Income Tax Appellate Tribunal - Jodhpur
Acit, Paota C Road vs Gopi Kishan Malani, Sardarpura Jodhpur on 9 April, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
JODHPUR BENCH, JODHPUR.
BEFORE: DR. S. SEETHALAKSHMI, JJUDICIAL MEMBER &
SHRI RATHOD KAMLESH JAYANTBHAI, ACCOUNTANT MEMBER
I.T.A. No.241/Jodh/2023
Assessment Year: 2018-19
Asstt. Commissioner of Vs. Gopi Kishan Malani
Income-tax, Block No. 3, Malani House,
Circle-1, Jodhpur Nehru Park, Sardarpura,
(Appellant) Jodhpur.
[PAN: AAPPM3322C]
(Respondent)
Appellant by Sh.Rajendra Jain, Adv.
Respondent by Smt. Alka Rajvanshi Jain, CIT-DR
Date of Hearing 01.02.2024
Date of Pronouncement 09.04.2024
ORDER
Per:DR. S. Seethalakshmi, JM:
This appeal filed by Revenue is arising out of the order of the ld. CIT(A), National Faceless Appeal Centre, Delhi dated 28.03.2023 [here in after "CIT(A)(NFAC)"] for assessment year 2018-19, which in turn arise from the order dated 19.04.2021 passed under section 143(3) r.w.s. 144B of the Income Tax Act, by the AO.
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 2
2.1. At the outset of hearing, the Bench observed that there is delay of 41 days in filing of the appeal by the Revenue for which the ld. DR of the Revenue filed an application for condonation of delay with following prayers:-
In this regard it is submitted that in the case of Gopi Kishan Malani (PAN:
AAPPM3322C) for AY 2018-19, CIT(A) has passed the order on 28.03.2023 but due to some technical glitch the same was not visible till 27.06.2023. It is submitted that the undersigned was regularly monitoring the list of orders passed by CIT(A) in the Appeal Register module on ITBA, but no order in the case of above mentioned assessee was visible on the system. As the date of receipt of order by CIT(A) is not ascertainable, so the period of 60 days to file further appeal before Hon'ble ITAT is also unascertainable.
Therefore, as the ITBA system is showing the same to be passed on 28.03.2023 so the delay due to technical glitch as the same was not appearing in ITBA, it is humbly requested to kindly consider this request for condonation of delay in the case of Shri Gopi Kishan Malani (PAN: AAPPM3322C)."
2.2 The ld. AR of the assessee has not raised any specific objection but submitted that even the department is also facing technical glitches which they should appreciate.
2.3 Considering the various judicial precedent where in the courts has considered ignored technicality of the reasons and has considered the delay.
Even the apex court in the case of Collector, Land & Acquisition Vs. Mst.
Katiji& Others 167 ITR 471(SC) directed the other courts to consider the liber approach in deciding the petition for condonation of delay.
2.4 We have heard both the parties and perused the materials available on record. The Bench Noted that there is merit in the condonation of delay of 41 days in the appeal filed by the revenue has merit and we concur with the I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 3 submission of the revenue. Thus, the delay of 41 days in filing the appeal by the revenue is condoned in view of the decision of Hon'ble Supreme Court in the case of Collector, land Acquisition vs. Mst. Katiji and Others, 167 ITR 471 (SC) as the assessee is prevented by sufficient cause and thus we condone the delay and consider the appeal for hearing.
3. In this appeal, the Revenue has raised following grounds: -
" On the facts and in the circumstances of the case the Ld. CIT(A) has erred in:-
"Whether the ld. CIT(a) was correct in the facts and in law to delete the addition of Rs. 16,30,00,000/- made on account of deemed dividend u/s 2(22)(e) of Income Tax Act, 1961."
That the appellant reserves its right to add, amend or alter the ground(s) of appeal on or before the date, the appeal is finally heard."
4. Brief facts of the case are that the assessee is an individual and has e-filed return of income for the assessment year 2018-19 on 16.09.2018 declaring gross total income of Rs. 4,93,97,143/- and claiming deduction under Chapter VIA of Rs. 1,60,000/- and thus, has declared total income of Rs. 4,92,37,140/- for the year under consideration. The case was selected for scrutiny under CASS. The assessment was completed u/s 143(3) on 19.04.2021 after making an addition of Rs. 16,30,00,000/- on account of 'deemed dividend' u/s 2(22)(e) and thereby, assessing the total income at Rs. 21,22,37,140/-. Conclusively, the AO made addition in the hands of the assessee by holding as under:-
Amount in Rs.
I) Income from salary 1,14,00,000
II) Income from House property 1,05,000
III) Income from Business -44484052.55
I.T.A. No.241/Jodh/2023
Gopi Kishan Malani 4
IV) Income from other sources 825653.75
Add as discussed in para 2.5 163000000 16,38,25,653.75
Gross total income 21,23,97,141.85
Less Chapter VIA 1,60,000
Total Income 21,22,37,142
Rounded off Rs. 21,22,37,140
5. Aggrieved from the order of the assessment making addition, assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised by the assessee in first appeal, the relevant finding of the ld. CIT(A) is reiterated here in below:-
4.2.2 The afore-noted facts of the case show that the appellant, though having substantial interest in the company M/s G. K. Tobacco Industries Pvt. Ltd. by virtue of holding 51% of the shares in the said company, did not in fact receive any loans or advance from the said company and thus, there could be no debtor-creditor relationship between the appellant and the said company. However, the appellant was in receipt of loans aggregating to Rs. 16,30,00,000/- from two unrelated parties, namely from Shri Sunil Jain (loan amount of Rs.9,00,00,000/-) and Shri Heera Lal Modi (loan amount of Rs.7,30,00,000/-), and thus, there has been debtor-creditor relationship between the appellant and the aforesaid two parties. In course of the assessment proceedings, the A.O. has examined the issue and found that the aforesaid sum of Rs. 16,30,00,000/- initially emanated from the company M/s G. K. Tobacco Industries Pvt. Ltd. by way of interest-bearing loans extended to Shri Sunil Jain (Rs.9,00,00,000/-) and Shri Heera Lal Modi (Rs.7,30,00,000/-), which amounts were then extended as loans to the appellant by Shri Sunil Jain and Shri Heera Lal Modi. As the aforesaid transactions by way of loans occurred in quick successions between parties involved, the A.O. was of the opinion that these were not in the nature of normal business transactions, and the appellant had devised an arrangement (or a colourable device) to obtain the loan of Rs. 16,30,00,000/- from the company (in which the appellant held substantial interest) through the conduits, being Shri Sunil Jain and Shri Heera Lal Modi and thereby, to avoid the risk of the said sum being taxed as 'deemed dividend' u/s 2(22)(e) of the Act.
4.2.3 However, it transpires from the record that the AO has not probed the matter in detail, but drawn his conclusions in haste. The A.O. has not even examined Shri Sunil Jain and Shri Heera Lal Modi to establish that the transaction entered into by them either with M/s G. K. Toabcco Industries Pvt. Ltd, or the appellant is not in normal course. The fact that the said loans were interest-bearing is not in dispute. There is no I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 5 dispute that both Shri Sunil Jain and Shri Heera Lal Modi are not shareholders of the company M/s G. K. Tobacco Industries Pvt. Ltd. in which the appellant has substantial interest. Thus, the transactions entered into between Shri Sunil Jain/ Shri Heera Lal Modi and the company were at arm's length having regard to the substantial quantum of interest paid on the said loans. Similarly, the appellant has paid even higher interest on the loans taken from Shri Sunil Jain/ Shri Heera Lal Modi. All the parties involved are assessed to income-tax regularly and the aforesaid interest incomes have been reported in their income-tax returns. In such facts and circumstances, the allegation of the A.O. for a colourable device being adopted by the appellant in the case on hand is not supported by any cogent evidence. As noted from the record, the appellant has repaid the entire loan along with the interest during the year and thus, it is not clear as to how the A.O. has even alleged that the appellant has derived the benefit or gains in terms of provisions of section 2(22)(e) of the Act, more particularly due to the fact that the sum of Rs. 16,30,00,000/- was received by the appellant from the third-party (Shri Sunil Jain/ Shri Heera Lal Modi) by way of loan and not from the company M/s G. K. Tobacco Industries Pvt. Ltd. in which the appellant has substantial interest.
