Shital Kumar Vij, Jalandhar vs Department Of Income Tax
Income
Tax Appellate Tribunal - Amritsar
Income
Tax Appellate Tribunal - Amritsar
Shital
Kumar Vij, , Jalandhar vs Department Of Income Tax
IN
THE INCOME TAX APPELLATE TRIBUNAL
BEFORE
SH. H.S. SIDHU, JUDICIAL MEMBER
AND
SH. B.P.JAIN, ACCOUNTANT MEMBER
I.T.A.
No.406(Asr)/2009
Assessment
year:2003-04
PAN
:AAGPN8364C
Sh.
Shital Kumar Vij, vs. Asstt. Commr. of Income-tax, Prop. M/s. Shital
International, Range-II, Jalandhar. Jalandhar. (Appellant) (Respondent)
I.T.A.
No.146(Asr)/2011
Assessment
year:2003-04
PAN
:AAGPN8364C
Dy.
Commr. of Income-tax, vs. Sh. Shital Kumar Vij, Circle-II, Prop. M/s. Shital
International, Jalandhar. Jalandhar. (Appellant) (Respondent)
Assessee
by: S/Sh. Ashwani Kalia & C.K. Koul, CAs Respondent by:Sh. Tarsem Lal, DR
Date
of hearing:11/09/2012 & 14/09/2012
Date
of pronouncement:20/09/2012
ORDER
PER
BENCH ;
The appeal of the
assessee in ITA No.406(Asr)/2009 arises from the order of the Ld. CIT(A),
Jalandhar, dated 16.07.2009 for the assessment year 2003-04. The Revenue has
also filed appeal in ITA No.146(Asr)/2011 which
arises from the order of
the ld. CIT(A), Jalandhar, dated 25.01.2011.
2.
The assessee in ITA No. 406(Asr)/2009 has raised following groundsof appeal:
"1. That the
Ld. CIT(A) has erred in rejecting application under rule 46A of the Income Tax
Rules. It does not give
rise to any new contention and only seeks to establish that provisions of
section 2(22)(e) are not attracted in the case. The fact of enhanced limit by
PNB is apparent from the file of the company M/s. Shital Fibres Ltd.
2. That the
Ld. CIT(A) erred in confirming the addition of Rs.1,39,45,384/- made by A.O. on
account of deemed dividend.
3. The Ld.
CIT(A) has erred in not appreciating the difference between loan account and a
mutual, open and current account especially when the assessee had lien over
funds obtained by the company from P.N.B as overdraft. His credit balance in
account in the books of the company M/s. Shital Fibres Ltd. was
Rs.1,93,11,583/- as against Debit balance of Rs.1,39,45,384/- during the
previous year.
4. Any other
ground that may be taken up at the time of hearing."
3.
The Revenue in their appeal in ITA No.146(Asr)/2011 has raised following
grounds of appeal for deleting the penalty by the ld. CIT(A) under section
271(1)(c) of the I.T.Act, 1961:
"1. That on the facts and in the
circumstances of the case, the ld. CIT(A) has erred in law in deleting the
penalty of Rs.43,92,796/- imposed by the AO u/s 271(1)(c) of the I.T.Act, 1961.
2. That, it
is prayed that the order of the ld. CIT(A) be set-aside and that of the A.O.
restored.
3. That the
appellant requests for leave to add or amend or alter the grounds of appeal
before the appeal is heard and disposed of."
4. First of all, we take up assessee's appeal in ITA No.406(Asr)/2009 as under:
The
brief facts as arising from the order of the A.O. are reproduced
for
the sake of clarity as under:
"The assessee is a director in M/s. Shital
Fibre Ltd. As per reply dated 23-12-2005 filed on 17-01-2006 in the case of
above company, it was stated that the assessee is holding a total of 1034400
shares of the above company out of total shares issued 1375000 i.e. he is
holding 75.23% equity. As per Audit report filed, it was stated in Annexure'D'
thereof that the assessee had accepated loan from the company during the year.
The company is having substantial reserves and surplus out of profits.
Accordingly, the assessee was required to show cause vide letter dated
07-02-2006 as to why loan taken from the above company should not be treated as
deemed dividend as per definition u/s. 2(22)(e) of the IT Act, 1961.
The assessee has filed reply dated
16-03-2006 alongwith copy of a/c of the assessee in the books of M/s. Shital
Fibre Ltd. It has been submitted that the firm is having running account with
the above company and the transactions have been squared up at the close of the
financial year. It was further submitted that the assessee did not receive any
payment in the nature of loan or advance from the company and thus the
provisions of section 2(22)(e) were not attracted.
The contention of the assessee has been
examined. It is seen from the copy of account filed that the assessee has
received various 4
amounts from the company starting from 02-04-2002
and there is a debit balance due to the company. The peak of such debit balance
is reached on 11-06-2002 when the debit balance is at Rs. 1,52,06,934/-. It was
held by the Apex Court West Bengal ( 108 ITR345) as under:
" when loan or advance made to shareholder
are repaid before the end of the accounting year, whether the loan or advance
could be treated as being dividend?. The Provision of S.2(6A)(e) of 1992 Act,
would be attracted at the time of advance of loan being made to the shareholder
except or the specific provision in s.12(IB) for the assessment year 1955-56,
the legislature has deliberately not made the subsistence of the loan on the
date of the prevision year a prerequisite for raising or applying the statutory
provision. Therefore, even though the loan was not outstanding as of the year
end, it should be treated as deemed dividend."
The above decision of
the Apex Court
5. The Ld.
CIT(A) after considering the written submissions of the assessee dated
17.11.2008 at pages 2 to 11 and thereafter the additional evidence and relying upon the decisions of
various courts of law confirmed the action of the Assessing Officer.
6. Before us,
the ld. counsel for the assessee Mr. Ashwani Kalia, CA, at
the
outset relied upon the submissions made before the ld. CIT(A), which for
the
sake of clarity is reproduced as under:
" In this case, the A.O. has made an addition
of Rs. 1,39,45,384 on account of deemed dividend u/s. 2(22)(e) of the Income
Tax Act, 1961 ( in short "the Act") on the ground that assessee has
received loans and advances of the aforesaid amounts from M/s. Shital Fibres
Ltd. The a.O. as treated the said amount as deemed dividend within the meaning
of section 2(22)(e) of the Act.
2.
Section 2(22)(e) is a deeming provision which creates a legal fiction. In order
to appreciate the scope of its applicability and the conditions which are
required to be satisfied, it would be appropriate to reproduce hereunder the
provision of this section. The section reads as under :
"Any payment by a
company not being a company in which the public are substantially interested,
of any sum (whether
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 beneficial owner of shares ( not being shares
entitled to a fixed rate of dividend whether with or without a right to
participate in profits) holdings not less than ten percent 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 ( herein after in this cause referred to
as the said concern) or any payment by any such company on behalf or for the
individual benefit of any such shares holder to the extent to which the company
in either case process accumulated profits."
