Income Tax Appellate Tribunal - Bangalore
Mr. Raja Bagmane, Bangalore vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE GEORGE GEORGE K., JUDICIAL MEMBER
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA Nos. 484 to 490/Bang/2010
Assessment years : 2001-02 to 2007-08
Mr. Raja Bagmane,
No.497, 14th Main,
3rd Block, Koramangala,
Bangalore. : APPELLANT
Vs.
The Asst. Commissioner of
Income Tax,
Central Circle 2(3),
Bangalore. : RESPONDENT
Appellant by : Shri B.P. Sachin Kumar, C.A.
Respondent by : Smt. Swathi S. Patil, CIT-II(DR)
ORDER
Per Bench These seven appeals of the assessee are directed against the orders of the Ld. CIT (A)-VI, Bangalore, in ITA No.264/ ACIT CC 2(3)/ CIT (A)-VI/ 2008-09 dated: 2.2.2010 for the assessment year 2001-02 and a consolidated order in ITA Nos: 261, 262, 263, 265, 266 & 267/ ACIT CC 2(3)/ CIT (A)-VI/ 2008-09 dated: 2.2.2010 for the assessment years 2002- 03, 2003-04, 2004-05, 2005-06, 2006-07 & 2007-08 respectively.
ITA Nos.484 to 490/B/10
Page 2 of 40
I. A.Y 2001-02 - ITA NO:484/10:
2. The assessee had raised four (sic) three grounds in an illustrative and narrative manner. For the sake of proper appreciation of facts, the issues are reformulated, in a concise manner, as under:
(i) the CIT(A) erred in sustaining the applicability of the provisions of s.2(22)(e) of the Act;
- the CIT(A) ought to have appreciated that the transaction between the assessee and Bagmane Pharmaceuticals (P) Ltd [BPPL] in the course of business activities and that the amount received could not be held as 'dividend'; &
(ii) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act.
II. A.Ys 2002-03, 03-04, 05-06, 06-07 & 07-08 - ITA NO:485, 486, 488, 489 & 490/10:
3. For these assessment years, the assessee had raised the following identical grounds which are reformulated, in a concise manner, as under:
(i) the CIT(A) erred in sustaining the applicability of the provisions of s.2(22)(e) of the Act;
- the CIT(A) ought to have appreciated the transaction between the assessee and Bagmane Developers (P) Ltd [BDPL] were in the course of business activities and that the amounts received could not be held as 'dividend';
(ii) the CIT(A) erred in not reducing the actual tax liability of the relevant 'current year' from the profits of that year for the purposes of computation of 'accumulated profits'; & ITA Nos.484 to 490/B/10 Page 3 of 40
(iii) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act.
III. A.Y 2004-05 - ITA NO:487/10:
4. In this assessment year, the assessee had raised the following grounds which are reformulated as under:
(i) the CIT(A) erred in sustaining the applicability of the provisions of s.2(22)(e) of the Act;
- the CIT(A) ought to have appreciated the transaction between the assessee and Bagmane Developers (P) Ltd [BDPL] were in the course of business activities and that the amount received could not be held as 'dividend';
(ii) the CIT(A) erred in not reducing the actual tax liability of the relevant 'current year' from the profits of that year for the purposes of computation of 'accumulated profits';
(iii) the CIT (A) erred in confirming the action of the AO in disallowing the bad debts written off; &
(iv) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act.
5. As pointed out earlier, the issues raised in these appeals more or less similar and rather inter-linked; they were heard, considered and disposed off in this common order for the sake of convenience and clarity.
I. A.Y 2001-02 - ITA NO:484/10:
6. The assessee, an individual, was carrying on the business in real estate. An action u/s 132 of the Act was carried out on 14.9.2006 in ITA Nos.484 to 490/B/10 Page 4 of 40 the case of the assessee, his group of companies and connected other associates.
6.1. During the course of assessment proceedings, the AO noticed in the balance sheet of the assessee that an advance of Rs.16.64 lakhs was received from BPPL. On being queried, it was revealed that during the year the said amount was received from BPPL by an account payee cheque and that no further details could be furnished since the books pertaining to the AY under dispute were lost during the shifting of the office.
6.2. However, the AO was of the view that BPPL was a closely- held company and that the assessee was the Managing Director of this company. During the period under consideration, he was the beneficiary, holding more than 10% of equity share in this company. Taking cue from the provisions of s. 2 (22)(e) of the Act and since the assessee was a beneficiary holding more than 10% of equity share capital in BPPL and as per the Balance Sheet, the accumulated profit of the said company was Rs.19.35 lakhs and Rs.20 lakhs as on 1.4.2000 and 31.3.2001 respectively, the AO had required the assessee to respond as to why the advance given by BPPL should not be treated as deemed dividend in the hands of the assessee. On being queried, the assessee's reply was that Rs.16.64 lakhs being interest paid by BPPL against the funds provided by him earlier and since BPPL was started making losses and to protect the company from becoming sick, he decided and transferred back the same amount to the company.
ITA Nos.484 to 490/B/10 Page 5 of 40 6.3. Brushing aside the assessee's claim, the AO summed up in his impugned order that BPPL's only source of income for the AY under consideration was from leasing out the building, plant and machinery and that the money lending was not a substantial part of its business and, thus, the assessee cannot claim that the transaction done by this company was in its normal course of business. For the elaborate reasons set out in the impugned order, the AO had termed that the funds received by the assessee from BPPL was in the nature of loans and advances which come under the purview of s. 2 (22) (e) of the Act. Drawing strength from the ruling of the Hon'ble Supreme Court in the case of P.Sarada v. CIT reported in 229 ITR 444, the AO treated the entire amount of advance of Rs.16.64 lakhs received by the assessee from BPPL as deemed dividend in his hands and taxed accordingly.
6.4. Aggrieved, the assessee took up the issue with the CIT (A) for relief. After considering the contentions put forth by the assessee and also the perusal of the reasoning of the AO, the Ld. CIT (A) had observed thus -
(i) in the Balance Sheet of M/s. Bagmane Pharmaceuticals Pvt. Ltd, the amount has been showed under the head 'loans and advances'. The appellant also admitted the fact by showing the above amount under the schedule of advances and deposits in the annexure to the Balance sheet filed along with the return of income filed in his case;
(ii) the appellant failed to prove that the amount received as interest was returned back to the company, if it was so, then also the interest income was assessable in the hands of the appellant; &
(iii) the appellant's argument that the AO included the investment allowance reserve of Rs.584742/- and subsidy from DIC of ITA Nos.484 to 490/B/10 Page 6 of 40 Rs.750000/- in the accumulated profits for computing dividends is contrary to the facts on record, according to which the profit of BPPL as per profit and loss account was Rs.20,00,144/- without inclusion of the investment allowance reserve and subsidy from DIC. Even otherwise, the accumulated profit has to be taken as the commercial sense which will include the investment allowance reserve and subsidy also. This view is supported by the decision of the Hon'ble Supreme Court in the case of Sri P.K.Badlani v. CIT 105 ITR 642 (SC) Accordingly, he justified the AO's action in bringing to tax Rs.16.64 lakhs u/s 2 (22)(e) of the Act.
