TMI Blog2009 (10) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder (2) Smt. Nenu Bhatia 50% shareholder The shareholding pattern of the assessee company is as under: (1) M/s. Golden Strands (P) Ltd. 26.67% (2) Shri Ranjeet Bhatia 16.67% (3) Smt. Neenu Bhatia 16.66% (4) Ms. Tania Bhatia 20.00% (5) Ms. Radhika Bhatia 20.00% ------- Total 100.00% ------- The AO invoked provision of s. 2(22)(e) and added the amount of Rs. 4,25,08,497 stating as under: "The amount of Rs. 4,25,08,497 has been given by M/s Golden Strands (P) Ltd. to the assessee company. In Golden Strands (P) Ltd. Shri Ranjeet Bhatia and Smt. Neenu Bhatia are not only shareholders having 100 per cent holding of shares by way of 55-50 per cent shares being held by each of them. They are also directors of the company. At the same time both Shri Ranjeet Bhatia and Smt. Neenu Bhatia are shareholders in the assessee company holding 16.67 per cent and 16.66 per cent shares respectively. Besides this, M/s Golden Strands (P) Ltd. is also a shareholder in the assessee company holding 26.67 per cent s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's turnover is- Job work Rs. 1,98,66,179 Exports Rs. 39,90,478 Out of total job work of Rs. 1,98,66,179 the assessee has carried out job works of Rs. 1,96,20,076 for Golden Strands (P) Ltd. which account appears in Golden Strands (P) Ltd. (job work account) in its books of accounts. The job work account position is as under: Debit Opening balance Rs. 39,39,196 Job work done Rs. 1,96,20,076 TDS credit Rs. (4,68,375) Closing balance Rs. 2,30,90,897 At the same time, another account of Golden Strands (P) Ltd. shows the following credit transactions during the year: Credit Opening balance Rs. 2,04,28,462 Credit for payments received through bank Rs. 2,29,80,000 Credits for purchase of fabric Rs. 8,39,942 Credits for electricity and water charges Rs. 1,42,691 paid Repairs and maintenance Rs. 7,170 Other transfers (credit) Rs. 1,96,555 Debits for repayment through bank (-) Rs. 20,64,000 Other transactions (debit) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee also submitted that the amount received by assessee is in the course of business and not by way of loan or advance simpliciter. 7. We have considered the rival submissions. The provisions of s. 2(22)(e) create a fiction bringing amounts paid otherwise than as dividend into the net of dividends. Therefore this clause must be given a strict interpretation as held by the Hon'ble Supreme Court in the case of CIT vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC). The three limbs of s. 2(22)(e) are as follows: "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 31st May, 1987, by way of advance or loan. First limb (a) 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. Second limb (b) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not shareholder in the assessee company having substantial interest. The payer company is shareholder in the assessee company. In such circumstances s. 2(22) (e) could not have been invoked. It is also noted that the amount paid by payer company is in the course of business. The assessee is doing job work on behalf of payer company. Therefore the amount received by assessee is not by way of loan or advance but in respect of the business transaction as such. Hon'ble Delhi High Court in the case of CIT vs. Ambassador Travels (P) Ltd. (2008) 220 CTR (Del) 475 : {2008} 8 DTR (Del) 108 : (2008) 173 Taxman 407 (Del) held that when the transactions are entered into between two companies in the course of normal business transaction and as part of day to day business activities, the financial transaction cannot be treated as loans or advances within the meaning of s. 2(22)(e) of the Act. Similar issue came out before Tribunal Delhi in the case of Creative Dyeing Printing (P) Ltd. to which one of us (AM) was a party. The Tribunal observed: "7.5 In the present case the amount paid by M/s Pee Empro Exports to the assessee-company does not bear the characteristic of loans and advances. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. When the legislature realized that though money was reasonably available with the company in the form of profits, those in-charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under s. 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in moneylending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescribed for companies. This object was defeated by s. 23A which provides that in the case of undistributed profits, tax would be levied on the shareholders on the basis that the accumulated profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), dividend is not to include advance or loan made by a company in the ordinary course of business where the lending of money is a substantial part of the business of the company advance in the ordinary course of business where the lending of money is a substantial part of the business of the company advance in the ordinary course of carrying on business cannot be considered as 'dividend' within the meaning of s. 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such 'advance' as deemed dividend.' 10. We agree with the aforesaid observations. The finding of facts, arrived at by the Tribunal in the present case is that the transaction in question was a business transaction and which transaction would have benefited both the assessee company and M/s Pee Empro Exports (P) Ltd. In fact, as stated above, the counsel for the assessee has conceded that the amount is in fact not a loan but only an advance because the amount paid to the assessee company would be adjusted against the entitlement of moneys of the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the guise of loans and advances to avoid payment of tax. 10.4 Therefore, if the said background is kept in mind, it is clear that sub-cl. (e) of s. 2(22) of the Act, which is pari materia with cl. (e) of s. 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely-held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. 10.5 If this purpose is kept in mind then, in or view, the word 'advance' has to be read in conjunction with the word 'loan'. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan; it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term 'advance' mayor may not include lending. The word 'advance' if not found in the com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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