A bare reading of this section shows that
certain specified payments made by a company to a specified shareholder or to a
concern in which such shareholder is a member or a partner and in which he has
substantial interest or any payment by any by any such company on behalf or for
the individual benefit of specified shareholder to the extend to which company
possesses accumulated profit constitutes deemed dividend and as such liable to
tax in the hands of such shareholder. This section provides:
i) That it applies to a
closely held company and not to company in which public are substantially
interested;
ii) That such company has
made a payment by way of loan or advance to the shareholder or to certain
concern in
which the shareholder has s substantial interest;
iii) Or that the such
company has made payment on behalf of such shareholder;
iv) Or that such company
has made payment for the individual benefit of such share holder.
The aforesaid payments then be treated as
deemed dividend in the hands of shareholder and can be taxed as such. However
the scope of deemed dividend is restricted to payments to the extend of
accumulated profits. The section would not apply in case the company does not
have accumulated profits.
3. It is o doubt true that section 2(22)(e) of the Act is a deeming
provision. It is a settled rule of interpretation
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
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
that it purports to do. Reliance in this
regard is placed on the judgement of Hon'ble Allahabad High Court in the case
of CED Vs. Krishan Kumari Devi 173 ITR 561. In the case of D.K.Jain Vs. State
of Haryana (1995) suppl (1) SCC 349, the
Hon'ble Supreme Court has held that a statutory fiction cannot be extended
beyond the purpose. Similar view was taken by the apex court in the case
of CIT Vs. C.P. Sarthy Mudaliar 83 ITR 170 and of kerela high Court and in the
case of P.V. John 181 ITR 1. Thus, it clear that before the deeming provision
of the Act is invoked, the purpose for enacting the section must be clear and
borne in mind.
4. The companies to which section
applies include inter-alia the companies in which the majority of the voting
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.
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.
5 In the present case it is true that M/s.
Shital Fibres Ltd, is not a Public Ltd. Company and the assessee was holding
shares of M/s. Shital Febres Ltd exceeding the limit prescribed in section 2
(22) (e) of the Act. It is also true that the transactions noted by the
assessing officer appear in the name of M/s. Shital International which is a
proprietary concern of the assessee. Therefore both were related concerns and
apparently the conditions necessary for invoking the provisions of section 2
(22)(e) are satisfied so far these parameters are concerned. However for invoking he provisions of section
2(22)(e) of the Act, the Department is required to establish that payment
made by a company to the share holder or to a concern in which he has a
substantial interest fall into the nature and character of loans or advances as
there is no allegation of the department that the company has made payments on
behalf of the assessee for his individual benefit. Now the material question
which requires to be decided in this case
is whether the entries appearing in the account of Shital International in the
books of account of the company are in the nature and character of loan
or advances so as to fustify the invocation of section 2 (22)(e) of the Act.
The assessing officer has nowhere explained as to how these entries were in the
nature of loans. The A.O. has merely
referred to the statutory audit report in form no. 3CD where the Auditors have
indicated the amounts of deposits or loan from the company because there is
only one column for the same. But it does
not mean that these amounts were loans or advances in the legal sense.
Generalised meaning cannot be given to loan or advances. Moreover, items
(a) and (b) of column 24 in the statutory audit report in form no. 3CD refers
to particulars of each loan or deposit from and to related concerns. This also
includes items of deposits. The term
'deposit' has a difference meaning than the term 'loan'. Therefore it was not
correct on the part of the assessing officer o make a casual reference
to the audit report and jump to the conclusion that impugned transactions were
in the nature of loans.
6. As stated earlier the term 'deposit' is
different from the term 'loan'. It is relevant to point our that section 2
22)(e) is applicable only to loans or advances and not be deposits. The deeming
provisions of this section cannot be stretched to cover transaction of
'deposits' as these are legally different from the transaction of loan and
these have not been covered in the section The difference between the loans and
advances was duly noted by the Hon'ble Delhi High Court I the case of
Vaidyanath Plastics Industries (P) Ltd, Vs. K.L. Anand, Income Tax Officer 230
ITR 522 which was delivered in the context of provision of section 269T of the
Act. Section 269T of the Act as it stood at the relevant time prohibited the
repayment of deposits in cash exceeding the prescribed monetary limit. However,
the section did not include repayment of loans in cash at the relevant time.
The assessing officer considered the transaction of loans as transactions of
deposits and proceeded against the assessee for holding that the assessee had
violated the provisions of section 269 T of the Act. However, the Hon'ble Delhi
High Court observed that the provision of section 269T were applicable only to
'deposits' and not to 'loan'. The court also observed that there is a
distinction between a loan and deposit in a much as in the case of the former,
it is ordinarily the duty of the debtor to seek out the creditor and to repay
the money accordingly to the agreement and in the case of the latter it is
generally the duty of depositor to go to the banker or the depositee as the
case may be and make a demand for it. The court also noticed the difference
between a 'loan' and 'deposit' under the Limitation Act. The court observed
while articles 19 and 21 the Limitation Act provide for the period within which
a suit for recovery of a loan can be filed, article 22 deals with the period of
limitation for suits for recovery on account of a deposit. The Hon'ble High
Court observed that 'loans' and 'deposits' being different in legal terms and
by applying the strict rule of interpretation it could not be said that there
was a violation of provisions of section 269T of the Act because the
transactions of loans were not included in section 269T of the Act. In the
present case also section 2(22)(e) which is deeming provision must receive a
strict Interpretation. Since this section does not include the transactions of
deposits, the same cannot be extended to cover transaction of deposits. There,
the A.O. was not correct in summarily concluding that these were transactions of
loans without actually demonstrating that these were so in the legal terms.
7. Now the question arises what is
the meaning of a 'loan' and an ' advance'. Both these terms have distinct and separate meaning. The expression' advance' means something which is due
to a person but which is paid to him ahead of time when it is due to be paid. This view was taken by the Hon'ble
Madras High Court in the case of CIT.vs. k. Srinavasan 50 ITR788. In the dictionary of accounts by Eric
L. Kohler (5th Edition ) the expression 'advance' was defined as payment of cash or the transfer of goods
for which accounting must be rendered by the recipient at some later date. In the present case, no payment
was due to be made by the company to the assessee. Therefore, payments made do not fall in the category
of 'advances' so as to attract provision of section of section 2(22)(e) of the Act.
