TMI Blog2015 (3) TMI 767X X X X Extracts X X X X X X X X Extracts X X X X ..... ver 290 branches or units and collection by it exceeded- on an average ₹ 10 crores per month. Therefore, it could not be legitimately held that amount retained by the firm was for the assessee’s benefit. The amount of ₹ 1,84,19,305 was not deemed dividend in the hands of the assessee under the provisions of Section 2 (22) (e) of the Income Tax Act, 1961 - Decided in favour of assessee. Revenue’s application for rectification of the majority opinion, in view of the third member not noticing or wrongly appreciating important features has been challenged - Held that:- The impugned order does not suffer from any infirmity calling for interference. As to whether there was a mistake apparent from the face of the record, in the context of this case, the ITAT felt that the revenue could not establish its case, since the basic contention about applicability of Section 2 (22) (e) was not accepted. - Decided against revenue. - ITA No.398/2010 , WP(C) 1162/2012 - - - Dated:- 17-3-2015 - S. Ravindra Bhat And R.K. Gauba JJ. For the Appellant : Mr. Rohit Madan Mr. Ruchir Bhatia, Advocates. For the Respondent : Mr. Percy J. Pardiwala, Sr. Adv. With Mr. Satyen Set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nches to aid its operations. He was also a partner of the firm, which entered into an understanding with SISICOL on 17.8.1987, to conduct, promote, introduce and secure business through various schemes for the company. The firm also collected amounts through several schemes of SISICOL. Referring to the schemes, and the terms of the 1987 agreement, it was noted that there was no time limit stipulated for remittance of amounts collected by the firm on behalf of SISICOL to it. The amounts were to be collected in the ordinary course of business. The affidavit of Shri O. P. Srivastava dated 06.07.1996 was also relied on; it stated that such sums collected and retained before remission by firm to the company, SISICOL, constitute neither loan nor advance . 6. The Judicial Member then considered the question whether credit balances lying with the firm could be treated as loan or advance from the company. It was held that, in facts and circumstances of the case, the amount required to be remitted by the firm could be branded as a trade debt and not as loan or advance. Reference was made to the Chamber s Dictionary meaning of the term loan . The observations of the Supreme Court in Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an given by the firm to the assessee was part of credit balances of the SISICOL with the firm. The CIT (A) held that 44 % of availability of funds with the firm could be said to belong to SISICOL. The Judicial Member stated that such inference could not be drawn without providing specific link or direct nexus between the two figures. The revenue was unable to connect loan advanced to the assessee with the amount due to SISICOL. Consequently, the judicial member concluded that that there was no payment of any amount by way of loan or advance, either directly to the assessee shareholder or on his behalf or for his benefit. The trade debt payable by the firm in the normal course of business could not be treated to form the genesis of loan of ₹ 1.88 crores to the assessee. The Judicial Member further observed that the firm had been advancing interest free amounts to its partners, evident from the materials on record and that the details of repayment of loan by the assessee in the immediately succeeding year were made. He further noted that the assessee had taken loan from the firm right from 01.04. 1990, but the provision of Section 2(22)(e) was never invoked before by the Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber concluded that the provision of section 2(22)(e) were applicable in this case. It was noticed that SISICOL had share capital of ₹ 2,95,87,800/- and further reserves and surplus of ₹ 1,84,19,305/- as on 31.3.1992. These facts and figures supported the conclusion that the roots of the loan from the firm, to the assessee lay in the credit balance of the company, SISICOL, with the firm. 10. Dealing with the question whether the credit balance of SISICOL with the firm, was a trade debt or not, the Accountant Member noted the exception to the definition of dividend in clause (ii) of sub-section 2(22)(e) and observed that it operated only if there was an advance or loan to a shareholder by SISICOL and that the assessee had to show that his case fell within the exception clause and that no material had been placed before the ITAT to establish it. The Accountant Member noticed that of a total credit balance of several concerns aggregating to ₹ 60,61,54,638/-, only ₹ 26,24,12,223/- stood in the name of SISICOL and also addressed the issue of whether any nexus could be established between credit balance in the name of SISICOL and loan advanced by the firm to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting section 2(22)(e) of the Act. 12. In the case of CIT v. L. Alagusundaram Chettiar [1977] 109 ITR 508, the Madras High Court held that the word payment in the said section means the act of paying and, therefore, in that case it was held that payment by the company to Karuppiah Chettiar was for the benefit of the assessee, the managing director of the company, L. Alagusundaram Chettiar, and was therefore assessable as dividend in the hands of the assessee. In the said judgment it has been held that the basic test to be applied in such cases is not whether the loan given is a benefit but whether payment by the company to Karuppiah Chettiar was for the benefit of the assessee who was the managing director of the paying company. Applying the above test to the facts of the present case, we are of the view that the Tribunal was right in holding, on examination of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITAT s majority view. He submitted that once there was a factual finding with respect to absence of nexus between the amounts payable to SISICOL and the balance of firm s moneys (which was in excess of ₹ 33 crores) there was no question of applicability of Section 2 (22) (e). Counsel submitted that although the provision creates a fiction, before proceeding to the logical conclusion the strict terms of the statute are to be construed and applied. 15. Section 2 (22) (e) of the Act reads as follows: (22) dividend includes-- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 3.