TMI Blog2010 (11) TMI 997X X X X Extracts X X X X X X X X Extracts X X X X ..... in sustaining the applicability of the provisions of s.2(22)(e) of the Act; - the CIT(A) ought to have appreciated that the transactions between the assessee and Bagmane Developers (P) Ltd [BDPL] were in the course of business activities and that the amount received was 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. As pointed out earlier, the issues raised in these appeals were similar and inter-linked; they were heard, considered and disposed off in this common order for the sake of convenience and clarity. 4. With regard to the conclusion of assessments u/s 143(3) r.w.s. 153C of the Act for the AYS 2004-05, 05-06 and 06-07 respectively which were 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 procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the assessing officer having jurisdiction over such other person and that assessing officer shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A. 4.5. As rightly highlighted by the ld. CIT (A), the requirement of handing over the books of account to the AO having jurisdiction over the other person did not arise in the case on hand for a simple reason that the same AO who was having jurisdiction over the person searched u/s 132 of the Act i.e., Bagmane Developers Pvt. Ltd. and the other person i.e., the assessee and as such there was no need of handing over the books of accounts/documents seized to any other AO. The other argument of the assessee that no incriminating documents were unearthed pertaining to the assessee during the search except regular books of account and, thus, the initiation of the proceedings 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redressal. Extensively quoting the reasons adduced by the AO in his impugned orders and also mentioning that the AO had elaborately discussed all the arguments and judicial pronouncements which have been reiterated during the course of appellate proceedings, the CIT (A) opined that the conclusion drawn by the AO were logical, considering the facts and circumstances of the case. He, further, recorded that since the arguments of the appellant have already been considered by the AO, the same did not require further elaboration. However, he went on further to uphold the stand of the AO in invoking the provisions of s.2 (22)(e) of the Act on the grounds that (i) except the alleged agreement, the assessee failed to produce any other evidence to prove that the advances given were for the purpose of the business of BDPL; (ii) MOU (sic) agreement was produced only on 15.12.098 and it was neither a registered document nor entered by an independent person because the document was signed by husband and wife and, therefore, self serving document; (iii) Even if the MOU was in existence, it did not alter the nature of transactions which have been shown by the assessee in the form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the intended purpose which has not been disputed by the AO. Based on the ground realities, the assessee was free to adopt his/its own method of carrying on the business; - Relies on (a) S.A. Builders v. CIT 288 ITR 1 (SC) (b) CIT v. Sassoon David 118 ITR 261 (SC) (iii) the AO s reason for rejecting the agreement was that it was not found at the time of search. It was not as if the search party was expected to record/seize every paper on which it lays its hands. This agreement was kept along with the other original belongings of the assessee and the searching party s reasoning in not seizing this agreement cannot now be speculated; and the worst, the assessee cannot be found fault with either; - just because the said document was not seized by the search party, doesn t mean to conclude (as the AO did) that the document did not exist at all. The AO had not proved with any documentary evidence except alleging that the document was not genuine; - no agreement needs to be reduced in writing and it can even be oral. Even if an agreement was reduced in writing, it doesn t require to be registered under s.17 of the Registration Act; - In fact, all the agreements we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown as unsecured loan in the books of accounts cannot be concluded that it was deemed dividend. It was a settled law that in book-keeping, the entries in the books of accounts cannot go to decide the ambit of taxation Relies on a. Fort Properties Pvt. Limited 208 ITR 232 (Bom) b. Kedarnath Jute Manufacturing co. Ltd. 82 ITR 363 (SC) c. Kasturi Estates (P) Ltd. 62 ITR 578 (Mad) d. G.Venkataswami Naidu 35 ITR 594 (SC) e. Sultan Brothers 51 ITR 353 (SC) f. 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 advance had been received. Relies on ACIT v. Bhaumik Colour (P) Ltd 120 TTJ 865 (Mum) - 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 in the AY 2005-06. The cases relied by the AO have no application to the facts of the present case. relies on - G.R.Govindarajulu Naidu v. CIT 90 ITR 13 (Mad); - For AY 2006-07: With regard to the reasoning of the AO for rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equires to be upheld. 8. We have carefully considered the rival submissions, diligently perused the relevant records, the 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 proceedings. 8.1. On a critical examination of the relevant impugned assessment orders, 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 AYs under dispute, can be categorized as under: (i) the assessee in its Balance Sheets in Schedule 2 had shown those amounts under the head unsecured loans ; - in the Balance sheets of BDPL for the AYs under dispute, amounts receivable from the assessee have been shown under the head loans and advances ; - the balance sheets of BDPL show the accumulated profits for the relevant assessment years; (ii) the assessee had failed to substantiate its claim that the funds were received from BDPL for business expediency and were in the nature of contractual payments; - the Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom time to time for acquiring the properties and shall finance the construction till such time the first party is able to secure finance from the banks for the project or find an investor for the project. 