4.2.4 The primary condition to invoke the provisions of section 2(22)(e) is that the advance or loan must have been given to a person who is the owner of shares beneficially holding not less than ten percent of voting powers of the company. Shri Sunil Jain and Shri Heera Lal Modi ie. the persons receiving loan from M/s. G.K. Toabcco Industries Pvt. Ltd. do not hold any share of the said company. These individuals are mere business associates of the said company. The provisions of section 2(22)(e) operate on deeming fiction and the transaction covered by the section are deemed as dividends. The deeming fictions are to be construed strictly. The provisions nowhere stipulate that the transactions with a person who is not a beneficial shareholder are to be covered under the purview of the provisions of the said section.
Thus, as per provisions of section 2(22)(e), it becomes clear that the provisions of section 2(22)(e) cannot be attracted for the loan transactions between the appellant and Shri Sunil Jain/ Shri Heera Lal Modi for the ostensible reasons that such a transaction could not be deemed to be a loan transaction between the appellant and the company in the absence of any evidence being brought on record by the A.O. in this behalf. It may also be observed that as per the Companies Act, a company cannot pay any dividend to any person who is not a shareholder of the company The deemed dividends can be taxed only in the hands of person to whom loan or advance has been given by the company subject to the condition that said person could have been taxed with respect to normal dividends had it been declared by the company under normal circumstances. In the present case, the recipient of loans being non-shareholders were not entitled to dividends declared by the company in normal course. Therefore, receipt of loans by them cannot be held as deemed dividends under any circumstances.
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 6 4.2.5. In the instant case, the company M/s G. K. Tobacco Industries Pvt. Ltd. made short term loans/deposit to a number of parties including Shri Sunil Jain and Shri Heera Lal Modi out of the surplus fund available with it in order to eam income by way of interest on idle funds for short period. The company has also charged interest to Shri Sunil Jain and Shri Heera Lal Modi. The transactions emanating out of normal commercial and business prudence are not covered by the provisions of section 2(22)(e). Besides the company, Shri Sunil Jain and Shri Heera Lal Modi have also paid taxes on the differential interest received by them. The aforesaid facts show that receipt of loans by Shri Sunil Jain and Shri Heera Lal Modi and subsequent loans to the appellant have not resulted in any undue commercial advantage or gain to the appellant. The AO has not brought on record any evidence to prove/show that the transactions with the company by Shri Sunil Jain/ Shn Heera Lal Mods were entered in connivance with the appellant for his advantage. It is a cardinal principal of law that suspicion howsoever strong cannot take the place of evidence. On facts and nightly so observed here that the appellant has paid interest at a higher rate to the lenders Shri Sunil Jain and Shin Heera Lal Modi than the interest charged by the company and thus, it would be difficult to presume an arrangement or colourable device in respect of the transactions, In any case, the AO has not brought on record any evidence that the appellant has acted with any mala fide intention or has in fact made any undesirable gains 4.2.6 Adverting to provisions of section 2(22)(e) of the Act, it is evident that 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 clause or to a concern in which such shareholder has a substantial interest. Dividend under the clause also includes any payment by such company on behalf or for the individual benefit, of any such shareholder. Deemed dividend under this clause would be to the extent the company in either case possesses accumulated profits. The shareholder referred to here should be beneficial owner of shares holding not less than 10% of the voting power but those shares should not be shares entitled to a fixed rate of dividend with or without a right to participate in profits.
4.2.7 Object of this clause (e) of section 2(22) is that a company in which public are not substantially interested may not declare dividends or adequate dividends and may not 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 income under the law. It is to avoid the evil of this nature that I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 7 clause (e) of section 2(22) has been enacted. This clause created a fiction that the amount in question was dividend. Normally legal fictions are created for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate filed. However, legal fictions ought to be carried to its logical conclusion within the framework of the purpose for which it was created.
4.2.8 The factum of the case on hand, when analysed and considered in the light of the provisions of section 2(22)(e) and the object for enacting the said section, clearly reveals that the appellant's case is not hit by clause (e) of section 2(22) because - (i) the appellant has not received any payment from the company by way of loan or advance during the year; (ii) the appellant has received loans from Shri Sunil Jain/ De Shri Heera Lal Modi who are independent third-party and not related party vis-à-vis the company nor are they relatives of the appellant, (iii) the transactions of loans have been undertaken at commercial rate of interest, and the appellant has repaid the entire loan during the year along with the requisite interest, and (iv) the AO has not brought on record any materials or cogent evidence to prove that Shri Sunil Jain/ Shri Heera Lal Modi obtained the loans from the company on behalf of or for the benefit of the appellant, and for this purpose mere allegation is not sufficient but it must be shown to be so on the basis of material evidence as to the actual conduct of the parties involved and the commercial significance embedded in the said transactions. Thus, the AO has not been able to make out a case of collusive arrangement whereby the appellant has used the conduits in order to receive the sum of Rs. 16,30,00,000/- by way of loan from the company in which he holds substantial interest. Au contraire, the unfolding facts of the case reveal significant commercial substance in the said loan transactions between the appellant and Shri Sunil Jain/ Shri Heera Lal Modi in which the lenders are independent third-party/ unrelated party vis-à-vis the appellant as well as the company in which the appellant holds substantial interest. The object for inserting clause (e) in section 2(22) has been briefly highlighted in para 4.2.7 above and the facts of the case on hand do not appear to militate against the aforesaid object behind section 2(22)(e). In the circumstances, the doctrine of colourable device as enunciated in the landmark judgment of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. vs. Commercial Tax Officer (1985) 22 Taxman 11 (SC) is not applicable to the facts unfolding in the appellant's case and thus, the AO has fallen into error by invoking the aforesaid doctrine of colourable device.
4.2.9 For what has been outlined, discussed and held above, I find sufficient merits and force in the submissions and contentions made by the appellant against the action of the A.O. in treating the sum of Rs. 16,30,00,000/- as deemed dividend u/s 2(22)(e) of the Act. It cannot be said that the appellant's case is hit by the provisions of section 2(22)(e) in any manner for the analysis and determination of facts made herein-before.
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 8 4.2.10 In view of the above and for the reasons stated above, the A.O. is directed to delete the addition of Rs. 16,30,00,000/-. Consequently, the Ground No. 2 raised by the appellant is allowed."
6. Feeling dissatisfied from the above order of the ld. CIT(A), the Revenue has preferred the present appeal on the ground as stated hereinabove. In support of the grounds so raised the ld. DR representing the revenue submitted that the assessee has undertaken a loan from Mr. Sunil Jain and Mr. Heera Lal Modi to the tune of Rs. 9,00,00,000/- and Rs. 7,30,00,000/- respectively. From the bank account of the assessee M/s G.K. Tobacco Industries Private Limited (GKT) where the assessee is a director and having 51% shareholder and Mr. Sunil Jain and ledger confirmation filed by the assessee and the GKT in response to the notice u/s 133(6) of the Income Tax Act, 1961. It is seen that the amount received by Shri Sunil Jain and Shri Heera Lal Modi from the from the GKT and the same has been transferred to the assessee on same day. Therefore a show cause noticed was issued on 12.03.2021, in this regard, the assessee submitted that Shri Sunil Jain and Shri Heera Lal Modi to whom, short term deposits were made by the said company exclusively on account of business and commercial expediency and therefore they do not fall in the category of persons who are share holders or the beneficial shareholders. Even Mr. Sunil Jain and Mr. Heera Lal Modi both persons are not director or shareholders of the said company but since these amount gain rooted from these two persons to the assessee. The ld.
