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TMI Blog2015 (1) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... tent to which the company possessed the accumulated profits includes a trade advance and constitutes deemed dividend ?" 3. ITA Nos.105, 106, 107, 108, 109, 110, 112, 113, 114, 115, 118 and 119/2011 are all appeals preferred by the Revenue in which the assessee is a concern. ITA Nos.124, 125, 126, 127, 128, 129/2011 are also appeals preferred by the Revenue in which the assessee is an individual shareholder. ITA Nos.473, 474, 475, 476, 511, 512, 513, 514, 536 and 537/2013 are all appeals by the assessee challenging the portion of the order of the Tribunal which is against its interest. 4. The factual background which has given rise to the substantial question of law are broadly as under:- M/s. Bagmane Development Private Limited is a closely held Company (for short hereinafter referred to as "M/s. BDPL"). Sri Raja Bagmane was the substantial shareholder. M/s. BDPL advanced money to its sister concerns namely Bagmane Builders Pvt. Ltd., Chandra Developers Pvt. Ltd., Bagmane Leasing and Finance Pvt. Ltd., Bagmane Construction Pvt. Ltd., and Raja Bagmane, the shareholder, who is having 99% of the equity share capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered with the concerned Government Authority. The deed is dated 13/11/2002. The period of limitation for a specific performance of the contract is three years from the date fixed for the performance. There is no mention in the agreement about the time limit within which the performance is to be completed. Therefore, these facts indicate that the agreement was submitted before the department for camouflaging the transaction when the question of deemed dividend had been raised. 7. The transaction of funds and payments by M/s. BDPL to the assessees were made bit by bit during the whole year and hence the assessees were given the loan or advance bit by bit from its profits during the year. Therefore, the assessees cannot take the plea that loans or advances do not attract the provisions of Section 2(22)(e) of the Income Tax Act, 1961. Therefore, tax was levied on such loans and advances received to the extent of the accumulated profits earned by M/s. BDPL. Aggrieved by the said orders, the assessees preferred the appeals before the Commissioner of Income Tax (Appeals). The Appellate Commissioner on consideration of the aforesaid material, declined to interfere with the said finding r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity different kinds of commercial agreements and technical agreements are involved. The finance structure of every activity differs. The risk of reward involved in every activity has difference. In order to meet such complex constraints, the flagship company/promoter may create various distinct entities being Special Utility Vehicles (SUV) to deal in each of these activities independently. The promoter along with these SUVs jointly works to complete the overall project. In such situation, funds being the bloodline for all these entities flow from one entity to the other. Such transfer of funds arising out of commercial expediency may not be in the nature of advance or loans in all circumstances. 8. After looking into the details in each of these cases, it was held that the assessing authority was not justified in invoking the provisions of Section 2(22)(e) of the Act which the assessees disputed before the CIT (A), the Appellate Authority. The order passed by the Appellate Authority upholding the order of the Assessing Authority was held to be unjustified and therefore, the appeal was allowed and it was held that the advances made by flagship company i.e., M/s.BDPL to these ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pearing for the assessees submitted that the material on record clearly discloses that the flagship company - M/s.BDPL is in the business of development of land and building. It is a company registered under the Companies Act, 1956 in the State of Karnataka. In view of the provisions of the Karnataka Land Reforms Act, a non-agriculturist including a company cannot purchase or own agricultural land. In those circumstances, for the purpose of acquiring agricultural land and development of such agricultural land, they form sister companies/sister concerns and advance money to them to enable them to acquire agricultural land and get it converted for non-agricultural purposes and then convey such land. Therefore, the amounts were given to these assessees as trade advance. It is not given out of the accumulated profits. In fact, the material on record shows that major portion of such advances are not out of such accumulated profits and therefore, he submits that the word "advance or loan" referred to in Section 2(22)(e) of the Act has to be interpreted in the context in which the said provisions was brought on the statute book and the object was sought to be achieved. The literal interpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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;" 17. Sections 104 to 109 of the Act relate to levy of additional tax on certain closely held companies other than those in which the public was substantially interested, if they fail to distribute a specified percentage of their distributable profits as dividends. These provisions had lost much of their relevance with the reduction of the maximum marginal rate of personal tax to 50% which is lower than the rate of corporation tax on closely held companies. Therefore, Sections 104 to 109 have been omitted by the Finance Act, 1987. If on the deletion of Sections 104 to 109, there was a likelihood of closely held companies not distributing their profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning." Xxx We must, therefore, eschew literalness in the interpretation of Section 52, sub-section (2), and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction." 