High Court was right in answering the questions of law referred to it in the affirmative and in favour of the assessee. We, accordingly, dismiss these appeals with costs."
13. Thus, we find that Sub-clause(e) of section 2(22) lays down that dividend includes any payment by a closely-held company of any sum by way of advance or loan to a shareholder who comes in the category described in that sub-clause or to a concern in which such shareholder has a substantial interest. Dividend under this sub-clause also includes any payment by such company on behalf or for the individual benefit, of any such shareholder. Deemed dividend under this sub-
clause would be to the extent to which the company in either case possesses accumulated profits. It is immaterial whether such payment represents any part of the assets of the company or otherwise. On consideration of the object of the section we noticed that a company in which public are not substantially interested may not declare dividends or adequate dividends and may merely give loans to shareholders and such loans, not being dividends under the general law, would not be taxable as income in the hands of shareholders. As the public would not have substantial interest in such company, those substantially interested in the company may not recover the loans or allow them to be barred by time. The result would be that amounts which were ostensibly received as loans or advances become the income of shareholders and yet they would not be required to pay any tax on said 36 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 income under the general law. It is to avoid the evil of this nature that sub-clause
(e) of section 2(22) has been enacted. This sub-clause created a fiction that the amount in question was dividend but limited it to the extent of "accumulated profits". The object of enacting sub-clause (e) has been explained in CIT vs. P.K. Badiani (1970) 76 ITR 369 (Bom.)
14. In the light of detailed discussion made above, we are unable to appreciate the contention of the assessee in respect of possession of accumulation of profit.
The requirement of section 2(22)(e) is only in respect of possession of accumulation of profit. For this purpose one need not to see corresponding utilization of those accumulation of profit. The accumulated profit is required to be reduced or is required to adjust only as prescribed in the section e.g. clause (e)
(i) (ia) (iii) etc. There is no such adjustment as claimed by the assessee is provided in the section to reduce the accumulated profit for the purpose of disallowance u/s.
2(22) of the Act. The CIT(A) after detailed discussion found that contention of the assessee is not correct. After taking into account the entire balance sheet of M/s.
Malwa Vehicles (P) Ltd. and the manner of computation of closing balance of accumulated profit, the CIT(A) found that M/s. Malwa Vehicles (P) Ltd. is very much in possession of the accumulated profits which is shown in the form of reserve and surplus and hence, it is clear that the loan given to the appellant, which remained outstanding on the dates as shown by the A.O. in the assessment order, 37 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 are out of accumulated profits and hence, the A.O. is correct in making addition u/s. 2(22)(e) for the loan taken from M/s. Malwa Vehicles (P) Ltd. as on 30.09.2007 to the extent of Rs.7,85,961/- and as on 22.12.2007 to the extent of Rs.52,583/-. However, whether addition of Rs.52,583/-.is to be confirmed or not depends upon the other conditions discussed below.
(ii) Whether transactions with M/s. Malwa Vehicles (P) Ltd. were covered under exceptional circumstances provided in section 2(22)(e)(ii):
15. Another contention of the assessee is that transaction with M/s. Malwa Vehicles (P) Ltd. covered by exceptional circumstances provided in section 2(22)(e)(ii), that assessee is paying interest. Interest income of the assessee constituted more than 20% of the total income. A comparative position of interest income furnished by the assessee and noted by the CIT(A) in his order at page no.
10 are as under :
FY 05-06 FY 06-07 FY 07-08
Total Income 182895 74662 724977
Interest income 872659 439870 277252
16. On similar facts, the I.T.A.T., Agra Bench has decided the issue in the case of Shri Krishna Gopal Maheswari vs. Addl. Commissioner of Income Tax, ITA No.82/Agr/2012 order dated 23.10.2012. The relevant finding is reproduced as under:-38 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09 "On consideration of the facts of the case, we noticed that there is no dispute about the facts that all the conditions laid down under section 2(22)(e) are satisfied for application of section 2(22)(e) except condition laid down under clause (ii) of section 2(22)(e) of the Act. Only argument of the assessee was that the case of the assessee falls under clause (ii) of section 2(22)(e) of the Act. The crux of the argument of the ld. Authorised Representative that loans and advances received by the assessee from the company is during the ordinary course of business as substantial part of the business of the assessee company is lending money. In other words, money lending is a substantial part of company from whom the loan was taken by the assessee and the loan received to the assessee was in the ordinary course of this money lending business. To examine whether the said company was having substantial part of money lending business or not ? Before that it is relevant to mention that the ld. Authorised Representative submitted that the accounting entries are not relevant for examining the issue but, in this regard, we are of the considered view that the books of account maintained on the basis of principle of accountancy and same is certified by technical person like Auditor, the figures reported in financial audited statements can be considered for the purpose of income tax Act unless some contrary material facts have been brought on record, or any material brought on record showing that the books of account maintained by the assessee was not in accordance with the accounting standard and principle of accountancy. This view is supported by section 145 of the Act itself. The judgement cited by the ld. Authorised Representative in the case of Sutlej Cotton Mills Limited vs. CIT (supra) and CIT vs. Laxmi Sugar & Oil Mills Limited (supra) does not help to the assessee as the CIT(A) did not accept the figures reported in financial statement blindly. But certainly he has taken the