TMI Blog2006 (7) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... in the light of decision in the case of Nagindas M. Kapadia [ 1988 (12) TMI 89 - BOMBAY HIGH COURT] ), we hold that payments made by a company in the course of carrying on of its regular business through a mutual, open and current account to a related party do not come under the purview of section 2(22)( e ) of the Act. The payments are in the nature of payments other than advances and loans. The payments in the present case were made by PIL in settlement of its accounts with the assessee-company in the ordinary course of business where the assessee-company is acting as the broker of PIL in carrying on the business of purchase and sale of shares. The payments were made by PIL either in settlement of existing debts or on account. Therefore, we hold that the payments made by PIL to the assessee-company through the mutual, open and current account involved in the present case were the payments made in the ordinary course of business and, therefore, do not come under the purview of section 2(22)( e ). Thus, we delete the addition made by the assessing authority as deemed dividend u/s 2(22)( e ) of the Act - In result, the appeal filed by the assessee is partly allowed. - DR. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw contained in section 2(22)( e ) or not. 5. The other company, PIL is a Non-Banking Finance Company (NBFC) engaged in the business of investment and trading in shares. The assessee-company, NHSL, as already stated, is mainly in the business of broking. According to the assessee-company, it is acting as the broker for PIL whenever the other company purchased shares and securities and sold shares and securities. When purchases are made by the assessee-company on the instruction of PIL, the assessee will debit the account of PIL and correspondingly suffered in trading of the shares on the directions of PIL, the entries are passed in the above manner. When shares are sold by the assessee-company on the instructions of PIL and proceeds are received, the account of PIL will be credited in assessee s accounts and the assessee s account will be debited in the accounts of PIL. In short, the assessee-company as well as PIL have been passing respective entries in their books of account depending upon the nature of transactions they had entered into. 6. In the light of the above facts, the Assessing Officer came to the following conclusions : ( i )That M/s. PIL is a company in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 12. The grounds raised by the assessee-company in its appeal have two segments. The first segment of the grounds raised by the assessee-company is against invoking of the provisions of section 142(2A) of the Act, by the Assessing Officer allegedly for extending the period of limitation. The second segment of the grounds raised by the company is on the merits of the addition made by the assessing authority under section 2(22)( e ). The principal ground in the second segment is that there is no ground whatsoever to make an addition of Rs. 21,02,77,135 as deemed dividends under section 2(22)( e ) for the reason, according to the assessee-company, that PIL had not made any payments to the assessee-company in the nature of advances or loans. The other grounds raised by the assessee-company in the second segment are alternative in nature mainly relating to the quantum of the accumulated profits, to be considered for section 2(22)( e ) if at all so necessary. 13. The assessee-company has also raised two other grounds, one relating to the disallowance of Rs. 8,68,081 pertaining to donations and the other one relating to levy of interest under sections 234B and 234C. 14. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be covered by the second category case. 17. The learned senior counsel stated that the Revenue has framed a case that the payments made by PIL to the assessee-company and on its behalf fall under the second and third categories, respectively. He stated that it is nobody s case that any payment has been made by PIL to the shareholder, i.e. , Shri Kirtikumar N. Parekh or for his benefit or on his behalf. 18. Therefore, he submitted that in the present appeal filed by the assessee-company, the two issues are to be considered. The first issue is that what is the amount of payment by way of loans or advances by PIL to the assessee-company (the case falling within the second category)? The second issue is that subject to the finding on the first issue, what is the accumulated profit for the purpose of section 2(22)( e )? 19. The contentions further made by the learned senior counsel may be summarised as below : 1. The assessing authority has treated the entire credit entries reflected in the ledger account of PIL in the personal name of the assessee-company as loans and advances. The Assessing Officer has not looked into the character of individual transactions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a debt subject to further settlement and do not partake the character of loan or advance. Even otherwise in the light of the specific facts of the present case, those payments made by PIL on behalf of the assessee-company are not covered by section 2(22)( e ) because as already stated, the third category of cases cover payments made by PIL on behalf of or for the individual benefit of a shareholder, i.e. , Shri Kirtikumar N. Parekh in the present case, and not on behalf of or for the benefit of the company in which such person is a shareholder. In the present case PIL has not made any such payment for and on behalf and for the benefit of Shri Kirtikumar N. Parekh as such payments were made only for the assessee-company. Therefore, it is obvious that such transactions do not come under the purview of section 2(22)( e ). 