of a fiction that court/authority must ascertain for what purpose the fiction is created, and after ascertaining
the purpose, the court has to assume all facts which are incidental to the giving effect to that fiction. However,
it will not be given a wider meaning then 7
power lies in the hands of grounds of persons other than the public. These companies are controlled by group
of persons. The decision whether the profits of the companies should be distributed as dividends or not rests
with such group of persons. The Legislature realised that though the money was available with the company
in the form of profit, yet those in control of the company intentionally refused to distribute the same as
dividend to shareholders. Instead, such group controlling the company adopted the device of advancing the
said accumulated profits by way of loan or advance to one of the shareholders. It was obvious that such
practice was resorted to one of the shareholders. It was obvious that such practice was resorted to with a view
to evade the tax on accumulated profits. The purpose of enacting section 2 (22)(e) was to correct this mischief.
As per deeming provision of this section, such payments s by a company to a shareholder constitutes deemed
dividend, which may not otherwise fall in the category of divided. In this context, reliance is placed on the judgment of Hon'ble apex court in the case of Navneet Lal Javeri Vs. K.K. Sec 56 ITR 207, where the purpose for inserting this section in the Act was duly explained.
background of these transactions. A copy of the account of the assessee in the books of the company is enclosed. It may be seen there from that the account between the assessee and the company is mutual, open and current in nature. The account opens with Rs. 100,000 on 02.04.2002. The debit balance goes on increasing till it reaches maximum of Rs. 1,52,06934 on 11.06.2002. It shows debit balance till 11.11.2002. Thereafter the same starts showing credit balance. The maximum debit balance is on 18.02.2003 of Rs. 1,93,11583. In simple words the payment made by the assessee to the company during the period from 11.11.2002 to 18.02.2003 far exceeded the payments received by the assessee during the period from 02.04.2002 to 11.06.2002. There are about 200 entries in his account which show that it is a running account for the mutual accommodation of the parties and not a loan account. It is not the case of the Department that there was a written or implied contract to bring these transactions between the purview of loans. On the other hand, the assessee any the company were parking their surplus funds with each other as 'deposits' for their mutual benefits.
applicable in the present case since the facts in that case are distinguishable
because the amount given by the company in the case of shareholders was in
the nature of loan and it was not in dispute. The dispute before the court in
the said case was whether any payment by a company by way of advance or
loan to a shareholder out of the accumulated profits is to be deemed as
dividend even if that advance or loan was subsequently repaid in its entirety
during the relevant previous year. But in the case of present assessee, the
transactions are in the form of deposits and not in the nature of loans or
advances. The transactions have been carried out in the ordinary course of
business as mentioned hereinabove.
on 31.10.2006 declaring total income of Rs.6,78,056/-. The case of the assessee was selected for scrutiny and
notice u/s 143(2) and 142(1) were issued. The assessee is a Managing Director of M/s. Ravindra Services (P)
Ltd. (hereinafter referred to as RSPL) having substantial ownership of shareholding and 10% of voting power.
The assessee had taken a loan of Rs.17,65,517/- from RSPL which was subsequently repaid by the assessee.
The Assessing Officer treated the said amount as deemed dividend and made addition under the head "other
sources" invoking the provisions of section 2(22)(e) of the Act. Apart from the above, the AO made addition
of Rs.2,62,035/- towards the rent received from RSPL under the head 'Income from House Property'. Further,
an addition of Rs.1,20,718/- was made in the total income of the assessee as 'undisclosed income'. The
assessee preferred an appeal against the assessment order dated 10.02.2008. The CIT(A) allowed the appeal
of the assessee vide order dated 6.4.2011 deleting the additions under the provisions of section 2(22)(e) as well as additions made under other heads.
record, orders of the lower authorities as well as the judgments referred to by the respective parties. The
provisions of section 2(22)(e) are reproduced herein below:-
"2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. but 'dividend' does not include-(i) a distribution made in accordance with sub-clause (c) or sub-clause(d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) a distribution made in accordance with sub-clauseÂ© or sub- clause (d) in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964 ( and before the Ist day of April, 1965)
settled law. In the facts and circumstances of the instant case, judgments relied upon by the DR in the cases of
Miss P. Sarada (supra), P.K. Abubucker (supra) and Smt. Tarulata Shyam (supra) are not applicable
of the our aforesaid findings, the appeal of the Revenue fails and the same is dismissed being devoid of any