Rajasthan High Court - Jodhpur
Mewar Polytex Ltd vs A.C.I.T.Circle-1,Udaipur on 22 December, 2016
Bench: Sangeet Lodha, Vinit Kumar Mathur
(1 of19)
[ITA-28/2012 AND ONE CONNECTED MATTER]
IN THE HIGH COURT OF JUDICATURE FOR
RAJASTHAN AT JODHPUR
D.B.INCOME TAX APPEAL NO. 28 / 2012
Mewar Polytex Ltd., Through its Managing Director, Babulal
Hastimal Bapna, aged 73 years, S/o Late Hastimal Bapna, 207-
A, Mewar Industrial Area, Madri, Udaipur.
----Appellant
Versus
Assistant Commissioner of Income Tax, Circle-1, Udaipur.
----Respondent
Connected With
D.B.INCOME TAX APPEAL No. 29 / 2012
Mewar Polytex Ltd., Through its Managing Director, Babulal
Hastimal Bapna, aged 73 years, S/o Late Hastimal Bapna, 207-
A, Mewar Industrial Area, Madri, Udaipur.
----Appellant
Versus
Assistant Commissioner of Income Tax, Circle-1, Udaipur.
----Respondent
_________________________________________________
For Petitioner : Mr. Anjay Kothari
Mr. Bhagirath Patel
For Respondent : Mr. K.K. Bissa
Mr. G.S. Rathore
(2 of19)
[ITA-28/2012 AND ONE CONNECTED MATTER]
HON'BLE MR. JUSTICE SANGEET LODHA
HON'BLE MR. JUSTICE VINIT KUMAR MATHUR
Judgment
By the Court: (Per Hon'ble Mr.Sangeet Lodha, J.):-
Reportable Dated:- 22nd December, 2016.
1. These two appeals preferred by the assessee company under Section 260A of the Income Tax Act, 1961 (for short 'the Act of 1961') arising out of order dated 9.12.11 passed by the Income Tax Appellate Tribunal (ITAT), Jodhpur Bench, Jodhpur in ITA No.455/JU/2009 and ITA No.382/JU/2010 for Assessment Years 2006-07 and 2007-08, raising the common questions of law were heard together and are being disposed of by this common judgment.
2. The relevant facts are that the appellant, a public limited company, engaged in manufacturing of PP/HDPE Fabric/Sacks, filed its return of income for the Assessment Year 2006-07, declaring total income of Rs.1,66,89,710/-. The assessee company declared dividend @ 5% on the paid up capital and paid Rs.16.15 lacs as dividend to its share holders and also paid tax on dividend amounting to Rs.2,26,504/-. During the relevant assessment year the assessee had taken loan of Rs.1,32,20,000/-. The Assessing Officer ('AO') vide notice dated 31.7.08 directed assessee company to furnish the break up of the above loan amount. The assessee through reply dated 6.8.08 gave the break up of loan amount as under :
(3 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] Sun Polytex Pvt. Ltd. (Interest paid) Rs.75,00,000/- Crescent Polytex P.Ltd.(Interest paid) Rs.7,75,000/- Galaxy Industries (Interest paid) Rs.23,50,000/- Sisarama Plastic P.Ltd.(Interest paid) Rs. 8,00,000/- Crescent Polytex Pvt.Ltd.(Interest paid) Rs.25,15,000/-
_____________ Total Rs.1,32,20,000/-
3. The assessee company was share holder in the above companies from which the loan had been received by it. Under the directions of the AO, the assessee company furnished the details of its share holdings in the above companies. The percentage of share holdings of the assessee company in M/s Sun Polytex was 23.67% and in M/s Sisarama Plastic Pvt. Ltd. 14.7%. Considering the share holdings of the assessee company in above two companies being more than 10% of total share capital, the AO served the assessee company with a notice dated 21.8.08, asking as to why the loan taken by the assessee company from above two companies comprising of Rs.75,00,000/- from Sun Polytex Pvt. Ltd. and Rs.8,00,000/-