11. On completion of the construction on the properties acquired, the first party shall assign the area on the basis of cost + 4% margin to the second party for the amounts paid by the second party to the first party pursuant to the above arrangement entered. The allotment of space is irrevocable. In this connection, the first party shall in close co-ordination with the second party freeze the cost of project per sq. feet and shall allow the representatives of the second party for periodical access to its accounts. As could be seen from the agreement cited supra, the purpose intended and the terms and conditions have been duly earmarked. This has neither been disputed by the AO nor by the first appellate authority. The AO s sole objection was that such amounts have been shown under the head unsecured loans in its balance sheets. In this connection, we would like to point out that the funds flown through from BDPL to the assessee company have not been disputed, but, the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. (2) The AO s another contention was that the assessee was unable to substantiate its claim that the funds were given for business exigencies and was in the nature of contractual payments. In this connection, we would like to mention here that the balance-sheets, journal entries in the books of account amply make it clear that the funds were provided during the course of business.. (3) The other reasoning of the AO which was ratified by the learned first appellate authority that the alleged non-registered agreement was produced before the AO only on 15.12.2008 and signed by husband and wife [Raja Bagmane and Smt. Vasundhara Raja] which was nothing but an after thought and so on and so forth. With regard to the CIT(A) s argument that the agreement dt.13.11.2002 was produced by the assessee as a piece of evidence only on 15.12.2008 before the AO even though the hearing was going on and also when the AO contemplated to treat the same as deemed dividend by issuance of a show-cause notice etc., it may not be out place to bring on record that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of s. 2 (22)(e) of the Act. (5) We are in total disagreement with the Ld. CIT (A) s perception that the assessee s reliance on the ruling of Hon ble Supreme Court in the case of S.A. Builders v. CIT cited supra was not applicable. No doubt, the issue was whether interest on borrowed capital allowable or not. However, the Ld. CIT (A) had failed to notice, perhaps by oversight, the concept and the ratio laid down by the Hon ble Court while deciding the issue. For the sake of ready reference, we reproduce the relevant portion of the ruling of the Hon ble Court that It was required to be enquired as to whether the interest-free loan was given to the sister concern as a measure of commercial expediency. If it is so, interest on borrowed funds is to be allowed It, further, went on to observe that the authorities should examine the purpose for which the assessee advanced the money to its sister concern and what the sister concern did with this money in order to decide whether it was for commercial expediency . Thus, the ratio laid down by the Hon ble Supreme Court in the case cited supra is fit in to the issue on hand. One should analyze the issue, keeping in view the proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for its own benefit, but, the funds were provided for the execution specific purpose on behalf of BDPL. Thus, in our considered view, the case law cited by the authorities below is distinguishable. With due respects, we would like to make it clear that none of the three conditions prescribed by the Hon ble Court are applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has referred to two recent Division Bench judgments of this Court reported as CIT v. Raj Kumar [2009] 181 Taxman 155 and CIT v. Ambassador Travels (P.) Ltd. [2008] 173 Taxman 407 to contend that merely because a loan is given by M/s. Pee Empro Exports Pvt. Ltd. to the assessee-company would not mean that the same would become a deemed dividend inasmuch as moneys are paid for transactions which are business transactions/commercial transactions and, therefore such transactions cannot fall under the expression deemed dividend within the provision of section 2(22)(e). Before we refer to the rival contentions of the parties, we would like to reproduce the following finding of facts arrived at by the Tribunal : 7.5 In the present case the amount paid by M/s. Pee Empro Exports to the appellant-company does not 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 appellantcompany for the individual benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this group. When the Legislature realized 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 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the lending of money is a substantial part of the business of the company, advance in the ordinary course of carrying on business cannot be considered as dividend within the meaning of section 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such advance as deemed dividend. We agree with the aforesaid observations. The finding of facts, arrived at by the Tribunal, in the present case, is that the transaction in question was a business transaction and which transaction would have benefited both the assessee-company and M/s. Pee Empro Exports Pvt. Ltd. In fact, as stated above, the counsel for the appellant has conceded that the amount is in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vances to avoid payment of tax. Therefore, if the said background is kept in mind, it is clear that subclause (e) of section 2(22) of the Act, which is parimateria with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. If this purpose is kept in mind then, in our view, the word advance has to be read in conjunction with the word loan . 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 conjunct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of the purpose for which a fiction is created. Moreover, as far as possible, the legal fiction should not be given a meaning so as to cause injustice. Thus, it is obvious that the fiction created in section 2(22)(e) only refers to pure advances or loans. Any amount paid on account of genuine business transaction between the entities falls outside the ambit of section 2(22)(e). As a result of globalization during the recent past, various giant infrastructure projects have sprung up and many are in the pipeline. Multivarious activities are involved in promoting these giant projects. All these activities collectively strive to complete the projects. Each activity is distinct in character. For each activity, different kinds of commercial agreements and technical agreements are required. The financial structure of 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantial interest etc., We find that - - The sales of shares have been disclosed in the Balance Sheets of Raja Bagmane and Smt. Vasundhara Raja as on 31.3.2006. There was a running account of Smt. Vasundhara Raja in books of Raja Bagmane and, therefore, the consideration due was debited to her account. Similarly, in the account of Raja Bagmane in the books of Smt. Vasundhara Raja, credit entries were passed; - Raja Bagmane was not having 10% shareholding in the assessee company throughout the year. Though Raja Bagmane did hold more than 10% share in BDPL throughout the year, he did not hold 10% share in the assessee company throughout the year. Thus, the provisions of s.2 (22)(e) will get attracted only if the concerned person was not only a registered shareholder but also a beneficial shareholder holding not less than 10% of the share; - Evidence for transfer of shares from Raja Bagmane to Smt.Vasundhara Raja in the case of the assessee was produced in the form of Registrar of Companies Certificate Annual return of the assessee for the year 2005-06 [Source: P 87 94 PB AR ] and also the Company Secretary [Registrar of Companies] in his letter dated: 28.11.2008 [P ..... 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