7.1 The expression 'loan' means a lending'
delivery by one party to and receipt by another party of a sum of money upon
agreement, express or implied, to reply with or without interest. For a loan
there must be a lender, a borrower, a thing loaned for use as well as a
contract between the parties of return of the thing loaned. A loan contracted
no doubt creates as debt but there may be a debt without contracting a loan. In
a loan the mind and intention of the two parties, the lender and the borrower
must be ad idem. Now in the present case, the A.O. has not examined these
aspects before coming to the conclusion that impugned transaction were in the
nature and character of loans. Nowhere has he brought our the intent and mind
of the parties. The mere fact that there was a running current account of the
assessee in the book of a company does not mean that these were transaction of
loans. Such inference is not automatic until it is so shown by the Revenue.
8. In order to appreciate the nature and character
of transactions in this case, it is pertinent to mention the
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.
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.
9. It is also relevant to point out that in the
year 1999, the company was badly in need of availing of higher credit limit from the bank. But the company
had no properly to pledge with the bank as collateral security. At this stage in assessee came forward to pledge his own properties so that
the company may avail of higher credit limit which was badly required by the company for the purpose of its
business. To be specific assessee pledged the following properties:
1. Equitable mortgage of land and building
measuring 8 k 8 marlas situated at Ram Nagar, Gaji Gulla, Jalandhar, in the name
of Sh. Shital K. Vij.
2. Equitable
mortgage of land and building measuring 127.57 marlas situated at S-9,
Industrial Area, Jalandhar, in the name of Sh. Shital K. Vij.
3. Equitable
mortgage of land and building situated at S-18 Industrial Area, Jalandhar, in
the name of Sh. Shital K. Vij.
4. Equitable mortgage of land and building
measuring 8 kanal 7 marla situated at Sanjay Gandhi Nagar, Industrial Area,
Jalandhar, in the name of Sh. Shital K. Vij,
Against
the pledge of above mentioned properties, the bank had advanced the following
credit facilities:
Packing
credit Rs. 75.00 lac
FOBP
Rs. 100.00 lac
FOBNCL
Need based (Within PBF) PBF Ceiling Rs. 1.60.000 lac
FLC(DP)
Rs. 400.00 lac
The Certificate to this effect form Pumjab
National Bank is enclosed as an additional evidence. Considering the fact such
additional evidence is very vital which goes to the very root of this issue and
in the interest of substantial justice he same may kindly be admitted as per
provision of Rule 46 A.
Thus, it is clear that the company benefited
more than assessee. However, while agreeing to pledge the above mentioned properties with the bank it was
mutually agreed that both the company and the assessee would park their
surplus funds with each other for their mutual benefit. With this understanding
the company had parked its surplus funds as 'deposits' with the assessee during
the lean period. It is relevant to mentioned the company is in the business of
manufacture of mink blankets for which the demand is generally more in the
winter season. The business in summer months is generally lean and, therefore,
the surplus funds were deposited with the assessee during this lean season,
these When the funds were needed by the company during the winter season, these
were not only returned but also the assessee himself parked his surplus funds
with the company. This is clear form the fat that as against the peak of debit
balance of Rs. 1,52,06934 due from the assessee on 11.06.2002, 13
the peak of credit balance payable by the
company to an assessee stood t Rsl 1,93,11853 as on 18.02.2003. In addition to
the same here was a separate account in the name of assessee in the books of
the company where company owed an amount of Rs. 12,61,550 throughout the year.
Therefore, there was no intention of advancing any 'loan' to assessee out of
accumulated profits. This only shown that these were not loans as alleged by
the department but these were deposits in the mutual, open current account for
the mutual benefit of each other. Therefore the provision of section 2(22)(e)
are not attracted to this case.
10.
Further, as discussed earlier, the account between the assessee and the company
is mutual, open and current in nature. There are more than200 entries.
Sometimes there is a debit balance and in the latter part there is huge credit
balance. Therefore no part of running account could be treated as loan as the
account is moving one and the balance reflected in that running account is
momentary in nature and subject to frequent charges. In this regard attention is
invited to the provision contained in schedule to Limitation Act, 1963 to
explain the distinction provided by the statute between mutual, open, current
account and loan account for the purpose of limitation. As per article 1 and 10
of schedule to Limitation Act, 1963, the limitation period prescribed in the
case of mutual, open, current is there years from the close of the year in
which the last item is admitted or proved as entered in the account whereas in
the case of a loan the limitation period is three years from the date on which
the loan is made. The distinction made by the Limitation Act is recognized by
the courts to determine the exact nature of these transactions. Reliance in
this regard is placed on the two judgments of Hon'ble Bombay High Court in the
case of Durga Prasad Mandelia Vs. Registar of companies (1987) 61 companies
cases479 and Pennwelt India Ltd. Vs. Registrar of Companies (1987)62 companies
cases 112. Thus a running account maintained by two concerns even if they are
related concerns does not fall within the purview of section 2(22)(e) of the
Act as 14
entries therein are in the normal course
of the business which cannot be treated as loans. Reliance in this regard is
also placed on the decision of ITAT Bombay bench in the case of NH Securities
Ltd. Vs. Deputy Commissioner of Income-tax (2007) 11SOT 302 where it was held
that the law does not prohibit business transaction
between related concerns and therefore payment made in the ordinary course of
business cannot be treated as loans and advances for the purpose of
section 2(22)(e) of the Act.
11. In the
case of DCIT Vs. Lakra Bros (2004)106TTJ 205 ITAT Chandigarh bench has held
that section 2(22)(e) cannot be extended to include even legitimate transaction
carried out in the ordinary course of business where the international is
neither to give loan nor an advance.
12. The
Department has heavily relied on the solitary judgment of the Hon'ble Supreme
Court in the case of Smt. Tarulata Shyam & others Vs. CIT 108 ITR 345
without appreciating the facts of that case and the issues raised therein. It
is settled position of law that the judgement of the court takes it colour from
the facts of the case and the issues raised therein. It is not correct to pick
up an isolated world from the judgment and read as law laid down by the court.
Reliance in this regard is based on the judgment of Hon'ble Supreme Court in
the case of CIT Vs. Sum Engineering works 198 ITR 297. In the case of Smt.
Tarulata Sham & others Vs. CIT the issue raised before he court 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 divided even if that advance or loan,
was subsequently period in its entirely during the relevant previous year in
which it was taken. In that case there was no dispute about the fact that the
amount given by the company to the shareholder was in the nature of loan.
Therefore, the court was not required to determine whether the transactions
were in the nature and character of loans or not. The Hon'ble court held that
such loan 15
would fall within
the purview of section 2(22)(e) irrespective of the fact that such loan was
returned before the close
of the accounting year itself. In the present case the main controversy relates
to the impugned transaction which is not in the nature of loans or advances.
These are transactions in the mutual, running and current open account where
surplus funds were kept as deposits for the mutual benefit of each other.