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 9 AO rightly concluded that the assessee has made such arrangement to receive loans or advances indirectly from the GKT where the assessee is a shareholder and has a substantial interest in the GKT. Thus, the assessee has received loans or advances through colorable device to avoid the provisions of Section 2(22)(e) of the Act and therefore, the addition deleted by the ld. CIT(A) should be sustained. Based on the detail entry wise finding recorded by the Assessing Officer by analyzing the bank account of the persons involved in this transaction to avoid the charging of dividend income as per proviso of section 2(22)(e) of the Act. The ld. DR relying on the Hon'ble Supreme Court in case of Mc Dowell & Co. Ltd. Vs. Commissioner Tax Officer (1985) 22 taxman 11(SC) and CIT vs. Durga Prasad More (1971) 82 ITR 540 (SC) submitted that addition should be deleted by the Ld. CIT(A) should be restored with that finding recorded by the ld. AO.
7. Per contra, the ld. AR of the assessee representing the assessee submitted that the ld. CIT(A) order in detail analysing the facts of the case and held a view that in absence of any evidence being brought on record by the ld. AO that the assessee has avoid the tax liability of dividend the assessee has received the money from a person for short term loan and the same has rightly been observed that has been rapid . This type of short term loan cannot be considered within the provisions of section 2(22)(e) of the Act. Thus, he heavily relied upon the findings recorded by ld. CIT(A) and following written submission:
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 10 Argument & written submissions of the Appellant:
3. The appellant has filed the following written submissions during the course of present appellate proceedings:
"The assessment order referred above as framed by the learned Assessing Officer is bad in law and on facts. The learned assessing officer, while framing the assessment order neither provided proper opportunity of being heard to the assessee nor applied various provisions of the Income Tax Act, 1961 in their true spirits and in judicious manner. In this way the learned assessing officer erred in making the said assessment u/s 143(3) read with section 144B of Income Tax Act, 1961 and consequently making erroneous addition(s) by relying upon grossly imaginary, impracticable and presumptive interpretation of various provisions of law and applying them without any thoughtful consideration. The specific instances of above facts shall be highlighted against specific submissions in respect of action taken/ additions made by him, in the following grounds of appeal.
ADDITION OF RS.16,30,00,000/- U/S 2(22)(e) ON ACCOUNT OF ALLEGED DEEMED DIVIDENDS The learned assessing officer while framing the assessment order referred above made an addition of Rs. 16,30,00,000/- on account of alleged deemed dividends in the hands of the assessee by holding the unsecured loans taken from third parties as having taken from GK Tobacco Industries Private Limited..
In this regard it is respectfully brought into kind notice of your honor that during the course of assessment proceedings u/s 143(3) read with section 144B of Income Tax Act, 1961, the assessee on being asked as to why the unsecured loans under consideration should not be taxed by applying the provisions of Section 2(22)(e) of Income Tax Act, 1961 had submitted a comprehensive reply which reads as under.
"01. Unsecured Loans/ Dividends With reference to issue relating to Unsecured Loans/ Dividends your honor has asked as to why the unsecured loans under consideration should not be taxed by applying the provisions of Section 2(22)(e) of Income Tax Act. 1961. In this regards before proceeding further it will be quite relevant to have a look on the relevant provisions of above referred section which read as under:
"(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."
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 11 The provisions of above section essentially mean that the section comes into play when there is 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 of the company.
In order to attract the application of said section the transactions are required to satisfy the test of falling within it by corresponding satisfaction of all the conditions prescribed therein. The provisions are applicable when the person to whom loans and advance is made is a person who is a shareholder and who is beneficial owner of shares holding not less than ten percent of voting power of the company.
Your honor has argued that had the assessee taken loan or advance directly from the company, the provisions of section 2(22)(e) would have been applicable and hence, it has been alleged that a colorable devise by routing the funds from the third party was adopted by him. In view of your above findings your honor have reached at a conclusion that such unsecured loans purportedly received from GK Tobacco Industries Private Limited should be taxed under the provisions of section 2(22)(e) of the Income Tax Act, 1961 even though such loans have not been given by the company to the assessee.
In this regards it is submitted that looking to the factuality of the transactions, such findings and allegations are grossly erroneous and groundless. The provisions sought to be made applicable to the assessee are not at all applicable to it because of the reasons narrated below:
The parties namely Mr. Sund Jain and Mr. Heera Lal Modi to whom, short term deposits were made by the said company exclusively on account of business and commercial expediency, do not at all fall in the category of persons who are shareholders being beneficial owners of shares holding not less than ten percent of voting power of the company. As a matter of fact both the above persons are not even the shareholders of G K Tobacco Industries Private Limited and are simply its business associates.
In the present case company has not provided loan or advance to the assessee and hence, the basic condition for invoking the provisions fall absolute flat as in no circumstances it can be said that the loan or advance has been granted to a shareholder who beneficially holds more than ten percent of voting rights of the company. The legislation intended to cover only the loan or advance that is made directly to such shareholder and in no circumstances it intended to cover indirect loan or advance made out of commercial expediency in its purview Had the legislation intended to cover such indirect loan or advances it would have specifically covered the same in crystal clear terms in the provisions of the section under reference.
In this regard it also makes sense to note that under the provisions of Income Tax Act wherever the legislation intended to cover the indirect transactions in the purview of I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 12 law it has clearly and specifically provided so in the relevant sections of the Income Tax Act.
The provisions of section 2(22)(e) operate on deeming fiction and the transaction covered by the section are deemed as dividends. The section nowhere permit that the deeming fiction should be extended beyond imagination and therefore the transactions with a person who is not a beneficial shareholder are not intended to be covered under the purview of the provisions of the section. The proposed action by your honor is intended to consider even a person who is not a beneficial share holder as a deemed shareholder in order to undesirably invoke the provisions by suo-motto enlargement of scope of said section to make an unwarranted addition to income. In this regard the kind attention of your honor is drawn towards the observations of honorable Delhi High Court in the case of CIT V/s Ankitech Private Limited and Others (2012) 340 ITR 0014, which read as under:
"Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to 'dividend'. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to 'shareholder'. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein). which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder, then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective."
The above views of honorable Delhi High Court were endorsed by honorable Supreme Court of India in the case of CIT V/s Madhur Housing and Development Company (Appeal No. 3961 of 2013).
The honorable Supreme Court of India in the case of CIT V/s C. P. Sarathy Mudaliar also held that the provisions of Section 2(22)(e) create a fiction bringing in amounts paid otherwise than as dividend into the net of dividends and therefore, this clause must be given a strict interpretation.
The honorable Bombay High Court also had an occasion to interpret the provisions of the section under consideration on this aspect in Income Tax Appeal No. 197 of 2013 in the case Commissioner of Income Tax V/s Jignesh P. Shah wherein the I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 13 honorable high court following its own decision in the case of CIT V/s Universal Medicare Private Limited 324 ITR 263 and endorsing the views of honorable ITAT (SB), Mumbai in its decision in the case of ACIT V/s Bhaumik Colours Private Limited 313 ITR 146, concluded that the Section 2(22)(e) is required to be strictly interpreted and therefore the amount given to non-shareholder cannot be termed as deemed dividend under any circumstances.
