TMI Blog2013 (5) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... company with M/s Shalimar Estate (P) Ltd. was to share a plot which was being applied or to purchase another piece of land and money was given by M/s Shalimar Estates (P) Ltd. for definite l/3rd share of such plot or for purchase of another land, cannot be simply called a loan or advance, therefore, such payment would not be hit by s. 2(22)(e) of the Act. In these circumstances, we set aside the order of learned CIT(A) and delete the addition of deemed dividend. - IT Appeal No. 258 (Chd.) of 2012 - - - Dated:- 1-5-2013 - T.R. Sood, Accountant Member And Ms.Sushma Chowla, Judicial Member For the Appellant : Tej Mohan Singh For the Respondent : Smt. Jyoti Kumari ORDER T.R. Sood, Accountant Member This appeal is directed against the order passed by the learned CIT(A). Chandigarh dt. 1st Dec., 2011. 2. In this appeal the assessee has raised the following grounds : 1. That the learned CIT(A) has erred in law as well as on facts in upholding the disallowance of O/D interest resulting in an addition of ₹ 13,63,428 which is arbitrary and unjustified. 2.That the learned CIT(A) has failed to appreciate that the fact that the expenditure incurred was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plot had been allotted, the same would have given an advantage to the company in the heart of IT park because of easy availability of skilled workers and other facilities would have led to the growth of the IT business of the assessee. Reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT v. Malayalam Plantation Ltd. [1964] 53 ITR 140. It was further submitted that financial charges paid by the assessee for expansion of the business were also treated as interest for the purpose of business under s. 36(l)(iii) and in this regard reliance was placed on the decision of Dy. CIT v. Gujarat Alkalies Chemicals Ltd. [no citation has been mentioned in the order of CIT(A)] [The citation should be [2008] 299 ITR 85/167 Taxman 203 (SC)]. It was submitted that as per Accounting Standard AS-16, the cost of borrowing can be capitalized only when-(a) expenditure for the acquisition, construction or production of qualifying asset is being incurred; (b) borrowing costs are being incurred; and (c) activities that are necessary to prepare the asset for its intended use or sale are in progress. Since no capital asset had come into existence, the same cannot be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this interest expenditure amounting to ₹ 13,63,428 against the interest income of ₹ 15,39,228. 9. Ground Nos. 3 and 4 : After hearing both the parties, we find that during assessment proceedings, the AO noticed that assessee company has received a loan of ₹ 6 crores from M/s Shalimar Estate (P) Ltd. and at the end of the year the loan outstanding as payable to M/s Shalimar Estate (P) Ltd. was ₹ 1,93,94,909. The AO was of the opinion that this loan is required to be treated as deemed dividend under s. 2(22)(e) and accordingly issued a show-cause notice to the assessee that why this amount should not be treated as deemed dividend. The assessee filed its reply dt. 15th Dec., 2010 and brought following facts to the notice of AO : A. Facts of the transaction : (i) That as per advertisement dt. 30th Nov., 2007 HSIDC launches Panchkula Technology Park. (ii) That as per the conditions mentioned in the advertisement Shalimar Estates (P) Ltd. (engaged in real estates business) did not fulfil some of the eligibility criterion and Shalimar Infonet (P) Ltd. (engaged in information and technology) had financial constraint to fulfil the eligibility criterion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of M/s Shalimar Estate (P) Ltd. in the books of the assessee clearly shows that only money transactions have taken place and no single transaction is related to the business of the assessee. He also observed that payment by way of advance or loan to a shareholder or to a concern in which such shareholder has substantial interest would constitute dividend under the provisions of this section. He observed that the contention of the assessee was not correct that assessee was not a shareholder because Shri Ram Kumar Aggarwal and Smt. Kamlesh Aggarwal who were having 35 per cent shares each of Shalimar Infonet (P) Ltd. were having shares worth 50 per cent each in M/s Shalimar Estate (P) Ltd., therefore, the assessee was clearly governed by the expression or to a concern in such shareholder has substantial interest . In this background, the AO treated the sum of ₹ 1,93,94,909 as deemed dividend under s. 2(22)(e) of the Act. 12. On appeal, before the learned CIT(A), submissions made before the AO were reiterated and certain case law was cited. The learned CIT(A) after examining the submissions did not find merit in the same. He observed that case law cited by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentative submitted that Shri Ram Kumar Aggarwal and Smt. Kamlesh Aggarwal who were having 35 per cent share each in the assessee company were also holding 50 per cent share each in M/s Shalimar Estate (P) Ltd. and, therefore, they were substantial shareholders and any payment made to a concern where such shareholder is a substantial shareholder is also covered by s. 2(22)(e) of the Act. She further submitted that loan was given by M/s Shalimar Estate (P) Ltd. not for any business purpose. It was only a financial transaction and, therefore, the same is hit by definition of deemed dividend. She also relied on the decisions of the Hon'ble Delhi High Court in the cases of CIT v. National Travel Services [2012] 347 ITR 365/[2011] 202 Taxman 327/14 taxmann.com 14 (Delhi) and ITO v. Ajanta Cycles (P.) Ltd. [2006] 99 TTJ (Chd.) 1159. 