Therefore the judgment relied upon by the revenue is not at all applicable to
the facts of the present case.
13. further, without prejudice and independent of the view that impugned
transaction were not in the nature of loans or advances, it is submitted that
A.O. has erroneously made the addition by taken peak of the debits. This is not
an addition of cash credit where addition could be made and worked out on peak
basis. This is an addition under the deeming provision of section 2(22)(e) of
the Act. The entire transaction appearing in the account needed to be examined
in detail before coming conclusion that all transactions were in the nature of loans. Further, the A.O. was duty bounds to
examine the subsequent transaction where the entire debit balance stood
liquidated on 11.11.2002. Thereafter it was a credit balance payable to the
assessee stood at staggering figure Rs.
1,93,11,583 ass on 18.02.2003. The company owed much higher amount to the
shareholder then the vice versa. If the intention of the group of
shareholder was to divert the accumulated profit to the assessee in the guise
of loans, why would the assessee subsequently keep huge deposits with the
company in the same accounting year. This only proves beyond doubt that
transactions appearing in the mutual, open running account were in the nature
of deposits and not loan and advances as alleged by the Department. This is not
a case which would fall in the mischief for which deeming provision of section
2 (22)(e) were enacted.
14. Thus. To
sum up it is respectfully submitted that the impugned transactions in the
mutual, open and current account are in the nature of deposit where surplus
funds are parked by the parties for their mutual benefit. These are not loans
and advances specified in section 2(22)(e) of the Act. Therefore section 2
(22)(e) of the Act is not applicable to the present case. The addition made by
the A.O. is illegal, unwarranted and contrary to the provision of the Act. The
same may kindly be deleted. "
15. He further argued
that the additional evidence under Rule 46A of I.T. Rules, 1962 was withdrawn with a misconception that the certificate from
PNB must
have been filed with the return of income. Accordingly, he filed a fresh
application dated 17.11.2008 for admitting the additional evidence which is the
certificate from PNB. The Ld. CIT(A), however, observed on the fresh
application that this document does not have the impact on the application u/s
2(22)(e) of the Act. The ld. counsel for the assessee, Mr. Ashwani Kalia,
relied upon the decision of coordinate Bench of ITAT Chennai Bench 'A' in the
case of ACIT vs.. Smt. G. Sreevidya in ITA No.1270(MDS) of 2011 dated
28.06.2012 reported in (2012) 24 Taxman .com 75 (Chennai) Trib., which is
exactly on the identical issue in hand before the Bench in the case of the
present assessee. The Ld. counsel for the assessee read the said decision of
the coordinate Bench in the case of ACIT vs. Smt. G. Sreevidya (supra) and
invited our attention to the explanation submitted before the ld. CIT(A) that
the assessee did not receive any payment in the nature of loan or advance from
the company. Thus, the provisions of section 2(22)(e) of the Act are not
attracted. He invited our attention to para 9 being the explanation given
before the ld. CIT(A) that the company M/s. Shital Fabrics Ltd. was badly in
need of availing of higher credit limit from the bank and the company had no
property to pledge with the bank as collateral security. At this stage, the
assessee came forward to pledge his own properties so that company might avail
of higher credit limit. The assessee pledged four properties mentioned in the
explanation and the written submissions before the ld. CIT(A) mentioned
hereinabove. There was a mutual agreement with the company that both the
company and assessee would park their surplus funds with each other for their
mutual benefit. With this understanding the company had parked its surplus
funds as 'deposits' with the assessee during the loan period. The business in
summer months
is generally lean and therefore, the surplus funds were deposited with the
assessee during this lean season. When the funds were needed by the company
during the winter season, these were not only returned but also the assessee
himself parked his surplus funds with the company. This is clear from the fact
that as against the peak of debit balance of Rs.1,52,06,934/-due from the
assessee on 11.06.2002, the peak of credit balance payable by the company to an
assessee stood at Rs.1,93,11,853/- as on 18.02.2003. In addition to the same there was a separate account in the name of
assessee in 18 the books of the company where the company owed an amount
of Rs.12,61,550/- throughout the year. Therefore, there was no intention of
advancing any 'loan' to assessee out of accumulated profits. 8. The Ld. counsel
for the assessee, Mr. Ashwani Kalia, argued that the account between the
assessee and the company is mutual, open and current in nature. Sometimes,
there is a debit balance and in the latter part there is a huge credit balance
and therefore, no part of running account could be treated as loan. He invited
our attention to schedule of Limitation Act, 1963, in which as per article 1
and 9 of schedule to Limitation is different in case of mutual, open and
current account as compared to the loan. The Ld. counsel for the assessee, relied
upon the decision of the ITAT, Mumbai Bench in the case of N.H. Securities
vs. Dy. CIT (2007) 11 SOT 302 where it has been held that the law does not
prohibit business transactions between related concerns and therefore payments
made in the ordinary course of business cannot be treated as loans and advances
for the purposes of section 2(22)(e) of the Act. He further invited our
attention to the decision of the ITAT, Chandigarh Bench in the case of DCIT vs.
Lakra Bros (2004) 106 TTJ 205, in which it has been held
that section 2(22)(e) cannot
be extended to include even legitimate transactions carried out in the ordinary
course of business where the intention is neither to give loan nor an advance.
9.The decisions relied
upon by the AO and the ld. CIT(A) in the case of Smt. Tarulata Shyam & Others vs. CIT 108
ITR 345 cannot be made
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.
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.
10. The Ld.
counsel also relied upon the decision of the Hon'ble Calcutta High Court, in
the case of Pradip Kumar Malhotra vs. CIT 338 ITR 538 where any loan in return
to advantage conferred by shareholder is not treated as deemed dividend u/s
2(22)(e) of the Act. The Ld. Counsel also relied
upon the judgment of hon'ble Delhi High Court in the case of CIT vs. 20 Raj
kumar (2009) 318 ITR 462 and in the case of Baidya Nath Plastic Industries (P)
Ltd. vs. K.L. Anand ITO reported at 230 ITR 522.
11.
The Ld. DCIT(DR), Mr. Tarsem Lal, on the other
hand, made the written submissions which are reproduced for the sake of clarity
as under:
"It
is submitted that the following facts were admitted by the learned counsel for
the assessee during the course of last hearing i.e.
a) The assessee was holding around 75.52% (i.e.
more than 10% as stipulated in the provisions of section 2(22)(e) of the Income
Tax Act, 1961 of the shares of the Company. b) The company M/s. Shital Fibres
Ltd. had substantial accumulated profits kept in reserves.
c) The
company M/s. Shital Fibres Ltd. is one in which public are not substantially
interested i.e. it was a closely held company.
d) Money has
been paid by the company to the shareholder i.e. the assessee for the
individual benefit of the assessee.