help of determining the nature of transaction. The Courts held in those cases that Balance Sheet and financial statement prepared on the basis of books of account are not conclusive for determining the nature of transaction. The Court did not hold that one cannot take the help of those figures for determining the nature of business or transaction in determining the issue under the Income Tax Act. The issue whether the business of the company was a business of money lending or not, to examine this aspect one has to see various aspect of evidences including procedural aspect which are required to be taken under Company's Act and report to controlling Officers including Registrar of Companies, SEBI and others. For doing money lending business one has to obtain necessary 39 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 permission from competent authority. We may state here that the assessee has failed to furnish any single evidence to support that the company has followed such procedure based on which it can be said that the substantial part of the business of the company was money lending. If we examine this aspect from business activities, we noticed that there are accepted principles that the business activities and transaction are recorded in the books of account. In the case under consideration, the total loan and advances as on 31.03.2008 are only in respect of three parties, Krishna Gopal Maheswary i.e. the assessee and other two parties Abhishek Enterprises & Gaurav Luminaries Pvt. Ltd. The details of loans and advances are reproduced from page no.22 of the Paper Book as under :-
Name of the Party Balance as Interest Rate of Shown in the Balance Sheet
on earned Interest as
31.03.2008
Krishna Gopal Maheswari 3790339 62280 12% Deposits, Loans & Advances
Abhishek Enterprises 3500000 420000 12% Investments
Gaurav Luminaries Pvt. Ltd. 1000000 Deposits, Loans & Advances
10. Further in respect of loan and advances to Abhishek Enterprises of Rs.35 lacs, this amount has been shown as investment in the balance sheet and not under the loans and advances. We may also mention that the assessee did not take interest bearing loans and advances from different parties. The auditor has also in his report clarified that the company has not granted but taken unsecured loans, interest free, from other parties covered in the register maintained under Section 301 of the Companies Act, 1956. In money lending business, the transactions are taking and giving money on finance.
This is a fundamental characteristic of money lending business. The Apex Court in the case of State of Gujrat vs. Raipur Manufacturing Company Limited, 19 STC (1) SC while defining the word business in taxing statute the Courts held that the word "business" used in the sense of an occupation or profession are which occupies time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealing either only continued or contemplated to be continued with a profit motive and not for support or pleasure. Whether or not a person carries on business in a particular commodity must depend 40 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 upon volume, frequency continuity and regularity of transaction of purchase and sale in a class of goods and transaction must ordinary be included into that profit motive. To carry on business ordinarily the characteristic of volume, frequency, continuity and regularity indicate and intension to continue the activity of carrying on transaction must exist. This decision which was recorded in the context of Sales Tax law was relied upon and referred to in the context of Income Tax law in a decision of the Hon'ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust vs. CIT, 101 ITR 234 (SC).
11. In the light of above discussion, we find that the assessee has failed to establish that the substantial part of business of the company is money lending and the loans and advances received to the assessee is the in the ordinary course of money lending business. Unless the assessee establishes that money lending business was the substantial part of the business of the company and the loans and advances received during the course of money lending business, the assessee will not fall under the exceptional circumstances provided in section 2(22)(e)(ii) for the purpose not to include the calculation of deemed dividend. Further, merely stating in the object clause that the business of the assessee company was money lending cannot be held that the case of assessee falls under exceptional circumstances not to treat the deemed dividend. On the basis of above discussions, we do not find any infirmity in the order of CIT(A). Order of CIT(A) is accordingly confirmed."
17. If we consider the facts of the case under consideration, we find that substantial part of the business of the company is not money lending as the substantial part of the business of M/s. Malwa Vehicles (P) Ltd. is sale and purchase of vehicles having turnover of Rs.19,08,31,940/- whereas turnover of other income including interest was Rs.66,75,937/-. In the light of the facts, we find that advance or loan made to the assessee by the company is not in the ordinary course of its business, where the lending of money is a substantial 41 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 part of the business of the company, we therefore, confirm the order of the CIT(A) on the issue.
(iii) Whether transactions with M/s. Prakash Vehicles (P) Ltd. are business transactions or advances or loan?
18. The expression used in first part of section 2(22) is "advance or loan". The word "advance" has not been defined. It ordinarily means payment of cash or transfer of goods for which accounting must be rendered by the recipient at some later date. Thus, there would be advance by the company when goods are transferred to shareholder [M.D. Jindal vs. CIT (1987) 59 CTR (Cal.) 78: (1987) 164 ITR 28 (Cal.). The expression "advances" also refers to something which is due to be paid to the shareholder but which is paid to him ahead of time when it is due to be paid [CIT vs. K. Srinivasan (1963) 50 ITR 788 (Mad.). The transaction of loan involves lending and delivery by one party and receipt by another party of sum of money upon express or implied agreement to repay it with or without interest. Thus a loan of money results in a debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources; loan is one of them [Bombay Steam Navigation Co. (1953) (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC).