15. We have considered the rival submissions carefully. Sec. 2(22)(e) of the Act reads as under : (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) (made after the 31st day of May, 1987, by way of advance or lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay rent for next three months of the lease in advance even if he is required to pay the rent on each month. Another example could be that employer pays a salary to an employee in advance. Purchaser of goods may make payment to the supplier even before the supplies have been made. Now let us understand whether on the facts in the case before us, the payment can be described as loan or advance or not. There was an advertisement by HSIDC and assessee company being an infotech company, was eligible to apply for allotment of such plot because the same were located in an IT Park. The assessee company did not have sufficient funds. At the same time, M/s Shalimar Estate (P) Ltd., the sister concern also wanted to make an application for allotment of the same plot but that company was not eligible for making an application because that company was not engaged in the business in IT Industry. In this background, both companies came together. The issue was discussed in the board's meeting of M/s Shalimar Estate (P) Ltd. and following resolution was passed in the meeting held on 19th Nov., 2007 (copy of the same was filed at page No. 90 of the paper book) : Extracts of the minutes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets available with the applicant for making an application, therefore, assessee company borrowed a sum of ₹ 6 crores from M/s Shalimar Estates (P) Ltd. and made an FDR of ₹ 5 crores so as to show that it was in possession of liquid assets to the extent of ₹ 5 crores and overdraft limit was taken against this FDR and the amount was paid to M/s Shalimar Estates (P) Ltd. and the balance outstanding at the end of the year was ₹ 1,93,94,909. After obtaining this loan and making an FDR, the assessee company made an application to HSIDC by remitting a sum of ₹ 60 lakhs towards application, copy of the letter addressed to HSIDC has been placed on p. 88 of the paper book. In the resolution, it was also agreed that if the assessee does not become a successful allottee then same money would remain with the assessee as a purchase imprest towards making fresh application for plot or purchase of agricultural land etc. From these facts, it becomes clear that the money was given by M/s Shalimar Estates (P.) Ltd. on a specific understanding for purchase of a plot with HSIDC and if the assessee was not to be successful in the allotment, then the money would be used fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d within the meaning of the provision if the following conditions are fulfilled : (i) the company making the payment is one in which the public are not substantially interested; (ii) money should be paid by the company to a shareholder holding not less than ten per cent of the voting power of the company. It would make no difference if the payment was out of the assets of the company or otherwise; (iii) the money should be paid either by way of an advance or loan or it may be 'any payment' which the company may make on behalf of or for the individual benefit of any shareholder or also to any concern in which such shareholder is a member or a partner and it which he is substantially interested; and (iv) the limiting factor being that these payments must be to the extent of accumulated profits, possessed by such a company. The immediate precursor to s. 2(22)(e) is found in s. 2(6A) of the Indian IT Act, 1922. The purpose of insertion of sub-cl. (e) to s. 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely-held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. Therefore, sub-cl. (e) of s. 2(22) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;advance' or 'loan' are related to the accumulated profits of the company; and (iii) the purpose behind the insertion of the term 'advance' was to bring within the tax net payments made in the guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders. The word 'advance' which appears in the company of the word 'loan' could only mean such advance which carries with it an obligation of repayment. Trade advances which are in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provision of s. 2(22)(e) of the Act. The assessee was in the business of manufacturing customized kitchen equipment. The assessee was also the managing director and held nearly 65 per cent of the paid-up share capital of C. A substantial part of the business of the assessee, which was nearly 90 per cent was obtained through C. For this purpose, C would pass on the advance received from its customers to the assessee to execute the job work entrusted to the assessee. The AO was of the opinion that the money received by the assessee was in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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