The only point which the assessee disputed is
that the monies received by him were in the nature of deposits and not loan or
advances. The submissions made by the ld. counsel made are as under:
a) The
assessee had received deposits from the company M/s. Shital Fibres Ltd.
b) The
account with company M/s. Shital Fibres Ltd. was a running account or current
account.
c) The
company had entered into an agreement with the assessee that in lieu of keeping
his immovable properties as security with PBN and standing collateral security
for the company, the company would deposit its surplus funds with him.
The submissions made are self contradictory and
loudly proclaim that the assessee is having no worthwhile submission to make.
The irrelevance of the submissions made is discussed hereunder:
The ld. counsel for the assessee has been
harping mainly on the submission that the assessee had received deposits from
the company. He was vehemently asserting that the payments received were in the
nature of deposits and not loan. He merely asserted that the payments received
from deposits but could not adduce any argument/evidence as to how the payments
received should be accepted as deposits. The only submission made in support of
this contention was by way of additional evidence in support of his contention
that the company had entered into an agreement with him that in lieu of keeping
his immovable properties as security with PBN and standing collateral security
for the company. The company would deposits its surplus funds with him. This
contention has been sought to be raised in ground No.1 of appeal. It is
pertinent to mention here that the ld. counsel had adduced no argument or
evidence in support of this contention and moreover the assessee had withdrawn the
additional evidence before the AO which he had filed before the AO. This fact
has been recorded at para 3.3.1 of the ld. CIT(A)'s order.
In view of the above, it is clear that the only
basis of the assessee's claim that the payments received by the assessee were
deposit is not existing on record and as such, this submission is not worth
entertaining in the first place itself.
The other submission in support of this contention was
that in Annexure D to the Audit Report for the assessment year 2003-04, what
had been shown were deposits and not loan. The ld. counsel had invited the kind attention of the Hon'ble Bench to para 3 of
the assessment order in this regard. He had asserted that in the said
Annexure-D, both the words loan or deposit are mentioned and the AO picked up
the word 'loan' and ignored the word 'deposit' when actually the said amount
represented deposit. In this regard, it is submitted that when the assessee on
the one hand claims that the monies were deposits and in the same breath it claims
that the account of the assessee with company was a running account or current
account, this clearly shows that the assessee has adopted a conflicting stance.
The perusal of the account shows that the monies received by the assessee was for the free use of the
assessee. Thus the assessee himself affirms when he claims that it was a
running account and as and when money was needed, the same was raised by them
for each other. This being so, it hardly leaves any room for the culmination of
the fact that the monies received by the assessee were in the nature of loan
and the assessee's case was covered by the provisions of section 2(22)(e) on
all fours.
The judgments relied upon by the ld. counsel are
also not relevant. The irrelevance of the judgments relied upon by the ld.
counsel for the assessee is discussed as under:
CIT vs. Raj Kumar 318 ITR 462
The finding of the Hon'ble
Tribunal in this case in appreciation of which the Hon'ble Delhi High Court
passed the
judgment was the money received by the assessee from CEI ltd. was in the nature
of a trade advance. The ld. counsel for the
assessee Sh. Ashwani Kalia never claimed in his submissions before the Hon'ble
Bench that the monies received by Sh. Shital Vij was in the nature of
trade advance. He had made two submissions mainly i.e. the monies received were
in the nature of deposits and second it was a running or current account with
the company. There was no claim of any business dealing with each other.
Therefore, this judgment is clearly not relevant to the facts of the case and
does not help the assessee in any way.
Baidya Nath Plastic
Industries (P) Ltd. vs. K.L. Anand ITO reported at 230 ITR 522.
It may be stated that this judgment gives a
lucid account of the terms 'deposit' and 'loan' and clearly show that the
monies received by the assessee were in the nature of loan.
In this case, the
contention of the assessee had been that it had raised loan and repayment was
made in cash of the
said loan. But the department had taken the stance that the repayment had been
made of deposit. The Hon'ble High Court delved into the relative meaning of the
term 'deposit' and 'loan' and on appreciating that the complainant i.e. the AO
had himself written to the assessee in show cause notice dated 2nd March, 1987
that the said assessee had raised a loan from M/s. Summan Steel & Rolling
Mills and made payment for the said 23
loan in the previous year relevant to the A.Y.
1984-85 in cash, had set aside the prosecution proceedings u/s 276E of the I.T.
Act.
In view of the above, it is clear that the
factual matrix of the case is not at par with the assessee. Nonetheless, as
submitted above, in this judgment, the Hon'ble High Court had delved into the
relative meaning of the terms 'deposit' and loan which is as under:
that a deposit is to be kept by the depositeee
for the depositor and the loan is to be kept by the borrower for himself. Thus,
I deposit my hat in the cloak room. My hat is not to be used by the depositee
but is to be kept for me and returned to me on my demand' but I lend my money
to a friend and he can do what he likes with it as long as he returns it to me
either on demand or at some specified time.
In view of such a clarity of the terms 'deposit' and
'loan' it becomes clear that the monies received by the assessee were loan and
not deposit as vehemently claimed the ld. counsel for the assessee. It is
pertinent to mention here that when the assessee claims that it had a current
account or running account with the company, it
clearly shows that it was free to use the money in any manner it liked and was
not to keep the money for the company as such, as a deposit. Thus, the
essential ingredient of 'deposit' is not satisfied. Rather, it emphatically
affirms that the monies given by the company was in the nature of loan as the
assessee was free to use the monies received from the companies in the manner
he liked. This is what is the true import of a running or current account.
In view of the above
submissions, it becomes crystal clear that the assessee's submissions are
totally irrelevant and
it was copy book case where the provisions of section 2(22)(e) had direct
applicability.
Last but not the
least, it may be mentioned here that the assessee has stated in the ground No.1
of appeal as the company
had been allowed enhanced limit by Punjab National Bank. It is strange that the
assessee had raised this ground which
required to be supported by additional evidence and what to speak of seeking
the admission of any evidence, the assessee had chose to withdraw the 24
additional evidence before the AO himself. In
this regard, the finding of the ld. CIT(A) at para 3.3.1 are quoted verbatim:
"The AO submitted that the assessee
had not sought to adduce additional evidence which he had filed earlier also
and the withdrawn. The AO submitted that the changing stands showed that the
provisions of section 2(220(e0 were
attracted in the case of appellant and support of additional evidence was an
afterthought to hide the true facts of the case."
The assessee has relied upon the judgment
of the Hon'ble Chennai Bench 'A" in the case report as ACIT vs. Smt. G.