The Phrase "by way of advance or loan" appearing in sub-clause (e) of clause (2) of section 2 must be construed to mean those advances or loans which a share holder enjoys for simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or 42 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 without a right to participate in profits) holding not less than ten per cent of the voting power; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. [Pradip Kumar Malhotra vs. CIT (2011) 338 ITR 538 (Cal.)] A loan is different from ordinary debt. A loan envisages a lender, a borrower, a money or a thing loaned and a contract between the parties for the return of thing loaned or repayment of money loaned (Lakhmichand Muchal vs. CIT (1961) 43 ITR 315 (M.P.). Where the plea of the assessee is that payment made by the company to him was not a loan but repayment or part-payment of loan earlier advanced by the assessee, the authorities were bound to ascertain nature of transaction [K. Sreedharan vs. CIT (1992)106 CTR (Ker) 304 : (1993) 201 ITR 973 (Ker). In CIT vs. Saurashtra Cement & Chemical Industries (1975) 101 ITR 502 (Guj), unpaid purchase price was held not to be a loan. Amount advanced to the assessee company by another company having common directors not being a loan but an advance for business transaction which is to be adjusted against the moneys payable by the latter to the assessee company in the subsequent years, same did not fall within the definition 43 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 of deemed dividend under section 2(22)(e). CIT vs. Creative Dyeing & Printing (P) Ltd. (2010) 229 CTR (Del) 250 : (2010) 318 ITR 476 (Del), following CIT vs. Raj Kumar (2009) 23 DTR (Del.) 304 : (2009) 181 Taxman 155 (Del). 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 do not fall within section 2(22)(e), one 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's 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). This interpretation is in accordance with the legislative intention of introducing section 2(22)(e). Therefore, the amounts advanced for business transaction between the parties, was not such to fall within the definition of deemed dividend under section 2(22)(e).
19. In the light of above discussions, if we consider the facts of the case under consideration, we notice that the CIT(A) recorded the facts that on examination of account of M/s Prakash Vehicles (P) Ltd. maintained with the assessee, it has been found that this account is relating to business transactions between the assessee and M/s. Prakash Vehicles (P) Ltd. relating to supply of tractor being the main stockiest of Escorts Ltd. and M/s. Prakash Vehicles (P) Ltd. being distributor and 44 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 dealer, the amount received from M/s. Prakash Vehicles (P) Ltd. is in the nature of trade advance and it has also been found that at no point of time all funds of this account are utilized for the personal benefit of the appellant. The CIT(A) further noted that the A.O. could also not show any personal benefit derived by the appellant by the amount received from M/s. Prakash Vehicles (P) Ltd. in this account. The CIT(A) after considering the facts relating to the nature of transaction between the assessee and M/s. Prakash Vehicles (P) Ltd., found that the money taken from M/s. Prakash Vehicles (P) Ltd. is in the nature of trade advance and on account of such trade advances taken from this company, no addition can be made under section 2(22)(e) on account of any outstanding balance remained in this account and therefore, the addition of Rs.12,50,332/- on account of balance appearing in the account of M/s. Prakash Vehicles (P) Ltd. with M/s.
Prem Motors in the capacity of proprietary concern and Rs.1,32,496/- appearing with M/s. Prem Motors in the capacity of partnership firm were deleted. The CIT(A) after recording the nature of transaction found that the transaction with M/s. Prakash Vehicles (P) Ltd. are business transactions and that aspect of the fact was not controverted by the A.O. in the remand report furnished before the CIT(A). Even before us, the Revenue failed to controvert the facts noted by the CIT(A). In the light of fact, we confirm the order of the CIT(A) on this issue also.
45 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09
(iv). Whether loan & advances given to partnership firm wherein the assessee is partner is subject to section 2(22)(e) of the Act :
20. This issue has been examined by the I.T.A.T., Agra Bench in the case of M/s. India Casting Company, ITA No.55/Agra/2012, order dated 09.08.2012. The relevant finding is reproduced below:
"6. We have heard the ld. Representatives of the parties and records perused. The admitted facts of the case under consideration are that the assessee is a partnership firm. The partnership firm is not a registered share holder of both the private limited companies, however, partners of assessee firm were share holders of the companies. From a reading of the provision of section 2(22)(e) of the Act, it is clear that it comprehends manifold requirements, the first being the payment should be made by way of loan or advance to the concern. Of course, on this aspect, the conclusion has been recorded by the Revenue authorities in favour of the Revenue which is not in dispute. The more important aspect, being the requirement of section 2(22)(e) is that "the payment may be made to any concern, in which such shareholder is a member or partner and in which he has substantial interest or any payment by any such company on behalf or for the individual benefit of any such shareholder . . . " Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf or for whose individual benefit the amount is paid by the company whether to the shareholder or to the concerned firm. In which event, it would fall within the expression "deemed dividend". Obviously, income from dividend is taxable as income from other source under section 56 of the Act and in the very nature of things the income has to be of the person earning the income. The assessee partnership in the present case is not shown to be one of the persons being shareholder. Of course, the two individuals being Shri Ajay Kumar Agarwal, and Shri G.K. Agarwal persons holding more than requisite amount of shareholding and having requisite interest in the firm but then thereby the deemed dividend would not be deemed dividend in the hands of the firm rather it would obviously be deemed dividend in the hands of the individuals on whose behalf or on whose 46 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 individual benefit being such shareholder the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax as deemed dividend could be attracted in the hands of the individuals being the shareholders and not in the hands of the firm. This view is fortified by the order of I.T.A.T., Special Bench, Mumbai in the case of Asstt. CIT vs. Bhaumik Colour P. Ltd, 313 ITR (AT) 146 (Mum) (SB) wherein it was held that provisions of section 2(22)(e) for making addition can be invoked in the case of registered share holders. The order of I.T.A.T., Special Bench, Mumbai in the case of Asstt. CIT vs. Bhaumik Colour Pvt. Ltd. has been confirmed by the Hon'ble Bombay High Court in the case of CIT vs. Universal Medicare Pvt. Ltd., 190 Taxman 144 (Bombay). The relevant question before the Hon'ble Bombay High Court and their finding are as under :-
"1. Whether, on the facts and in the circumstances of the case, the ITAT, in law, was right in deleting the addition of Rs.35 lakhs treated as deemed dividend under section 2(22)( e) of the Income-tax Act, 1961, by stating that since the transactions are not reflected in the books of account, it cannot be treated as deemed dividend ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal in law, was right in holding that the Assessing Officer has not established that the money was advanced for the benefit of any shareholder and the same has to be taxed in the hands of such shareholder who obtained the benefit and not in the hands of the assessee- company, following the ratio of decision in the case of ACIT v. Bhaumik Colour (P.) Ltd. 27 SOT 270 (SB) ?