The above ruling has been rendered in the similar set of circumstances and therefore the same is squarely applicable to the instant case of the assessee without any apprehension whatsoever. The honorable high court also opined that fiscal status have to be interpreted strictly and in this regard referred to the case of CIT V/s Vatika Township 2015 (1) SCC 1 wherein it was observed as under.
"At the same time, it is also mandated that there cannot be imposition of any tax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the provision concerned of the taxing statue is ambiguous and vague and as susceptible to two interpretations, the interpretation which favours the subjects, as against the Revenue, has to be preferred. This is a well
- established principle of statutory interpretation, to help finding out as to whether particular category of assessee is to pay a particular tax or not. No doubt, with the application of this principle, the courts make Endeavour to find out the intention of the legislature. At the same time, this very principle is based on "fairness" doctrine as it lays down that if it is not very clear from the provisions of the Act as to whether the particular tax is to be levied to a particular class of persons or not, the subject should not be fastened with any liability to pay tax."
The above observations of honorable Supreme Court of India signify the fact that even when a judicial interpretation leads to more than one conclusion the conclusion which is favorable to the assessee should be banked upon, however in the instant case the provisions are quite unambiguous and crystal clear which state that the first and foremost condition to invoke the provisions of the section under consideration is that the person to whom loan or advance is made should be beneficial shareholder holding more than 10% shares of such company.
It is also brought into kind knowledge of your honor that as per The Companies Act a company cannot pay any dividend to any person who is a non-shareholder under any circumstances. The relevant provisions of Income Tax Act merely extend the scope of dividends and do not seek to treat a non-shareholder as shareholder and therefore the mischievous interpretation adopted by your honor do not have any legal leg to stand.
In view of above explanation it is thus beyond doubt that in order to invoke the provisions of Section 2(22)(e) the recipient of loan or advance must be a beneficial share holder holding more than 10% shares of such company and if it not so the provisions of said section cannot be made applicable under any circumstances.
It is further stated that the proposed action on your part is an attempt to exponentially enlarge the scope of the provisions of law on imaginary grounds and nothing else.
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 14 The addition made on such a flimsy and imaginary grounds are neither legally justified nor warranted.
In the instant case the company namely GK Tobacco Industries Private Limited made short term deposits to above referred parties out of surplus funds available with it in order to earn income by way of interest on idle funds for short term tenure. As a general practice and out of pure commercial prudence, the company whenever it has idle surplus/ investible funds, make investment thereof in securities or lend it for earning interest from third parties.
It may be visualized that the company has charged interest on such short term deposits made to the said persons and offered the interest so earned for taxation during the assessment year under consideration. The amount of interest earned by the company from both the parties namely Mr. Sunil Jain and Mr. Heera Lal Modi was Rs. 34.56 Lacs and Rs. 19.43 Lacs respectively.
The deposits made by the company to such persons were clearly for short term tenure and intended to be refunded within the agreed time. The said intentions are quite clear as the deposits were refunded by the above referred persons to the company along with agreed interest with in the year itself. The above fact is quite evident from the documents already submitted to you during the course of assessment proceedings.
It is therefore earnestly submitted that the transactions emanating out of pure commercial or business prudence are not at all intended to be covered by the provisions of Section 2(22)(e) of Income Tax Act, 1961 and the said position of law has been clearly endorsed in various judicial rulings at different levels of judicial proceedings.
It is also worthwhile to note here that Mr. Sunil Jain and Mr. Heera Lal Modi who made loans or advances to the assessee under the separate arrangement entered with him, charged interest to the extent of Rs. 40.32 Lacs and Rs.22.66 Lacs respectively from him. It is a factual conclusion that both the person charged interest from the assessee on much higher rate as compared to the rate which was charged from them by the company. The income in the form of differential interest was taken by both the persons in their respective computation of income and offered for taxation.
Thus, as a matter of fact had the arrangement would have been a colorable devise, why the assessee would have paid higher interest to such parties when the company charged lower interest from them.
It is further submitted that had there been any intention to adopt a colourable device to take advantage out of such arrangement the assessee would have taken loan or advance either without interest or at least at the same rate of interest and not on higher rate of interest. The sequence of events clearly show that the assessee had taken loan from such parties for short term purposes and repaid it with interest with in the agreed time which clearly show that no undue commercial advantage or gain I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 15 has been derived by him out of such arrangement and therefore the inference drawn by your good self is absolutely harsh and erroneous.
Your honor has alleged that the transactions were made under arrangement which was a colorable devise to bypass the provisions of income Tax Act. In this regard it is submitted that before reaching at such a conclusion your honor must prove by way of concrete/ conclusive evidence that the assessee has acted with any mala-fide intention or has in fact made any undesirable gains out of the said arrangement and if it is not so the allegations are completely out of context and are liable to be summarily rejected.
The intentions of the assessee can also be inferred from the fact that as he has maintained a common bank account for routing all type of business and non-business transactions, it has not claimed any deduction on account of interest paid by him as expenditure out of its taxable income for the assessment year under consideration. It is also extremely relevant to note that even though a part of borrowed funds were used by the assessee for business purposes no deduction was claimed in respect of payment of interest made to various persons including Mr. Sunil Jain and Heera Lal Modi just to avoid undesirable litigation in this respect.
The above factual analysis suggests that your honor has not evaluated the issue in totality and merely relied on the partial facts and circumstances which suits your side of imaginary story whereas had the issue been evaluated based on the totality of circumstances there would have remain no scope of making an adverse case out of it.
The kind attention of your honor is further drawn towards the fact that Mr. Sunil Jain and Mr. Heera Lal Modi are neither relatives nor employees of the company or the assessee. They are simply business associates of the company and are connected to its suppliers. These persons are neither agents of the assessee nor his puppets who will act on behest of him. Both the persons are independent persons having their own commercial identity and acted independently on their own behalf. The transactions so entered into by them, in fact resulted into significant commercial gains to them which they have factually derived out of the said transactions and there is nothing on record to prove/ show that they were acting in connivance with the assessee for his advantage or were his benamidars. The allegation levelled by your honor may at best be said to be a result of suspicion or presumption which however grave that may be cannot take place of actual happening or evidence. The additions made on the foundation of such suspicion or presumptions are never allowed under the taxation laws.
It is further submitted that the Conclusive Presumptions/ proofs can be considered as one of the strongest presumptions. With regards to Conclusive proofs, the law has absolute power and shall not allow any proofs contrary to the presumption. The general definition of Conclusive Proof is a condition when one fact is established beyond doubt, then the other facts or conditions become conclusive proof of another as declared under the relevant provision, Legal fictions compel to believe the existence of an artificial state of facts which may be contrary to the real state of facts. When a fiction is created by law, it is not open to anybody to plead or argue that the I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 16 artificial state of facts created by law is not true. The basic purpose of a deeming provision is an assumption that something is true even though it may be untrue. It creates a presumption that accepts something as fact without the benefit of evidence and further the legal consequences of such facts have to follow accordingly. Under such circumstances, when on the proof of one fact, which, in the case in hand is fact of advancement of loan to the beneficial share holder holding more than 10% shares of such company, the other fact that such a loan is a diversion of the accumulated profits of the company for the benefit of such a shareholder, hence income of the shareholder, is to be assumed automatically. For raising such an irrebuttable presumption, the first set of facts which are deemed to be conclusive proof of the other, Le regarding the advancement of loan to the beneficial share holder holding more than 10% shares of such company has to be proved strictly and beyond reasonable doubt and such facts cannot be assumed or presumed merely on the basis of suspicion, howsoever strong it may be.
It is further stated that in the case of clearly independent commercial transactions, undesirable interpretations can neither be inferred nor presumed. To put the matter in proper perspective if for example 'A' enters into a sale transaction with 'B' and 'B' in turn enters into a sale transaction with 'C' then it cannot be said that 'A' entered into a sale transaction directly with 'C'. In case such undesirable interpretations are allowed to be inferred or presumed merely on the basis of suspicion, it would always lead to unintended misleading or absurd results.