Sreevidya in ITA No.1270(MDS) of 2011 which is clearly not applicable as the
assessee had furnished no evidence to prove that he had entered into an
agreement with the company that he would give bank guarantee and also given
collateral security for enhancing the limit of the company and the company in
turn would also him liberty to withdraw funds form the company as and when
required. Pressing this judgment and ground No.1 rather was completely off the
tangent.
It is further submitted that the ld.
CIT(A) has passed a well- reasoned order and it may further be mentioned that the judgment of the Hon'ble Supreme Court in
the case of Smt. Tarulata Shyam & Ors vs. CIT reported at 108 ITR
345 clears all doubts about the applicability of the provisions of section
2(22)(e) in the facts and circumstances which are obtaining in this case. It
had held that 'advance to shareholder during the relevant previous year by the
company is chargeable as deemed dividend even though the loan does not remain
outstanding as on last day of the previous year. If the assessee comes under
the letter of law, he has to be taxed, however, great the hardship may appear
to the judicial mind to be."
12. We have heard the rival
contentions and perused the facts of the case. In the present case, the AO
noticed that as per Audit Report in Col. No.24, the Auditors' had reported the
particulars of loans or deposits. It is on the basis of the report by the Tax
Auditors' in Form 3CD in Col.24, the AO had 25 initiated proceeding to give
show cause notice dated 07.02.2006 as to why loan taken from the M/s. Shital
Fibres Ltd. should not be treated as deemed dividend under section 2(22)(e) of
the Act. The assessee submitted his reply dated 16.07.2006 that the firm is
having running account with the said company and the said amount has not been
received in the nature of loan or advance and therefore, the provisions of
section 2(22)(e) of the Act were not attracted. The assessee submitted the
explanation before the ld. CIT(A) dated 17.11.2008,
which is available at pages 2 to 11 of ld. CIT(A)'s order, which for the sake of
clarity has been reproduced hereinabove. There cannot be any dispute that in
Col. No.24, the 'word' loan or deposit has been mentioned and not only the loan
which is required to be reported by tax auditors'. Therefore, according to the
tax auditors' the amount reported could be loan or deposit for which the
assessee had submitted the reply, which was not found satisfactory by the A.O.
Now the question before us is whether the said running account is in the
character of loan or advance or deposit. The second question is whether the
amount has been received by the assessee and given by the assessee to the said
company during the ordinary course of business or as per some mutual agreement.
There is no dispute to the fact and which has not been denied by any of the
authorities below that 26 the assessee Sh. Shital Vij had pledged his
properties to the bank for availing higher limits by M/s. Shital Fibres Ltd;
which for the sake of clarity are reproduced in short as under :
i)
Land and building measuring 8 k 8 marla at Ram Nagar, Jalandhar.
ii)
Land and building measuring 127.57 marlas at Industrial Area, Jalandhar.
iii)
Land and building at S-18 Industrial Area, Jalandhar.
iv) Land and building measuring 8 k 7 marlas situated at
Sanjay Gandhi Nagar, Jalandhar.
All the properties are
owned and registered in the name of Sh. Shital K. Vij, is a matter of record
which has been explained before the Ld. CIT(A) and thee fact is available at
pages 7 & 8 of CIT(A)'s order. Against the said pledge of above properties,
the bank had advanced the following creditfacilities, which
for the sake of clarity are reproduced as under:
i)
Packing credit Rs.75 lacs
ii)
FOBP Rs.100 lacs
iii)
FOBNCL Need based (within PBF)
iv)
PBF Ceiling Rs.160 lacs
v)
FLC (DP) Rs.400 lacs 27
Even if the additional
evidence in the form of bank certificate had not been admitted, the facts are
on record of the Company which were before the authorities below. The said
argument and the explanation of the assessee cannot be brushed aside by the ld.
CIT(A) and cannot be commented upon or disposed of that such explanation does
not make impact on the applicability of section 2(22)(e) of the Act, to the
facts of the present case. There is no doubt that the Company in the present
case has benefited more than the assessee. As per the mutual agreement both the
company and the assessee would park their surplus funds with each other for
their mutual benefit. With this understanding the company had parked its
surplus funds as 'deposits' with the assessee during the lean period. This was
explained by the ld. counsel for the assessee before the ld. CIT(A) as well as
before us. Therefore, there was no intention of advancing any loan to the
assessee out of accumulated profits by the company, M/s. Shital Fibres Ltd. The
said amount in the open, current account was in the nature of deposit and not
as a loan or advance by the company M/s. Shital Fibres Ltd. The distinction of loan,
mutual, open and current account has been defined in the Limitation Act, 1963,
argued by the ld. counsel for the assessee which is different in the case of
loan as compared to the mutual, open and current account. Therefore, in the
present case, the transactions are business transactions 28carried out in the ordinary course of business and cannot be treated as
loans and
advances.
12.1 The decision of
Hon'ble Supreme Court in the case of Smt. Tarulata Shyam & Ors vs. CIT reported
in 108 ITR 345, relied upon by the AO and the Ld. CIT(A) and the ld. DCIT(DR),
Mr. Tarsem Lal is not applicable being distinguishable on facts since in that
case the issue before the Hon'ble Court was that if the loans or advances were
subsequently repaid in its entirety during the relevant previous year in which
it was taken then provisions of section 2(22)(e) are attracted or not. In that
case there was no dispute about the fact that the amount given by the company
to the shareholder was in the nature of loan. Therefore, the Hon'ble court was
not required to determine whether the transactions were in the nature and character
of loans or not and held that such loan would fall within the purview of
section 2(22)(e) of the Act, irrespective of the fact that such loan was
returned before the close of the accounting year. Therefore, in that case, essentially
it was established that it was a loan and not a deposit in the ordinary course
of business.
12.2. The reliance is
placed on the decision of Hon'ble Calcutta High Court, in the case of Pradip
Kumar Malhota vs. CIT (supra) by the Ld. counsel for the assessee, applies to
the present facts and circumstances of the 29 case. The Head Note of the said
decision of Hon'ble Calcutta High Court, in the case of Pradip Kumar Malhota
vs. CIT (supra), is reproduced for the sake of clarity as under:
"The phrase "by way of advance
or loan" appearing in sub- clause (3) of section 2(22) of the Income-tax
Act, 1961, must be construed to mean those advances or loans which a
shareholder enjoys simply on account of being 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; but if
such loan or advance is given to such shareholder as a consequence of any
further consideration which is beneficial to the company received from such a
shareholder, in such case, such advance or loan cannot be said to be deemed
dividend within the meaning of the Act. Thus, gratuitous loan or advance given
by a company to those classes of
shareholders would come within the purview of section 2(22) but not cases where
the loan or advance is given in return to an advantage conferred upon
the company by such shareholder.