7. Disenchanted with the finding of the CIT (A), the assessee has come up with the present appeal.
7.1. During the course of hearing, the Ld. A R reiterated more or less what was urged before the first appellate authority. In furtherance, it was submitted that the amount paid by the company was in respect of funds taken from the assessee; that the transaction between the assessee and BPPL was in the course of business activities and as such the same could not be held as dividend. It was, further, submitted that the authorities below erred in inclusion of investment allowance reserve and subsidy from DIC in the accumulated profit for the purpose of computing dividends. The Ld. D R present was heard.
7.2. We have duly considered the rival submissions. The assessee asserted that the amount paid by the company was in respect of funds taken from the assessee in the earlier years, which if the interests offered by the company were to be accepted by the assessee, the loss of the company would have increased further. However, before the AO, it ITA Nos.484 to 490/B/10 Page 7 of 40 was contended that during the year, Rs.16.64 lakhs received from BPPL through an account payee cheque and since the books pertaining to AY 2001-02 had been lost in transit during shift of office, no further details could be furnished. The assessee in his, further, communication dt:
12.12.2008 submitted before the AO that "the company paid interest of Rs.16.64 lakhs for earlier years during the assessment year 2001-02.
However, the company is started making losses and to protect the company from becoming sick, it was decided that Raja Bagmane will not charge any interest, transfer back the funds received by him and to advance further funds to safe guard the interest of the company and share holders. Since this fund received was returned which was actually due to him (earlier to 2000-01) as interest and no individual benefit was derived from such funds, we kindly pray to you not to treat the said sum as deemed dividend and charge tax in the hands of Mr.Raja Bagmane."
7.3. However, we find there were contradictions in the submissions of the assessee. He had not produced any proof for having received the amount through account payee cheque and, subsequently, the amount was transferred back to the company to save from becoming sick, that the fund received was returned which was actually due to him etc., No documentary evidences are forth-coming to suggest that the assessee had advanced the fund to the company prior to the AY 2000-01, the company was in the verge of becoming sick and also not established that no individual benefit was derived from such transaction. In view of the above, we are of the firm view that the AO was justified in treating the amount of ITA Nos.484 to 490/B/10 Page 8 of 40 Rs.16.64 lakhs received by the assessee from BPPL as deemed dividend in the hands of the assessee. It is ordered accordingly.
8. The other objection was that of the CIT(A)'s stand in confirming the order of the AO in inclusion of investment allowance reserve and subsidy from DIC in the accumulated profits for the purpose of computing dividends. On a glimpse of the impugned orders of authorities below, we find that the assessee's claim was contrary to the actual fact in the sense that the AO had not included the investment allowance reserve of Rs.5.84 lakhs and subsidy from DIC of Rs.7.5 lakhs in the accumulated profits for computing the dividends. Even otherwise, the AO's stand, as rightly highlighted by the CIT(A), had the judicial support to the effect that the accumulated profits had to be taken at the commercial sense which will include the investment allowance reserve and subsidy too [verdict on a similar issue by the Hon'ble Supreme Court in the case of P.K.Badiani v. CIT 105 ITR 642 (SC)]. Thus, this issue is decided against the assessee.
9. The last ground of the assessee was that the CIT (A) erred in upholding the levy of interest u/s 234B of the Act. This ground of the assessee is not maintainable as charging of interest u/s 234B of the Act is mandatory and consequential in nature. This ground is, therefore, dismissed II. A.Ys 2002-03, 03-04, 04-05, 05-06, 06-07 & 07-08 - ITA NO:485, 486, 487, 488, 489 & 490/10:
10. The common issue raised in respect of these assessment years was with regard to the applicability of the provisions of s. 2 (22)(e) of the Act.
ITA Nos.484 to 490/B/10 Page 9 of 40 10.1. Briefly stated, it was noticed by the AO during the course of assessment proceedings for the assessment years under consideration that the assessee was a beneficial owner of the shares holding 99% shares in the case of BDPL which was having accumulated profits in all the above AYs and shown unsecured loans in the books of accounts in the name of the assessee. Accordingly, for the elaborate reasons recorded in the respective assessment orders under dispute, the AO treated the unsecured loans shown by BDPL to the extent of the accumulated profits of BDPL of the respective assessment years in the hands of the assessee as deemed dividend u/s 2 (22)(e) of the Act. The following chart shows the loans and advances given by BDPL to the assessee and the amounts treated as deemed dividends in the assessee's hand for the respective assessment years:
Asst.year Loan and Assessed as
advances deemed dividends
2002-03 Rs.2,45,57,022 Rs. 15,74,755
2003-04 Rs.3,57,78,308 Rs. 3,05,995
2004-05 Rs.2,77,81,341 Rs.2,77,81,341
2005-06 Rs.6,41,59,544 Rs.6,41,59,544
2006-07 Rs.7,68,47,008 Rs.7,68,47,008
2007-08 Rs.4,23,16,001 Rs.4,23,16,001
11. Disappointed with the action of the AO referred supra, the assessee had approached the Ld. CIT (A) for redressal. After due consideration of the spirited arguments of the assessee and also reasoning of the AO, the Ld. CIT (A) was of the firm view that -
ITA Nos.484 to 490/B/10 Page 10 of 40
(i) the assessee in his sworn statement admitted that BDPL and he himself cannot acquire the agricultural lands which were required for the business of BDPL, once the assessee was not entitled to purchase the agricultural land, the argument that the payments were made by BDPL to acquire the lands for the business of the company to the assessee do not have any weight and, therefore not acceptable;
(ii) the AO had also brought on record that the assessee himself was engaged in the business of purchase and sale of lands in his individual capacity. It was also evident from the fact on record that between 1.4.2000 to 31.3.2007, the assessee had not transferred any land to BDPL. Even if the land was purchased for sale to BDPL in future doesn't alter the true nature of transaction i.e., the payment was made to the assessee as loan and advances for individual benefit to him;
(iii) the assessee's argument that the book entries cannot decide the ambit of taxation was not acceptable in view of the provisions of s 2 (22)(e) of the Act, according to which, not only the loans and advances but any payment made for individual benefit of a share- holder who was the beneficial owner of shares holding not less than 10% of the voting power comes under the purview of s.2 (22)(e) of the Act;
- As the AO after examining the facts of the case in detail had arrived at a conclusion that the payments were made to the assessee for his individual benefit, therefore, even if the same were not treated as loan or advance, the same comes under the purview of s. 2 (22)(e) of the Act as the payments were made for the individual benefits of the assessee;
(iv) Sheltering himself [the Ld. CIT (A)] in the rulings of the Hon'ble Supreme Court in the cases of (a) Miss P.Sarada v. CIT 229 ITR 444 (SC); (b) Navnit Lal's case 56 ITR 198 (SC) and (iii) Smt. Tarulatha Shyam 108 ITR 357 (SC), it was clear that the provisions of s. 2 (22)(e) of the Act were clearly applicable to the case of the assessee in respect of loans and advances and, accordingly, the AO was right in invoking the provisions of s.2 (22)(e) of the Act.
