TMI Blog2015 (3) TMI 812X X X X Extracts X X X X X X X X Extracts X X X X ..... ating ₹ 76,86,829/-, which amount was shown as loan or advance in the books of accounts of KIPL. The company's business is not money-lending and it could not be said that the loans had been advanced by the company in the ordinary course of its business. In such circumstances, in the instant case, all the amounts advanced to the assessee/appellant under the head loans and advances fall squarely within the ambit of Section 2 (22) (e) of the Income Tax Act Assessing Officer has taken the entire amount of ₹ 76,86,829/- received by the assessee from the company as dividend, while computing the income, but has lost sight of the payment made. In such circumstances, this Court is of the considered opinion that the CIT (Appeals) has rightly come to the conclusion that "the position as regards each debit will have to be individually considered, because it may or may not be a loan. The AO is, therefore, directed to verify each debit entry on the aforesaid line and treat only the excess amount as deemed dividend u/s 2 (22) (e) of the Act". We find such a direction issued by the CIT (Appeals), as upheld by the Tribunal is in consonance with the provision of Section 2 (22) (e) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger shows only two entries - ₹ 6,00,000/- on 31st July, 2008 and ₹ 12,00,000/- on 31st March, 2009? 2. The facts, in a nutshell, are as hereunder:- The appellant/assessee, in his return of income for the assessment year 2009-2010, on 12.8.10, declared an income of ₹ 24.33,877/-, which was processed under Section 143 (1) of the Income Tax Act. The case was selected for scrutiny and a notice under Section 143 (2) of the Income Tax Act was issued on the assessee on 25.8.10. The assessee responded to the said notice and appeared before the Assessing Officer. In the course of scrutiny proceedings, the assessee was asked to file the financial statement of M/s.Kapoor Imaging Pvt., Ltd. (for short 'KIPL') for the assessment year 2009-2010. On perusal of the same, the Assessing Officer came to hold that the assessee had taken loans and advances on various dates from the company in a total sum of ₹ 76,86,829/-. The Assessing Officer also noticed that there were certain payments as on 31.3.09 and the balance due to the company was ₹ 39,32,345/-. It is also recorded by the Assessing Officer that the assessee is having more than 60% of the shares in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The Assessing Officer, taking note of the fact that the loan outstanding in the books of accounts of the company in favour of the appellant as on 31.3.09 is ₹ 45,44,303/-, held that the amount of ₹ 76,86,829/- received by the assessee from KIPL has not been repaid as on that date and, therefore, all the payments made by KIPL to the assessee upto 31.3.09 by way of loans and advances should be treated as deemed dividend in terms of Section 2 (22) (e) of the Income Tax Act because the conditions required to hold the transaction as 'deemed dividend' have been satisfied. The Assessing Officer held that the four basic requirements for construing a transaction as 'deemed dividend' are fulfilled in the present case. For better clarity, the said portion of the order is extracted hereinbelow:- (i) A shareholder, who is the beneficial owner of shares with not less than 10% voting power. (ii) Any concern in which such shareholder is a member or partner, having beneficial entitlement of not less than 20% of such concern's income. (iii) Any payment on behalf, or for the individual benefit of such shareholder. (iv) The company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-clause (e) of definition of 'dividend' appearing in Section 2 (22) (e). The Hon'ble Bombay High Court in the case of CIT v. P.K. Badiani, 76 ITR 369 (Bom.) has held that in case of a mutual, open and current account which a shareholder has with a company, every debit, i.e., every payment by the company to the shareholder may not be a loan. To be treated as a loan, every amount paid must make company a creditor of the shareholder for that amount. If, however, at the time when the payment is made, the company is already a debtor of the shareholder, the payment would be merely a repayment by the company towards its existing debt. It would be a loan by the company only if the payment exceeds the amount of its already existing debt and that too only to the extent of the excess. Therefore, the position as regards each debit will have to be individually considered, because it may or may not be a loan. The AO is, therefore, directed to verify each debit entry on the aforesaid line and treat only the excess amount as deemed dividend u/s 2 (22) (e) of the Act. The ground is partly allowed for statistical purpose. 6. According to the CIT (Appeals), the provisions of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of ₹ 45,44,303/- for which interest of ₹ 2,12,783/- has been paid and TDS of ₹ 24,108/- has been deducted and paid over to the department and the other account is a running account, which has been reconciled as on 31.3.09 at a sum of ₹ 76,86,829/- and after giving credit to the various amounts, balance due was determined as ₹ 39,32,345/-. This finding of the CIT (Appeals) was upheld by the Tribunal stating that the two accounts are distinct and separate, which, this Court is of the considered opinion, on the facts of the present case, appears to be correct and justified, warranting no interference. 12. However, at the present time, the larger issue before this Court is with regard to the interpretation of Section 2 (22) (e) of the Act on which much reliance has been placed by the Department to hold that the amount pending in the books of accounts of KIPL under the head loans and advances to the assessee is to be construed as 'deemed dividend'. For better clarity, Section 2 (22) (e) of the Income Tax Act is extracted hereinbelow :- 2. Definitions - * * * * * * * * * (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it likes with the management of the company, its affairs and its profits within the limits of the Companies Act. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. When the legislature realised that though money was reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescribed for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g from the company, any interest payable by him going to swell the savings fund; and at any time the individual could acquire the whole balance of the fund in the character of capital by putting the company into liquidation . What Simon says about one-man company can be equally true about the controlled company whose affairs are controlled by a group of persons closely knit and having the same interest. 15. Following the view of the Supreme Court in Navnit Lal Javeri's case (supra), the Calcutta High Court, in the case of Smt. Tarulata Shyam Ors. - Vs - Commissioner of Income Tax, West Bengal II, Calcutta (1971 (82) ITR 485 (Cal), held that tax is attracted at the point when the loan is borrowed by the member/shareholder. For better clarity, the relevant portion of the order is quoted hereunder :- It is clear from the above cited passage that if a controlled company adopted a device of making a loan or advance to one of its shareholders such a shareholder would be deemed to have received the said amount out of the accumulated profits and would be liable to pay tax on the basis that he had received the said loan by way of dividend. Whether the loan is ultimately rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. There three kinds of payments are: (1) payments made to the shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before section 12(1B) can be invoked against a shareholder. The first condition is that the company in question must be one in which the public are not substantially interested within the meaning of section 23A as it stood in the year in which the loan was advanced. The second condition is that the borrower must be a shareholder at the date when the loan was advanced ; it is immaterial what the extent of his shareholding is. The third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit at the date of the loan. This is an important limit prescribed by the relevant section. The fourth condition is that the loan must not have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (e) of section 2(6A) of the Act was substituted for the original provision by the Finance Act, 1955, with effect from 1st April, 1955. The object of the provision is to prevent avoidance of tax by the shareholders of a closelyheld company. In such a company, a few shareholders, who effectively control it, can easily exploit its juristic personality, by restraining it from distributing its yearly dividends and thereby accumulating its profits, and thus saving themselves from a higher tax incidence resulting from the distribution of dividend. 19. In such a backdrop, the above provision came to be inserted so as to make any payment made by the company by way of advances and loans to shareholders, who satisfy certain conditions, as enumerated above, to fall under the head dividend as defined under Section 2 (22) (e) of the Income Tax Act. In the case on hand, the assessee/appellant having received the above amount from KIPL under the head loans and advances as shown in the books of accounts of KIPL, the five ingredients, as propounded by the Supreme Court in Tarulata Shyam's case (supra) to bring the said amount under the ambit of dividend are wholly satisfied in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X
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