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2015 (11) TMI 1009 - ITAT KOLKATA

2015 (11) TMI 1009 - ITAT KOLKATA - [2016] 45 ITR (Trib) 197 - Deemed dividend u/s Sec.2(22)(e) - BAPL gave money to the Assessee and was of the view that the same was “Loan or Advance” within the meaning of Sec.2(22)(e) of the Act by a company (BAPL) to a person who holds substantial interest in the company (BAPL) and had to be brought to tax as deemed dividend to the extent the company possesses accumulated profits - CIT(A) deleted the addition - Held that:- In the present case the transaction .....

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. - ITA No.151/Kol/2013 - Dated:- 30-10-2015 - Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM] For The Appellant : Shri Debasish Roy, JCIT, Sr.DR For The Respondent : Shri Ravi Tulsiyan, FCA ORDER Per Shri N.V.Vasudevan, JM This is an appeal by the Revenue against the order dated 12.10.2012 of CIT(A)-I, Kolkata, relating to AY 2009-10. 2. The Assessee is an individual. She is a director in a company by name M/S.Bright Advertising Pvt. Ltd., (BAPL). She holds 25.24% shares in BAPL. There were .....

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extent the company possesses accumulated profits. The provisions of Sec.2(22)(e) of the Act, reads as follows: Sec.2(22) "dividend" includes- (e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987, 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 r .....

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end" does not include- (i) a distribution made in accordance with sub-clause (c) or sub-clause (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 sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity sharehol .....

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it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Explanation 1.-The expression "accumulated profits", wherever it occurs in this clause, shall not incl .....

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on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the 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 .....

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cipate in profits, carrying not less than twenty percent of the voting power. 3. The provisions of Sec.2(22)(e) treats loan or advance given by a company in which public are not substantially interest as distribution of dividend by the company to its shareholders and chargeable to tax. It is being done to bring within the tax net monies paid by the closely held companies to their shareholders who have substantial interest in the company, payment by way of loan or advance presuming that the accum .....

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ection which is Deemed Dividend , connotes that this section has been brought on statue as Deeming Fiction . It means that the income termed as dividend is actually not dividend distributed by a closely held company but the amount paid is still treated as dividend and hence the term Deemed Dividend . 4. The AO applying the provisions of Sec.2(22)(e) of the Act treated the total of transactions by which monies were given by BAPL to the Assessee which was quantified by the AO at ₹ 15,76,77,4 .....

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see contended that the transactions between the Assessee and BAPL in which the Assessee was a Director represented not a loan account but a current and mutual account. It was submitted that a current or mutual account is different from a loan account in the sense that it has the feature of mutuality which is not present in a loan account. An account is mutual when transactions on one side are independent of the transactions on the other side. When an account has a shifting balance that is favour .....

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ed with the payments made by the other. The Assessee drew attention of the CIT(A) to the decision of the Hon'ble Supreme Court in the case of Kesari Chand Jaisukh Lal vs Shillong Banking Corporation Ltd. in which it has been held that "to be mutual there must be transactions on each side creating independent obligations on the other and not merely transactions which create obligations on the one side, those on the other being merely complete or partial discharge of such obligations..... .....

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ere about 5 to 10 transactions involving payments by both the Assessee and BAPL to each other. Referring to the transactions in the Ledger Account, the Assessee pleaded that during the first few months of the Fin. Year 2008-09, the outstanding balances were in favour of BAPL and it was, therefore, advantageous to BAPL. However in subsequent months the position reversed and the balances after each transaction were in favour of the Assessee. It was argued that in any case whether the outstanding b .....

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urrent account or an account in the course of business of the company, there must be each side creating an independent obligation on the other. Mere credit entries with adjustment entries like payment of interest and deduction of tax at source cannot make an account, a current account or an account in the course of business transaction". The A.R. has also referred to another decision of the Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra (338-ITR-538) wherein it has bee .....

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essee in terms of Sec.2(22)(e) of the I.T. Act. 8. The CIT(A) agreed with the contentions on behalf of the Assessee and deleted the addition made by the AO, observing as follows: I have gone through the submission of the A. R. and the judicial decisions referred to by him. It appears to me that the sum of ₹ 15,76,77,411/- paid by the company to the appellant cannot be considered as distribution of dividend in the form of loans which was the intention of the Legislature behind enacting Sec. .....

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2)(e) of the LT. Act. The addition of ₹ 3,10,83,635/- as made by the A.O. is, therefore, deleted. Since the addition made by the A.O. in the hand of the appellant has been deleted by me, the dispute relating to correct computation of accumulated profit of the company as raised by the appellant in her ground No.3 has become infractuous. 9. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal raising the following grounds: 1. That the facts and circumstances of .....

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tra Vs. CIT 338 ITR 538(Cal). Further reliance was also placed on the decision of the ITAT Kolkata Bench in the case of Mr.Purushottam Das Mimani Vs. DCIT IT(SS) A Nos. 60 to 62/Kol/2011 for AY 2006-07 to 2008-09 order dated 17.10.2014 wherein the Kolkata Bench on identical facts following the decision of the Hon ble Calcutta High Court in the case of Daga & Co. (P) Ltd., (supra) was pleased to hold that provisions of Sec.2(22)( e) of the Act were not applicable. 11. We have given a very car .....

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hows that as on 2.4.2008 BAPL owed Assessee a sum of 1,95,000. BAPL paid the Assessee a sum of ₹ 2.4.2008 a sum of ₹ 21,05,000 and the Assessee owed BAPL a sum of ₹ 19,10,000. The amounts given in the bracket in the last column of the enclosed balances in the running current account is the amount which BAPL owed the Assessee. Mutual transactions go on in this fashion throughout the previous year and as on the last date of the previous year the account is squared i.e., neither t .....

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artial discharge of such obligations. There were reciprocal demands between the parties and the account was mutual. 13. This tribunal in the case of Mr.Purushottam Das Mimani (supra) on identical facts came to the conclusion that the account between the Assessee and a public limited company was a running mutual current account and thereafter following the decision of the Hon ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra) held as follows: 4. We have heard rival submissions a .....

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her parties, i.e. the assessee and the loan giving company, resulting in shifting balances. On many occasions the balance was in favour of the assessee and on some other occasions the balance was in favour of Ganesh Wheat Products (P) Ltd. The ledger of the assessee further reveals that no payment by loan creditor is followed by a repayment by the loan debtor and, in fact, the payments by the assessee and Ganesh Wheat Products (P) Ltd. are independent of one another. No interest was charged by e .....

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balance and the resultant debit balance was ₹ 5,00,833/-. For A.Y. 2007-08, in respect of Mima Flour Mills, opening balance was ₹ 5,00,833/- and after shifting balance, the debit balance came to nil. In respect of Ganesh Wheat Products, opening balance was ₹ 18,87,522/- and after shifting balance the credit balance came to ₹ 9 lakhs. On perusal of the ledger account of the assessee in the books of M/s. Mima Flour Mills (P) Ltd. it is seen that on several dates there were .....

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reason that feature of mutuality is not present in a loan transaction. 5. Here in the present case, from the facts narrated above, it is clear that both the parties are beneficiary of the transaction being current account of the above transactions i.e. shifting balances. This issue has been answered by Hon ble Calcutta High Court in the case of Pradip Kumar Malhotra v. CIT 338 ITR 538 (Cal) wherein Hon ble High Court held as under: The phrase by way of advance or loan appearing in sub-clause (e .....

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ficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to be deemed dividend withín the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. From the above facts and legal proposition decided by Hon ble jurisdictional Hi .....

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