TMI Blog2010 (11) TMI 983X X X X Extracts X X X X X X X X Extracts X X X X ..... ns between the assessee and Bagmane Developers (P) Ltd [BDPL] were in the course of business activities and that the amounts received were not in the nature of loans and advances ; (iii) the CIT(A) erred in directing the AO to compute the current year s profit; (iv) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act. 3. With regard to the conclusion of assessment u/s 143(3) r.w.s. 153C of the Act which was sustained by the Ld. CIT(A), it was contended by the Ld. A R that the provisions of s.153C of the Act were not attracted to the assessee since nothing incriminating relating to the assessee have been found at the time of search, that only the regular books of accounts were found and seized during the course of search and, therefore, the AO ought not to have proceeded to invoke the provisions of s.153C of the Act and that the Ld. CIT (A) had grossly erred in out-rightly rejecting the case laws on which the assessee had placed strong reliance. It was, therefore, pleaded that the order of AO was opposed to law which requires to be summarily annulled. 3.1. The Ld. D R was vehement in her resolve that the AO was within his sphere to invoke the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings u/s 153C of the Act illegal etc., doesn t hold water since the provisions of s.153C (1) of the Act make it explicitly clear that where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A . 4.3. In view of the above, we are of the considered view that the AO was well within his realm to resort to issue of notice u/s 153C of the Act and, accordingly, the assessee s objection is not sustainable and, thus, dismissed. . II. Applicability of the provisions of s.2(22)(e) of the Act: 5. With regard to the assessee s grievance in applying the provisions of s.2 (22) (e) of the Act by the AO and treating the amounts received under contractual terms as loans for the AY under dispute, the issue, in brief, was that during the course of assessment proceedings, the AO noticed that Sri Raja Bagmane who was the beneficial owner of the shares holding 99% shares in the case of BDPL was also holding substantial interest in the assessee company in terms of s.2 (32) of the Act i.e., the beneficial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reported in 229 ITR 444 (SC) and concluded that the assessing officer was right in invoking provisions of section 2(22) (e) of the Income-tax Act. 6. Disheartened with the findings of the Ld. CIT (A) cited supra, the assessee has come up with the present appeal. 6.1. During the course of hearing, the stand of the authorities below was vehemently contested by the Ld. AR in his submission, the substance of which is summarized as under: - the amounts paid by BDPL were in the normal course of business and, therefore, what was taken by the assessee from BDPL was not a loan or advance. Amounts given to sister concerns were just to invest further in the share capital of the company; - the BDPL under mutual understanding with assessee and gave some money for the purpose of acquiring its shares. The AO treated the same as not relating to the business. It was clear that BDPL had funded the amounts at arms length basis with an intention to make or earn profits from this venture and on complete commercial understanding. This being made in the course of business and for the purposes of business, the same was outside the ambit of deemed dividends; - The monies taken from BDPL whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries in the books of accounts cannot go to decide the ambit of taxation Relies on Fort Properties Pvt. Limited 208 ITR 232 (Bom) Kedarnath Jute Manufacturing co. Ltd. 82 ITR 363 (SC) Kasturi Estates (P) Ltd. 62 ITR 578 (Mad) G.Venkataswami Naidu 35 ITR 594 (SC) Sultan Brothers 51 ITR 353 (SC) CIT v. Express Newspapers 53 ITR 250 (SC) - The question of deemed dividend can arise only in the hands of a share holder having substantial interest in the lending company. The assessee was not a shareholder in BDPL from whom the alleged funds had been received. Relies on ACIT v. Bhaumik Colour (P) Ltd 120 TTJ 865 (Mum) - the AO appears to have taken into account the amounts received by the assessee during the whole financial year from BDPL as deemed dividend. However, it is evident from the books of account of the assessee that all the credits were through JVs only for the AY under dispute which was not an actual transfer of funds, but were mere journal entries. - It is common knowledge that in journal entries there is neither flow out or flow in of funds. There was no deemed dividends to be taxed at all. The cases relied by the AO have no application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans for the AY under challenge and was rightly treated them as deemed dividend in the hands of the assessee by bringing them to tax net under the head income from Other Sources . The learned first appellate authority had, after due consideration of rival submissions, substantiated the AO s action which vindicated the stand of the AO on this point. It was, therefore, vehemently urged that the action of the authorities below requires to be upheld. 7. We have carefully considered the rival submissions, diligently perused the relevant records, various judicial pronouncements on which either party had placed their faith and also the voluminous paper books [in volumes I, II, III IV running into hundreds of pages in its group of cases] furnished by the Ld. AR during the course of hearing. 7.1. On a decisive examination of the relevant impugned assessment order, the reasons for having arrived at such a conclusion that those amounts were to be treated as deemed dividends u/s 2 (22)(e) of the Act for the AY under dispute, can at best be categorized as under: - the assessee in its Balance Sheet (Schedule 2) had reflected unsecured loan of ₹ 10,17,621/- from BDPL; - i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act, 1961. A careful examination of the facts of the case indicates that there was not a real transfer of share and it was only a colourable device to reduce the number of shares by Raja Bagmane so that he is not treated as a shareholder having a substantial interest in the company and, thereby, avoid the taxability of deemed dividend. But in reality, he was still having substantial interest in the company and had total control over the company. In view of the above, it is held that even if Raja Bagmane had transferred his shares during this year and reduced it to 9%, he was still having substantial interest in M/s. Bagmane Leasing Finance Pvt. Ltd.[sic] M/s.Bagmane Realtors Pvt. Ltd. and the provisions of section 2(22)(e) is applicable in the case of the assessee for this assessment year (also) . 