ITA Nos.484 to 490/B/10 Page 11 of 40
12. During the course of hearing before us, the spirited arguments put forth by the Ld. A R to rebut the conclusion of the authorities below are summarized as under:
(i) the amounts received by the assessee were not advances as attributed by the Revenue, but, it were the funds in the course of business transactions the assessee tied up with BDPL and as such they were neither advances or loans to the assessee and, therefore, could not be classified as deemed dividends;
(ii) However, the AO held with a wrong notion that -
- as per Karnataka Land Reforms Act, no agricultural land can be purchased in the name of the assessee and, hence, whatever purchased was only through Veerappa and, therefore, the claim of the assessee that the funds were given to him by BDPL to procure land was untrue;
- BDPL was carrying on real estate business and it had itself purchased a plot of land in Byrasandra during FY 1996-97 on which it had developed an STPI and let-out. BDPL had purchased properties from HMT Ltd and from N.Narayana Reddy & Sons during the AYs 2006-07 and 2007-08 respectively. No other land was acquired by BDPL from the assessee;
- The assessee himself was carrying on real estate business in his individual capacity and whatever purchased by him was for his own business and not for BDPL;
- the 'procurement agreement' of the assessee cannot be accepted as genuine;
- the assessee himself had changed the head of account to 'unsecured loan' which indicate that the funds received by the assessee were in the nature of 'loans and advances';
- the amounts given by BDPL were profits which the company could have distributed to its shareholders;
- the advances taken by the assessee were without any interest;
- the transfer of funds from the company's account to the assessee's account includes payments made by the company on behalf of the assessee on various dates, e.g., payments made on 30.2.02 of Rs.1.38 ITA Nos.484 to 490/B/10 Page 12 of 40 crores to Embassy Investments and Rs.2.80 crores paid as share application money;
- the only exception was in respect of money advanced by a company carrying on money lending business which was not part of normal course of business of the company;
- with regard to the quantum of deemed dividends, the AO's observation was that though the outstanding liabilities as at the end of the year was different, the total advance received from BDPL during the each FY was to be taken as deemed dividend. The assessee may claim that the amount repaid during each year was not within the purview of s. 2 (22)(e) of the Act. This observation of the AO was totally wrong;
- the assessee further contended that the deemed dividend was chargeable only to extent of accumulated profits as on beginning of the year and that the current year profits cannot be considered for the purpose of deemed dividend. This was also untenable in the light the decision of Hon'ble Allahabad High Court in the case of CIT v. Roshanlal 98 ITR 349 12.1. The observation of the AO was, further, contested by the assessee that -
(a) The assessee's statement was recorded in 2006. by that time, the assessee had already procured certain lands and thus exceeded his limit as per the Karnataka Land Reforms Act. Therefore, Veerappa was involved in further purchase of lands;
(b) A plot of land in Byrasandra in FY 1996-97 on which the assessee had developed an STPI and let out was also purchased by the assessee during 1992 which was got converted to non-agricultural land and transferred to the company. The properties purchased by the company from HMT Ltd and N.Narayana Reddy and sons during AY 2006-07 and 2007-08 respectively were converted non-agricultural lands. No other lands had been acquired by the company as it cannot purchase any agricultural lands;
(c) The AO's other objection that the assessee was carrying on real estate business in his individual capacity etc., which was countered by the assessee that -
- whatever the assessee had purchased for self were only small dimensions of lands with less capital with a view to make layout and ITA Nos.484 to 490/B/10 Page 13 of 40 selling them as plots. However, the lands indented for BDPL were with high commercial value and larger proposition suitable for versatile complexes. The properties purchased by the assessee's relatives on behalf of BDPL were ultimately transferred to BDPL [source: P 199 - 247 of PB AR]
(d) The AO's objection that in the return of income for the AY 04- 05, the assessee had himself changed the head of account to 'unsecured loan' which indicated that the funds received by the assessee were in the nature of loans and advances which was countered by the assessee that in book-keeping, the entries in the books of accounts cannot go to decide the ambit of taxation;
Relies on -
(i) Fort properties Pvt. Ltd. 208 ITR 232 (Bom)
(ii) Kedarnath Jute Manufacturing co. Ltd. 82 ITR 363 (SC)
(iii) G.Ventakaswami Naidu 35 ITR 594 (SC)
(iv) Sultan Brothers 51 ITR 353 (SC)
(v) CIT v. Express Newspapers 53 ITR 250 (SC)
(vi) Sitalpur Sugar works v. CIT 25 ITR 548
(vii) CIT v. PKN Company Ltd. 60 ITR 65
(e) the AO's reason for rejecting the agreement was that it was not found at the time of search. It was not as if the search party was expected to record/seize every paper on which it lays its hands. This agreement was kept along with the other original belongings of the assessee and the searching party's reasoning in not seizing this agreement cannot now be speculated; and the worst, the assessee cannot be found fault with either;
- just because the said document was not seized by the search party, doesn't mean to conclude (as the AO did) that the document did not exist at all. The AO had not proved with any documentary evidence except alleging that the document was not genuine;
- no agreement needs to be reduced in writing and it can even be oral. Even if an agreement was reduced in writing, it doesn't require to be registered under s.17 of the Registration Act;
- In fact, all the agreements were reduced in writing on stamp papers, just because they were not registered, there can be no reason to reject them;
- The other reasoning of the AO that as per Specific Relief Act (SRA), the agreements were time-barred. The limitation starts from the day of default and not earlier and even if no remedy was available under ITA Nos.484 to 490/B/10 Page 14 of 40 SRA, the aggrieved party can have recourse to normal provisions of the Civil Procedure Code;
(f) The reasoning of the AO that the amounts given by BDPL were profits which the company could have distributed to its shareholders was unfounded as the same was utilized only to make the maximum possible efforts for investments in land and would like to conserve the resources and, thus, distribution of dividends would be its last priority, particularly when there were huge borrowals;
- the AO's presumption that the funds taken with no interest or end date by the assessee was one of the factors which led to prove that it being an advance or loan was unfounded since the amount was held by the assessee for procurement of properties on behalf of the company and as such there was no question of paying any interest;
- according to the AO, the only exception was in respect of money 'advanced' by a company carrying on money lending business. The question of exception will crop up only after considering the vital question as to whether the amount was an 'advance' or a loan or otherwise.
