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TMI Blog2007 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... t no part of the loan of Rs. 1,88,96,202 to the assessee could have come from the credit balance of Rs. 26,24,12,222 in the name of the company, SISICOL or would it be inferred that 44 per cent. of the loan would have come from the above credit balances on proportionate basis ?" 3 The hon'ble President of Income-tax Appellate Tribunal exercising his power under section 255(4) of the Act referred the matter to the Third Member, the then Senior Vice President, Shri V. Dongzathang. He heard both the party's counsel at length and after going through the orders of the learned Members, who heard this appeal initially, passed the order dated March 26, 1998. It appears that the Department feeling aggrieved from the findings recorded by the learned Third Member filed Miscellaneous Application No. 13/Alld/1998 pointing out that the learned Third Member has not fully answered the points of difference in the questions raised before him. The learned Third Member, after hearing the standing counsel for the Department as well as counsel for the assessee, rejected the application, vide order dated April 7, 2000. 4 The facts have been noted by the learned Third Member in his impugned order in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no direction by the company SISICOL to the firm to advance the sum of money to the assessee. There is, therefore, no reason to treat the amount as loan or advance. It was also held by him that it cannot be inferred that any part of the loan given by the firm to the assessee forms part of the amount due to SISICOL by the firm especially having regard to the fact that the debt due by the firm represents only 44 per cent. of the total funds of the firm and there were sufficient other funds available with the firm for advancing the loan to the assessee. The learned Judicial Member further noted that in the past also the firm has advanced loans to the assessee but no such assessment to tax has been made by him invoking the provisions of section 2(22)(e) of the Act in any of the earlier years. According to the learned Judicial Member, a sum of Rs. 26,24,12,223 primarily represents collection of the last two months due to be remitted by the firm to SISICOL. There is, therefore, no nexus between the amounts due to the SISICOL and the advances made by the firm to the shareholders. Even if the amendment brought about with effect from April 1, 1988, was to be invoked then it could on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord, the Third Member opined that point of difference cannot be answered on the basis of material brought on record, as they were said to be insufficient for coming to a definite conclusion. First of all, it was noted that nature of the account of the assessee has not been looked into nor was it clear how the firm, M/s. Sahara India was advancing huge amount without any proportionate capital, profit or reserve in the account nor was any security obtained. About letters written by the assessee to M/s. Sahara India for loan, the learned Third Member opined that it was not clear in what capacity Shri Subrata Roy requested M/s. Sahara India to give loan on the date he wrote letters and the same was to be ascertained. He also was of the opinion that the arrangement made by the assessee with M/s. Sahara India and SISICOL has to be looked into to see how these transactions can be carried out without following any normal formalities for transaction of business and that aspect has not been looked into. Lastly, it was opined that the point of difference No. 1 as framed by the learned Members, if read as it stand, then there cannot be any question of invoking section 2(22)(e) of the Act beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to the assessee. The loan given to the assessee, as mentioned hereinabove, was separately shown in the assets side of the balance-sheet of the firm in Schedule C-I and the remittance thereof was also made to the company through account payee cheque by the firm which cheques were drawn on the behest of the borrower, i.e., the assessee and this remittance was debited to the loan account of the assessee. He further pointed out that the credit balances standing in the current account of the partners were only on account of accumulated loss suffered by the firm in the earlier years and during the year the profit sharing of Shri Subrata Roy, the assessee in the firm, M/s. Sahara India itself amounted to Rs. 2,80,64,386 which was far in excess of the amount of loan given to him of Rs, 1,88,96,202. 11 Learned counsel for the assessee further drawn our attention to the order of the learned Judicial Member and relied on the same. He submitted that the Bench is entitled to draw fresh inferences after appraisal of the facts of the case as per the order of the learned Third Member. 12 On the other hand, the learned Departmental representative opined that since the learned Members who h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h by the respective representatives of the parties. The learned Third Member is expected to examine whatever material is on record and the question is to be answered accordingly. - 15 After considering all the facts and circumstances, we have no option but to refer the points of difference as emerged from the order of the respective Members who heard the appeal and except replacement of word "credit" to the word "debit" in question No. 1, no other material change is required. Accordingly, we are referring the points of difference to the hon'ble President under section 255(4) of the Act for necessary action and point of difference are annexed separately. ORDER OF THIRD MEMBER 16 VIMAL GANDHI (President).