from Sisarama Plastics Pvt. Ltd. be not added to the income of the assessee company under Section 2(22)(e) of the Act of 1961. The assessee company by way of reply to the notice clarified that it has taken loan from Sun Polytex Pvt.Ltd. a sum of Rs.55,00,000/- as corporate loan instead of Rs.75,00,000/- and paid interest Rs.1,05,534/- @ 12% and also deducted the tax at source a sum of Rs.23,682/-. The balance as on 31.3.06 (4 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] was disclosed as Rs.57,27,988/-. The assessee contended that he has taken loan from Sun Polytex Pvt. Ltd. in ordinary course of its business. While referring to the Memorandum of Association of Sun Polytex Pvt. Ltd., the assessee company submitted that Sun Polytex Pvt.Ltd. is engaged in business of manufacturing of PP/HDPE Fabric as well as financing to the companies/firms as inter corporate loans on interest at the rate prevailing in the market and the said company has earned Rs.2,97,552/- as interest during the year. The assessee company contended that by virtue of provisions of Section 2(22)(e)(ii) of the Act of 1961, the "dividend" does not include any advance or loan made by a company to a shareholder or to any concern in which such shareholder is a member or partner, in the ordinary course of business where the lending of money is substantial part of the business of the company. The AO after due consideration arrived at the conclusion that the provisions of sub-clause (ii) of Section 2(22)(e) are attracted where money lending is primary/main object of the company but since, the main object of the company Sun Polytex Pvt. Ltd. was manufacturing of PP/HDPE Fabrics and not financing/money lending, the exception carved out cannot be invoked. Accordingly, a sum of Rs.55,00,000/- received by the assessee company from Sun Polytex Pvt. Ltd. was added back to the income of the assessee for the assessment year 2006-07 as deemed dividend under Section 2(22)(e) of the Act of 1961.
(5 of19) [ITA-28/2012 AND ONE CONNECTED MATTER]
4. Similarly during the assessment year 2007-08, a sum of Rs.18,40,000/- received by the assessee company as loan from Sun Polytex Pvt. Ltd. was added to its income under Section 2(22)(e) of the Act of 1961.
5. Aggrieved by the assessment order dated 30.9.08 passed by the AO for the assessment year 2006-07, the assessee company preferred an appeal before the Commissioner of Income Tax (Appeals) Udaipur [CIT(A)]. The assessment order dated 1.11.09 passed by the AO for assessment year 2007-08 was also appealed against by the assessee company before the CIT (A).
6. The CIT(A) opined that amount given by the Sun Polytex Pvt. Ltd. to the assessee company was in the nature of inter corporate deposit, which cannot be treated as loan for the purposes of Section 2(22)(e) of the Act of 1961 and accordingly, the addition made by the AO was ordered to be deleted by the CIT(A) vide order dated 29.5.09. For the parity of the reasons, the appeal preferred by the assessee against the order of the AO making addition as aforesaid during the assessment year 2007-08 was also allowed by the CIT(A) vide order dated 11.3.10 and the addition made was deleted.
7. Aggrieved by the orders passed by the CIT(A), the Revenue preferred two separate appeals before the ITAT. The appeal preferred by the Revenue for the assessment year 2006- (6 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] 07 has been allowed by the ITAT holding that the assesse company has not been able to show that Sun Polytex Pvt. Ltd. was having money lending business as substantial part of its business and therefore, AO was justified in holding the sum of Rs.55,00,000/- as deemed dividend in the hands of assessee. However, the issue of addition of loan amount to the income of the assessee as deemed dividend during the assessment year 2007-08 has been restored to the file of the AO to ascertain as to whether the advance during the year exceeds the closing balance of earlier year. The ITAT observed that in case it exceeds then the amount to be treated as dividend in view of finding arrived at for assessment year 2006-07 and if the amount is less then no addition will be made because the advance in immediately preceding year has already been treated as deemed dividend. Hence, these appeals.
