TMI Blog1998 (9) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... lender company, it was found by the Assessing Officer that the loan in question attracted the provisions of section 2(22)(e) of the Income-tax Act. He noted that provisions of section 2(22)(e) are applicable if the shareholder holds 10% voting power in the lender company and such shareholder also carried not less than 20% of the voting power under section 2(32) of the Act. After tabulating the shareholding pattern of Dr. Ramesh Gandhi and Dr. (Mrs.) Nandini Gandhi in these two companies, the Assessing Officer concluded that these two shareholders of Hyderabad Chemical Supplies Ltd. are holding substantial interest in Hyderabad Chemical Products (P.) Ltd. also and as such provisions of section 2(22)(e) are attracted in the case of the assessee-company and the unsecured loan taken by the company has to be taxed in the hands of the assessee as deemed dividend. He also noted that since the business of Hyderabad Chemical Supplies Ltd. is not money lending, the loan given to the assessee-company is not in its usual course of business and hence exemption under proviso (ii) to section 2(22) is not available to the assessee-company. He further noted that the accumulated profits of lender co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. has been declaring handsome dividends ranging from 50% to 60% and as such it has no intention of diverting accumulated profits by making payment to its few shareholders. It was further contended that the Hyderabad Chemical Supplies Ltd. started the product of manufacture of insecticides in its own name, and as such the provisions of section 2(22)(e) would not have been attracted. Assessee also placed reliance on the Board's Circular No. 495 in support of the above contentions, and submitted that the loan given to Hyderabad Chemical Products (P.) Ltd. was not for the benefit of the shareholders of the company. (b) The Assessing Officer was not convinced with the objections of the assessee to the proposed addition in terms of section 2(22)(e) of the Act. He was of the view that what has happened to the unsecured loan in the subsequent year is immaterial and even a journal entry reflecting the nature of transaction as an unsecured loan would be enough to attract the mischief of section 2(22)(e) of the Act. The contentions of the assessee, according to the Assessing Officer indicate that the lender-company has promoted another company, separately for its own benefit for manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the Companies Act the principal company was handicapped, and as such straightway no application could be moved by the principal company, though the amount was extended to the assessee company was meant to be share application money. In that behalf, attention was invited to the Board of Directors' resolution at its meeting on 17-10-1989, and allotment of shares to the tune of Rs. 24,99,100 in favour of the principal company (M/s. HCSL) in the succeeding year. Attention was also invited to the Annual Report of the principal company (M/s. HCSL) dated 27-8-1993 particularly explanatory statement under section 173(2) of the Companies Act, 1956. In support of the above factual position, it was argued for the assessee that the nomenclature of an amount is not decisive of the character, and its real nature determines the character, and though the amount in the instant case was described as unsecured loan, it was in reality share application money. It was also contended before the CIT(A) that Dr. Ramesh Gandhi and Dr. Nandini R. Gandhi were shareholders not in their individual capacities, and as such no benefit accrued to them, and they were representing the principal company M/s. HCSL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny are to be statutorily maintained and they therefore constitute good evidence to determine the nature of transaction. Even if the restrictions on the principal company (M/s. HCSL) in applying for shares in view of section 372 were real, on that ground, according to him, it cannot be held that the amount extended to the assessee partook the character of share application money for that reason. He noted that the claims which have no statutory recognition in terms of company law cannot be termed to be real in the eye of law. On a perusal of the ledger of Hyderabad Supplies Ltd. in the books of the assessee-company, the CIT(A) noted that Hyderabad Chemical Supplies Ltd. was making payments on behalf of the assessee company to various parties from time to time spread over a large number of days throughout the year and some of their names are mentioned in the ledger account itself. He noted that the entire amount was thus not paid in one day to the assessee-company, and there are many sums which are in round figures and many are mathematically odd figures, and all these figures total up to Rs. 65,32,219 at the end of the ledger, bifurcated into Rs. 15,00,000 and Rs. 50,32,161. The purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the provisions of section 2(22)(e) arc clearly applicable in the instant case and the Assessing Officer was very much correct in treating the unsecured loan of Rs. 41,05,122 as the deemed dividend in the hands of the assessee. (e) Aggrieved by the order of the CIT(A), assessee has preferred this second appeal before us. 4. The learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that the provisions of section 2(22)(e) are not at all applicable in the instant case. He submitted that the amounts paid by M/s. Hyderabad Chemical Supplies Ltd. to the assessee was wrongly shown in Balance Sheet as Unsecured Loan, while in reality it is a share-application money/trade advance. In this connection, it was submitted that the entries of unsecured loan were reversed by rectification in the Balance Sheets, as per minutes of the respective companies. He submitted that the reasons given by the CIT(A) are contradictory. He submitted that the share application money need not be in a roundsum and can be made periodically as Hyderabad Chemical Supplies Ltd. is the promoter of HCPL, viz., the assessee and it is the common practice among t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that the affidavits of the Directors and the Auditor of the assessee-company also independently conform the correctness of the assessee's version. Even the events that took place in the succeeding year clearly establish the correctness of the assessee's version that what is received in the year under appeal was mere share application money/advances towards material to be supplied to M/s. HCSL in future. Inviting our attention to the balance-sheets filed in the paper-book at pages 16 and 41 of the paper-book and the first show-cause notice issued by the Assessing Officer invoking the provisions of section 