(g) With regard to the transfer of funds from the company's account to the assessee's account include payments made by the company on behalf of the assessee on various dates; for which, it was explained that -
- payments made on 30.3.02 of Rs.1.38 crores to Embassy investments and Rs.2.80 crores paid as share application money, the AO himself had admitted that on the opening day the company owed Rs.3.18 crores and during the year the assessee had paid the company a further sum of Rs.1.04 crores. Thus, what was transferred to the assessee's account was far less than the aggregate of the aforesaid amounts. Further, those two items were mere journal entries;
- payments made on 2.4.2002 of Rs.50 lakhs to Gautham Maini, this item was merely a journal entry;
- the credits on 11.4.05, 1.8.05 and 23.2.06 were mere journal entries which need to be excluded from the computation of deemed dividends. Excluding these, the deemed dividends could at best be Rs.2.47 crores for the AY 2006-07. This submission was, however, without prejudice to the assessee's main submission that there was no deemed dividend which could be assessable;
ITA Nos.484 to 490/B/10 Page 15 of 40
- It is a common knowledge that in journal entries there is neither flow out or flow in of funds. There was no deemed dividends to be taxed at all in the AY 2005-06. The cases relied by the AO have no application to the facts of the present case. relies on - G.R.Govindarajulu Naidu v. CIT 90 ITR 13 (Mad);
(h) A.Y. 2004-05: With regard disallowance of Rs.49.35 lakhs being the amounts written off as bad debts, the submission was that - Karnataka Chemsyn Ltd: Rs.42.85 lakhs: These funds were advanced to the above company to purchase surplus land at Jigani. The assessee being the director, no agreement was entered into. During the AY 2003-04, the said company had become sick and referred to BIFR. Since the company had become sick and was not in a position to transfer the lands in question, the advance paid by the assessee had become irrecoverable and, accordingly, written off in the assessee's books of account;
- Relied in the case law reported in the case of CIT v. Asea Ltd. 258 ITR 407 (Bom).
Divya Jayanth Rs.3.25 lakhs and Tasmi Jayanth Rs.3.25 lakhs: Token advances paid to the above persons aggregating to Rs. 6.5 lakhs for a property at Gottigere. While finalizing the property, it was found not legally viable to proceed further to acquire the property which was subsequently abandoned. As the advances paid could not be recovered since the transaction did not materialize, the same was written off in the assessee's books of account.
- Relied in the case law reported in the case of K. Raheja Dev. Corporation v ACIT 2 SOT 744 (Bangalore Bench).
12.2. On the other hand, the Ld. D.R. was very emphatic in her urge that the issue under dispute has been extensively analyzed by the AO and also drawing strength from various judicial pronouncements arrived at a conclusion that the entire amounts received from BDPL as loans for the AYs under challenge was rightly treated them as deemed dividends in the hands of the assessee by bringing them to tax net under the head 'income from Other Sources'. The learned first appellate authority had, after due ITA Nos.484 to 490/B/10 Page 16 of 40 consideration of rival submissions, substantiated the AO's action which vindicated the stand of the AO on this point.
With regard to the disallowance of bad debts, the submission of the Ld. D R was that the assessee had not produced any evidence in support of his claim and, therefore, bad debts were to be disallowed.
In conclusion, it was vehemently urged that the action of the authorities below requires to be upheld.
13. We have carefully considered the rival submissions, meticulously perused the relevant records, the various judicial pronouncements on which either party had placed their faith and also the voluminous paper books [in volumes I, II, III & IV running into hundreds of pages - group of cases] furnished by the Ld. AR during the course of hearing proceedings.
13.1. On a decisive examination of the relevant impugned assessment orders, the reasons for having arrived at such a conclusion that those amounts were to be treated as deemed dividends u/s 2 (22)(e) of the Act for the AYs under dispute, can be categorized as under:
(i) the assessee in his Balance Sheets up-to AY 2003-04 had shown the amounts payable to BDPL under the head 'outstanding liability' and afterwards under the head 'unsecured loans';
- in the Balance sheets of BDPL for the AYs under dispute, amounts receivable from the assessee have been shown under the head 'loans and advances';
- the balance sheets of BDPL show the accumulated profits for the relevant assessment years;
ITA Nos.484 to 490/B/10 Page 17 of 40
(ii) the assessee had failed to substantiate its claim that the funds were received from BDPL for business expediency and were in the nature of contractual payments;
(iii) the journal entries passed in various assessment years in the case of BDPL resulted into the personal benefit to the assessee;
- BDPL who advanced the loan to the assessee was not engaged in the business of money lending and, therefore, the loan given to the assessee comes under the purview of s.2 (22)(e) of the Act; 13.2. While dealing with the issue, the Ld. CIT (A) had reasoned thus -
(i) The assessee in his statement on oath admitted that BDPL and himself cannot acquire the agricultural land which was required for the business of BDPL, the payments were made by BDPL to acquire the lands for the business of the company to the assessee do not have any weight and therefore not acceptable;
(ii) The AO had brought on record that the assessee himself was engaged in the business of purchase and sale of the land in his individual capacity and that between the period from 1.4.2000 to 31.3.2007 the assessee had not transferred any land to BDPL &
(iii) The case laws relied on by the assessee cannot come to his rescue as they were distinguishable and the assessee's argument that the books entries cannot decide the ambit of taxation was not acceptable in view of the provisions of 2. 2 (22)(e) of the Act, according to which, not only the loan and advance but any payment made for individual benefit of a shareholder who was the beneficial owner of shares holding not less than 10% of the voting power comes under the purview of the said section. . 13.3. On analyzing the reasons attributed by the authorities below, the following crucial points were emerged -
(a) Both the entities - BDPL and the assessee - were in the businesses of (i) real estate of acquiring lands and developing them into ITA Nos.484 to 490/B/10 Page 18 of 40 buildings; and the other (ii) also being carrying on real estate business in his individual capacity.
(b) The prime objection of the AO was that as per the provisions of Karnataka Land Reforms Act [KLR Act], no agricultural land can be purchased in the name of the assessee and, hence, they were purchased through Veerappa. Therefore, the claim of the assessee that the funds were given to him by BDPL to procure land was not true etc., In this connection, it is relevant to reproduce the statement of the assessee on oath recorded on 11.10.2006 wherein he had stated that -
"3.6
(i)...................................................................................................
....................... Ans: As per the rules of Karnataka Land Reforms Act, neither I nor the companies of Bagmane group can acquire agricultural lands. Since lands are the bloodline of our trade, there is a necessity of buying agricultural lands. As such, we buy all the agricultural lands in the name of Mr. Veerappa as he is a phani holder and his income is below Rs.2 lakhs per annum. So only the agricultural land will be registered in the name of Mr.Veerappa. Payment to the land owners will be made by us directly and if any cash component involved will also be borne by us. All the registration and other incidental charges will be borne by us. Once the land gets converted, the land will be transferred to the company without any consideration. Conversion charges will also be borne by the company. In short Mr.Veerappa is only a conduit. He is not paid any consideration for this entire process. It is done out of goodwill."
(c) The assessee himself had admitted that the agricultural lands were purchased and registered in the name of Veerappa who was utilized as a conduit on behalf of the assessee to out-wit the provisions of Karnataka Land Reforms Act. Once all the agricultural lands have been converted into non-agricultural lands, they have been transferred to the company who have funded for the purchase of agricultural lands and ITA Nos.484 to 490/B/10 Page 19 of 40 subsequently converting them into non-agricultural purposes. The respective registered sale deed [pages 199 - 207 of Volume 2 of PB - AR ] which goes to prove that the monies so funded during the course of business and for the business purposes only.