8. On 22.7.13, the appeals preferred by the assessee company were admitted by this Court on the following substantial questions of law :
"(i) Whether, ITAT has grossly erred in misconstruing the provisions of section 2(22)(e) by ignoring the exception carved out by sub-clause (ii) of Section 2(22) and by not appreciating the settled position of law that transactions entered in the ordinary course of business are not hit by section 2(22)(e) of the Act ?
(ii) Whether the impugned order dt. 9.12.2011 passed by the ITAT is liable to be set aside in view of the provisions of section 10(34) r.w.s.115-O of the Act since income by way of dividends is exempt in the hands of the shareholder ?"
(7 of19) [ITA-28/2012 AND ONE CONNECTED MATTER]
9. Learned counsel appearing for the assessee company contended that true and correct nature of the amount of Rs.55,00,000/- by way of inter corporate deposits is "Deposit" and not loan and therefore, Section 2(22)(e) was at all not attracted. Learned counsel submitted that the inter corporate deposits can neither be regarded as loan nor as advance for the purposes of Section 2(22)(e) of the Act of 1961. Learned counsel submitted that even if the substantial part of the business of Sun Polytex Pvt. Ltd. is not taken to be money lending, the inter corporate deposit, a genuine business transaction, not being gratuitous loan advanced, do not fall within Section 2(22)(e) of the Act of 1961 and there is no need even to go further to sub-clause (ii) of Section 2(22)(e) of the Act of 1961. Learned counsel submitted that the provisions of Section 2(22)(e) were brought so as to tax deemed dividend in the form of payments by way of advance or loan to a shareholder, holding not less than 10% of voting power, where the real object of such payment is distribution of accumulated profits and not giving of loan in its true perspective. Learned counsel urged that the loans and advances covered by Section 2(22)(e) are such loans and advances which are not genuine and made solely with a view to evade tax on dividend income. In support of the contention, learned counsel has relied upon a decision of the Hon'ble Supreme Court in the matter of 'Navnit Lal C. Javeri Vs. K.K. Sen, Appellate Assistant Commissioner of (8 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] Income Tax, Bombay' (1965) 66 ITR 198 (SC). According to the learned counsel, the normal transactions made on account of commercial expediency with profit motive to earn interest do not fall within the purview of Section 2(22)(e) of the Act of 1961. In support of the contention, learned counsel has relied upon a decision of High Court of Delhi in the matter of 'Commissioner of Income Tax Vs. Creative Dyeing & Printing (P) Ltd.' (2009) 318 ITR 476 and a decision of High Court of Calcutta in the matter of 'Pradip Kumar Malhotra Vs. Commissioner of Income Tax' (2011) 338 ITR 538. Learned counsel urged that interest income received by Sun Polytex Pvt. Ltd. formed part of its business income and has been assessed under the head "profits and gains of the business". Learned counsel submitted that business of money lending consisted a substantial part of business of Sun Polytex Pvt. Ltd. and the money was advanced to the assessee company in the ordinary course of its business activity. Relying upon a decision of High Court of Bombay in the matter of 'Commissioner of Income Tax Vs. Parle Plastics Ltd. and another' (2011) 332 ITR 63, learned counsel submitted that the expression "substantial part" does not connote an idea of being the "major part" or the part that constitute majority of the whole. Learned counsel submitted that any business of a company, which the company does not regard as small, trivial or inconsequential as compared to the whole of the business is substantial business. Learned counsel (9 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] submitted that Sun Polytex Pvt. Ltd. during the assessment year 2006-07 has earned interest income, a sum of Rs.2,97,552/- and thus the money lending has to be treated as substantial part of its business and therefore, the provisions of Section 2(22)(e) cannot be validly invoked in view of specific exception carved out in sub-clause (ii) of Section 2(22)(e) of the Act of 1961. Lastly, learned counsel submitted that by virtue of provisions of Section 10(34) of the Act of 1961, the income of the assessee company by way of dividend cannot be included while computing the total income of the previous year and therefore, the order impugned passed the ITAT, setting aside the order passed by the CIT(A) and restoring the order passed by the AO deserves to be set aside for this reason also.