2(22)(e) of the Act to make the impugned addition at page 90 of the paper-book, it is contended that the balance sheet for the financial year ended on 31-3-1994 was finalised and signed on 3-9-1994 whereas the notice was issued by the Assessing Officer only later on 6-10-1994. Also inviting our attention to the Directors' Report filed at page-8 of the paperbook, for the financial year ending on 31-3-1994, dated 3-9-1994, it was pointed out that it was very clearly stated therein that the assessee had become a subsidiary company of HCSL on 26-4-1994, that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 128 that trade advances are not deemed dividends under section 2(22)(e) of the Act. Placing reliance on the decisions of the Madhya Pradesh High Court in Gulabchand Motilal v. CIT [1988] 174 ITR 117/[1987] 34 Taxman 456 of the Allahabad High Court in CED v. Smt. Krishna Kumar Devi [1988] 173 ITR 561/[1987] 34 Taxman 179 and of the Kerala High Court in the case of K. Sreedharan, he submitted that while interpreting a deeming provision such as section 2(22)(e), a strict interpretation is to be given and all attendant facts and circumstances are to be considered. Placing further reliance on the decisions of the Supreme Court in Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1/3 Taxman 1 and C.P. Sarathy Mudaliar's case, it is contended that the terms 'shareholder' and 'beneficial owner' are not synonymous and they are to be interpreted strictly. He also submitted that payments made towards a pre-existing liability are not loans or advances and section 2(22)(e) would not apply, and relied on the decision of the Bombay High Court in the case of CIT v. P.K. Badiani [1970] 76 ITR 369 in this behalf. He also submitted that the minutes of a board meeting are evidence of the proceedings therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was described in the books of account. Also inviting out, attention to the provisions of sections 193 to 195 of the Companies Act on the scope and authenticity of the minutes of the meetings of a Board of Directors, and the provisions of section 373(b) of the Companies Act, he submitted that the lower authorities were not justified in brushing aside the various resolutions of the Board and several other factual aspects as of no consequence or as after-thought, and invoking the provisions of section 2(22)(e) of the Income-tax Act. 8. We have considered the rival submissions and perused the orders of the lower authorities. We have also perused the various papers filed by the learned counsel for the assessee in its paper-book and also the decisions cited before us, and also in his written submissions. It is the description of the amounts totalling to Rs. 50,32,161 received by the assessee from M/s. Hyderabad Chemical Supplies Ltd., as 'unsecured loan', which has led the Assessing Officer to invoke the provisions of section 2(22)(e) of the Income-tax Act, 1961, to treat the same as deemed dividend and bring the same to tax. It is when confronted with this proposition, that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder of the specified type of company. Even where the loan has been fully repaid, the inclusive provision in section 2(6A)(e) of the Indian Income-tax Act, 1922 [Section 2(22)(e) of the Act of 1961] would squarely apply. The only relief in such a situation is conferred by the Legislature by the mechanism of the exclusion clause, which excludes certain categories of dividends from the definition. These are specifically enumerated in clauses (i), (ii) and (iii). Unless an assessee qualifies for relief by falling within the stipulations contained in any of these clauses, the Legislature intended that no relief was due to the assessee." For a dividend to arise under this clause, the following conditions should be fulfilled --- (1) The company must be a company, the shares of which are closely held. (2) Money (not money's worth) should be paid by the company. (3) The money must form a part of the assets of the company. (4) It may be paid either by way of advance or loan or it may be in "any payment'. (5) (i) The payee must be a shareholder of the company having substantial interest in the company, or (ii) The payee must be a person who is acting on behalf of or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event the shareholders would be liable to pay income-tax. In order to avoid such a tax liability, the company may grant a loan. When such a loan is advanced to a shareholder who has substantial interest in the company, the inference is obvious that the loan is made up affair and there is every reason for treating such loan as dividend. 15. It may be true that the entries in the books of account are not conclusive as to the nature of a transaction, and merely because an amount is mentioned as 'unsecured loan' in the balance-sheet it cannot be taken as such rejecting all the contentions of the assessee to the contrary. One has to go by the entries in the books of account, particularly since they are statutorily maintained in the case of the assessee before us, which is a company incorporate since the entries in the books constitute prima facie evidence. But, when the assessee disputes the nature of transactions in relation to such entries in the books, it has to substantiate its contentions in that behalf. In the instant case, the contentions of the assessee that what has come to the assessee from M/s. Hyderabad Chemical Supplies Ltd. is share application money and not unsecured lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have depicted the unsecured loans in question as share application money. 17. None of the decisions relied upon by the learned counsel for the assessee either before us or in the written submissions filed before us have any application to the facts of the case on hand. It is considering totality of the design of the assessee's principal, viz., Hyderabad Chemical Supplies Ltd. in the floating of the assessee's company to overcome the hurdles in the Companies Act, that the assessee wants us to treat the unsecured loans of the year under appeal as share application money, since it was ultimately treated as such in the subsequent years. But, we are of the firm view that in determining the taxability of an amount, what has to be seen is the nature of the amount in the year under appeal, and not the events that take place in subsequent years changing the character of that amount in those years nor overall plans or designs that prompted the principal to introduce the unsecured loans so as to convert them later into share-capital of the assessee-company. The affidavits of Dr. Nandini Gandhi and N. Sukumar have very correctly been rejected by the lower authorities as self-serving evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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