TMI Blog2014 (9) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... ction would not be given a wider meaning than what it purports to do - Sec. 2(22)(e) has not been enacted to stifle normal business transaction carried out during the course of business - It not obviously bring within its limited purview collection of debts from customers so to ensure the speedy recovery of trade debts - the amount received by the assessee can neither be treated as loan or advance for the purposes of S. 2(22)(e) - A loan is granted for temporary use of money or temporary accommodation - basic features which characteristics, a loan transaction are conspicuous by their absence - the amount cannot be construed as a loan. The addition which was collected by the assessee on behalf of CCPL in pursuance of resolution passed by the Company and deposited in the assessee's bank account for a short period which is a temporary loan and to the extent of amount remitted to the CCPL, cannot be considered as deemed dividend in the hands of the assessee - only that portion of the amount which was unsettled as on 31-03-2009, i.e., the closing day of the Company's account for F.Y. 2008-09, is to be considered as deemed dividend in the hands of the assessee under section 2(22)(e) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee from CCPL despite the fact that the entire money collected and kept as imprest cash was deposited immediately in the Savings Bank Account in the name of the assessee. The assessee did not derive any benefit from the amount so collected as it was kept in the Savings Bank Account throughout till the date the said amount was finally remitted to the company within the gap of short periods. 4. Regarding the amount of ₹ 23,16,678/- added to income again as deemed dividend u/s. 2(22)(e) of the Act, the Assessing officer observed that in the books of the Ceyannar Chemicals P. Ltd. three accounts of the assessee are maintained. They are Shri N. Rajagopal, LIC a/c, Shri N. Rajagopal Remuneration account and N. Rajagopal a/c. The assessee was asked to prepare consolidated account of this statement to determine if the provisions of sec. 2(22)(e) was attracted. In the consolidated account there was a credit balance of ₹ 699253/- and 369487/- at the beginning and end of the year. The only credits during the year is the remuneration. There are withdrawals from this account during the course of the year and the first debit balance started on 16-09-2008. Therefore any amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have been collected on behalf of the company. It is observed that these transactions do not fall within the ambit of definition of section 2(22)(e) of the Act as this is not a case where the payment is being directly made by the company to its shareholder, and as such, the very deposit in the assessee's bank account would not partake the character of a loan or advance, as positive and direct element of payment from the company is missing in this case. Accordingly, the CIT(A) deleted the addition made by the Assessing officer. 7. Regarding the addition of ₹ 23,16,678/-, the CIT(A) observed that first of all there has been a mistake by which the accountant has instead of taking the firm's account, has debited the account of the assessee in the books of the company. Secondly, the applicability of the provisions of sec. 2(22)(e) in the instant case, could only happen through the firm IRC. The Assessing officer has not brought out the firm IRC, which is having substantial interest in the company, If it is so, there is force in the contention of the assessee that the consolidated account should have considered the account of the firm also, in order to find out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with sec. 12(1B) of the Act, 1922, even if that advance or loan was subsequently repaid in its entirety during the relevant previous year in which it was taken. Even if such temporary loan is returned, the deeming provision will apply. Further he relied on the judgment of the Hon'ble Supreme Court in the case of Miss P. Sarada vs. CIT, 96 Taxman 11 (SC) wherein it was held as under: section 2(22) of the Income Tax Act, 1961 - Deemed dividends - Assessment year 1973-74. Assessee-shareholder had overdrawn her account in company's book between 03-07-1972 to 22-03-1973. On 31-03- 1973, her account was credited by debiting account of one 'M', another shareholder who had allegedly written on 3-4-1972 to company to make available advance to assessee from his credit. Whether advances made by company to assessee would have to be treated as deemed dividends paid on dates when withdrawals were allowed to be made and subsequent adjustment of account made on very last day of accounting year would not alter position that assessee received notional dividends on various dates. Held, yes. He further relied on the judgment of the Jurisdictional High Court of Kerala in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into certain other transactions also for and on behalf of the firm India Rubber and Chemicals (IRC) in which he was a partner. The transactions in the three accounts, considered by the Assessing Officer, included the transactions entered for and on behalf of IRC also. The aggregate of such transactions made on behalf of IRC was ₹ 19,61,176/-. Consequently, the company CCPL, in its books, had transferred the sum of ₹ 19,61,176/- at the end of the year on 31-03-2009 to the account of the firm IRC. For the purpose of determining the net debit balance, the transactions relating to IRC amounting to ₹ 19,61,176/- should be excluded. The balance in the consolidated statement of account after such merger of four accounts was showing credit always and hence the balance of this account was not a loan or advance. The Assessing Officer did not consider this important fact. 11. Without prejudice to the above factual position, the Ld. AR submitted that these three accounts maintained in the name of the assessee with CCPL, are current and running accounts and not a loan or advance account. According to the Ld. AR the character and nature of the transactions in the three acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d through the efforts of regular employees and sales representatives. It was felt that the assessee, the new Managing Director Shri N. Rajagopal should personally contact these defaulting customers on a continuous basis to recover the money due to the company, CCPL. Accordingly, the Board of Directors of CCPL in their meeting held on 03-04-2008 authorised the assessee to meet the customers of the company and collect the amount due to the company against the sale of the products. The Board also gave a mandate to the assessee to keep the amount to be collected from the customers as an imprest cash on behalf of the company and to account and remit the money to the company or and in the names of the respective customers as and when he returns to the Head Office. The assessee accordingly with the mandate obtained from the company, collected various amounts from different customers for a total sum of ₹ 32,74,635/-. 