-On account of difference between the hon'ble Members of the B-Bench, Allahabad (subsequently jurisdiction transferred to the Lucknow Bench), the following questions have been referred to me for consideration as a Third Member under section 255(4) of the Income-tax Act, 1961 "(1) Whether the loan of Rs. 1,88,96,202 advanced by the registered firm, M/s. Sahara India, to the assessee can be treated as a loan advanced by the company, SISICOL, to the assessee on the basis that the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The provisions of section 2(22)(e) were applied in view of its amendment with effect from May 31, 1987, for the assessment year 1988-89 to include concerns in which share holder is a member or partner. The learned Commissioner of Income-tax (Appeals) upheld the addition. 19 The assessee carried the matter in appeal to the Appellate Tribunal. After hearing both the parties, the hon'ble Members of the Bench proposed separate orders. The learned Judicial Member decided the issue in favour of the assessee. 20 In holding that a sum of Rs. 1,84,19,305 was not deemed dividend, the learned Judicial Member gave the following reasons 21 The assessee is the managing director of the closely-held company, SISICOL. The principal business of the company is to accept deposits from public under various schemes launched by the company from time to time. The company has 290 offices throughout the country and is carrying on this activity through its agents. 22 The assessee is also a partner of the firm, M/s. Sahara India, which entered into an understanding with SISICOL on August 17, 1987, to conduct, promote, introduce and secure business through various schemes for the company. The firm was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicability of section 2(22)(e), namely :- (a) the payments should be made by the company by way of advance or loan; (b) such payments should be made either to the shareholder or on his behalf for his individual benefit. 27 In the case in hand, the firm has extensive regular financial dealings with the company and is accredited with the task of collecting deposits under the scheme of the company. No time limit is fixed by the party for remittance of collection made by the firm on behalf of the company. It might be an act of business necessity, prudence or commercial expediency not to specify any time limit for remittance of collection. The learned Judicial Member was reluctant to read anything between the lines for providing no time limit. 28 The learned Judicial Member thus proceeded to consider the question whether credit balances lying with the firm can be treated as loan or advance from the company. He held that, on 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. He referred to the Chamber's Dictionary meaning of the term "loan" and as provided in Manual of Law, Terms & Phrases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm to the company. The firm had sufficient funds from other sources which fact was also noted by the learned Commissioner of Income-tax (Appeals) in paragraph 4 of his order. The total fund available with the firm at the relevant time stood at Rs. 60,61,54,638, which, of course, included Rs. 26.24 crores payable to SISICOL. The detail of Rs. 60,61,54,638, the amount payable is noted at page 25 of the order. Therefore, on facts, it could not be said that loan of Rs. 1.88 crores given by the firm to the assessee was part of credit balances of the company with the firm. The learned Commissioner of Income-tax (Appeals) held that 44 per cent. of availability of funds with the firm can be said to belong to the company. But such an inference, according to the Judicial Member, could not be drawn without providing specific link or direct nexus between two figures. The Department remained unable to connect advancement of loan to the assessee with the amount due to the company. A legal inference drawn was legally not tenable. 32 The learned Judicial Member, on facts, concluded that there was no payment of any sum by way of loan or advance, either directly to the assessee shareholder or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of centers and, therefore, in making accounts, reconciliation, trial balances and in providing other details of collection and remittance, time would be taken. Therefore, two to three months are taken in remitting the amount. The learned Judicial Member did not agree with the view that Rs. 1.88 crores advanced by the firm to the appellant came out of credit balance of Rs. 26.24 crores. This conclusion stood disapproved as funds exceeding Rs. 60 crores referred to supra were available with the firm. The Revenue's case was further not supported by other facts. The learned Judicial Member noted the details of loan advanced by the firm and found that on April 25, 1991, a sum of Rs. 20 lakhs was advanced by the firm to the assessee. This could not have come out of the credit balance of Rs. 26.24 crores, which has represented merely the collections of February and March, 1992, and partly of January, 1992. On facts, the learned Judicial Member concluded that it was impossible to establish