In view of above analysis it is earnestly submitted that conclusion drawn by your honor is not at all justified on facts and circumstances under consideration and therefore it is urged that such an unwarranted and undesirable addition by unnecessarily invoking provisions of section 2(22)(e) of Income Tax Act, 1961 may please be not resorted upon. It is also submitted that framing of Draft Assessment Order on the basis of such pre-judicial and pre-conceived notions is nothing but an attempt to make a high pitch assessment and to create undesirable and unlawful demands during assessment proceedings."
Sir, the assessee hereby humbly submits before your honor that in spite of aforesaid well justified and well-reasoned satisfactory explanations, the learned assessing officer proceeded to make an addition of Rs. 16,30,00,000/- by holding the unsecured loans under reference as deemed dividends in the hands of the assessee by relying, applying and reciting various irrelevant case laws and unsubstantiated facts and evidences. In this regard in addition to our submissions before the learned assessing officer we further submit as under:
Sir, before proceeding for discussion about the matter under reference it will be quite relevant to reproduce the provisions of Section 2(22)(e) of Income Tax Act, 1961 which reads as under.
"(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 I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 17 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,"
The primary condition to invoke the provisions of aforesaid section is that the advance or loan must have been given to a person who is the owner of shares beneficially holding not less than ten percent of voting power of the company. however, the parties namely Mr. Sunil Jain and Mr. Heera Lal Modi to whom, short term loans/ deposits were made by the said company exclusively on account of business and commercial expediency, do not at all fall in the category of persons who are shareholders being beneficial owners of not less than ten percent of voting power of the company. It is quite relevant to note the fact that both the above persons are not even the shareholders of G K Tobacco Industries Private Limited and are simply its business associates.
In the instant case under reference the company has not provided loan or advance to the assessee and hence, the basic condition for invoking the provisions fall absolute flat as in no circumstances it can be said that the loan or advance has been granted to a shareholder who beneficially holds more than ten percent of voting rights of the company.
The legislation intended to cover only the loan or advance that is made directly to such shareholder and in no circumstances it intended to cover indirect loan or advance made out of commercial expediency in its purview. Had the legislation intended to cover such indirect loan or advances it would have specifically covered the same in crystal clear terms in the provisions of the section under reference. In this regard it also make sense to note that under the provisions of Income Tax Act wherever the legislation intended to cover the indirect transactions in the purview of law it has clearly and specifically provided so in the relevant sections of the Income Tax Act.
It is further stated that in the case of clearly independent commercial transactions, undesirable interpretations can neither be inferred nor presumed. To put the matter in proper perspective if for example 'A' enters into a sale transaction with 'B' and 'B' in turn enters into a sale transaction with "C' then it cannot be said that 'A' entered into a sale transaction directly with "C". In case such undesirable or absurd interpretations are allowed to be inferred then it would always lead to unintended, misleading and absurd results.
In view of above analysis read with the above referred provisions of Section 2(22)(e) of the Income Tax Act, 1961 it can be concluded that in order to invoke the provisions of the said section the first and foremost condition which is required to be satisfied is that the stipulated beneficial owner must have directly entered into the relevant transaction with the company and not otherwise. In the instant case under I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 18 reference there is no transaction by the assessee directly with the company and hence there cannot be any application of section 2(22)(e) of the Income Tax, Act, 1961 in this case.
The provisions of section 2(22)(e) operate on deeming fiction and the transaction covered by the section are deemed as dividends. The section nowhere permit that the deeming fiction should be extended beyond imagination and therefore the transactions with a person who is not a stipulated beneficial shareholder are not intended to be covered under the purview of the provisions of the said section. The stand taken by the learned assessing officer to consider even a person who is not a shareholder as a deemed shareholder in order to undesirably invoke the provisions of said section is nothing but suo-motto enlargement of scope of said section to make an unwarranted addition to income which is not at all allowed in the relevant statute.
In this regard the kind attention of your honor is drawn towards the observations of honorable Delhi High Court in the case of CIT V/s Ankitech Private Limited and Others (2012) 340 ITR 0014, which read as under:
"Further, it is an admitted case that under normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by legal fiction created under Section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to 'dividend'. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to 'shareholder. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under Section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distribute the profits in the form of dividend to its shareholders/members and such dividend cannot be given to non-members. The second category specified under Section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder. then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the Revenue would stand answered, once we look into the matter from this perspective."
The above views of honorable Delhi High Court were endorsed by honorable Supreme Court of India in the case of CIT V/s Madhur Housing and Development Company & Ors. (2018) CTR (SC) 524.
The honorable Supreme Court of India in the case of CIT V/s C. P. Sarathy Mudaliar also held that the provisions of Section 2(22)(e) create a fiction bringing in amounts paid otherwise than as dividend into the net of dividends and therefore, this clause must be given a strict interpretation.
I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 19 The Co-ordinate bench of Honorable ITAT, Mumbai Benches in the case of The Bombay Oil Industries Limited V/s Deputy Commissioner of Income Tax in (2009) 28 SOT 383 (Mum) held that Section 2(22)(e) of the Act enacts a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the Section. Such a deeming fiction would not be given a wider meaning than what it purports to do. This provisions would necessary be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits.
The honorable Bombay High Court also had an occasion to interpret the provisions of the section under consideration on this aspect in the case of Commissioner of Income Tax V/s Jignesh P. Shah (2015) 274 CTR 198 (Bom) wherein the honorable high court following its own decision in the case of CIT V/s Universal Medicare Private Limited (2010) 324 ITR 263 (Bom) and endorsing the views of honorable ITAT (SB), Mumbai in its decision in the case of ACIT V/s Bhaumik Colours Private Limited 313 ITR 146, concluded that the Section 2(22)(e) is required to be strictly interpreted and therefore the amount given to non-shareholder cannot be termed as deemed dividend under any circumstances.
The above ruling has been rendered in the similar set of circumstances and therefore the same is squarely applicable to the instant case of the assessee without any apprehension whatsoever. The honorable high court also opined that fiscal status have to be interpreted strictly and in this regard referred to the case of CIT V/s Vatika Township 2015 (1) SCC 1 wherein it was observed as under:-
"At the same time, it is also mandated that there cannot be imposition of any fax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the provision concerned of the taxing statue is ambiguous and vague and as susceptible to two interpretations, the interpretation which favours the subjects, as against the Revenue, has to be preferred. This is a well established principle of statutory interpretation, to help finding out as to whether particular category of assessee is to pay a particular tax or not. No doubt, with the application of this principle, the courts make Endeavour to find out the intention of the legislature. At the same time, this very principle is based on "fairness" doctrine as it lays down that if it is not very clear from the provisions of the Act as to whether the particular tax is to be levied to a particular class of persons or not, the subject should not be fastened with any liability to pay tax."
The above observations of honorable Supreme Court of India signify the fact that even when a judicial interpretation leads to more than one conclusion the conclusion which is favorable to the assessee should be banked upon, however in the instant case the provisions are quite unambiguous and crystal clear which state that the first and foremost condition to invoke the provisions of the section under consideration is that the person to whom loan or advance is made should be a shareholder beneficially holding more than 10% shares of such company.
The honorable Madras High Court in the recent case of Commissioner of Income Tax V/s Checkpoint Apparel Labeling Solution India Limited (2021) 276 Taxman I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 20 312 (Mad) held that since the recipient of the loan was not a shareholder in a company from which the loan was received, hence loan cannot be assessed as deemed dividend. Similarly the honorable Income Tax Appellate Tribunal, 'C' Bench, Chennai in a recent decision in the case of Pallava Resorts Private Limited V/s The Income Tax Officer (2022) 197 ITD 411 (Chennai) alsn held that there cannot be any deemed dividend if the recipient of the loan is not a shareholder of the company from which loan is received.