The assessee had substantial shareholding in a
private company. The assessee permitted his immovable property to be mortgaged
to the bank for enabling the company to take the benefit of loan and in spite
of request of the assessee the company was unable to release the property from
mortgage. Consequently, the board of directors of the company passed
interest-free deposit up to R.50 lakhs as and when required. During the
previous year relevant to the assessment year 1999-2000, the assessee obtained
from the company a sum of Rs.20,75,000 by way of security deposit. Out of the
amount, a sum of Rs. 20 lakh was subsequently returned by the assessee to the
company. In the assessment made for 1999-2000 the Assessing Officer added the sum
of Rs.20,75,000 as deemed dividend. This was upheld by the Tribunal. On appeal
to the High Court:
Held, allowing the appeal, that for retaining
the benefit of loan availed of from the bank if decision was taken to give
advance to the assessee such decision was not to give gratuitous advance to its
shareholder but to protect the business interest of the company. The sum of
Rs.20,75,000 could not be treated as deemed dividend." 30
12.3 The reliance is
also placed on the decision of the Hon'ble Delhi High Court, in the case of
C.I.T. vs. Raj Kumar, reported in 318 ITR 462, where the advances which are in
the nature of money transacted to give effect to a
commercial transaction,
would not fall within the ambit of the provisions of section 2(22)(e).
12.4. As mentioned hereinabove, the word
'deposit' is different from the word 'loan', has been decided by the Hon'ble
Delhi High Court, in the case of Baidya Nath Plastic Industries (P.) Ltd. And
Others vs. K.L. Anand,
Income Tax Officer (supra). The Head Notes of which
are reproduced for the sake of clarity as under:
"In case two interpretations are possible,
an interpretation which takes an assessee out of the clutches of a penal
provision must be preferred.
A perusal of section 269T of the Income-tax Act, 196,
makes it clear that the aggregate amount of deposits held by a company shall
not be repaid to any person otherwise than by an account payee cheque or
account payee bank draft where the amount of deposit, or where the amount of
deposit is to be repaid together with any interest, the aggregate of the amount
of deposit and such interest, is ten thousand rupees or above, after the
Income-tax (Second Amendment) Act, 1981, received the assent of the President
of India. The President of India assented to the Amendment Act on September
19,1981. The provisions of section 269T read with section 276E are penal in
nature and must be strictly construed. Since the Legislature specifically used
the word "deposit" in contradistinction to the term "loan",
the provisions would only be attracted if the repayment has been made in
respect of a deposit. The meaning of the word "deposit" occuringg in
section 269T cannot be stretched to include a loan. The distinction between a
loan and a deposit is that in the case of the former, it is ordinarily the duty of the
debtor to seek out the creditor and to repay the money according to the
agreement and in the case of the latter it is generally the duty of the
depositor to go to the banker or to the depositee,
as the case may be, and make a demand for it. While articles 19 and 21 of the
Limitation Act fix the period within which a suit for recovery of the
loan can be filed, article 22 deals with the period of limitation for suits for
money on account of deposit."
12.5. The facts in the
present case are identical to the facts in the case of Asstt. Commr. of
Income-tax vs. Smt. G. Sreevidya, in ITA No.1270(MDS) of 2011 for the
assessment year 2006-07, dated 28th June, 2012, where the amount withdrawn from
the company by the assessee even for personal purposes has not been held to be
deemed dividend. For the sake of clarity, the facts of the case are reproduced
as under:
"The present appeal has been filed by the
Revenue impugning the order of the CIT(A)-V,Chennai dated 06.04.2011.
2. The facts in brief of the case are that the assessee had filed
return of income relevant to the A.Y. 2006-07
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.
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.
3. The
present appeal has been filed by the Revenue assailing order of the CIT(A) only
on the ground that CIT(A) has erred in
deleting the addition of Rs.17,65,517/- made by the A.O. as deemed dividend u/s
2(22)(e) of the Act.
4. Mr. Shaji
P. Jacaob, DR appearing on behalf of the Revenue vehemently opposed the order
of the CIT(A). He submitted that the loan was granted by RSPL to the assessee
who is having substantial interest in the company having more than 10% voting
power. The amount advanced by the company to the assessee falls within the
ambit of definition of 'deemed dividend' under section 2(22)(e) of the Act, as
the company was having accumulated profits
to that extent when the amount was advanced to the assessee. He further
submitted that the repayment of loan amount as alleged by the assessee
cannot be criteria to take out the said amount from the ambit of the provisions
of section 2(22)(e) . He strongly contended that the CIT(A) has erred in
relying on the following cases:
i) CIT vs. Creative
Dyeing & Printing (P) Ltd [2009] 318 ITR 476 (Delhi )/184
Taxman 483 (Delhi
ii) CIT vs. Ambassador
Travels (P) Ltd. [2009] 318 ITR 376/[2008] 173 Taxman 407 (Delhi
iii) CIT vs. Rajkumar [2009] 318 ITR 462/181
Taxman 155 (Delhi
The DR submitted that case
of the assessee is squarely covered by the judgment of the Hon'ble Supreme Court of
India in the case of Miss P.Sarda v. CIT [1998] 229 ITR 444/96 Taxman 11
as well as Smt. Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC). He further
relied on the judgment of the Ho'ble Madras High Court in the case of CIT vs.
P.K. Abubucker [2003] 259 ITR 507/[2009]135 Taxman 77 (Mad.)
5. On the other hand, Dr. Anita Sumanth, counsel appearing on behalf of
the assessee submitted that the order passed by the CIT(A) is a well reasoned and
detailed order.She submitted that the amount was advanced to the assessee as per her pre-condition of granting bank guarantee and a
collateral security for finding of the company. The counsel submitted that the
assessee had given personal guarantee and had given collateral security to
facilitate availing of credit facility by the company. At the time of extending
guarantee/security the assessee had sought liberty to withdraw funds from the company as and when amount from the company
and had also repaid the amounts withdrawn periodically. Therefore, the
transaction between the assessee and the company was purely out of business
consideration. The counsel further contended that if the assessee would not
have given bank guarantee and collateral security, the operations of the
company would have come to a standstill. The counsel submitted that the amount was advanced by the company to the
assessee purely on the terms of commercial expediency. In order to
support her contentions the counsel relied on the judgment of the Hon'ble
Calcutta High Court in the case of Pradip
Kumar Malhotra v. CIT [2011] 338 ITR 538/203 Taxman 110/15 taxman.com 66 and
the judgments of the Hon'ble Delhi High Court in the following cases :
i) Creative Dyeing &
Printing (P) Ltd (supra) ii) Ambassador Travels (P) Ltd. (supra)
iii) Rajkumar (supra)
6. We have heard the submissions made by the
respective parties and have gone through the documents on
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-clause© 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)
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-clause© 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)
ii) any advance or loan
made to a shareholder [ or the said concern] by a company in the ordinary
course of its business,
where the lending of money is a substantial part of the business of the
company;
iii) any dividend paid by a company which is set
off by the company against the whole or any part of any sum previously paid by
it and treated as a dividend within the meaning of sub clause (e) to the extent
to which it is so set off;
iv) any payment made by a company on purchase of
its own shares from a shareholder in accordance with the provisions of section
77A of the Companies Act, 1956 ( 1 of 1956);
v) any distribution of shares pursuant to
a demerger by the resulting company to the shareholders of the demerged company
(whether or not there is a reduction of capital in the demerged company)."