any nexus between loan advanced to the assessee by Sahara India and the credit balance of Rs. 26.24 crores due to the company. The amount of the credit balance was unavailable and the same existed in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) of section 2(22)(e) of the Act which provides that dividend does not include an advance or loan made to a shareholder or a concern of the shareholder in the ordinary course of its business where the lending of money is sub stantial part of business of the company. The learned Accountant Member also considered Circular No. 495, dated September 22, 1987, of the Central Board of Direct Taxes ([1981] 168 ITR (St.) 87) where the above provisions were explained. The Accountant Member concluded that the "concern" included a firm. 41 The learned Accountant Member observed that the Assessing Officer did not take recourse to the amended provisions of section 2(22)(e) and considered only the application of payment of loan or advance to the shareholders only. It is noted that the total loan advanced in the relevant period was Rs. 1,88,96,202 which through a mistake was taken by the Assessing Officer at Rs. 6.03 crores. The learned Accountant Member noted that the company, SISICOL, had the credit balance in the books of the firm to the tune of Rs. 26,24,12,222 and held the view for reason stated in the assessment order that the loan of Rs. 1,88,96,202 taken by the assessee came to him fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction only. The cases relied upon by the assessee were held to be not applicable as in those cases, the question of lifting the corporate veil or the question of "conduit" was not considered. The above question which was very material, according to the learned Accountant Member, was somewhat considered in the case of M. D. Jindal v. CIT [1987] 164 ITR 28 (Cal). In that case, the assessee and his wife were only directors of the company dealing in iron materials. In the course of construction of plots, iron rods were supplied by the company to the assessee and his wife. It was held that through supply of iron rods, the company benefited the assessee and that arrangement was made to circumvent the provisions of section 2(22)(e) of the Act. The value of iron rod received by the assessee was treated as dividend. The learned Accountant Member quoted the said decision and emphasized the principle of piercing the veil of the corporate entity. 46 The learned Accountant Member thereafter took into account constitution of the firm and the name of the directors of SISICOL. He noted the argument of the Revenue that the assessee is himself the firm and he is the company. The credit balance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in this case with the following observations "A further perusal of schedule of notes on accounts to the balance-sheet of M/s. Sahara India contains note No. 4 as below: 'Interest payable to Sahara India Savings & Investment Corporation Ltd. and Sahara India Mutual Benefit Co. Ltd. for the year 1991-92 has riot been accounted for during the year as it shall be accounted for as and when paid. As such balance of these companies are subject to pending reconciliation.' Thus, the interest payable to SISICOL was neither being paid nor being accounted for. This is an instance of the advantage being derived by the firm from SISICOL. 39. On the other hand, the company, SISICOL, had share capital of Rs. 2,95,87,800 and further reserves and surplus of Rs. 1,84,19,305 as on March 31, 1992. These facts and figures speak eloquently and confirm my earlier finding that the roots of the loan from the firm, M/s. Sahara India, to the assessee lay in the credit balance of the company, SISICOL, with the firm. 40. It, therefore, falls squarely to be considered under the provisions of section 2(22)(e) of the Act subject to fulfilment of other conditions.' As far as the questions whether credit the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions "I hold further that only 44 per cent, of Rs. 1,88,96,202 i.e., Rs. 83,14,329 will be treated as having come from the assessee SISICOL as a loan to the assessee-shareholder. The Assessing Officer is directed to carry out consequential calculations." 52 On the question of computation of deemed dividend based on accumulated profit of the company, the learned Accountant Member agreed with the learned Judicial Member but gave some directions as to how deemed dividend was to be worked in the hands of the assessee. 53 On account of difference in approach of two learned Members, the issue has been referred to me under section 255(4) of the Income-tax Act for resolving the controversy through the majority decision. 