TMI Blog2010 (11) TMI 998X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions 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 s case 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 urge that the AO was within his domain to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, 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 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. 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 beneficial interest in the assessee company in terms of s.2 (32) of the Act i.e., the beneficial owner of share in the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 2(22)(e) of the Income-tax Act. 6. Disillusioned 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 with his lengthy submission, the focal point of which is summarized as under: - the amounts paid by BDPL were in the normal course of business and, therefore, what were taken by the assessee from BDPL was not a loan or advance. Amounts given to sister concerns were for allotment of built-up area in the buildings which they develop; - the sister concerns were nothing but the Special Purpose Vehicles [SPV] formed by the promoters to arrange funds for different projects being executed by them. Equity partners look or project specific SPV to invest as they would not generally invest in holding company for obvious reasons because of existing loan commitments, tax dues arising out of past transactions, pending legal issues etc. The banks also have per company exposure to fund their projects. By creating more companies, promoters will be in a position to raise more funds from banks. This commercial fitness an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to normal provisions of the Civil Procedure Code; - The reasoning of the AO that the amounts given by BDPL were profits which the company could have distributed to its shareholders was unfounded as the same was utilized only to make the maximum possible efforts for investments and would like to conserve the resources and, thus, distribution of dividends would be its last priority, particularly when there were huge borrowals; - the AO s presumption that the funds taken with no interest or end date by the assessee was one of the factors which led to prove that it being an advance or loan was unfounded since the amount was held by the assessee for procurement of properties on behalf of the company and as such there was no question of paying any interest; - according to the AO, the only exception was in respect of money advanced by a company carrying on money lending business. The question of exception will crop up only after considering the vital question as to whether the amount was an advance or a loan or otherwise. A number of case laws relied on by the AO were not applicable for the reasons that (a) ACIT v. Smt. Lakshmi Kutti Narayanan 112 TTJ 396 (ITAT Koch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) - Raja Bagmane was not having 10% share-holding in BCPL through the year. For applicability of s. 2 (22)(e), it was essential that the share holder should have 10% equity share capital in both the concerns, namely, the concern which lent money and the another concern to whom the money was lent. Though Raja Bagmane held more than 10% share in BDPL throughout the year, he did not hold 10% share in the assessee company throughout the year. Another condition was that the relevant share holder should not only be a registered share-holder but a person having beneficial interest. Thus, the provisions of s. 2 (22)(e) will get attracted only if the concerned person is not only a registered shareholder but also a beneficial share holder holding not less than 10% of share. - 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 to the facts of the present case. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit to the assessee; -BDPL who advanced the loan to the assessee was not engaged in the business of money lending and, therefore, the loan given to the assessee comes under the purview of s.2 (22)(e) of the Act. 7.2. The reasoning of the Ld. CIT (A) was that - Except the alleged agreement, no other evidence was advanced to prove that the advances given were for the purpose of the business of BDPL; - The alleged agreement was produced before the AO only on 15.12.2008 which was neither a registered document nor a document entered into by an independent person, but, was between a husband and wife and, therefore, self serving document; - The case laws relied on by the assessee has not come to its rescue as they were distinguishable. 7.3. On analyzing the reasons attributed by the authorities below, the following crucial points emerged were that (1) Both the companies - BDPL and the assessee company governed by the Board of Directors - were in the businesses of real estate of acquiring lands and developing them into buildings, developing tech parks etc., Since both the parties were in the same line of business real estate and developing of tech. park - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was advanced for earning profits . With highest regards, we would like to point out that the assessee had received funds as a measure of commercial expediency of this venture which, in any stretch of imagination, can be termed as either advance or loan as alleged by the Revenue. While deciding the issue in the case of S.A. Builders cited supra, the Hon ble Supreme Court had puts its seal of approval to the ratio laid down by the Hon ble Delhi High Court in the case of CIT v. Dalmia Cement reported in 254 ITR 377 (Del) wherein the Hon ble Court held that The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. (3) 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-sheet, journal entries in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purview of s. 2 (22)(e) of the Act. (8). 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, may be 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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 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 appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, 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 indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the discretion 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) provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of business where 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of loans and advances to avoid payment of tax. Therefore, if the said background is kept in mind, it is clear that sub-clause (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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the parameters 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc., We find that (i) 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; (ii) 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 81 86 PB AR ] and also the Company Secretary [Registrar of Companies] in his letter dated: 28.11.2008 [P 119 of PB AR] had a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