3. Whether on the facts and in the circumstances of the case, the ITAT in law was right in directing the Assessing Officer to allow the amount of provision for leave encashment without appreciating the fact that the disallowance was made as there was no proof of payment furnished to the effect that the same was paid before the due date of filing the return under section 139(1) of the Incomes-tax Act ?"47 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
2. For convenience of reference, it would be appropriate to take up the third question initially. The Tribunal has relied upon the judgment of the Calcutta High Court in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 4701, in which the provisions of section 43B(f) have been struck down. The Tribunal directed the Assessing Officer to allow the amount as claimed towards leave encashment. The issue as regards the correctness of the judgment of the Calcutta High Court in Exide Industries Ltd.'s case (supra) is pending in appeal before the Supreme Court and interim orders have been passed. The appeal, insofar as the issue of leave encashment is concerned is admitted on the following question of law :
"Whether the Tribunal was justified in directing the Assessing Officer to allow the amount claimed by way of provision for leave encashment in view of the provisions of section 43B(f) of the Income-tax Act, 1961 ?"
3. The first and second questions are now taken up. Briefly stated, the admitted facts are that an amount of Rs. 32,00,000 was transferred from the bank account of a company by the name of Capsulation Services Private Limited (CSPL) to the account of the assessee maintained in the Chembur Branch of the State Bank of India. Mr. Vikram Tannan was a Director of CSPL. He held over 10 per cent of the equity capital of CSPL and over 20 per cent of the equity capital of the assessee. The Assessing Officer, in the course of the order of assessment, relied on the provisions of section 2(22)(e) and treated the amount of Rs. 35,00,000 as deemed dividend in the hands of the assessee and directed that the amount be added back to its total income. The assessee contended that one Mr. Teredesai, Vice President (Finance) had misappropriated large sums of money by opening bank accounts and the transaction by which an amount of Rs. 32,00,000 was transferred from CSPL was part of the misappropriation. According to the assessee, the amount was not reflected in the books of the assessee since it had been misappropriated by the Vice President (Finance). The fact that the amount has been defalcated could not, according to the assessee, be disputed in view of the fact it has been allowed by the Assessing Officer as a business loss during the assessment 48 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 year 2006-07. Hence, the contention of the assessee was two- fold. First, according to the assessee, for section 2(22)(e) to apply the amount ought to have been received as an advance or loan from a company to a concern in which the shareholder had substantial interest. This condition, according to the assessee, was not met since the amount was neither an advance nor a loan to the assessee but represented misappropriation of funds by the Vice President (Finance). Consequently, even if the amount is treated as deemed dividend within the meaning of section 2(22)(e) it is taxable in the hands of the shareholder and not in the hands of the assessee. Secondly, even on the assumption that this was an amount advanced to the assessee by the CSPL, for the purposes of taxation a deemed dividend would be taxable in the hands of the shareholder and not the assessee to whom the payment was advanced.
4. The Assessing Officer came to the conclusion that the provisions of section 2(22)(e) are attracted the moment a loan or advance is made and the subsequent defalcation of funds was immaterial. The Assessing Officer held that the loan was received from the bank account of CSPL; the money was deposited in the bank account of the assessee and the subsequent defalcation of the funds after the receipt of moneys by the assessee was an extraneous circumstance which made no difference to the application of section 2(22)(e). The Assessing Officer found that Mr. Vikram Tannan who was a Director of the assessee held more than 20 per cent of the equity capital of CSPL. The Assessing Officer came to the conclusion that all the conditions for the application of section 2(22)(e) were fulfilled and the loan of Rs.35,00,000 from CSPL would have to be treated as deemed dividend in the hands of the assessee.
5. In appeal, the Commissioner of Income-tax (Appeals) affirmed the order of the Assessing Officer, save and except with a modification that the actual amount which has been received by the assessee was held to be Rs.32,00,000 and not Rs.35,00,000 as determined by the Assessing Officer.