54 The case was fixed for hearing and both the parties have been heard. Shri Pardiwala, appearing for the assessee contended that the provisions of section 2(22)(e) create a fiction and, therefore, burden is on the Revenue to establish that the transaction in question falls within the scope of the pro vision. In support of the above proposition, he relied upon the cases of CIT v. C. P. Sarathy Mudaliar reported in [1972] 83 ITR 170 (SC) and CIT v. P. V. John [1990] 181 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1966] 61 ITR 480 (Mad). He argued that direct nexus between the shareholder and the loan has to be established. He further quoted the decision in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC). The principle of piercing the veil would apply only if there was no existence of firm or firm was just held to be benamidar of the company, but here existence of firm or of company has not been doubted by the Revenue authorities. There is no finding that firm is benamidar of the assessee. The learned Commissioner of Income-tax (Appeals) had made a case that the amended provisions were applicable. Payment to the assessee was made by the assessee through conduit of the firm. However, both the learned Members have agreed that clause (ii) relating to concern is not applicable. It was further established on record that collections of the firm in the month of February and March were to the tune of Rs. 25,87,44,498 collected through hundred outlets and accounted for and remitted to the company after March 31, 1992. On facts and circumstances of the case, inference that out of every rupee of loan given to the assessee by the firm, 44 per cent, represented loan given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent by way of loan or advance by SISICOL to the assessee through the conduit of the agent firm, M/s. Sahara India, the arrangement being a device. 60 In my considered opinion, the issue should be considered in the light of the latest decision of the hon'ble Supreme Court in the case of CIT v. Mukundray K. Shah [2007] 290 ITR 433 (SC); [2007] 8 RC 717. In the said case, the assessee was the shareholder of MKTPL was also a partner in two firms MKF and MKI. Their Lordships held that the Tribunal was right in holding on examination of the cash flow statement, that MKSEPL had made payments to MKF and MKI for the benefit of the assessee which enabled the assessee to buy 9 per cent. RBI Relief Bonds in the financial year 1999-2000. The two firms were used as conduit by the assessee. It was not in dispute that the assessee had more than 10 per cent. of voting powers in MKSEPL during the block period. The assessee also had sub stantial interest about 16 per cent, in MKF. It was also not in dispute that MKTPL, SCPL and MKSEPL were three closely related companies in which assessee had controlling interest. It was found that timing of so- called repayments by the above three companies to MKF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein the import of the word "payment" in the similar pro vision was considered and it was held that the payment by the company to Karuppiah Chettiar was for the benefit of the assessee, the managing director of the company, arid was, therefore, assessable as a dividend in the hands of the assessee. Their Lordships noted that the court had held that the basic test to be applied in such cases is not whether the loan given is a benefit but whether the payment by the company to Karuppiah Chettiar was for the benefit of the assessee who was the managing director of the paying company. Following the test laid down by the hon'ble Madras High Court, their Lordships held (page 445 of 290 ITR) "We are of the view that the Tribunal was right in holding, on examination of the cashflow statement, that MKSEPL had made payments to MKF and MKI for the benefit of the assessee which enabled the assessee to buy 9 per cent. RBI Relief Bonds in the financial year 1999-2000." 63 Their Lordships also quoted the following observations from the decisions of the Calcutta High Court in the case of Nandlal Kanoria v. CIT [1980] 122 ITR 405 (page 415) "The only question which remains to be considered is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 1957, to March 31, 1958, should be taken as the amount to be treated as dividend and as the assessee's account is on the last day to his credit, no amount can be deemed to be dividend. As already pointed out, the position has to be ascertained at the date of each payment by the company to the assessee and this contention must, therefore, be rejected. If Mr. Rajgopal's contention was to be accepted, the result would be that if a shareholder borrows a large amount during the year, but repays it on the last day of the year, it would not be considered to be a loan, though the facts show that he did borrow a loan. Such a contradiction of the real fact would result if Mr. Rajgopal's contentions were to be accepted. Mr. Rajgopal further contended that in any event the highest amount to the assessee's debit on any day of the year should be the amount to be deemed to be dividend. This argument, again, ignores the principle laid down by us, that the position at the date of each payment must be considered. Moreover, there is another reason and that is that if it were to be so done, it would not enable the position of the balance of the 'accumulated profits' being taken into account, as mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay Steam Navigation Co. (1953) P. Ltd. [1965] 56 ITR 52 (SC) and on several other decisions to contend that there should be outflow of funds. However, in my considered opinion, the problem cannot be resolved by merely answering the question on consideration of entries in books of account. I have note the above decided cases where addition was sustained in the hands of the assessee although as per entries in the books of account, the assessee was not shown to have received any loan or advance. On facts and circumstances of the case, the provisions of section 2(22)(e) were held to be applicable. Therefore, total facts and circumstances of case and material available on record is to be considered to decide the questions. Further, the learned Accountant Member has recorded that two transactions of loan by the firm to the assessee and the other one from the company to the firm relating to use of funds, are really one transaction. It is undisputed position that the assessee did take loan from the firm and, therefore, if it is held that the two transactions are really one, i.e., loan represented funds of SISICOL, then case of loan and advance has to be accepted as established for applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm. The Revenue has not shown that the above factual finding suffers from any legal infirmity. 