6. Without prejudice, the other relevant contentions to be highlighted by the assessee-company, if the above-mentioned three types of payments, viz. , the payments made by PIL to the assessee-company against existing debit balance, payments on account of regular business transactions and payments on behalf of the assessee-company which will not come under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payments made by PIL towards its debts to the assessee-company, the payments of regular business transactions and payments on behalf of the assessee-company along with occasional excess payments are excluded, the disputable amount would be reduced to Rs. 1,17,02,010 as explained. 20. Besides the contentions advanced by the learned senior counsel in the light of the details and characteristics of the payment involved in this case, he has further raised his contention on the basic proposition governing the provisions of law contained in section 2(22)( e ). He explained that the payments were made between assessee-company and PIL, on account. The account between the assessee-company and PIL is mutual, open and current in nature. Therefore, no part of that running account could be treated as loans or advances as the account is a continuously moving one and the balances reflected in that running account are momentary in nature and subject to frequent changes. The learned senior counsel invited our attention to the provisions contained in Schedule to Limitation Act, 1963 to explain the distinction provided by the statute between a mutual, open and current account and a loan accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecific day like rental income or capital gains. He explained that however, in spite of the insertion made by Explanation 2, it does not cover income which does not arise on a day-to-day basis but recognised only at the end of a particular previous year. The example is profits from business. 23. The learned senior counsel relied on the decision of the Hon ble Bombay High Court in the case of Bhogilal Laherchand v. CIT [1955] 28 ITR 919 where it has been held by the court that the profits or losses of a company from a commercial point of view could be ascertained only at the end of each year and it would not be possible to predict that the company has made profit or incurred any loss on any particular day preceding or prior to the year end of that particular year. Therefore, globally it is accepted that profits of a business is recognised, as accrued, at the end of that particular year. Therefore, even in the context of Explanation 2 to section 2(22) of the Act, the "accumulated profits" cannot include profits and gains of business which is not accrued to the company on the date of payment of deemed dividend. In computing the accumulated profits, up to the date of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liability on account of gratuity. So many such exercises are required in order to obtain the true and correct profit of a business on a particular day within the accounting year. Such things are almost next to impossible. Even if such a computation or exercise is contemplated, then the burden is on the Revenue to determine the accumulated profits in respect of business income on a day-to-day basis. Therefore, Explanation 2 to section 2(22) needs to be read harmoniously with the ordinary meaning of the expression "accumulated profits" so as to include only such income of a current year which is accrued, identified and ascertainable on the date of its computation and not unascertainable income like business income. 24. The learned counsel stated that as observed by the Supreme Court in the case of Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 , the provisions of section 2(22)( e ) must be made applicable where dividend disguised as a loan is paid by a company. The concept should not be stretched too far to involve any absurdities. The learned counsel further relied on the decision of the Supreme Court in the case of CIT v. C.P. Sarathy Mudaliar [1972] 83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to be assessed as deemed dividend cannot exceed the "accumulated profits" which in the present case is Rs. 65,03,731. 