Sir, it is quite relevant to note that as per the provisions of The Companies Act a company cannot pay any dividend to any person who is a non- shareholder under any circumstances. The relevant provisions of Income Tax Act merely extend the scope of dividends and do not seek to treat a non-shareholder as shareholder and therefore the mischievous interpretation adopted by the learned assessing officer do not have any legal leg to stand. It is also respectfully brought into kind attention of your honor that deemed dividends can be taxed only in the hands of person to whom loan or advance has been given by the company subject to the condition that before doing so it is required to be determined whether the said person would have been taxed with respect to normal dividends also had it been declared by the company under normal circumstances as per the provisions of The Companies Act. It therefore follows that if dividends declared by the company in normal course is taxable in the hands of recipient of loan then only the deemed dividends can be taxed in his hand and not otherwise. In the case under reference the recipient of loans being non-shareholders were not entitled to dividends declared by the company in normal course and therefore the receipt of loans by them cannot be held as deemed dividends under any circumstances.
In view of above explanation it is thus beyond doubt that in order to invoke the provisions of Section 2(22)(e) the recipient of loan or advance must be a shareholder beneficially holding more than 10% shares of such company and if it not so, the provisions of said section cannot be made applicable under any circumstances. It is further stated that the action taken by learned assessing officer is an attempt to exponentially enlarge the scope of the provisions of law on imaginary grounds and nothing else. The case laws referred by the assessee at the relevant point of time during the course of assessment proceedings were either totally ignored or misinterpreted or summarily rejected by the learned assessing officer on imaginary and self-conceived grounds. The additions made on such a flimsy and imaginary grounds are neither legally justified nor warranted.
In the instant case the company namely GK Tobacco Industries Private Limited made short term loans/ deposits to above referred parties out of surplus funds available with it in order to earn income by way of interest on idle funds for short term tenure. As a general practice and out of pure commercial prudence, the company whenever it has idle surplus/ investible funds, make investment thereof in securities or lend it for earning interest from third parties.
It may be visualized that the company has charged interest on such short term loans/ deposits made to the said persons and offered the interest so earned for taxation during the assessment year under consideration. The amount of interest earned by the I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 21 company from both the parties namely Mr. Sunil Jain and Mr. Heera Lal Modi was Rs.34.56 Lacs and Rs. 19.43 Lacs respectively.
The loans/ deposits made by the company to such persons were clearly for short term tenure and intended to be refunded within the agreed time. The said intentions are quite clear as the deposits were refunded by the above referred persons to the company along with agreed interest with in the year under consideration itself. The above fact is quite evident from the documents on record submitted by the assessee during the course of assessment proceedings.
It is therefore earnestly submitted that the transactions emanating out of pure commercial or business prudence are not at all intended to be covered by the provisions of Section 2(22)(e) of Income Tax Act, 1961 and the said position of law has been clearly endorsed in various judicial rulings at different levels of judicial proceedings.
In this regard the kind attention of your honor is also invited towards the fact that Mr. Sunil Jain and Mr. Heera Lal Modi who made loans or advances to the assessee under the separate arrangement entered with him, charged interest to the extent of Rs.40.32 Lacs and Rs.22.66 Lacs respectively from him. It is a factual conclusion that both the person charged interest from the assessee on much higher rate as compared to the rate which was charged from them by the company. The income in the form of differential interest was taken by both the persons in their respective computation of income and offered for taxation.
The sequence of events clearly show that the assessee had taken loan from such parties for short term tenure and repaid it with interest with in the agreed time resulting into definite finding that no undue commercial advantage or gain has been derived by him out of such arrangement and therefore the inference drawn by the assessing officer is absolutely harsh and erroneous.
The fact that the amount has come in the bank account of the assessee from the said parties and the same has been repaid back to them within a short period of time along with agreed interest is sufficient enough to prove that neither any money nor any other monetary benefit has remained with him and in these circumstances no individual benefit can be said to have been derived by him from the arrangement. If there was at all any benefit from the said arrangement then the same may be said to have been derived only by either the company G K Tobacco Industries Private Limited who has earned interest on its surplus funds advanced to recipients of loans or by both the parties under consideration who have obtained funds at lower rate of interest from the company and charged higher rate of interest from the assessee on loans granted to him. In these circumstances when no benefit or income has either accrued to the assessee or remained with him, no tax liability can be fastened on him in any manner whatsoever.
In this regard it is also very kindly brought into the notice of your honor that although the transactions under reference do not at all attract the provisions of Section 2(22)(e) of Income Tax Act, 1961 yet it will not be out of context to mention I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 22 here that even where the transactions have attracted the provisions of the said section it has been held that if the loan has been repaid along with interest in the same year, there cannot be any application of provisions of the said section. In this regard reference is invited towards the cases of PCIT V/s Govind Promoters Private Limited (2022) Taxman 42 (Cal) and PCIT V/s Suprabha Industries Limited (2022) 286 Taxman 156 (Cal) wherein the above conclusion has been clearly drawn by the honorable court.
In view of foregoing it is submitted that in the transactions under reference neither any individual benefit can be said to have been derived by the assessee nor the transactions fall in the ambit of any other limb of the provisions of Section 2(22)(e) of Income Tax Act, 1961 and therefore the addition made by the assessing officer cannot be held as justified under any circumstances.
Sir, the kind attention of your honor is further drawn towards the fact that Mr. Sunil Jain and Mr. Heera Lal Modi are neither relatives nor employees of the company or the assessee. They are simply business associates of the company and are connected to its suppliers. These persons are neither agents of the assessee nor his puppets who will act on behest of him. Both the persons are independent persons having their own commercial identity and acted independently on their own behalf. The transactions so entered into by them, in fact resulted into significant commercial gains to them which they have factually derived out of the said transactions and there is nothing on record to prove/ show that they were acting in connivance with the assessee for his advantage or were his benamidars.
The allegation levelled by the assessing officer may at best be said to be a result of suspicion or presumption which however grave that may be cannot take place of actual happening or evidence. The additions made on the foundation of such suspicion or presumptions are never allowed under the taxation laws It is further submitted that the Conclusive Presumptions/ proofs can be considered as one of the strongest presumptions. With regards to Conclusive proofs, the law has absolute power and shall not allow any proofs contrary to the presumption The general definition of Conclusive Proof is a condition when one fact is established beyond doubt, then the other facts or conditions become conclusive proof of another as declared under the relevant provision.
Legal fictions compel to believe the existence of an artificial state of facts which may be contrary to the real state of facts. When a fiction is created by law, it is not open to anybody to plead or argue that the artificial state of facts created by law is not true. The basic purpose of a deeming provision is an assumption that something is true even though it may be untrue. It creates a presumption that accepts something as fact without the benefit of evidence and further the legal consequences of such facts have to follow accordingly. Under such circumstances, when on the proof of one fact, which, in the case in hand is fact of advancement of loan to the beneficial share holder holding more than 10% shares of such company, the other fact that such a loan is a diversion of the accumulated profits of the company for the benefit of such a shareholder, hence income of the shareholder, is to be assumed automatically. For I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 23 raising such an irrefutable presumption, the first set of facts which are deemed to be conclusive proof of the other, i.e. regarding the advancement of loan to the beneficial share holder holding more than 10% shares of such company has to be proved strictly and beyond reasonable doubt and such facts cannot be assumed or presumed merely on the basis of suspicion, howsoever strong it may be.