10. On the other hand, the counsel appearing for the Revenue while supporting the order of ITAT submitted that the factum of Sun Polytex Pvt. Ltd. advancing loan to the assessee company was not even disputed on behalf of the assessee company before the AO rather, only contention raised by the assessee was on anvil of the provisions of sub-clause (ii) of Section 2(22)
(e) of the Act of 1961, which has rightly been rejected by the ITAT holding that the money lending cannot be treated to be substantial part of the business of the company Sun Polytex Pvt. Ltd. Learned counsel submitted that after due consideration of rival submissions the ITAT has categorically (10 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] held that the money received by the assessee company was not inter corporate deposits and thus, the money lending being not substantial part of the business of the said company, the short term loan taken by the assessee cannot be construed to be in course of money lending business. Learned counsel urged that the order passed by the ITAT does not suffer from any infirmity or illegality and as a matter of fact, no substantial question of law arises for consideration of this Court out of the orders impugned and therefore, the appeals deserve to be dismissed.
11. We have considered the rival submissions and perused the material on record.
12. Indisputably, in the first instance, the provision, to bring within the tax net the monies paid by a closely held companies to their principal shareholders in the guise of loan or advance out of their accumulated profits to avoid payment of tax was introduced by inserting clause (e) to Section 2 (6A) in the Income Tax Act, 1922 ('the Act of 1922'). The definition of "Dividend" as incorporated in Section 2(22) of the Act of 1961, corresponds to Section 2 (6A) of the Act of 1922.
13. The provisions of Section 2 (22)(e) and sub-clause (ii) appended thereto carving out an exception, relevant for determination of the substantial question of law arising for consideration of this court in the present appeals may be beneficially quoted:
(11 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] "2(22) "dividend" includes-
xxx..........xxxxx..
(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 31 st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent, of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but "dividend" does not include-
(i) ....xxxxx......xxxxx.
(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company."
14. A bare perusal of Section 2 (22) (e) makes it abundantly clear that it embodies the concept of "deemed dividend"
whereby any sum paid by way of advance or loan by a company in which the public are substantially interested to a shareholder being a person who is beneficial owner of shares (not being shares entitled to a fixed rate of dividend with or without a right to participate in profits) holding not less than 10% of voting power or to any concern in which such shareholder is a member or partner and in which he has a substantial interest or any payment by any such company on behalf of or for individual (12 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] benefit to the extent to which the company in either case possesses accumulated profits, is deemed to be dividend.
15. The facts not in dispute are that the assessee company having percentage of shareholding in Sun Polytex Pvt. Ltd. 23.67%, had taken loan from the said company a sum of Rs.55,00,000/-. According to the assessee company, since the Sun Polytex Pvt. Ltd. is engaged in business of manufacturing of PP/HDPE Fabric as well as financing to the companies/Firms as inter corporate loan on interest at the prevailing market rate, it was inter corporate loan taken in ordinary course of business. The assessee company claimed that it has already paid interest on the loan advanced a sum of Rs.1,05,534/- @ 12% and also deducted the tax at source a sum of Rs.23,682/-. The further stand of the assessee company before the Assessing Officer was that in light of para (ii) of Section 2 (22)(e), any advance or loan made to a share holder (or the said concern), a company, in ordinary course of business is excluded from the definition of "deemed dividend".
16. In Navnit Lal C. Javeri's case (supra) relied upon by the learned counsel appearing for the appellant, the Hon'ble Supreme Court while rejecting the challenge to the validity of Sections 2 (6A) (e) and 12 (IB) of the Act of 1922 observed that to meet the mischief by the private controlled companies in adopting the device of making advances or giving loans to their (13 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] shareholders with the object of evading payment of tax, the legislature can step in and create a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan, is treated in reality for tax purposes as payment of dividend to him.
