TMI Blog2005 (10) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration declaring an income of Rs. 7,80,454. The assessment has been framed by the Assessing Officer under section 143(3) at an income of Rs. 22,80,450 whereby an addition of Rs. 15 lakhs was made on account of section 2( 22 )( e ) of the Act. The assessee is an equity shareholder holding 40 per cent equity capital in a company Chandigarh Construction Co. Pvt. Ltd. (hereinafter referred to as the Company ). The assessee also is the Managing Director of the company. The Assessing Officer found that during the year under consideration the assessee had received a sum of Rs. 15 lakhs from the company as a loan. It was found that the company had executed a contract for construction of Satluj-Yamuna Link Canal in respect of which some dispute arose with Executive Engineer, Patiala Ki Rao, Construction Division, Punjab in the earlier years. It appears that the dispute was referred for arbitration. The arbitrator gave the award on 31-8-1994 which was decreed by Court of the Sub-Judge, Ropar, on 21-10-1995: whereby the company was to receive additional amount of Rs. 1,63,39,649. The said decree was challenged by the State Government of Punjab ( i.e., through Executive Eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the purpose of fiction created by section 2( 22 )( e ) of the Act. He accordingly has treated the sum of Rs. 15 lakhs as deemed dividend in the hands of the assessee and added the same to his income. Aggrieved with the order of the Assessing Officer the assessee carried the matter in appeal before the CIT(A). In appeal, the assessee contended that the Assessing Officer had failed to appreciate the facts of the case and also the provisions of section 2(22)( e ) of the Act. The assessee reiterated his stand that the amount released consequent to the order of the Hon ble High Court of Punjab and Haryana could not be considered as income in the hands of the company and, therefore, there was an absence of accumulated profits in the hands of the company so as to make the provisions of section 2( 22 )( e ) inapplicable to the impugned transaction. The assessee also submitted that the Assessing Officer was wrong in misinterpreting the balance-sheet of the company to the effect that the depiction of the sum of Rs. 39,67,620 as part of liabilities was wrong. It was submitted that even if the impugned amount was to be treated as a part of profits the same would at best be considered as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e placed in the paper book. The ld. counsel drew our attention strongly to the interim order of the Hon ble High Court of Punjab and Haryana which is placed in the paper book at pages 46 to 48. The brief interim order dated 22-4-1996 whereby the execution of the award was stayed by the Hon ble High Court was referred to, which reads as under : "Admitted. Stay execution of the award subject to appellant s depositing 25 per cent of the amount of award within six weeks from today. In case the amount is deposited, the same shall be paid to the contractor on his furnishing security for the refund thereof in the event of appeal being allowed." 4. The ld. counsel submitted that following the aforesaid interim order, the Government of Punjab through Executive Engineer, Patiala Ki Rao, Construction Division, Punjab deposited in the Court of the District Judge, Ropar the requisite amount which was released to the company, subject to the assessee standing surety for the company in the said Court, in compliance with the order of the Hon ble High Court of Punjab and Haryana. The main contention of the assessee, on the basis of the aforesaid is, that the dispute in relation to the arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount was released against security, was unjustified. According to the ld. counsel it is undeni-able that the amount was released after the Court was satisfied with the security offered and therefore, it was not open for the revenue to construe it differently. In nutshell, the ld. counsel has submitted that the release of Rs. 39,67,620 to the company, can at best be construed as a temporary relief which was subject to the final decision of the High Court. It was pointed out that the Company did not possess any accumulated profits and thus the requisite condition envisaged by section 2( 22 )( e ) was not fulfilled, our attention was invited to the Balance Sheet and Profit and Loss Account for the period ended 31-3-1997 of the Company which is placed in the Paper book at page 102. The Company was making losses and its cumulative loss stood at Rs. 2,58,526, therefore, according to him, it could not be said that the Company possessed any accumulated profits. 5. On the other hand, the ld. DR Dr. Shikha Darbari appearing on behalf of the respondent-revenue has placed reliance on the orders of the lower authorities in support of her submissions. According to the ld. DR, the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iala Ki Rao, Construction Division, Punjab. The High Court directed the Executive Engineer, Patiala Ki Rao, Construc- tion Division, Punjab to deposit 25 per cent of the award in the Court which was to be released to the company against furnishing of security. The Sub-Judge, Ropar has since released the said amount on furnishing of personal surety by the assessee being the Managing Director of the Company. The amount so released has been shown by the Company as a liability in its balance-sheet. 8. Section 2( 22 )( e ) enacts a deeming fiction. It provides that any payment made by a company to its shareholders by way of advance or loan shall be liable to be considered as dividend income subject to the fulfilment of conditions mentioned therein. The conditions are that the company should be such in which the public are not substantially interested; that the shareholder should be beneficial owner of shares holding not less than 10 per cent of the voting power or be a concern in which such shareholder is a Member or a partner in which he has substantial interest; that the Company must possess accumulated at least to the extent of such loan or advance paid to the shareholder. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Supreme Court in the case of P.S.L. Ramanathan Chettiar ( supra ) is worthy of notice at this stage. The Hon ble Court was dealing with the nature of deposit of money made into the Court to stay the execution of decree on the pleas of the judgment debtor and the release of the same to decreeholder on furnishing security. With regard to the real effect of deposit of money in Court in such situations, the Hon ble Court said as under : "On principle, it appears to us that the facts of a judgment-debtors depositing a sum in Court to purchase peace by way of stay of execution of the decree on terms that the decree-holder can draw it out on furnishing security, does not pass title to the money to the decree-holder. He can if he likes take the money out in terms of the order; but so long as he does not do it, there is nothing, to prevent the judgment-debtor from taking it out by furnishing other security, say, of immovable property, if the court allow him to do so and on his losing the appeal putting the decretal amount in court in terms of Order 21 Rule 1.C.P.C. in satisfaction of the decree. The real effect of deposit of money in court as was done in this case is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the arbitrator is also challenged. That the appeal challenging the arbitration award by the Executive Engineer, Patiala Ki Rao, Construction Division, Punjab, on such grounds, has not only been admitted but its execution stayed by the Hon ble High Court, only demonstrates that the disputes raised therein have been regarded by the Hon ble High Court as real and substantial. This is further strengthened by the fact that the company was permitted to withdraw amount deposited by the Executive Engineer, Patiala Ki Rao, Construction Division, Punjab in the Court, only against the furnishing of security. Therefore, it is safe to deduce that the very foundation of company s claim, namely the arbitration award was in serious jeopardy and nothing would be due to it if the appeal was decided against the Company. Hence, it could not be said that the amount released was in the nature of income as the very basis was disputed. Infact, the Company did not have an absolute right to receive the amount at that stage. Therefore, in such circumstances when the right to receive the payment was itself in dispute, there does not remain any element of income which can be said to have accrued. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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