28. Dr. P. Daniel, the learned standing counsel appearing for the income-tax department argued for the Revenue and supported the orders of the lower authorities on this point. The learned standing counsel invited our attention to the expression used in section 2(22)( e ) to convince the propositions made by the Revenue. He stated that "any payment by a company by way of advance or loan to a shareholder...." comes under the purview of the deeming provisions contained in section 2(22)( e ). The learned standing counsel explained that the stress is on the expression "any payment by a company". He, therefore, explained that it is the duty of the assessee-company to show that the payments received by it are not by way of advances or loans. The learned standing counsel explained that even if the payments and receipts of monies are reflected in a running account that does not guarantee that those receipts and payments were not in the nature of loans and advances. He explained that what is to be looked into is the character and feature of every individual paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as loan or advance even a hand loan for a short period would be treated as loan or advance as such and the various arguments of the learned senior counsel regarding the excess payments on account made by PIL to the assessee-company, etc. are not sustainable in law. 32. In reply, Shri S.E. Dastur, the learned senior counsel explained that the expression used in section 2(22)( e ) "any payment" is not an expression simplicitor, but followed by very crucial qualification that "by way of loans or advances". He, therefore, submitted that any other payment and for that matter every payment does not ipso facto come under the ambit of section 2(22)( e ) unless those payments are made by way of loans or advances. A payment made by a debtor to a creditor on account cannot be treated as a case of loan or advance and, therefore, such payments cannot be hit by section 2(22)( e ) even if as argued by the learned standing counsel that "any other payment" or for that matter "every payment" has to be looked into in the context of section 2(22)( e ). The learned senior counsel relied on the decision of the Supreme Court in the case of CIT v. G. Narasimhan [1999] 236 ITR 327 1 wherein the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack to the provisions of Limitation Act, 1963, referred to by the learned senior counsel to point out the statutory distinction between mutual, open and current account and an advance/loan. As per the Schedule to the Limitation Act, 1963 and as per Articles 1 and 19 thereto, the limitation period prescribed in the case of mutual, open and current account is three years from the close of the year in which the last item is admitted or proved as entered in the account. On the other hand, in the case of a loan, the limitation period is three years from the date on which the loan is made. This throws light on the characteristic feature of a running account and a loan account in a subtle manner. The Limitation Act, 1963 recognises the running character of a mutual, open and current account by taking the last acknowledged transaction as the starting point of limitation. But in the case of the loan, once for all and single transaction, that single transaction itself is the starting point of limitation. This statutory distraction reflected in the Limitation Act, 1963 is a pointer towards the basic difference between a running account and a loan account. The law relating to limitation as exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company to the assessee at Rs. 1,31,672 and Rs. 3,86,000 respectively which were held to be deemed dividend under section 2(22)( e ) by the assessing authority. The Tribunal found that payments other than Rs. 28,500 and Rs. 10,000 in the assessment years 1968-69 and 1969-70 were made as advances towards purchases to be made by the company from the proprietary concern of the assessee and, therefore, only Rs. 28,500 and Rs. 10,000 fell within the meaning of section 2(22)( e ) which could be treated as deemed dividend. While the High Court confirming the action of the Tribunal in treating the payments of Rs. 28,500 and Rs. 10,000 as deemed dividend, has also upheld the finding of the Tribunal that the payments made by the company to the shareholder in the account of his proprietary business for purchases would not be held as deemed dividend for the purpose of section 2(22)( e ). 37. In the light of the discussion made in paragraphs above, it is to be seen that payments made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course of business carried on by both the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regarding the direction of the Assessing Officer given to the assessee-company under section 142(2A). As the main issue involved in this appeal has been decided on its own merit, this ground is not so relevant in deciding the appeal and, therefore, it is rejected. 42. The third ground raised by the assessee is that the CIT(A) has erred in confirming the disallowance of Rs. 8,68,081 out of the donations paid by the assessee during the year. Donations are only appropriation of income and, therefore, not entitled for deduction in computing the taxable income. This ground is rejected. 43. The fourth and last ground raised by the assessee in its appeal is regarding levy of interest under sections 234B and 234C. The assessee has raised two-fold contentions on this point. The first one is that levy of interest is not proper and the second is that the assessee was not heard before levying the interest. As far as the quantum of the interest is concerned, it is only consequential and will be subject to our order deleting the addition of Rs. 21,02,77,135. 44. With regard to the legal contention raised regarding the levy of interest under sections 234B and 234C, they are not sust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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