(d) However, the AO had taken a stand that the claim of the assessee that the funds are given to him by the company to procure land is therefore not true. The reasons for arriving at such a conclusion have not been spelt out explicitly in the assessment orders with documentary evidence to belie the assessee's statement. The transactions which took place have not been disputed either.
(e) On the other hand, the assessee had produced a copy of Memorandum of Agreement made on 3.5.2002 [source: P.167 - 174 of PB AR] between the assessee, Veerappa and Smt. Vasundhara Raja (as vendors) on one hand and BDPL as purchaser for the properties situated at
(i) Byrasandra, (ii) Kaggadaspura village; (iii) Huthanhalli village, (iv) Jigani village for a total consideration of Rs.40 crores. It was mutually agreed upon that the vendors shall get converted the above schedule properties from agricultural purposes to non-agricultural purposes.
- The above agreement goes to prove that the assessee along with Veerappa (as his conduit) and Smt.Vasaundhara Raja have entered into an agreement with BDPL.
(f) On a perusal of the assessment order for the AY 2002-03, it was mentioned by the AO that the assessee was the Managing Director of ITA Nos.484 to 490/B/10 Page 20 of 40 BDPL and also carrying on real estate business in his individual capacity and his assessment records reveal that he had purchased a vast tract of land at Gottegere, developed it into residential layouts and sold them out and profits in ranges of Rs. 2.7 lakhs to Rs.70 lakhs from the AYs 2001-02 to 2006-07, however, he had shown a loss of Rs.66 lakhs from Gottigere project for the AY 2007-08. From the above, the AO had reasoned that the assessee had purchased the properties for his own business and not for the company. He had also listed out the alleged loans and advances received by the assessee from BDPL of Rs.1.41 crores, Rs.4.69 crores, Rs.6.63 crores and Rs.19.68 crores for the AYs 2002-03, 03-04, 04-05 and 06-07 respectively.
- In this connection, it is more appropriate to have a glimpse of the ruling of the Hon'ble Apex Court in the case of S.A. Builders v. CIT reported in 288 ITR 1 (SC) wherein the Hon'ble Court, in its infinite wisdom, had observed thus -
"The expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.........................................That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of whether the amount was advanced for earning profits...."
With highest regards, we would like to point that the assessee had received funds as a measure of commercial expediency of this venture ITA Nos.484 to 490/B/10 Page 21 of 40 which, in any stretch of imagination, can be termed as either 'advance or loan' as alleged by the Revenue. While deciding the issue in the case of S.A.Builders cited supra, the Hon'ble Supreme Court had puts its seal of approval to the ratio laid down by the Hon'ble Delhi High Court in the case of CIT v. Dalmia Cement reported in 254 ITR 377 (Del) wherein the Hon'ble Court held that -
"The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits."
(g) The AO's another contention was that the assessee was unable to substantiate its claim that the funds were given for business exigencies and was in the nature of contractual payments. In this connection, we would like to mention here that the balance-sheets, journal entries in the books of account amply make it clear that the funds were provided during the course of business..
(h) The other reasoning of the AO that the assessee had produced alleged non-registered procurement agreement dated: 11.2.2002 purportedly entered into between the assessee and BDPL represented by his wife Smt. Vasundhara Raja as a director of BDPL. As per the said agreement, the assessee had agreed to act as procurement agent of agricultural lands for and on behalf of BDPL. This claim, according to AO, belied the assessee's statement on oath wherein he had stated that it was not possible for him or the company to acquire agricultural lands as per ITA Nos.484 to 490/B/10 Page 22 of 40 KLR Act and as such, all agricultural lands were acquired in the name of Veerappa who was a phani holder etc.,
- It was also an undisputed fact that the assessee himself was engaged in a small scale in purchase and sale of lands in his individual capacity, but, at the same time he was not forbidden under any law to use his acumen-ship in the field of real estate business to procure vast agricultural lands on behalf of BDPL by using the name and services of Veerappa as a conduit thereby maneuvering to out-wit the provisions of KLR Act - stuck two mangoes in one stone.
(i) With regard to the AO's assertion that the claim of the assessee that he had entered into a procurement agreement dt.11.2.2002 etc., was contrary to his statement on oath wherein he had stated that it was not possible for him or the company to acquire agricultural land as per KLR Act etc., there are to aspects which require careful study, namely:
(a) The Procurement Agreement dt: 11.2.2002 was entered into between the assessee and BDPL and as per this agreement the assessee had agreed to act as procurement agent of agricultural land for and on behalf of BDPL. When the agreement was entered into in the year 2002 the assessee had agreed to act as procurement agent of agricultural land.
(b) When his statement was recorded at the end of the year 2006, he had stated that "As per the rules of KLR Act, neither I nor the companies of Bagmane group can acquire agricultural lands....... As such, we buy all the agricultural lands in the name of Mr.Veerappa as he is a phani holder and his income is below Rs.2 lakhs per annum. So only the agricultural land will be registered in the name of Mr.Veerappa.................."
ITA Nos.484 to 490/B/10 Page 23 of 40
- The simple logic behind this was that when the assessee had entered into a procurement agreement way back in 2002, he was eligible to acquire agricultural lands as per the provisions of KLR Act whereas the statement which was recorded at the fag end of year 2006, according to the assessee's contention before us, by that time, he had already made purchase of certain agricultural lands and thus reached the maximum limit as per KLR Act and, therefore, he averred that it was not possible for him to acquire agricultural lands and, thus, the lands were acquired in the name of Veerappa. From the sequence of above events, we find that there was no contradiction in the statement of the assessee as alleged by the AO.
(j) On a perusal of either the impugned assessment orders or the order of the Ld. CIT (A), it could not be gauged as to whether Veerappa was examined by the authorities concerned to find out the veracity of the assessee's claim that Veerappa was utilized as a conduit by the assessee to buy agricultural lands in his behalf etc., As things stand now, the Revenue had not disputed the very fact that Veerappa had purchased the agricultural lands.
(k) Another question being posed was - How did the AO foresee that whatever the lands purchased by the assessee was for his own business and not for BDPL?
- The AO had failed to see the reason that the lands purchased by the assessee was for his own business with ultimately included for BDPL too. We fail to understand the philosophy of the AO to attribute that the lands purchased by the assessee were for his own business only. How did ITA Nos.484 to 490/B/10 Page 24 of 40 the AO demarcate the lands dealt by the assessee was only for his own business is anybody's guess?
(l) We are also not in agreement with the CIT(A)'s presumption that when the assessee was not entitled to purchase any agricultural lands, the argument that the payments were made by BDPL to acquire the lands for the business of the company to the assessee do not have any weight and, therefore, not acceptable.
- When the assessee was not entitled to indulge in purchase of agricultural lands himself as he had exceeded the limit of buying the agricultural lands under K.L.R. Act, he had explored or devised the other avenue of buying the lands for the company by using Veerappa as a conduit. No prudent businessman - being an individual or a registered firm or a company, as the case may be - lie down at home as he was not entitled to go for a buying spree of agricultural lands in his name due to ceiling of K.L.R Act. He shall explore the other possible avenues by using his expertise in the field to furtherance his fortune. The assessee being a prudent person in the real estate field for decade as conceded by the Revenue, he must have utilized the name and services of Veerappa in procuring the agricultural lands for the company.