Sir, before invoking the provisions of the said section another dimension which is required to be kept in mind is that to whom the loan has been granted and who will be under obligation to repay the said loan and interest thereon. It is also required to be determined that who will be a legal debtor in the books of account of the company and who will be liable to be sued in case there is default in repayment of either the principal amount or interest thereon. In this regard as per the factual matrix of the case it is beyond doubt that it was definitely not the assessee who was liable to repay the said loan or interest thereon as the loan was neither granted to him nor he had guaranteed the same. The fact that the loan was granted by the company to independent parties having their own independent status and identity under commercial arrangement with the company is sufficient enough to negate application of provision of the Section 2(22)(e) of Income Tax Act, 1961 in the case under consideration. The learned assessing has therefore reached at grossly erroneous findings to justify him stand in order to impose undesirable tax liability on the assessee.
Sir, the learned assessing officer has alleged that the arrangement was a colorable devise to avoid payment of legitimate taxes and in this regards it is submitted that had the arrangement would have been a colorable devise as alleged by the assessing officer, why the assessee would have paid higher interest to such parties when the company charged lower interest from them. It is further submitted that had there been any intention to adopt a colorable devise to take advantage out of such arrangement the assessee would have taken loan or advance either without interest or at least at the same rate of Interest and not on higher rate of interest.
In this regard it is also stated that before reaching to the conclusion that any arrangement was a colorable devise to bypass the provisions of the income Tax Act, it is required to be proved by way of concrete/ conclusive evidence that the assessee has acted with any mala-fide intention or has in fact made any illicit or undesirable gains out of the said arrangement and if it is not so the allegations are completely out of context and are liable to be summarily rejected.
The assessing officer has undesirably tried to compare the case under reference with the case of Mc Dowell & Co. Ltd V/s Commercial Tax Officer (1985) 22 Taxmann 11 (SC) to label it as illegitimate tax planning whereas in the instant case the issue under reference is based on theory of deeming fiction wherein there cannot be any role of any tax planning.
The above factual analysis suggests that the assessing officer has not evaluated the issue in totality and merely relied on the partial facts and circumstances which suits his side of imaginary story whereas had the issue been evaluated based on the totality I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 24 of circumstances there would have remain no scope of making an adverse case out of it.
In view of above analysis it is urged that unwarranted and undesirable addition made by the assessing officer by unnecessarily invoking provisions of section 2(22)(e) of Income Tax Act, 1961 may please be quashed or deleted as the same has only resulted into high pitch assessment to create undesirable and unlawful demands during assessment proceedings on the basis of pre-judicial and pre-conceived notions.
The learned AO has also referred to the observation of the Apex Court in the case of National Travel Services Vs Commissioner of Income Tax, Delhi, VII in Civil Appeal Number 2068-2071 of 2012 dated 18.01.2018 that "this being the case, we are prima facie of the view that the Ankitech judgment (supra) itself requires to be reconsidered". However, the learned AO failed to realize that the honourable Apex Court in the said case has not given any decision rather it has thought it prudent to refer the matter to CJI in order to constitute an appropriate Bench of three learned judges in order to have a relook at the entire question. Your honour, we are not aware of the formation and decision of any such Bench of the Apex Court nor is the same pointed out by the learned AO. Thus, as on the current date the decision of the Apex Court in the case of Ankitech judgment (supra) holds good till a different decision is given by the Honourable Apex Court deviating from the existing decision. Thus, we are of the view that the learned AO cannot deviate from the decision of the Apex Court in the case of Ankitech judgment (supra) just on the basis of the observation of the Apex Court in the case cited by him."
7.1 The ld. AR of the assessee to drive home to the contentions so raised has also relied upon the following decisions:-
S. No. Particulars Page No.
1. CIT vs. Ankitech (P) Ltd & Ors 340 ITR 0014 (Del) 01-04
2. CIT vs. Madhur Housing & Development Co. & Ors 401 ITR 152 (SC) 05-06
3. CIT vs. Jignesh P. Shah 372 ITR 392 (BOM.) 07-13
4. Pr. CIT vs. Govind Promoters (P) Ltd. 289 Taxman 42 (Cal) 14-16
5. G.G. Continental Trades (P) Ltd vs. DCIT (2023) 37 NYPTTJ 976 17-25 (ASR)
8. We have heard the rival contentions and perused the material placed on record and gone through the various judicial precedent cited by both the parties to drive home to their contention on the issue disputed. The brief fact of the case I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 25 is that the assessee is an individual and has efiled return of income for the year under consideration declaring gross total income of Rs. 4,93,97,143/- and also claimed a deduction under chapter VIA for an amount of Rs. 1,60,000/-. The assessment in the case was completed on 19/04/2021 by making an addition of Rs. 16,30,00,000/- by invoking the provision of section 2(22)(e) of the Act. The fact as emerges from the order of the lower authority is that the assessee is having substantial interest in the company M/s G. K. Tobacco Industries Pvt.
Ltd. by virtue of holding 51% of the shares in the said company. From the said companyin fact assessee has not received any loans or advances and thus the assessee is not debtor-creditor for the direct financial transaction.
8.1 The ld. AO while making the assessment noted that the assessee is in receipt of loans aggregating to Rs. 16,30,00,000/- from two unrelated parties, namely from Shri Sunil Jain for an amount of Rs.9,00,00,000/- and Shri Heera Lal Modi loan amount of Rs.7,30,00,000/-. In the course of the assessment proceedings, the ld. A.O. examined the issue and found that the aforesaid sum of Rs. 16,30,00,000/- which is received from the said two non related parties are in fact received from the company M/s G. K. Tobacco Industries Pvt.
Ltd.(GKT) by way of interest-bearing loans extended to Shri Sunil Jain Rs.9,00,00,000/- and Shri Heera Lal Modi Rs.7,30,00,000/-. The ld. AO noted that the loans advanced by the GKT has link between the money received by the assessee form Mr. Jain and Mr. Modi. Thus, the ld. A.O. believed these were I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 26 not in the nature of normal business transactions, and the assessee devised an arrangement (or a colourable device) to obtain the loan of Rs. 16,30,00,000/-
from the company wherein the assessee holds substantial interest. This routing of money through the conduits, being Shri Sunil Jain and Shri Heera Lal Modi is nothing but to avoid the risk of the said sum being taxed as 'deemed dividend' u/s 2(22)(e) of the Act.The ld. CIT(A) noted that the AO has not probed the matter in detailed, but drawn his conclusions in haste. The ld. A.O. has not even examined Shri Sunil Jain and Shri Heera Lal Modi to establish that the transaction entered into by them either with M/s G. K. Toabcco Industries Pvt. Ltd, or the assesseeare in normal course of activity or to avoid any alleged violation of provision of law. The fact that the said loans were interest-bearing and the payment of interest charged is not disputed before the ld. CIT(A) or not before us by the ld. AO through the ld. DR. It is also not in dispute that both person Shri Sunil Jain and Shri Heera Lal Modi are not shareholders of the company M/s G. K. Tobacco Industries Pvt. Ltd. in which the assessee has substantial interest. Thus, the transactions entered between Shri Sunil Jain and Shri Heera Lal Modi and the company were at arm's length having regard to the substantial quantum of interest paid on the said loans. Similarly, the assessee has paid even higher interest on these loans taken from Shri Sunil Jain and Shri Heera Lal Modi. All the parties involved are duly assessed to income-tax regularly and the aforesaid interest incomes have been offered in their I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 27 respective return of income-tax returns. In such facts and circumstances, the allegation of the A.O. for a colourable device being adopted by the assessee in the case on hand is not supported by any cogent evidence. As noted from the record, the assessee has repaid the entire loan along with the interest during the year and thus, it is not clear as to how the A.O. has even alleged that the assessee has derived the benefit or gains in terms of provisions of section 2(22)(e) of the Act, more particularly due to the fact that the sum of Rs.