The definition laid down by section 2(22)
is inclusive and not exhaustive. The following payments of distributions by a
company to its shareholder are deemed as dividends to the extent of accumulated
profits of the company although these payments may not be dividends under the
provisions of Companies Act:
a) any distribution or release of company's
assets; b) any distribution of debentures, debenture stock, deposit
certificates and bonus to preference share-holders; 35
c) distribution
on liquidation of company;
d) distribution
on reduction of capital.
e) any payment
by ay of loan or advances by a closely held company to a shareholder holding
substantial interest provided the loan should not have been made in the
ordinary course of business and money lending should not be a substantial part
of the company's business.
7. In order
to attract the provisions of section 2(22)(e), the important consideration is
that there should be loan/advance by a company to its shareholder. Every amount
paid must make the company a creditor of the shareholder
of that amount. At the same time, it is to be borne in mind that every payment
by a company to its shareholders may not be loan/advance. In the present
case, the amount was withdrawn by the assessee from the company only to meet
her short term cash requirements. By virtue of offering personal guarantee and
collateral security for the benefit of the company, the liquidity position of
the assessee had gone down. In the strict sense if it is to be construed the
amount forwarded by the company to the assessee was not in the shape of advances
or loans. The arrangement between the assessee and the company was merely for
the sake of convenience arising out of business expediency. In the facts and
circumstances of the case, it is not appropriate
to hold that the amount withdrawn by the assessee partake the character of
deemed dividend under the provisions of section 2(22)(e) of the Act.
8.
The case of the assessee is squarely covered by
the Division Bench judgment of the Hon'ble Calcutta High Court in the case of
Pradip Kumar Malhotra (supra), wherein the facts were similar to the facts of
company. The assessee permitted his immovable property to be mortgaged to the
bank for enabling the company to take the benefit of loan. The Board of
Directors of the company passed a resolution to obtain interest free deposit
upto Rs.50 lakhs as and when requi8red. The assessee obtained from the company
a sum of Rs.20,75,000/- by way of security deposit. Out of this amount, a sum
of Rs.20 lakhs was returned by the assessee to the company. The AO added the sum
of Rs.20,75,000/- as deemed dividend. The Hon'ble High Court while allowing the
appeal of the assessee held that for retaining the benefit of loan availed of
from the bank, if decision was taken to give advance to the assessee such
decision was not to give gratuitous advance to its shareholder but to protect
the business interest of the company. The sum of Rs.20,75,000/- could not be
treated as deemed dividend. The Division Bench of the Hon'ble High Court
followed the decision of the Hon'ble Delhi High Court in the case of Creative
Dyeing & Printing (P) Ltd (supra). In the instant case also the assessee
was allowed to withdraw funds from the company as per requirement for personal
purposes against the personal guarantee and the collateral security given by
her to facilitate her availing of credit facility of the company.
9. It is a well settled law that loan or advance
given to a shareholder by a company in which public is not substantially interested and which had accumulated profits, the amount advanced
as loan to such shareholder is deemed to be dividend as per the provisions of section 2(22)(e) of the Act.
However, the facts and circumstances of each case have to be scrutinized before applying the ratio of
the cases holding above well
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
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
10. The CIT(A) vide order dated 6.4.2011 has
rightly deleted the addition made on account of "deemed
dividend" by the Assessing Officer. We do not find any infirmity in the
order passed by the CIT(A). In view
of the our aforesaid findings, the appeal of the Revenue fails and the same is dismissed being devoid of any
merit."
of the our aforesaid findings, the appeal of the Revenue fails and the same is dismissed being devoid of any
merit."
12.6 The Ld. DCIT(DR) has tried to distinguish the cases relied upon by the ld. counsel for the assessee, which in
fact go in favour of the assessee and therefore, cannot help the revenue.
12.7 In the
facts and circumstances of the case, the Ld. CIT(A) is not justified in
confirming the action of the AO in treating the said deposits as deemed dividend under section 2(22)(e) of the
Act. The AO is accordingly 37 directed to delete the addition. Thus, all
the grounds of the assessee are allowed.
13. As regards
the appeal of the Revenue in ITA No.146(Asr)/2011 for the assessment year
2003-04, the A.O. levied penalty under section 271(1)(c) of the Income Tax Act,
1961 @ 100% of the tax sought to be evaded by the assessee by order dated
28.05.2010. The said penalty has been
deleted by the Ld. CIT(A), since the assessee was able to substantiate his
contention that the money received from M/s. Shital Fibres Ltd. was in the
nature of deposits and accordingly cancelled the penalty levied by the
Assessing Officer. The Ld. CIT(A) relied upon the decisions of various courts
of law.
14. We have
heard the rival contentions and perused the facts of the case.
Since the additions in the present case have been
deleted by us in quantum
appeal
hereinabove in assessee's case in ITA No. 406(Asr)/2009 for the assessment year
2003-04 by our order of even date. Therefore, in the absence of any addition,
no penalty under section 271(1)(c) of the Act, can be levied by the AO and the
same deserves to be cancelled. The Ld. CIT(A) has deleted the penalty since the
assessee had established that the money received
from M/s. Shital Fibres Ltd. is in the nature of deposits and we do 38 not
find any infirmity in the order of the Ld. CIT(A). Thus, all the grounds of the
Revenue are dismissed.
15. In the result, the appeal of the assessee in ITA
No.406(Asr)/2009 is allowed
and the appeal of the Revenue in ITA No.146(Asr)/2011 is dismissed.
Order pronounced in the open court on 20th September,
2012. Sd/-
Sd/-(H.S. SIDHU) (B.P. JAIN)
JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 20th September,
2012 /SKR/ Copy of the order forwarded to:
1. The
Assessee:M/s. Shital Kumar Vij Prop. M/s. Shital International, Jalandhar.
2. The ACIT
R-II/DCIT,Cir.II, Jalandhar.
3. The
CIT(A), Jalandhar.
4. The CIT,
Jalandhar.
5. The SR DR Amritsar
By
order
(Assistant Registrar)
Income Tax Appellate
Tribunal,
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