14. According to the Ld. AR, with a view to avoid keeping the money in his hands, and to keep a track of the amounts collected and for correctly accounting later, the assessee immediately deposited all those amounts in the two bank accounts opened in his name. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same in his Savings Bank Accounts. Both these accounts were opened exclusively for the purpose of depositing the amounts to be collected from the customers of the Company. Subsequently, when the purpose of collecting the money from the customers was served, the assessee closed both these accounts. So these two accounts were opened by, operated and maintained only for the purpose of assisting the company in collecting the arrears from its defaulting customers and for the exclusive benefit of the company. The amount withdrawn from the two bank accounts were immediately transferred to the company on the same date and correctly accounted in the names of the respective customers in the books of the company. 17. The Ld. AR drew our attention to the meaning of the term loan or advance. It may be kindly recognized that the term loan or advance as envisaged in sec. 2(22)(e) means lending, delivery by one party to and receipt by another party the sum of money upon an agreement, expressed or implied to repay it. The mind and intention of two parties, namely the lender and borrower must be as ad idem . Imprest money manifestly and evidently was kept by the assessee to enable the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en he received the payments from each customer. The assessee did not utilize any part of the amount collected for his personal needs or purposes. 20. The Ld. AR submitted that thus it is clear the company did not make any payment by way of loan or advance to the assessee. The amount so received by the assessee is not a loan or advance. Such amount will not be covered by the mischief of section 2(22)(e). 21. The Ld. AR also submitted that it is a settled law that the provisions of section 2(22)(e) can be invoked only when the transactions in question give individual benefit to the shareholders. Such requirement is essential to be fulfilled in case of the assessee. 22. The Ld. AR submitted that the provisions of sec. 2(22)(e) are not applicable to the sum of ₹ 32,74,635/- received by the assessee on behalf of and for the benefit of the company on account of business expediency. The transaction was in the normal and regular course of business of the company. The assessee was keeping the entire amount collected in the Savings Bank account and balances in these accounts were always more than the amount actually collected from the customers at any point of time. The copies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved from the Assessing Officer. 26. Ld. AR submitted that the sum of ₹ 32,74,635/- received by the assessee from the customers of the company does not have the nature and character of loan or advance within the meaning of sec. 2(22)(e) of the Act as the said sum was received and kept as imprest cash with the bank and the assessee did not utilize it for his personal purposes , benefits or needs. In fact the company was benefited immensely by the efforts of the assessee in approaching various customers and collecting long pending dues and arrears from them. The amount so collected was kept as an imprest money for a short period in the bank. Therefore, the Ld. AR submitted that by any stretch of imagination, such money kept as imprest cash in a bank account cannot be treated as a loan or advance within the meaning of sec. 2(22)(e) of the Act to assess as deemed dividend. 27. The Ld. AR submitted that the sum of ₹ 23,16,678/- appearing as debit balance in the consolidated three accounts of the assessee is the net result of a series of open, mutual and current account transactions against which payments were received by the assessee from the company. Such amount given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 loan 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, 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 said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; but dividend does not include-- (i) a distribution made in accordance with sub-clause (c) or subclause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; [(ia) a distribution made in accordance with sub-clause (c) or subclause (d) in so far as such distribution is attributable to the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akers wanted to bring to tax monies paid by closely held companies to their principal shareholders, in the guise of loans and advances to avoid payment of tax. The Hon'ble Supreme Court also held in the case of Navneet Lal C.Jhaveri V K.K.Sen (1965) 56 ITR 198 (S.C) that the provisions of section 2(22) (e) of the Act must be made applicable where dividend disguised as loan is paid by a company. But, they have also held that this concept should not be stretched too far to involve any absurdities. This section defines dividend by giving an exclusive definition. The sub-clauses (a) (b) (c) (d) and (e) are different types of payments. If the same are made in the conditions defined in those clauses exist in a given case, Such payments are treated as deemed dividend. This section, further, lays down exclusive situations wherein such distribution of payments are not treated as deemed dividend. In the explanations, the expression 'accumulated profits' has been defined vide Explanation 2 with reference to clauses (a) (b) (d) (e) . Since we are concerned with clause (e) of section 2(22) of the Act, Explanation 2 would be relevant. In this Explanation 'accumulative profits&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icuous by their absence. Therefore, the amount, in the instant case, cannot be construed as a loan. 37. Having regard to the aforesaid, the assessee submitted that the arrangement under consideration is neither in nature of a loan nor an advance, as contemplated and required for application of section 2(22)(e) of the Act, nor there was any attempt to evade tax by the company and/or the shareholder rather it was at arms length and was not intended for any personal benefit or enjoyment of the appellant instead the arrangement has worked to the detriment of the appellant therefore, the additions cannot be sustained, both on facts and in law. The debts collected by the assessee in the ordinary course of business for business expediency could not be covered under the provisions of section 2(22) (e) of the Act. In our opinion, the addition of ₹ 32,74,635/- which was collected by the assessee on behalf of CCPL in pursuance of resolution passed by the Company and deposited in the assessee's bank account for a short period which is a temporary loan and to the extent of amount remitted to the CCPL, cannot be considered as deemed dividend in the hands of the assessee. In other wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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