- Unwittingly, the AO himself had admitted that the assessee was indulged in the business of purchase and sale of land in his individual capacity and, thus, the Revenue had duly recognized that the assessee was in the real estate business. Since the provisions of K.L.R. Act came in the way of the assessee to purchase of any agricultural lands in a vast ITA Nos.484 to 490/B/10 Page 25 of 40 scale on behalf of BDPL, this must have prompted the assessee to bring Veerappa into picture as his conduit. It is not uncommon in this line of real estate business that the incumbents put into motion their acumen-ship in the trade to overcome the obstacles coming in their way.
(m) The proclamation of the AO which was duly ratified by the CIT (A) that BDPL had made the payments to the assessee for his individual benefits only was without any clinching documentary evidence to substantiate their claim.
(n) The AO's another reasoning was that the seized/impounded materials in this group of cases do not indicate the existence of any such agreement and as such it appears that the 'procurement agreement' was only an after thought and a camouflage for the factual nature of transaction with the company and give it a different colour.
In a nut-shell, the authorities below have failed to bring on record any documentary evidence to prove that the action of the assessee was nothing but an after thought and the document itself was 'self serving' etc., Merely making a sweeping remark on the genuineness of the very existence of an agreement without an indisputable evidence, in our view, is lacking conviction. The AO was not firm in his conviction that the alleged 'procurement agreement' was only an after thought which prompted him to choose the word 'appears' in coming to such a conclusion.
(o) The other reasoning of the AO was that BDPL which advanced the alleged loans to the assessee not engaged in the business of money lending and, therefore, the loan given to the assessee comes ITA Nos.484 to 490/B/10 Page 26 of 40 under the purview of s.2 (22)(e) of the Act. We would like to reiterate that the BDPL was not engaged in the business of money lending, but, the funds so allocated to the assessee during the course of business which purely on business exigency and, thus, the amounts so funded do not fall within the sphere of advance or loan, as the case may be, so as to bring it under the purview of s. 2 (22)(e) of the Act.
(p) Let us have a glimpse of the assessee's reliance on the ruling of Hon'ble Supreme Court in the case of S.A. Builders v. CIT cited supra. No doubt, the issue was whether interest on borrowed capital allowable or not. However, one should accept the concept and the ratio laid down by the Hon'ble Court while deciding the issue. For the sake of ready reference, we reproduce the relevant portion of the ruling of the Hon'ble Court that "It was required to be enquired as to whether the interest-free loan was given to the sister concern as a measure of commercial expediency. If it is so, interest on borrowed funds is to be allowed..." It, further, went on to observe that "the authorities should examine the purpose for which the assessee advanced the money to its sister concern and what the sister concern did with this money in order to decide whether it was for commercial expediency...." Thus, the ratio laid down by the Hon'ble Supreme Court in the case cited supra is fit in to the issue on hand. One should analyze the issue, keeping in view the procedure laid down by the Hon'ble Supreme Court, whether the funds received was during the course of business or otherwise. As the transaction took place during the course of business and in the business exigency, we are of the ITA Nos.484 to 490/B/10 Page 27 of 40 firm view that the ratio laid down by the Hon'ble Supreme Court in the case of S.A. Builders cited supra is absolutely applicable to the facts of the issue on hand.
(q) In the case of Ms. P Sarada v. CIT reported in 229 ITR 444 (SC), the issue before the highest judiciary of the land was that Whether, the withdrawals made by the assessee from Universal Radiators Private Limited totaling Rs. 93,027 can be assessed in the hands of the assessee under section 2(22)(e) of the Act for the year 1973-74 ? After due consideration of the facts of the case, the Hon'ble Court was pleased to rule that -
"The withdrawals made by the appellant from the company amounted to grant of loan or advance by the company to the shareholder. The legal fiction came into play as soon as the monies were paid by the company to the appellant. The assessee must be deemed to have received dividends on the dates on which she withdrew the aforesaid amounts of money from the company. The loan or advance taken from the company may have been ultimately repaid or adjusted, but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period."
With highest regards, we would like to point out that the issue before the Hon'ble Apex Court was on the different footing which has no relevance to the issue on hand on the very ground that the assessee had not received any loan or advance for its own benefit, but, the funds were provided for specific purpose. Thus, in our considered view, the case law cited by the authorities below is distinguishable.
With due respects, we would like to make it clear that none of the three conditions prescribed by the Hon'ble Court are applicable to ITA Nos.484 to 490/B/10 Page 28 of 40 the case on hand, namely, (1) no payments were made to the assessee by way of advance or loan by BDPL, but, funds were allocated for procurement of lands on its behalf; (2) no payments were made on its behalf; and (3) payments made were not for anybody's individual benefit. The payments in question were provided due to business exigencies of BDPL and the funds so provided for the sole benefit of BDPL and NOT to individual benefit of a shareholder and, therefore, the question of applicability of the provisions of s.2 (22)(e) of the Act doesn't arise.
We are, therefore, of the considered view that the case laws relied on by the authorities have no relevance to the present issue.
13.4. The Hon'ble Delhi High Court in its recent judgment in the case of CIT v. Creative Dyeing and Printing Pvt. Limited reported in 318 ITR 476 (Del) ruled that section 2 (22) (e) of the Act can be applied to 'loans' or 'advances' simpliciter and not to those transactions carried out in the course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is -what is the purpose of such advance? If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may be treated as 'deemed dividend', but, if it is otherwise, the amount given cannot be branded as 'advances' within the meaning of deemed dividend under ITA Nos.484 to 490/B/10 Page 29 of 40 section 2 (22) (e). In rendering this decision, the Hon'ble High Court had placed reliance in the decision of the case of CIT v. Raj Kumar (2009) 318 ITR 462 (Del), CIT v. Ambassador Travels (P.) Ltd. (2009) 318 ITR 376 and CIT v. Nagin Das M. Kapadia (1989) 177 ITR 393)(Bom). We herebelow reproduce the relevant portion of the case CIT v. Creative Dyeing and Printing P. Ltd. for reference:
" Before us, the learned counsel for the appellant/Revenue has contended that the present case is a case of deemed dividend inasmuch as M/s. Pee Empro Exports Pvt. Ltd. has given a loan to the assessee-company but the lending company, namely, M/s. Pee Empro Exports Pvt. Ltd. is not into the business of money lending as required by section 2(22)(e)(ii). The counsel for the respondent, on the other hand, has referred to two recent Division Bench judgments of this Court reported as CIT v. Raj Kumar [2009] 318 ITR 462 (Delhi); [200]) 181 Taxman 155 and CIT v. Ambassador Travels (P.) Ltd. [2009] 318 ITR 376 (Delhi); [2009] 173 Taxman 407 to contend that merely because a loan is given by M/s. Pee Empro Exports Pvt. Ltd. to the assessee- company would not mean that the same would become a deemed dividend inasmuch as moneys are paid for transactions which are business transactions/commercial transactions and, therefore, such transactions cannot fall under the expression "deemed dividend" within the provision of section 2(22)(e).