17. Precisely, whenever any payment is made by closely held company by way of loans or advances to certain share holders of the company or to the concern/companies in which they have substantial interest shall be treated to be dividend by deeming fiction, which is not actually dividend distributed by closely held company and shall be liable to be taxed in the hands of the recipient to the extent to which the closely held company has accumulated profits.
18. As noticed hereinabove, the assessee company has received a sum of Rs.55,00,000/- during the relevant assessment year from the closely held company M/s. Sun Polytex Pvt. Ltd. wherein, the assessee company has more than 10% of the shares. The record does not reflect that the loan advanced by M/s. Sun Polytex Pvt. Ltd to the assessee company in the previous year relevant to the assessment year was inter corporate deposit. Merely because, the assessee company has paid the interest to the closely held company and also deducted the tax at source, the loan taken cannot be treated to be inter corporate loan received in ordinary course of (14 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] business. In other words, on account of the payment of interest by the assessee company to the closely held company against the loan advanced or the repayment of loan, the deeming fiction in treating the loan advanced as 'deemed dividend' shall not be ceased to be operative. As a matter of fact, if on account of payment of interest by the assessee company to the closely held company on the loan advanced, it is not treated to be 'deemed dividend' within the meaning of Section 2 (22)(e) and treated to be inter corporate deposit, the very object sought to be achieved by incorporation of the said provision to remedy the mischief, shall stand frustrated.
19. Coming to the contention of the appellant company that the business of money lending consisted a substantial part of the business of M/s. Sun Polytex Pvt. Ltd., it is pertinent to note that in the previous year relevant to the assessment year, there is only one loan advanced i.e. the loan advanced to the assessee and other advances shown relate to the main business and increase in advance on account of increase in refundable excise duty. Suffice it to say that the other advances in no manner could be construed as advances for the purpose of money lending. That apart, during the relevant assessment year, M/s Sun Polytex Pvt. Ltd. is alleged to have earned a meagre Rs.2,97,552/- as interest. Thus, the conclusion arrived at by the Assessing Officer, affirmed by the ITAT that the (15 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] perusal of the balance sheet and profit & loss account of M/s. Sun Polytex Pvt. Ltd. did not inspire any confidence that M/s. Sun Polytex Pvt. Ltd. was having money lending as substantial part of business, cannot be faulted with and therefore, the loan advanced by the closely held company M/s. Sun Polytex Pvt. Ltd. to the assessee company does not fall within the exception carved out under para (ii) of Section 2 (22)(e) of the Act of 1961 either.
20. At this stage, it would be appropriate to refer to the decisions of various High Courts cited by the learned counsel appearing for the appellant.
21. In Creative Dyeing & Printing (P) Ltd.'s case (supra), wherein the assessee company received funds for expansion of production capacity from a company PE Ltd. having 50% of the shareholdings in the assessee company as also common directors with the assessee, the Delhi High Court held that the amount advanced for business transaction by PE Ltd. to the assessee company whereby both the assessee and the recipient company were to be benefited does not fall within the definition of deemed dividend under Section 2 (22) (e).
22. In Pradip Kumar Malhotra's case (supra), the Calcutta High Court opined that the phrase "by way of advance or loan"
appearing in sub-clause (e) of Section 2 (22) must be construed to mean those advances or loans which a (16 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] shareholder enjoys simply on account of being a person who is beneficial owner of shares (not being shares entitled to a fixed rate of dividends whether with or without a right to participate in profits) holding not less than 10% shares of voting powers, but where such loan or advance is given to such shareholder as a consequence of any other consideration which is beneficial to the company, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act of 1961 and accordingly, taking into consideration the fact that the loan advanced by the company to a shareholder, the assessee, who permitted company to mortgage his immovable property for enabling company to secure loan and in spite of request of the assessee, the company was unable to release the property from the mortgage, the loan advanced was not treated to be gratuitous and deemed dividend within the meaning of Section 2 (22) (e) of the Act of 1961.
