TMI Blog2015 (1) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... end. 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. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder, in such an event, by the deeming provisions, such payment by the company is treated as dividend. It is so made by legal fiction created under Section 2(22)(e) of the Act. 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 required for carrying on the business, it would not fall within the definition of Section 2(22)e of the Act as the object was not to pay the said amount to the shareholders after avoiding payment of dividend distribution tax under Section 115-O of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in M/s. BDPL. It was the amounts advanced by M/s. BDPL to these sister concerns for different assessment years 2004 - 05 to 2007 - 08, and insofar as the shareholder of Raja Bagmane is concerned, the amounts were advanced for the assessment years 2002-03 to 2007-2008. 5. The recipient of these advances are the assessees before the Court. Proceedings were initiated under Section 153C insofar as Companies are concerned and in case of the individual assessee, proceedings under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 recorded by the Assessing Authority. Aggrieved by the same, the assessees preferred appeals before the Tribunal. The Tribunal on consideration of the rival contentions and after taking note of the various Judgments relied upon by the parties and also the statutory provisions, held that the material on record shows that funds have flown from M/s.BDPL to the assessee-companies. In the balance sheet the funds received could have been shown inadvertently as unsecured loans/advances , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 assessees would not fall within the definition of dividend as contained in Section 2(22)(e) of the Act and not taxable. Aggrieved by this, revenue has preferred the appeals. 9. In the assessees' appeals they have challenged the very institution of the proceedings under Section 153C and 153A of the Act on the ground that satisfaction of the Assessing Authority was not recorded in writing as held by the Apex Court in the case of Manish Maheshwari v. Assistant Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interpretation of the said provision would lead to absurdity and injustice and therefore, purposive construction has to be placed on the said provision i.e., precisely what the Tribunal has done and hence, there is no substance in these appeals. STATUTORY PROVISIONS 14. In order to appreciate these rival contentions, first we have to look at the word dividend , which is defined in the Companies Act. The word dividend is inserted by the Companies (Amendment) Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 to share holders by way of dividends but by way of loans or advances so that these are not taxed in the hands of the shareholders, to forestall the manipulation, Section 2(22) has been suitably amended. Under the existing provisions payment by way of loans or advances to shareholders who have substantial interest in a company to the extent to which the company possessed accumulated profits is treated as dividend. The shareholders who have substantial interest are those who have shares carrying not less than 20% of voting power as per the provision of clause (32) of Section 2 of the Act. Amendment to the definition extends its applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income Tax, Kanpur v. Mother India Refrigeration Industries P.Ltd. [155 ITR 711] as under:- The legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field. 20. The Delhi High Court had an occasion to consider the scope of Section 2(22)(e) in the case of Commissioner of Income Tax v. Rajkumar [2009 318 ITR 462] wherein it was held as under:- 21. This, however, leaves us with the submission of the Revenue that even a trade advance could fall within the ambit of section 2(22)(e) of the Act. In order to deal with this submission it would be convenient to extract the relevant part of the provision of section 2(22)(e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) of he Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 shareholder and that the word shareholder can mean only a registered shareholder. A beneficial owner of shares whose name does not appear in the Register of shareholders of the Company cannot be stated to be a shareholder. He may be beneficially entitled to the share but he is certainly not a shareholder. In other words, it is only the person whose name is entered in the Register of the shareholders of the Company as the holder of the shares who can be said to be a shareholder qua Company and not the person beneficially entitled to the shares. We are therefore, of the view that it is only where a loan is advanced by the Company to the registered shareholder and the other conditions set out in Section 2(22)(e) of the Act are satisfied, that amount of loan would be liable to be regarded as deemed dividend within the meaning of this section. 24. Therefore, from the aforesaid judgments, it is clear that the purpose of the insertion of sub-clause (e) of Section 2(22) of the Act was to bring within the tax net accumulated profits which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 receives a limited interpretation by reason of its company is well established. In such circumstance, one can legitimately draw on the noscuntur a sociis principle. In fact this latter maxim is only an illustration or specific application and broader than the maxim ejusdem generies. 26. The Apex Court in the case of State of Bombay and Others v. The Hospital Mazdoor Sabha and Others reported in AIR 1960 SC 610 has observed as under:- 9. It is, however, contended that, in construing the definition, we must adopt the rule of construction noscuntur a sociis. This rule, according to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general. The same rule is thus interpreted in Words and Phrases (Vol. XIV, p. 207): Associated words take their meaning from one another under the doctrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the definition of industrial dispute given by Section 2(k), of wages by Section 2(rr), workman by Section 2(s), and of employer by Section 2(g). Besides, the definition of public utility service prescribed by Section 2(m) is very significant. One has merely to glance at the six categories of public utility service mentioned by Section 2(m) to realise that the rule of construction on which the appellant relies is inapplicable in interpreting the definition prescribed by Section 2(j). 27. In this background when we look at the aforesaid provision, it is clear that any payment made by a company by way of advance or loan has to be understood in the context of the object with which the said provision is introduced. Though the legislature has introduced 'advance' as well as 'loan' which are two different words, the meaning of each of those words have to be understood in the context in which they are used. Each word takes its colour from the other. The meaning of the word 'advance' is to be understood by the meaning of the word loan which is used immediately thereafter. Associated words take their meaning from one another under the doctrine of noscuntu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as a consideration for the goods received which is required for carrying on the business, it would not fall within the definition of Section 2(22)e of the Act as the object was not to pay the said amount to the shareholders after avoiding payment of dividend distribution tax under Section 115-O of the Act. In that view of the matter, it is not possible to accept the interpretation sought to be placed by the revenue. 29. The learned Counsel for the revenue pointed out clause(ii) of Section 2(22)e which expressly provides that any payment by a company by way of any advance or loan made to a shareholder or the concern in the ordinary course of business where the lending of money is a substantial part of the business of the company and if the case of the assessee does not fall under the said provision, the said advance constitutes dividend. The question of looking into the aforesaid provision would arise only when all the conditions prescribed in clause (e) of Sub-Section (2) of Section 22 are complied with. If a payment is made by way of trade or business, advance or loan, clause (e) of Sub-section (2) of Section 22 of the Act is not at all attracted and the question of applying ..... X X X X Extracts X X X X X X X X Extracts X X X X
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