Before we refer to the rival contentions of the parties, we would like to reproduce the following finding of facts arrived at by the Tribunal :
" 7.5 In the present case the amount paid by M/s. Pee Empro Exports to the appellant-company does not bear the characteristic of loans and advances. The amount has been paid by M/s. Pee Empro Exports in its own interest and that too for the purpose of business because the ultimate beneficiary of the proposed expansion of plant and machinery is M/s. Pee Empro Exports itself. M/s. Pee Empro Exports has not made the payment to the appellant- company for the individual benefit of Mr. R.S. Uppal and Mr. P.M.S. Uppal and on the contrary these two Directors have also provided funds to the appellant-company as ITA Nos.484 to 490/B/10 Page 30 of 40 owners of the company as also made by M/s. Pee Empro Exports.
The assessee undertook expansion of its capacity, which was in mutual interest of assessee as well Pee Empro Exports. If the assessee has not undertaken such expansion, no advance could have been made to it or that Pee Empro Exports would not have distributed as dividend to its shareholders. Thus, but for the advances, the amount of advances could not have reached assessee at all. We therefore, delete the additions as made by the Assessing Officer as the amount received by assessee is not deemed dividend within the meaning of section 2(22)(e) of the Act."
The counsel for the revenue has also further stated that it is not in dispute that the monies which have been advanced to the assessee-company by M/s. Pee Empro Exports Pvt. Ltd. have not to be repaid but have to be adjusted against the dues payable by M/s. Pee Empro Exports Pvt. Ltd. to the assessee-company in the subsequent years for the job work of printing and dyeing which is done by the assessee-company for M/s. Pee Empro Exports Pvt. Ltd.
We find that the Tribunal in the present case has very extensively dealt with legislative intention of introducing section 2(22)(e) and has referred to such legislative intention by reference to Supreme Court judgment in the case of Navnit Lal C. Javeri v. K.K. Sen AAC [1965] 56 ITR 198 where a similar provision of the Income-tax Act, 1922, i.e., section 2(6A)(e) was in issue by reproducing the relevant para in Navnit Lal C. Javeri's case (supra) as under :--
"In dealing with Mr. Pathak's argument in the present case, let as recall the relevant facts. The companies to which the impugned section applies are companies in which at least 75 per cent of the voting power lies in the hands of other than the public, and that means that the companies are controlled by a group of persons allied together and having the same interest. In the case of such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. When the Legislature realized that though money was ITA Nos.484 to 490/B/10 Page 31 of 40 reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescribed for companies. This object was defeated by section 23A which provides that in the case of undistributed profits, tax would be levied on the shareholders on the basis that the accumulated profits will be deemed to have been distributed amongst them. Similarly, section 12(1B) provides that if a controlled company adopts the device of making a loan or advance to one of its shareholders, such shareholders will be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he has received the said loan by way of dividend. It is clear that, when such a device is adopted by a controlled company, the controlling group consisting of shareholders have deliberately, decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company; but the main object underlying the loan is to avoid payment of tax."
The Tribunal has also referred to the judgment of the Bombay High Court in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 393 (Bom) in which it was held that business transactions are outside the purview of section 2(22)(e) of the Act. In the said case, the company in which Kapadia was having substantial interest had paid various amount to Kapadia. The Tribunal had found that Kapadia had business transactions with the company and on verification of the accounts, the Tribunal deleted the amounts which were relating to the business transactions and which finding was upheld by the High Court. In the present case the Tribunal on considering decisions in various cases held as under :
ITA Nos.484 to 490/B/10 Page 32 of 40 "From the ratio laid down in above cases and on the basis of judicial interpretation of words, 'loans' or 'advances', it can be held that section 2(22)(e) can be applied to 'loans' or 'advances' simpliciter and not to those transactions carried out in course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may be treated is 'deemed dividend', but if it is otherwise, the amount given cannot be branded as 'advances' within the meaning of deemed dividend under section 2(22)(e). Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by a company in the ordinary course of business where the lending of money is a substantial part of the business of the company, advance in the ordinary course of carrying on business cannot be considered as 'dividend' within the meaning of section 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such 'advance' as deemed dividend"
We agree with the aforesaid observations. The finding of facts, arrived at by the Tribunal, in the present case, is that the transaction in question was a business transaction and which transaction would have benefited both the assessee-company and M/s. Pee Empro Exports Pvt. Ltd. In fact, as stated above, the counsel for the appellant has conceded that the amount is in fact not a loan but only an advance because the amount paid to the assessee-company would be adjusted against the entitlement of moneys of the assessee-company payable by M/s. Pee Empro Exports Pvt. Ltd. in the subsequent years.
The counsel for the appellant has very strenuously urged that neither the Tribunal nor the judgment of this Court in Raj Kumar's case [2009] 318 ITR 462 (Delhi); [2009] 181 Taxman 155 deals with that part of the definition of deemed dividend under section 2(22)(e) which states that deemed dividend does not include an advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company ITA Nos.484 to 490/B/10 Page 33 of 40 [section 2(22)(e)(ii)], i.e., there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money-lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would, therefore, be covered by section 2(22)(e)(ii) and consequently payments even for the business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot, however, have a bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions do not fall within section 2(22)(e), we need not to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that is all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar's case [2009] 318 ITR 462 (Delhi); [2009] 181 Taxman 155. This Court in Raj Kumar's case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under (page
473) :
" A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax.
Therefore, if the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is parimateria with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or ITA Nos.484 to 490/B/10 Page 34 of 40 distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan.
If this purpose is kept in mind then, in our view, the word 'advance' has to be read in conjunction with the word 'loan'. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term 'advance' may or may not include lending. The word 'advance' if not found in the company of or in conjunction with a word 'loan' may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term 'advance'. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The sale rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing 'it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them' and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC
610."
Therefore, we hold that the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assessee-company and M/s. Pee Empro Exports Pvt. Ltd. was not such to fall within the definition of deemed dividend under section 2(22)(e). The present appeal is, therefore, dismissed."