19. The Apex Court again explained the meaning of a deeming provision under the Income Tax Act in the case of Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares 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; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder". 22. The Delhi High Court in the case of Commissioner of Income-Tax v. Ankitech P. Ltd. [(2012) 340 ITR 14 (Delhi)], explaining the meaning of the word "concern" found in the provisions as well as the Explanation (3), where the meaning of the said word is expressly given, held as under:- "24. The intention behind enacting the provisions of section 2(22)(e) is that closely-held companies (i.e., companies in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders or to a concern, under normal circumstances would not qualify as dividend, but it is so made by legal fiction created under Section 2(22)(e) of the Act. Thus, the definition of dividend has been enlarged, and that loan or advances given under the conditions specified under this provision would also be treated as dividend. The fiction, however, is not to be extended for enlarging the concept of shareholders. Dividend is to be given by any company, to its shareholders. Thus, in the second category under Section 2(22)(e) of the Act, loan or advances given to a concern, like the assessee in the present case, which is admittedly not a shareholder of the payee company, under no circumstances, could be treated as shareholder receiving dividend. As observed by Delhi High Court, if the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of deeming shareholder, then the legislature would have inserted deeming provision in respect of shareholder as well. The legislature has not done so. 17. Section 2(22)(e) of the Act is designed to strike balance, i.e., advance or loan to a shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under this provision would also be treated as dividend. Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. The intention behind the provisions of section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. 25. It is in this background, the word "any payment", by a company, by way of advances or loans, has to be interpreted. The attribute of a loan is that it is a positive act of lending money coupled with acceptance by the other side of the money as loan and generally carries interest and there is an obligation of repayment. The term "advance" may or may not include lending. The word "advance" if not found in the company or in conjunction with the word loan may or may not include the obligation of repayment. If it does then it would be a loan. However, the Legislature has used the expression by way of advance or loan. Therefore, both these words are used to mean different things. The principle of statutory interpretation by which a generic word receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d free of ambiguity, the rule of construction in question cannot be pressed into service. As has been observed by Earl of Halsbury, L.C., in Corporation of Glasgow v. Glasgow Tramway and Omnibus Co. Ltd. [ (1898) AC 631 at p. 634] in dealing with the wider words used in Section 6 of Valuation of Lands (Scotland) Act, 1854, "the words 'free from all expenses whatever in connection with the said tramways' appear to me to be so wide in their application that I should have thought it impossible to qualify or cut them down by their being associated with other words on the principle of their being ejusdem generis with the previous words enumerated". If the object and scope of the statute are considered there would be no difficulty in holding that the relevant words of wide import have been deliberately used by the legislature in defining "industry" in Section 2(j). The object of the Act was to make provision for the investigation and settlement of industrial disputes, and the extent and scope of its provisions would be realised if we bear in mind the definition of "industrial dispute" given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset which indirectly would benefit the company advancing the loan, such advance cannot be brought within the word 'advance' used in the aforesaid provision. The trade advance which is in the nature of money transacted to give effect to commercial transactions would not fall within the ambit of the provisions of Section 2(22)e of the Act. 28. In this context, it is useful to refer to the judgment of the Apex Court in the case of LIC of India -vs- Retired LIC Officers Association [2008 (3) SCC 321] where it was held that each word employed in a statute must take colour from the purport and the object for which it is used. Principle of purposive interpretation should be taken recourse to. If a literal interpretation is given to the said words, it means all trade advances are to be taxed as deemed dividend. If such an interpretation is placed, it would lead to absurdity. That was not the intention of the legislature in enacting the aforesaid provision. Even if the accumulated profit which ought to have been paid to the shareholders as the dividend paid to a sister concern for the purpose of acquisition of capital assets or as a consideration for the goods received which is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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