7.4. To belie the AO s reasoning, it was contended by the assessee that the sale of shares had been disclosed in the Balance sheets of Raja Bagmane and Mrs. Vasundhara Raja as on 31.3.06. Even an immovable property can be transferred for a consideration paid, part paid and part promised as per s.54 of the Transfer of Property Act. It was, further, contended tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghest judiciary of the land was that Whether, the withdrawals made by the assessee from Universal Radiators Private Limited totaling ₹ 93,027 can be assessed in the hands of the assessee under section 2(22)(e) of the Act for the year 1973-74 ? After due consideration of the facts of the case, the Hon ble Court was pleased to rule that - The withdrawals made by the appellant from the company amounted to grant of loan or advance by the company to the shareholder. The legal fiction came into play as soon as the monies were paid by the company to the appellant. The assessee must be deemed to have received dividends on the dates on which she withdrew the aforesaid amounts of money from the company. The loan or advance taken from the company may have been ultimately repaid or adjusted, but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period. With highest regards, we would like to point out that the issue before the Hon ble Apex Court was on the different footing which has no relevance to the issue on hand on the very ground that the assessee had not received any loan or advance fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. In other words, this provision would not apply to cases where the company which advances a loan to its shareholder carries on the business of money-lending itself; and the last condition is that the loan must have remained outstanding at the commencement of the shareholder's previous year in relation to the assessment year 1955-56. With due respects, we would like to point out that none of the three conditions prescribed by the Hon ble Court are applicable to the case on hand, namely, (1) no payments were made to the assessee by way of advance or loan by BDPL; (2) no payments were made on its behalf; and (3) payments made were not for anybody s individual benefit. The payments in question were provided due to business exigencies of BDPL and the funds so provided for the sole benefit of BDPL and NOT to individual benefits of a shareholder, the question of applicability of the provisions of s.2 (22)(e) of the Act doesn t arise. 7.9. We are, therefore, of the considered view that the case laws relied on by the authorities below has no relevance to the issue on hand. 7.10. On the other hand, the Hon ble Delhi High Court in its recent judgment in the case of CIT v. Cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t bear the characteristic of loans and advances. The amount has been paid by M/s. Pee Empro Exports in its own interest and that too for the purpose of business because the ultimate beneficiary of the proposed expansion of plant and machinery is M/s. Pee Empro Exports itself. M/s. Pee Empro Exports has not made the payment to the appellant-company for the individual benefit of Mr. R.S. Uppal and Mr. P.M.S. Uppal and on the contrary these two Directors have also provided funds to the appellant-company as owners of the company as also made by M/s. Pee Empro Exports. The assessee undertook expansion of its capacity, which was in mutual interest of assessee as well Pee Empro Exports. If the assessee has not undertaken such expansion, no advance could have been made to it or that Pee Empro Exports would not have distributed as dividend to its shareholders. Thus, but for the advances, the amount of advances could not have reached assessee at all. We therefore, delete the additions as made by the Assessing Officer as the amount received by assessee is not deemed dividend within the meaning of section 2(22)(e) of the Act. The counsel for the revenue has also further stated that it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em obviously is to take the benefit of the lower rate of super-tax prescribed for companies. This object was defeated by section 23A which provides that in the case of undistributed profits, tax would be levied on the shareholders on the basis that the accumulated profits will be deemed to have been distributed against them. Similarly, section 12(1B) provides that if a controlled company adopts the device of making a loan or advance to one of its shareholders such shareholders will 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 has received the said loan by way of dividend. It is clear that when such a device is adopted by a controlled company, the controlling group consisting of shareholders have deliberately, decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company; but the main object underlying the loan is to avoid payment of tax..... . The Tribunal has also referred to the judgment of the Bombay High Court in the case of CIT v. Nagindas M. Kapa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact not a loan but only an advance because the amount paid to the assessee-company would be adjusted against the entitlement of moneys of the assessee-company payable by M/s. Pee Empro Exports Pvt. Ltd. in the subsequent years. The counsel for the appellant has very strenuously urged that neither the Tribunal nor the judgment of this Court in Raj Kumar s case (2009) 318 ITR 462 (Delhi); (2009) 181 Taxman 155 deals with that part of the definition of deemed dividend under section 2(22)(e) which states that deemed dividend does not include an advance or loan made to a shareholder by a company in the ordinary course of its business where the lending of money is a substantial part of the business of the company [section 2(22)(e)(ii)], i.e., there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money-lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would, therefore, be covered by section 2(22)(e)(ii) and consequently payments even for the business transactions would be a dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan . Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term advance may or may not include lending. The word advance if not found in the company of or in conjunction with a word loan may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term advance . The rule of construction to our minds which answers this conundrum is noscitur a sociis. The sale rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610. Therefore, we hold that the Tribunal was correct in holding that the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... every activity differs. The risk and reward involved in every activity also differs. In order to meet such complex constraints, the flagship company/the promoter may create various distinct entities being special utility vehicles (SUV) to deal in each of these activities independently. The promoter along with these SUV jointly works to complete the over-all project. In such 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 advances or loan in all circumstances. 7.12. Taking into account the rival submissions, the facts and circumstances of the issue as deliberated upon in the fore-going paragraphs and also the various judicial pronouncements cited supra, we are of the unanimous view that the AO was not justified in invoking the provisions of s.2 (22)(e) of the Act in the case of the assessee for the assessment year under dispute. The Ld. CIT (A) s stand in upholding the findings of the AO is also not justifiable for the reasons recorded supra. It is ordered accordingly. 8. The issue of applicability of s.2 (22)(e) of the Act is not applicable in ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