13.5. Further, we would like to point out that Section 2(22)(e) brings in a deeming fiction. It provides in certain circumstances an advance or loan is treated as dividend in the hands of the shareholder. Advances and loans have to be interpreted in its true sense. Any payment made out of business expediency does not fall within the ambit ITA Nos.484 to 490/B/10 Page 35 of 40 of advances and loans, though the accounting entries are passed as such. The true nature of the transaction has to be seen as to whether the transaction is attributable to be a loan or an advance. In construing a deeming fiction, it is not to be extended beyond the purpose for which the deeming fiction is created or beyond the language of the section. In interpreting a deeming fiction, the intention of the Legislature has to be given due importance. The fiction should not be extrapolated beyond the purpose for which the legislation is brought in. On interpretation of a legal fiction, it was held in Controller of Estate Duty v. Krishna Kumari Devi (173 ITR 561) that the Court should ascertain the purpose for which the fiction is created and after doing so, assume all facts which are incidental to give in effect to the fiction. In CIT v. Hindustan Petroleum Corporation Ltd. (187 ITR 1) (Bom), it was held that a legal fiction has to be carried to its logical conclusion, but, only within the parameters of the purpose for which a fiction is created. Moreover, as far as possible, the legal fiction should not be given a meaning so as to cause injustice. Thus, it is obvious that the fiction created in section 2(22)(e) only refers to pure advances or loans. Any amount paid on account of genuine business transaction between the entities falls outside the ambit of section 2(22)(e). As a result of globalization during the recent past, various giant infrastructure projects have sprung up and many are in the pipeline. Multi-various activities are involved in promoting these giant projects. All these activities collectively strive to complete the projects. Each activity is distinct in character. For each activity, different kinds of commercial agreements and technical agreements are required. The ITA Nos.484 to 490/B/10 Page 36 of 40 financial structure of every activity differs. The risk and reward involved in every activity also differs. In order to meet such complex constraints, the flagship company/the promoter may create various distinct entities being special utility vehicles (SUV) to deal in each of these activities independently. The promoters along with these SUV jointly work to complete the over-all project. In such situation, funds being the bloodline for all these entities flow from one entity to the other. Such transfer of funds arising out of commercial expediency may not be in the nature of advances or loan in all circumstances. 13.6. Taking into account the facts and the circumstances of the issue which has been elaborately analyzed in the fore-going paragraphs, we are of the firm view that -
(i) The assessee had furnished the documentary evidence by means of an agreement entered into and that the amounts received during the course of business and due to business exigency;
(ii) the nomenclature 'unsecured loan' and 'advance', perhaps inadvertently, in the balance sheets shall not alter the character of the purpose for which the amounts received;
(iii) the sweeping remark of the authorities below that the agreement entered into by the parties concerned was an after-thought etc., will not stand the testimony of law unless it has been backed with clinching documentary evidence;
(iv) the authorities allegation that the journal entries passed in various assessment years in the case of BDPL resulted into the personal benefit to the assessee etc., will not hold water unless it has been proved so with documentary evidence;
(iv) no doubt, BDPL was not engaged in the business of money lending and, thus, it could be termed that the amounts so received come under the ambit of s. 2(22)(e) of the Act provided the amounts were in the nature of advance or ITA Nos.484 to 490/B/10 Page 37 of 40 loan. Incidentally, this has not been implicitly proved by the Revenue;
(v) the clinching evidence in the form of an agreement entered into with BDPL as produced by the assessee has not been rebutted with any concrete proof. The onus rather placed at the doorstep of the Revenue has not been duly discharged; 13.5. To sum up, we are of the unanimous view that the AO was not justified in invoking the provisions of s.2 (22)(e) of the Act in the case of the assessee for the assessment years 2002-03 to 2007-08 under dispute. The Ld. CIT (A)'s stand in upholding the findings of the AO was also not justifiable for the reasons recorded supra. It is ordered accordingly.
14. The issue of applicability of s.2 (22)(e) of the Act is not applicable in the case of the assessee for the reasons recorded in the fore-going paragraphs, the assessee's other grievance that the CIT(A) erred in not reducing the actual tax liability of the relevant current year from the profits of that year for the purposes of computation of accumulated profits has not been addressed to.
A.Y. 2004-05:
15. With regard disallowance of Rs.49.35 lakhs being the amounts written off as bad debts, for the detailed reasons set-out in the impugned order, the AO had concluded thus -
"4.1. It may also be stated here that writing off of bad debts, without charging the same in the profit and loss account, is not a write off at all, because assessment is made based on the profit and loss account and balance sheet filed along with the returns. It is not enough if the assessee writes off the debt in some of the books maintained by it (like personal ITA Nos.484 to 490/B/10 Page 38 of 40 account of debtors), which do not form part of his accounts including the profit and loss account and balance sheet based on which assessment is made.
4.2. To sum up, the assessee has not produced any evidence in support of his claim that there is debt owing to him, that it has been taxed in the earlier years, that the debt arose in the course of business of the assessee and, finally, that it had become bad in the year of account. He has also not furnished any evidence to prove that the debit has become irrecoverable. The claim of the assessee for advance written off of Rs.49,35,110/- is disallowed."
15.1. At the out-set, we would like to point out that once the assessee had written off debts as irrecoverable in his accounts, the assessee need not required to prove that they had become bad etc., Our view is in consonance with the various judicial pronouncements on the issue, chiefly -
(i) In the case of Lawlys Enterprises P. Ltd. v. CIT reported in (2009) 314 ITR 297 (Patna) the Hon'ble Patna High Court was pleased to observe that -, "The laws as amended with effect from April 1, 1989, permitted deduction of the amount of any bad debt or part thereof, which was written off as irrecoverable in the accounts of the assessee for the previous year. The assessee having written off the amount as irrecoverable in its accounts for the previous year was entitled to deduction of the amount of the bad debt. ...."
(ii) The Hon'ble High Court of Himachal Pradesh in the case of Suresh Gaggal v. ITO reported in (2009) 222 CTR (HP) 96 had held that -
"Once the assessee writes off the debt as irrecoverable, his claim for deduction cannot be rejected on the ground that the debt has not been established to have become irrecoverable. The aforesaid position is also supported by the amendment made to s.36(2) w.e.f. 1st April, 1989 and ITA Nos.484 to 490/B/10 Page 39 of 40 any doubt, if remaining, has been clarified by Circular No.551 dated:
23rd January, 1990.
(iii) The Hon'ble Bombay High court, in the case of CIT v. Star Chemicals (Bombay) P. Ltd. reported in (2009) 313 ITR 126 (Bom), in its wisdom had held that 'under section 36(1)(vii) of the Income-tax Act, 1961 and Circular No.551 dated January, 23, 1990 if the assessee had written off the debt as a bad debt that would satisfy the purpose of the section."
(iv) The Hon'ble Supreme Court of India, in the case of T.R.F. Ltd. v. Commissioner of Income Tax held that "After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable:
it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.
Accordingly, we hold that the bad debts written off by the assessee in his books of account shall be allowed as a deduction.
16. The last ground of the assessee that the CIT(A) erred in upholding the levy of interest u/s 234B of the Act is not maintainable as charging of interest u/s 234B of the Act is mandatory and consequential in nature. This ground is, therefore, dismissed for all the assessment years under appeal.
ITA Nos.484 to 490/B/10 Page 40 of 40
17. In the result,
(i) the assessee's appeal for the assessment year 2001-02 is dismissed; &
(ii) The assessee's appeals for the assessment years 2002-03, 2003-04, 2004-05, 2005-06, 2006-07 & 2007- 08 are partly allowed.
Pronounced in the open court on this 4th day of November, 2010.
Sd/- Sd/-
( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Bangalore,
Dated, the 4th November, 2010.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar
ITAT, Bangalore.