70 The learned Accountant Member, on the other hand, has held that the two transactions one from the company SISICOL to the firm and the second "firm" to the "assessee" should be treated as one. But the learned Accountant Member has not given justification or referred to any material on which the above inference is based. The firm admittedly has a legal existence separate and independent of the company. It is shown to have carried extensive business and collected crores of rupees. The fact is not in dispute nor refuted by the Revenue. It is nobody's case that the firm is a benamidar of the company or the assessee. Then, on what basis, it can be said that apparently the two transactions, one of advancement of loan by the firm to the assessee and the other of the alleged use of funds of the company by the firm are one transaction? In fact, the learned Judicial Member in the leading proposed order, after elaborate reasoning held that the loan advanced to the assessee by the firm was not out of funds of the company. The learned Accountant Member has not drawn attention to any material wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be drawn. No such attempt appears to have been made here. 71 Out of the three cases noted by their Lordships of the Supreme Court, the case of Nandlal Kanoria v. CIT [1980] 122 ITR 405 (Cal) is closer to the facts involved in the present case. In the said case, the assessee was the shareholder of a sugar company. During the previous year, relevant to the assessment year 1969-70, the assessee obtained two loans, one of Rs. 75,000 on July 30, 1968, and the second of Rs. 2 lakhs on September 2, 1968, from his proprietor concern, Indira and Co., which had, in fact, obtained loan from the sugar company. Rs. 75,000 was held to be "deemed dividend" within the meaning of section 2(22)(e) of the Income-tax Act and is not relevant here. The facts relating to the other amount of Rs. 2 lakhs are that on September 2, 1968, Rs. 4,75,000 was entered in books as advance by the sugar company to Indira and Co. Loan was also shown to be received from another concern, UnitedProvincesSugarCo. Ltd. Out of which cheque of Rs. 2 lakhs was issued by Indira and Co. in favour of the assessee. Subsequently, repayment by the assessee was recorded and the entire loan was repaid by February 5, 1969. The Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000 was advanced to the assessee. The Tribunal refrained from drawing the further. conclusion that Rs. 4,80,000 paid by the said company to Indira & Co. or any part thereof was meant for the benefit of the assessee. We have been unable to appreciate the observations of the Tribunal in this connection and its conclusions as to the situs of the debt or the shifting of entries in the books of Indira & Co. or the relevancy of the same in the controversy before us. We hold that the said sum of Rs. 2,00,000 lent by Indira & Co. to the assessee cannot be said to fall within the mischief of section 2(22)(e) of the Income- tax Act, 1961." 72 The facts in the case before Nandlal Kanoria [1980] 122 ITR 405 (Cal) and in the present case are quite similar. Like in the above case, the firm has not only funds of SISICOL but of several other entities aggregating to more than Rs. 60 crores when the loan amount is only Rs. 1,88,96,202. The firm is also agent of other entities. When amounts received from several sources were blended in the hands of firm Sahara India (like Indira & Co. in the cited case) and out of the blended funds, sum was advanced to the assessee, it is not possible to draw th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of L. Alagusundaram Chettiar [1977] 109 ITR 508 is not applicable as facts involved in that case were quite different. One apparent difference between the two cases is the efforts made by the Assessing Officer to establish the case that payment to Karuppiah Chettiar was for the benefit of the assessee share holder. In this connection, the Assessing Officer called the assessee and Shri Karuppiah Chettiar and subjected them to lengthy cross-examination regarding the purposes for which loans were taken by Chettiar from the company. On the basis of their deposition and admission, the Assessing Officer established that the loan taken by Karuppiah Chettiar was in fact loan by the assessee from the company. Other relevant facts and evidence that Karuppiah Chettiar was low paid employee of the company, loan was taken without promotes and that loans were advanced to Karuppiah Chettiar for the benefit of the assessee was collected and placed on record and this way case was established under section 2(22)(e). 75 Likewise in the case of Mukundray K. Shah [2007] 290 ITR 433 (SC), the Assessing Officer collected all the relevant material to show that loan from the company was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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