6. The Tribunal in appeal has reversed the findings of the Commissioner of Income-tax (Appeals) on two counts. Firstly, the Tribunal held that the provisions of section 2(22)(e) would 49 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 be attracted if a loan was taken by the shareholder from any closely held company. In the present case, the Tribunal noted that the amount was part of a fraud committed on the assessee and the transaction was not reflected in its books of account. In the circumstances, section 2(22)(e) was held not to apply. Secondly, the Tribunal held that even otherwise, the amount would have to be taxed in the hands of the shareholder who obtained the benefit and not in the hands of the assessee.
7. Under section 56, income of every kind which is not to be excluded from the total income under the Act is chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in items (a) to (e) of section 14. Under clause (1) of sub-section (2), income by way of dividend is chargeable to income-tax under the head 'Income from other sources'. Section 2(22) provides an inclusive definition of the expression 'dividend' for the purposes of the Act.
Section 2(22)(e) is as follows :-
"(22) 'dividend' includes--
(a) to (d) ** ** **
(e) any payment by a company, not being a company in which the public are substantially interested, or any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;"
8. Clause (e) of section 2(22) is not artistically worded. For facility of exposition, the contents can be broken down for 50 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 analysis : (i) Clause (e) applies to any payment by a company not being a company in which the public is substantially interested of any sum, whether as representing a part of the assets of the company or otherwise made after the 31 May, 1987; (ii) Clause (e) covers a payment made by way of a loan or advance to (a) a shareholder, being a beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power; or (b) any concern in which such shareholder is a member or a partner and in which he has a substantial interest; (iii) Clause
(e) also includes in its purview any payment made by a company on behalf of or for the individual benefit, of any such shareholder; (iv) Clause (e) will apply to the extent to which the company, in either case, possesses accumulated profits. The remaining part of the provision is not material for the purposes of this appeal. By providing an inclusive definition of the expression 'dividend', section 2(22) brings within its purview items which may not ordinarily constitute the payment of dividend. Parliament has expanded the ambit of the expression 'dividend' by providing an inclusive definition.
9. In order that the first part of clause (e) of section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten per cent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest. The Tribunal in the present case has found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the books of account of the assessee. The fact that there was a defalcation seems to have been accepted since this amount was allowed as a business loss during the course of assessment year 2006-07. Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled. In our view, the finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law. However, even on the second aspect which has weighed with the Tribunal, we are of the view that the 51 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 construction which has been placed on the provisions of section 2(22)(e) is correct. Section 2(22)(e) defines the ambit of the expression 'dividend'. All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder. The effect of section 2(22) is to provide an inclusive definition of the expression 'dividend'. Clause (e) expands the nature of payments which can be classified as a dividend. Clause (e) of section 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfillment of the requirements which are spelt out in the provision. Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression 'dividend'. Consequently, the effect of clause (e) of section 2(22) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder. The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder. The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee. We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the amount of Rs.32,00,000 is that there was a dividend under section 2(22)(e) and no other basis has been suggested in the order of the Assessing Officer.
10. For the aforesaid reasons, the first and second questions will not give rise to any substantial questions of law."
7. Further, on identical set of facts, the Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hilltop, 313 ITR 116 (Raj) has held as under :-
(Page nos.117 to 120) "This appeal by the Revenue against the judgment of the Tribunal dated September 16, 2004, was admitted, vide order 52 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 dated March 29, 2005, by framing the following substantial questions of law:-
"1. Whether on the facts and in the circumstances of the case and in law, the learned Tribunal was justified in upholding the order of learned Commissioner of Income- tax (Appeals) deleting the addition of Rs.10 lakhs as deemed dividend under section 2(22)(e) of the Income- tax Act ?
2. Whether the assessee-firm whose partners hold 100% share in M/s. Hilltop Palace Hotels (P.) Ltd., had received the payment of Rs.10 lakhs by way of security and not as an advance is perverse?"
The necessary facts are that a return was filed by the assessee (firm) M/s. Hotel Hilltop, 5, Ambavgarh, Udaipur, declaring income of Rs.72,000/- on January 3, 1992. The case was taken under scrutiny and notices were issued. It appeared that the assessee had shown liability of Rs.12,46,058/- under the head "other liabilities" out of which a liability to the extent of Rs.10,87,747/- pertained to M/s. Hilltop Palace Hotels (P.) Ltd. It also transpired to the Assessing Officer that this liability consisted of Rs.10 lakhs received as an advance against the security from the company to the firm under the agreement to hand over the management of the firm's hotel to the company and the balance amount of Rs.87,747/- are of trade credits.
The assessee, vide order-sheet dated August 13, 1993, was asked to explain why the security of Rs.10 lakhs be not treated as dividend under section 2(22)(e) of the Income-tax Act and added to the income of the firm. It is not in dispute that the amount of Rs.10 lakhs proceeded from the company to the firm. It is also not in dispute that the shareholding pattern of the company is as under :
"Shareholding pattern of M/s. Hilltop Palace Hotels (P.) Ltd.