23. Suffice it to say that in the instant case, the loan advanced is found to be gratuitous inasmuch as, the loan advanced was not in return to an advantage conferred upon the closely held company by the assessee company and thus, none of the decisions cited by the learned counsel referred to hereinabove help the appellant in any manner.
24. In Parle Plastics Ltd.'s case (supra), the Bombay High Court while considering the clause (ii) of Section 2 (22) (e) of (17 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] the Act of 1961 held that advance or loan made by a company to a shareholder or a concern in which the shareholder has substantial interest would not be regarded as dividend if the advance or loan was made by the lending company, if two conditions are satisfied namely, (i) that the loan or advance was made by the lending company in the ordinary course of its business and (ii) lending of money was a substantial part of business of the lending company. The Court observed that the "substantial part" does not connote an idea of being the 'major part' or the part that constitutes majority of the whole. The Court further observed that any business of a company which company does not regard as small, trivial or inconsequential as compared to the whole of business is substantial business. The Court opined that percentage of turnover in relation to the whole as also percentage of profit in relation to whole and sometimes even percentage of manpower used for a particular part of business in relation to the total manpower or working force of the company would be required to be taken into consideration.
25. In view of the conclusion arrived at by us after due consideration of the facts situation emerging in the present case that money lending cannot be treated to be substantial part of the business of the closely held company, the decision of (18 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] the Bombay High Court in Parle Plastic Ltd.'s case (supra), also does not help the appellant.
26. Accordingly, the question no.1 framed as aforesaid is answered in terms that the ITAT has committed no error in construing the provision of Section 2 (22)(e) of the Act of 1961 while arriving at the conclusion that the loan advanced by M/s Sun Polytex Pvt. Ltd. shall be treated to be 'deemed dividend' liable to be taxed in the hands of the assessee.
27. Coming to the second question regarding the income by way of dividends being exempt in the hands of shareholder in view of the provisions of Section 10(34) read with Section 115-O of the Act of 1961, it is true that by virtue of provisions of Section 10(34), any income by way of dividend referred to in Section 115-O shall not be included in computing the total income of a previous year of any person and thus, the recipient of the income of dividend shall not be liable to pay the tax on dividend income inasmuch as, under the new scheme, the dividend in the hands of recipient is tax free and the dividend paying company has been made liable to pay tax on the amount of dividend declared, distributed or paid by it. But then, the 'deemed dividend' in terms of Section 2 (22) (e) of the Act of 1961 is not covered by the said provision. Obviously, the 'deemed dividend' is included within the 'income' by virtue of provisions of Section 2(24) of the Act of 1961 and therefore, (19 of19) [ITA-28/2012 AND ONE CONNECTED MATTER] unless and until it specifically falls within the exclusion as contemplated under the provisions of Section 10(34) read with Section 115-O, the same cannot be presumed to be excluded while computing the income of the recipient thereof. A bare perusal of Section 10(34) read with Section 115-O makes it abundantly clear that by virtue of said provisions, only the amount declared, distributed or paid by the domestic company by way of dividends whether out of current or accumulated profits made chargeable to additional income tax in the hands of the company, stands excluded from the computation of the income of any person and not the 'deemed dividend' in terms of provisiosn of Section 2 (22)(e) of the Act of 1961. Thus, the loan or advance by closely held company to the shareholder, which is treated to be 'deemed dividend' by virtue of provisions of Section 2 (22)(e) of the Act of 1961, continues to remain liable to be taxed in the hands of the recipient. The question no.2 is thus answered accordingly.
28. In view of the conclusions arrived at as aforesaid, the appeals fail, the same are hereby dismissed. No order as to costs.
(VINIT KUMAR MATHUR)J. (SANGEET LODHA)J. Aditya/