16,30,00,000/- was received by the assessee from the third-party Shri Sunil Jain and Shri Heera Lal Modi by way of loan and not from the company M/s G. K. Tobacco Industries Pvt. Ltd. in which the assessee has substantial interest.The primary condition to invoke the provisions of section 2(22)(e) is that the advance or loan must have been given to a person who is the owner of shares beneficially holding not less than ten percent of voting powers of the company.
Shri Sunil Jain and Shri Heera Lal Modi i.e. the persons receiving loan from M/s. G.K. Toabcco Industries Pvt. Ltd. do not hold any share of the said company. These individuals are mere business associates of the said company.
The provisions of section 2(22)(e) operate on deeming fiction and the transaction covered by the section are deemed as dividends. The deeming fictions are to be construed strictly and the liability of tax cannot be fixed on such assumptions and presumptions. The provisions nowhere stipulate that the transactions with a person who is not a beneficial shareholder are to be covered I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 28 under the purview of the provisions of the said section. Thus, as per provisions of section 2(22)(e), it becomes clear that the provisions of section 2(22)(e) cannot be attracted for the loan transactions between the appellant and Shri Sunil Jain and Shri Heera Lal Modi for the apparent reasons that such a transaction could not be deemed to be a loan transaction between the assessee and the company GKT in the absence of any evidence being brought on record by the ld. A.O. Even, as per provision of the Companies Act, a company cannot pay any dividend to any person who is not a shareholder of the company. The deemed dividends can be taxed only in the hands of person who holds the beneficial shares and the money has to flow from the pocket of the company. In the present case, the recipient of loans being non-shareholders were not entitled to dividends declared by the company in normal course. The transaction are interest bearing between the parties. Therefore, receipt of loans by them cannot be covered as the transaction of deemed dividends and that these were loan transaction the parties have charged the interests. In the present case M/s G. K. Tobacco Industries Pvt. Ltd. made short term loansto a number of parties including Shri Sunil Jain and Shri Heera Lal Modi out of the surplus fund available with it in order to earn income by way of interest on idle funds for short period. The company has also charged interest from Shri Sunil Jain and Shri Heera Lal Modi. This aspect of the matter is not disputed by the revenue by bringing anything contrary on record. Thus, when the transaction between the I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 29 company, Shri Sunial Jain and Shri Heera Lal Modi are commercial interest bearing loan transaction with the merely transaction from mere analysis of the bank statement without confronting any of the parties involved making the addition merely on the presumption or assumption cannot fasten the liability and that too under the deemed provision of the law. The transactions emanating out of normal commercial and business prudence are not covered by the provisions of section 2(22)(e). Besides the company, Shri Sunil Jain and Shri Heera Lal Modi have also paid taxes on the differential interest received by them. The aforesaid facts show that receipt of loans by Shri Sunil Jain and Shri Heera Lal Modi and subsequent loans to the assessee have not resulted in any undue commercial advantage or gain to the assessee. The ld. AO has not brought on record any evidence so as to prove that the transactions with the company by Shri Sunil Jain and Shri Heera Lal Modi were entered in connivance with the assessee for his advantage and before doing so none of the parties were examined by the ld. AO. It is a cardinal principal of law that suspicion howsoever strong cannot take the place of evidence. In fact the ld. AO through the ld. DR even during the course of hearing did not bring on record to justify the addition. The loan transactions where the exchange of interest at the commercial rates are charged and the transaction are through normal banking channel and the same being short term loan has been adjusted. These commercial loan transaction cannot be coloured as deemed dividend when there I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 30 is no direct or indirect involvement of the assessee is proved. In fact the assessee paid interest at a higher rate to the lenders Shri Sunil Jain and Shin Heera Lal Modi than the interest charged by the company and thus, it would be difficult to presume an arrangement or colourable device in respect of the transactions, In any case, the ld. AO has not brought on record any evidence that the assessee has acted with any mala fide intention or has in fact made any undesirable gains by recording statement of any of the person before arriving at such conclusion. Thus, the 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 clause or to a concern in which such shareholder has a substantial interest. Dividend under the clause also includes any payment by such company on behalf or for the individual benefit, of any such shareholder. Deemed dividend under this clause would be to the extent the company in either case possesses accumulated profits. The shareholder referred to here should be beneficial owner of shares holding not less than 10% of the voting power but those shares should not be shares entitled to a fixed rate of dividend with or without a right to participate in profits. Here the assessee has not received any benefit from the company. The object of this clause (e) of section 2(22) is that a company in which public are not substantially interested may not declare dividends or adequate dividends and may not merely give loans to shareholders and such loans not being dividends I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 31 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 income under the law. It is to avoid the evil of this nature that clause (e) of section 2(22) has been enacted. This clause created a fiction that the amount in question was dividend. Normally legal fictions are created for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate filed. However, legal fictions ought to be carried to its logical conclusion within the framework of the purpose for which it was created. Thus on careful consideration of the overall facts and the case on hand, in the light of the provisions of section 2(22)(e) and the object for enacting the said section, clearly reveals that the assessee is not hit by clause (e) of section 2(22) because - (i) the assessee has not received any payment from the company by way of loan or advance during the year; (ii) the assessee has received loans from Shri Sunil Jainand Shri Heera Lal Modi who are independent third-party and not related party vis-à-vis the company nor are they relatives of the appellant, (iii) the transactions of loans have been undertaken at commercial rate of interest, and the assessee has repaid the entire loan during the year along I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 32 with the requisite interest, and (iv) the ld. AO has not brought on record any materials or cogent evidence to prove that Shri Sunil Jain and Shri Heera Lal Modi obtained the loans from the company on behalf of or for the benefit of the assessee and before arriving to such conclusion he has not recorded the statement of any of the parties involved before making such several allegation against the assessee. Thus, the mere allegation is not sufficient but it must be shown to be so on the basis of material evidence as to the actual conduct of the parties involved and the commercial significance embedded in the said transactions. Thus, the AO has not been able to make out a case of collusive arrangement whereby the assessee has used the conduits in order to receive the sum of Rs. 16,30,00,000/- by way of loan from the company in which he holds substantial interest. On the contrary the facts of the case is commercial substance in the said loan transactions between the assessee and Shri Sunil Jain and Shri Heera Lal Modi in which the lenders are independent third-party/ unrelated party vis-à-vis the assessee as well as the company in which the assessee holds substantial interest. In the circumstances, the doctrine of colourable device as enunciated in the landmark judgment of the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. vs. Commercial Tax Officer (1985) 22 Taxman 11 (SC) is not applicable to the facts unfolding in the appellant's case and thus, the ld. AO has merely based on the assumption and pesumptions invoked the provision of the act and trying impose the doctrine of I.T.A. No.241/Jodh/2023 Gopi Kishan Malani 33 colourable device without bringing anything contrary on record. Based on these set of arguments and discussion so recorded herein above we note that there is no infirmity in the finding of the ld. CIT(A) in holding that the action of the ld.
A.O. in treating the sum of Rs. 16,30,00,000/- as deemed dividend u/s 2(22)(e) of the Act is not correct and thus we confirm finding of the ld. CIT(A) that considering the set of facts discussed herein above and in the order of the ld.
CIT(A) the provisions of section 2(22)(e) does hit in the present case of the assessee.
In terms of this observation the appeal of the revenue stands dismissed.
Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 by placing the details on the notice board.
Sd/- Sd/-
(Rathod Kamlesh Jayantbhai) (DR. S. Seethalakshmi)
Accountant Member Judicial Member
Dated 09/04/2024
Santosh
Copy of the order forwarded to:
(1)The Appellant
(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.
True Copy
By order