(1) Shri Roop Kumar Khurana 23.33%
53 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
(2) Smt. Saroj Khurana 4.67%
(3) Vikas Khurana 22%
(4) Deshbandhu Khurana 25%
(5) Shri Rajiv Khurana 25%"
Likewise, it is also not in dispute that at the relevant time constitution of the firm was as under :-
"Constitution of M/s Hotel Hilltop :
1. Shri Roop Kumar Khurana 45%
2. Shri Deshbandhu Khurana 55%"
The Assessing Officer, in these circumstances, found the amount to be deemed dividend under section 2(22)(e) and assessed it in the hands of the firm. This order was challenged in appeal and the learned Commissioner (Appeals) found that since the firm is not a shareholder of the company the amount of Rs.10 lakhs cannot be assessed to tax under section 2(22)(e) and thus it was deleted.
Against this order of the Commissioner of Income-tax (Appeals), the Revenue filed an appeal before the learned Tribunal and the Tribunal found that the provisions under section 2(22)(e) are deeming provisions and are aimed at including the obvious or what is uncertain or to impose for the purpose of a statute an artificial construction of a word or phrase that would not otherwise prevail. Then the definition, as given in section 2(22)(e) was also considered and found that since the firm is not a shareholder of the company the amount of Rs.10 lakhs could not be assessed to tax under section 2(22)(e). It was also found that this amount cannot be stated to be an advance or loan as the agreement specifically mentions it as security. It was also considered that as on April 1, 1990, the company has accumulated profits of Rs.44,825/- only. Thus, the ingredients of the deeming clause are not satisfied. It was reiterated that unless the firm is a registered shareholder of the company any amount of advance to the partner cannot be taxed in the hands of the firm as such. Thus, the appeal was dismissed.
54 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09 We have heard learned counsel on the questions framed. Long drawn arguments were made on either side. However, before proceeding further, we may gainfully quote the provisions of section 2(22)(e), which read as under :-
"2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a share holder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or with out a right to participate in profits) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;"
From a reading of the above provision, it is clear that it comprehends manifold requirements, the first being the payment should be made by way of loan or advance to the concern. Of course on this aspect, the conclusion has been recorded by the Tribunal against the Revenue but then on a bare reading of the agreement and considering the totality of circumstances including the very nature of the term "security" and the fact that substantial portion of this Rs.10 lakhs of amount, say more than Rs.9 lakhs, have been advanced only during January 7, 1991, to March 22, 1991, it is difficult to accept it as a security in the sense of the term as comprehended in the agreement rather it clearly appears to be simply a nomenclature used to borrow the words of the Assessing Officer "transparent cover". Be that as it may.
The more important aspect, being the requirement of section 2(22)(e) is that "the payment may be made to any concern, in which such shareholder is a member or partner and in which he has substantial interest or any payment by any 55 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 such company on behalf or for the individual benefit of any such shareholder . . . " Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf or for whose individual benefit the amount is paid by the company whether to the shareholder or to the concerned firm. In which event, it would fall within the expression "deemed dividend". Obviously, income from dividend is taxable as income from other source under section 56 of the Act and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons being shareholder. Of course, the two individuals being Roop Kumar and Devendra Kumar are the common persons holding more than requisite amount of shareholding and having requisite interest in the firm but then thereby the deemed dividend would not be deemed dividend in the hands of the firm rather it would obviously be deemed dividend in the hands of the individuals on whose behalf or on whose individual benefit being such shareholder the amount is paid by the company to the concern.
Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax as deemed dividend could be attracted in the hands of the individuals being the shareholders and not in the hands of the firm.
Thus, the result of the aforesaid discussion is that question No. 2, as framed, is answered in favour of the Revenue, and against the assessee, while question No. 1 is answered against the Revenue and in favour of the assessee though for different reasons.
The net result of the answer to the above questions is, that the appeal fails and is dismissed."
8. As regards the judgement of Hon'ble Delhi High Court in the case of CIT vs. National Travel Services, 202 Taxman 327 (Delhi) cited by the ld. Departmental Representative, we noticed that in another judgement in the case of CIT vs. Ankitech (P) Ltd., 199 Taxman 341 (Del), the Hon'ble Delhi High Court decided the issue in favour of the assessee considering the 56 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 judgment of Hon'ble Bombay High Court in the case of CIT vs. Universal Medicare Pvt. Ltd., 190 Taxman 144 (Mum) and judgment of Rajasthan High Court in the case of CIT vs. Hotel Hilltop (supra). In the case of CIT vs. Ankitech (P) Ltd. (supra), the Hon'ble Delhi High Court has affirmed the order of I.T.A.T., Special Bench, Mumbai in the case of Baumik Colour (Supra). However, the Hon'ble Delhi High Court has taken a different view in the case of CIT vs. National Travel Services (supra) wherein it has been held that for the purpose of section 2(22)(e) of the Act the partnership firm is to be treated as the share holder and it is not necessary that it is to be "registered share holder". The Hon'ble Delhi High Court has decided the issue in favor of the Revenue.
9. From the above discussion, we have noticed that there are two possible views and interpretation on the issue is under consideration. Hon'ble Bombay High Court in the case of CIT vs. Universal Medicare Pvt. Ltd. (supra), Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hilltop (supra) and Hon'ble Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. (supra) decided the issue in favour of the assessee but in subsequent judgement Hon'ble Delhi High Court in the case of CIT vs. National Travel Services (supra) has decided the issue against the assessee and in favour of the Revenue. Under such circumstances, the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Limited, 88 ITR 192 (SC) has held as under:-
"There is no doubt that the acceptance of one or the other interpretation sought to be placed on section 271(1) (a)(i) by the parties willful lead to some inconvenient result, but the duty of the court is to read the section, understand its language and give effect to the same. If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of construction recognised by this court in several of its decisions. Hence, all that we have to see is, what is the true effect of the language employed in section 271(1)(a)(i). If we find that language to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation 57 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 which favours the assessee, more particularly so because the provision relates to imposition of penalty."