-For the purposes of this clause,- (a) 'concern' means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ; 16. The term dividend takes in any disbursal, by a company, of accumulated profits, distribution to its shareholders- by a company- of debenture stock, or deposit certificates in any form, (with or without interest), any sharing with its shareholders- by the company, on its liquidation, any distribution made to the shareholder by a company on the reduction of its capital. All these are spelt out by clauses (a) to (d) of section 2(22) of the Act. Section 2 (22) (e) enacts that payment by a company and not being a company in which the public are substantially interested, of any sum (whether as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany advanced the loans to the assessee-HUF who was the beneficial owners of the shares (in the company), though shares were registered in the name of the individual karta, who held them for and on behalf of the family. The Supreme Court held that the Hindu undivided family being only the beneficial shareholder and not a registered shareholder would not fall within the purview of section 2(6A)(e) of the 1922 Act. The Court held as follows: What section 2(6A)(e) is designed to strike at is advance or loan to a ` shareholder` and the word ` shareholder` can mean only a registered shareholder. It is difficult to see how a beneficial owner of shares whose name does not appear in the register of shareholders of the company can be said to be a ` shareholder` . He may be beneficially entitled to the share but he is certainly not a ` shareholder` . 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 the company and not the person beneficially entitled to the shares. It is the former who is a ` shareholder` within the matrix and scheme of the company law and not the latter. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that two transactions of loan by the firm to the assessee and the other, from SISICOL to the firm- were really one transaction. Indisputably, the assessee obtained the loan from the firm. Consequently, if it is held that the two transactions were in fact one, i.e., loan represented funds of SISICOL, then the case of loan and advance stood established and Section 2(22)(e) applied. Unquestionably, the firm worked for the company as its agent. If an agent had given a loan or advance to the assessee for and on behalf of the company, then there was no need for anything else to be established to attract Section 2 (22) (e). The concomitant issue (with whether the transaction was one whole or separate) was also the question if the assessee had used a smokescreen to evade tax and camouflage the transaction of loan/advance from SISICOL to himself by employing the firm as a conduit. The revenue argued that a device was used and that in such case, the assessee would hardly be expected to show the transaction as a loan from SISICOL to him. It cannot be seriously doubted that as managing director and shareholder of SISICOL, the assessee has sufficient control over its affairs; so is the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not have come out of credit balance of ₹ 26.41 crores which represented money collections in February and March, 1992. There is no contravention of the above factual finding at any stage of proceedings including the Third Member hearing before me. The main and the solid finding that ₹ 26.24 crores shown as credit balance payable to the company by the firm represented collections made by the assessee in the course of business for the months of February, March and partly for January, 1992, has also not been challenged or refuted with reference to any material on record. It is also not in dispute that the firm was making on an average a collection of more than ₹ 10 crores per month through 290 centers spread throughout the length and breadth of the country and that time was taken in making accounts, reconciliation, trial balances and in providing other details of collection and in remittance of money to SISICOL. Having regard to the huge turnover, two months cannot be said to be unreasonable. This is what the learned Judicial Member has recorded and my attention has not been drawn to any material, which would show that such a finding on facts of the case, could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. 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 a deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsel for the Revenue would stand answered, once we look into the matter from this perspective. 23. The revenue had relied on Commissioner of Income Tax v National Travel Services [2012] 347 ITR 305 to say that in similar circumstances, partners of a firm were held to have received advances and subjected to tax under Section 2 (22) (e). This Court notices that in that case, the assessee-firm consisted of three partners, N, S and JE having profit sharing ratio of 35 %; 15% and 50 % respectively. It had taken a loan of ₹ 28,52,41,516/- from JP in which the assessee/firm had invested. The assessee had subscribed to the equity shares which constituted 48.18 % of the share capital. The shares were purchased in the nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... names of all the members of the partnership firm should be entered in the register of members. Obviously then, with the purchase of shares by the firm in the name of its partners, it is the firm which is to be treated as shareholder for the purposes of section 2(22)(e) of the Act. 24. This court is of the opinion that the above decision does not advance the revenue s cause in this appeal. Granted, the assessee is a shareholder of SISICOL; he is also a partner of the firm. However, neither did SISICOL give him the money nor did it advance the amount to the firm. The firm has an independent existence and it had over ₹ 60 crores in its account. That a significant part of it, i.e., 44% or over ₹ 26 crores was payable to SISICOL could not have blinded the revenue to the fact that the other amount was available and given as a loan to the assessee. In these circumstances at least, it could not have been said that the loan to the assessee and the loan (in the form of credits in favour of SISICOL) were really one transaction. It is also a matter of record that the firm had over 290 branches or units and collection by it exceeded- on an average ₹ 10 crores per month. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnect to establish nexus between funds of SISICOL and advancement of loan to the assessee was, in consonance with the observations and findings already recorded by the learned Judicial member. The Third Member could not ask for further enquiries or investigation and permit a fresh - inning to the Revenue as suggested in the Misc. application. The contention raised is devoid of substance. 10. At any rate, I do not find any mistake, which can be treated as a mistake apparent from record , permitted to be rectified u/s 254(2) of the Income-tax Act, in order dated 17.7.2007. Revenue authorities are merely seeking review of the order, which is not permissible. The misc. application is devoid of any substance and is dismissed. 28. We are of the opinion that the impugned order does not suffer from any infirmity calling for interference. As to whether there was a mistake apparent from the face of the record, in the context of this case, the ITAT felt that the revenue could not establish its case, since the basic contention about applicability of Section 2 (22) (e) was not accepted. 29. The writ petition, i.e., W.P.(C)No. 1162/2012 has to fail. Therefore, both the matters, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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