10. The Hon'ble Patna High Court in the case of Tata Iron & Steel C. Ltd. vs. Union of India, 75 ITR 676 (Patna) has held that in a case of reasonable doubt, the construction must be beneficial to the tax payer is to be adopted.
11. In addition to above, the proposition of law relating to the issue as to which view, in case there are two possible views, should be followed, the decision in the following cases have been dealt with this proposition of law and have held that in case of provision of law is liable to interpretation, then interpretation in favour of the assessee should be adopted.
(1) Mysore Minerals Ltd. vs. CIT, 239 ITR 775 (SC)
(2) Orissa State Warehousing Corporation vs. CIT, 237 ITR589 (SC)
(3) CIT vs. Podar Cement Pvt. Ltd. & Others, 226 ITR 625 (SC)
(4) CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd., 196 ITR 149 (SC)
(5) CIT vs. Sahazada Nand, 60 ITR 392 (SC)
(6) CIT vs. Kulu Valley Transport Co. Ltd., 77 ITR 518, 530 (SC)
(7) CIT vs. Vegetable Products Ltd., 88 ITR 192 (SC)
(8) CIT vs. Naga Hills Tea Co. Ltd., 89 ITR 236, 240 (SC)
(9) Contr. ED vs. Kanakasabai, 89 ITR 251, 257(SC)
(10) CIT vs. Madho Jatia, 105 ITR 179, 184 (SC)
12. In the light of above discussions, we find that the CIT(A) followed the one possible view in favour of the assessee following the judgement of the Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Hilltop and the order of I.T.A.T. Special Bench, Bombay in the case of Asstt. CIT vs. Baumik Colour Pvt. Ltd. In the facts and circumstances and in view of the above discussions, we confirm the order of the CIT(A)."
21. Following the above order of I.T.A.T. in ITA No.55/Agra/2012 (supra), we set aside the order of the Revenue authorities and addition on account of loan/advances given to partnership firm by M/s. Malwa Vehicles (P) Ltd. of 58 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 Rs.52,583/- & M/s. Prakash Vehicles (P) Ltd. of Rs.1,32,496/- are deleted as partnership firm is not a registered shareholder of those companies.
22. Summary of additions sustained and deleted as per above discussion are as under :
Addition confirmed Addition deleted
Malwa Vehicles (P) Ltd. (*4) 7,85,961/- (*1) 52,583/-
Prakash Vehicles (P) Ltd. - (*2) 12,50,332/-
Prakash Vehicles (P) Ltd. - (*3) 1,32,496/-
(*1 &*3) The order of the CIT(A) is set aside on the issue and addition of
Rs.52,583/- and Rs.1,32,496/- on account of loan to partnership firm is deleted as per the discussions made in paragraph nos.21 of this order.
(*2) The CIT(A) deleted the addition of Rs.12,50,332/- made on account of loan given to individual and we confirmed the order of the CIT(A) on this issue as per the detailed discussions made in paragraph nos.18 to 19 of this order.
(*4) The order of the CIT(A) is confirmed in sustaining the addition of Rs.7,85,961/- on account of loan given to individual as per the detailed discussions made in paragraph nos.12 to 14 of this order.
59 ITA Nos.37 & 86/Agr/2012A.Y. 2008-09
23. The assessee's grounds of appeal are partly allowed as the addition of Rs.7,85,961/- is confirmed and the addition of Rs.52,883/- sustained by the CIT(A) is deleted.
24. The first ground of Revenue's appeal is dismissed as we confirmed the order of the CIT(A) in deleting the addition of Rs.12,50,322/- and Rs.1,32,496/-.
25. The second ground in Revenue's appeal challenges the order of CIT(A) in deleting the disallowance of Rs.67,137/- (Rs. 53,407/- and Rs.13,730/-) made under section 40A(3) of the Income Tax Act. According to the A.O., out of building maintenance expenses of Rs.1,22,060/-, an amount of Rs.31,350/- and Rs.22,050/- (53,407/-) was not allowable deduction as contemplated under section 40A(3), for the reason that it involved the payment made in cash exceeding to Rs.20,000/-. The A.O. further made adhoc addition of Rs.13,730/- representing 20% of remaining building maintenance expenses of Rs.68,653/- (1,22,060 -
53,407) as the supporting vouchers submitted by the assessee were loose and self made. The contention of the assessee has been that payment of Rs.31,357/- was made in cash for purchase of MS channels against voucher dated 15.04.2007, which was bank holiday being Sunday and the seller insisted for cash payment.
Therefore, this payment would be covered by the exception envisaged under Rule 6DD(J). With regard to labour payment of Rs.22,050/-, the assessee submitted 60 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 before the CIT(A) that three vouchers for payment amounting to Rs.9,600/- maid to Shri Diwarilal, Rs.8,400/- to Shri Hari Shankar and Rs.4,050/- to Shri Rajesh and none of these payments exceeded to Rs.20,000/-, hence, the provisions of section 40A(3) of the Act are not attractable in this case. Regarding the remaining disallowance of Rs.13,730/-, it was contended that before making adhoc disallowance the A.O. has not rejected the books of account and all the payments made are properly accounted for in the books of account maintained in regular course of business. The ld. CIT(A) considering the arguments of the ld. Counsel for the assessee deleted the disallowance of Rs.53,407/- made under section 40A(3) as well as adhoc disallowance of Rs.13,730/- made out of building maintenance expenses. The findings of the CIT(A) recorded in paragraph 9.2 of the impugned order are reproduced as under :-
"9.2 After considering the entire facts and circumstances as discussed in the assessment order with regard to disallowance out of building maintenance expenses u/s 40A(3) to the extent of Rs.53,407 and further disallowance of Rs.13,307/- on ad hoc basis, I find that with regard to the payment of Rs.31,352/- made in cash, it has been explained with relevant documentary evidence that this purchase was made on a holiday and therefore, the case of the appellant is covered by Rule 6DD(j), justifying the payment made by the appellant in cash. The AO has not doubted the genuineness of purchase of MS Channel by the appellant through the bill dated 15.04.2007 issued by M/s Inder Lal Krishan Murari Jain, Lohamandi as filed during the course of appeal proceeding. No adverse comment was made by the AO on the submission of the Ld. AR that the case of the appellant is covered by Rule 6DD(J). Therefore, in my considered opinion, the Ld. AR is correct in his submission that no disallowance u/s 40A(3) for payment of Rs.31,352/- in cash is required to be made. Therefore, I delete the addition of Rs.31,352/- made by the AO u/s 40A(3). With regard to 61 ITA Nos.37 & 86/Agr/2012 A.Y. 2008-09 the labour payment, the Ld. AR has shown that each payment made to three labours is less than Rs.20,000/-. The only objection raised by the AO in the remand report is that complete name and address of the payee is not mentioned on the payment vouchers. In this regard, Ld. AR has fairly explained the practice being followed in making payment to labours who are generally illiterate person and they generally just sign the vouchers made for them. The AO has not brought any fact on record during assessment stage or remand stage showing that payment made to labour is not genuine. Therefore, if the genuineness of payment to labour is not doubted and the only issue is to disallow this expenses u/s 40A(3), the Ld. AR has fairly explained before me that each payment was less than Rs.20,000/- and hence, such payment are not covered by section 40A(3). Therefore, the AO is not justified in making disallowance of Rs.22,050/- on account of labour payment for which a consolidated entry was passed in the account of building maintenance expenses. In view of these facts, I hereby delete the addition of Rs.22,050/- made u/s 40A(3). With regard to adhoc disallowance made by the AO out of building maintenance expenses taking 20% of remaining expenses, I find that the AO has only commented giving his general observation that vouchers are lose and self made and not verifiable. He has not pointed out any defect in the vouchers examined by him and he has also not pointed out as to which voucher was not found verifiable. Therefore, I find that the Ld. AR is justified in his submission that such adhoc disallowance as made by the AO cannot be made without pointing out any specific voucher which is not verifiable and also without rejecting books of account such ad hock disallowances have been made. When the books of account are accepted by the AO, it means that all the entries made in the books of account have also accepted by the AO and hence unless he specifically point out any defect in any particular bills or vouchers, no disallowance can be made out of any expenses. Therefore, I delete the ad hoc disallowance of Rs.13,730/- made by the AO out of building maintenance expenses. In view of my above decisions, the entire addition of Rs.67,137/- (53,407/- +13,730) made by the AO out of building maintenance expenses is deleted. Accordingly, Ground no.6 is allowed."62 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
26. Having considered the rival submissions, we do not find any justification to interfere with the order of the CIT(A) on this issue. It is worthwhile to note that payment of Rs.31,352/- was made on bank holiday as is evident from the concerned voucher. Hence, such payment is covered by exception provided under Rule 6DD(j) of the I.T. Rules. The labour payment of Rs.22,050/- involved each payment less than Rs.20,000/- and a consolidated entry was passed in the account of building maintenance expenses and as such, this payment was not covered by the provisions of section 40A(3) of the Act. Further, the A.O. before making adhoc disallowance of Rs.13,730/- has failed to point out any defect in the books of account nor the books of account have been rejected. The ld. Departmental Representative has also not been able to controvert the findings reached by the CIT(A). We, therefore, do not find any justification to reverse the conclusions arrived by the CIT(A) on this count. Accordingly, ground no.2 of the Revenue's appeal is liable to be dismissed.
27. In the result, the assessee's appeal is partly allowed and Revenue's appeal is dismissed.
(Order pronounced in the open Court)
Sd/- Sd/-
(BHAVNESH SAINI) (A.L. GEHLOT)
Judicial Member Accountant Member
PBN/*
63 ITA Nos.37 & 86/Agr/2012
A.Y. 2008-09
Copy of the order forwarded to:
1. Appellant
2. Respondent
3. CIT (Appeals) concerned
4. CIT concerned
5. D.R., ITAT, Agra Bench, Agra
6. Guard File.
By Order
Sr. Private Secretary
Income-tax Appellate Tribunal, Agra
True Copy