TMI Blog2010 (11) TMI 999X X X X Extracts X X X X X X X X Extracts X X X X ..... A) ought to have appreciated that the transaction between the assessee and Bagmane Pharmaceuticals (P) Ltd [BPPL] in the course of business activities and that the amount received could not be held as dividend ; (ii) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act. II. A.Ys 2002-03, 03-04, 05-06, 06-07 07-08 ITA NO:485, 486, 488, 489 490/10: 3. For these assessment years, the assessee had raised the following identical grounds which are reformulated, in a concise manner, as under: (i) the CIT(A) erred in sustaining the applicability of the provisions of s.2(22)(e) of the Act; - the CIT(A) ought to have appreciated the transaction between the assessee and Bagmane Developers (P) Ltd [BDPL] were in the course of business activities and that the amounts received could not be held as dividend ; (ii) the CIT(A) erred in not reducing the actual tax liability of the relevant current year from the profits of that year for the purposes of computation of accumulated profits ; (iii) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act. III. A.Y 2004-05 ITA NO:487/10: 4. In this assessment year, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being queried, the assessee s reply was that ₹ 16.64 lakhs being interest paid by BPPL against the funds provided by him earlier and since BPPL was started making losses and to protect the company from becoming sick, he decided and transferred back the same amount to the company. 6.3. Brushing aside the assessee s claim, the AO summed up in his impugned order that BPPL s only source of income for the AY under consideration was from leasing out the building, plant and machinery and that the money lending was not a substantial part of its business and, thus, the assessee cannot claim that the transaction done by this company was in its normal course of business. For the elaborate reasons set out in the impugned order, the AO had termed that the funds received by the assessee from BPPL was in the nature of loans and advances which come under the purview of s. 2 (22) (e) of the Act. Drawing strength from the ruling of the Hon ble Supreme Court in the case of P.Sarada v. CIT reported in 229 ITR 444, the AO treated the entire amount of advance of ₹ 16.64 lakhs received by the assessee from BPPL as deemed dividend in his hands and taxed accordingly. 6.4. Aggrieved, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in the earlier years, which if the interests offered by the company were to be accepted by the assessee, the loss of the company would have increased further. However, before the AO, it was contended that during the year, ₹ 16.64 lakhs received from BPPL through an account payee cheque and since the books pertaining to AY 2001-02 had been lost in transit during shift of office, no further details could be furnished. The assessee in his, further, communication dt: 12.12.2008 submitted before the AO that the company paid interest of ₹ 16.64 lakhs for earlier years during the assessment year 2001-02. However, the company is started making losses and to protect the company from becoming sick, it was decided that Raja Bagmane will not charge any interest, transfer back the funds received by him and to advance further funds to safe guard the interest of the company and share holders. Since this fund received was returned which was actually due to him (earlier to 2000-01) as interest and no individual benefit was derived from such funds, we kindly pray to you not to treat the said sum as deemed dividend and charge tax in the hands of Mr.Raja Bagmane. 7.3. However, we f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment years under consideration that the assessee was a beneficial owner of the shares holding 99% shares in the case of BDPL which was having accumulated profits in all the above AYs and shown unsecured loans in the books of accounts in the name of the assessee. Accordingly, for the elaborate reasons recorded in the respective assessment orders under dispute, the AO treated the unsecured loans shown by BDPL to the extent of the accumulated profits of BDPL of the respective assessment years in the hands of the assessee as deemed dividend u/s 2 (22)(e) of the Act. The following chart shows the loans and advances given by BDPL to the assessee and the amounts treated as deemed dividends in the assessee s hand for the respective assessment years: Asst.year Loan and advances Assessed as deemed dividends 2002-03 Rs.2,45,57,022 ₹ 15,74,755 2003-04 Rs.3,57,78,308 ₹ 3,05,995 2004-05 Rs.2,77,81,341 Rs.2,77,81,341 2005-06 Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 357 (SC), it was clear that the provisions of s. 2 (22)(e) of the Act were clearly applicable to the case of the assessee in respect of loans and advances and, accordingly, the AO was right in invoking the provisions of s.2 (22)(e) of the Act. 12. During the course of hearing before us, the spirited arguments put forth by the Ld. A R to rebut the conclusion of the authorities below are summarized as under: (i) the amounts received by the assessee were not advances as attributed by the Revenue, but, it were the funds in the course of business transactions the assessee tied up with BDPL and as such they were neither advances or loans to the assessee and, therefore, could not be classified as deemed dividends; (ii) However, the AO held with a wrong notion that - as per Karnataka Land Reforms Act, no agricultural land can be purchased in the name of the assessee and, hence, whatever purchased was only through Veerappa and, therefore, the claim of the assessee that the funds were given to him by BDPL to procure land was untrue; - BDPL was carrying on real estate business and it had itself purchased a plot of land in Byrasandra during FY 1996-97 on which it had developed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 1996-97 on which the assessee had developed an STPI and let out was also purchased by the assessee during 1992 which was got converted to non-agricultural land and transferred to the company. The properties purchased by the company from HMT Ltd and N.Narayana Reddy and sons during AY 2006-07 and 2007-08 respectively were converted non-agricultural lands. No other lands had been acquired by the company as it cannot purchase any agricultural lands; (c) The AO s other objection that the assessee was carrying on real estate business in his individual capacity etc., which was countered by the assessee that - whatever the assessee had purchased for self were only small dimensions of lands with less capital with a view to make layout and selling them as plots. However, the lands indented for BDPL were with high commercial value and larger proposition suitable for versatile complexes. The properties purchased by the assessee s relatives on behalf of BDPL were ultimately transferred to BDPL [source: P 199 247 of PB AR] (d) The AO s objection that in the return of income for the AY 04- 05, the assessee had himself changed the head of account to unsecured loan which indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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. (g) With regard to the transfer of funds from the company s account to the assessee s account include payments made by the company on behalf of the assessee on various dates; for which, it was explained that - payments made on 30.3.02 of ₹ 1.38 crores to Embassy investments and ₹ 2.80 crores paid as share application money, the AO himself had admitted that on the opening day the company owed ₹ 3.18 crores and during the year the assessee had paid the company a further sum of ₹ 1.04 crores. Thus, what was transferred to the assessee s account was far less than the aggregate of the aforesaid amounts. Further, those two items were mere journal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenge was rightly treated them as deemed dividends 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. With regard to the disallowance of bad debts, the submission of the Ld. D R was that the assessee had not produced any evidence in support of his claim and, therefore, bad debts were to be disallowed. In conclusion, it was vehemently urged that the action of the authorities below requires to be upheld. 13. We have carefully considered the rival submissions, meticulously 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 group of cases] furnished by the Ld. AR during the course of hearing proceedings. 13.1. On a decisive 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)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m into buildings; and the other (ii) also being carrying on real estate business in his individual capacity. (b) The prime objection of the AO was that as per the provisions of Karnataka Land Reforms Act [KLR Act], no agricultural land can be purchased in the name of the assessee and, hence, they were purchased through Veerappa. Therefore, the claim of the assessee that the funds were given to him by BDPL to procure land was not true etc., In this connection, it is relevant to reproduce the statement of the assessee on oath recorded on 11.10.2006 wherein he had stated that 3.6 (i) .. Ans: As per the rules of Karnataka Land Reforms Act, neither I nor the companies of Bagmane group can acquire agricultural lands. Since lands are the bloodline of our trade, there is a necessity of buying agricultural lands. As such, we buy all the agricultural lands in the name of Mr. Veerappa as he is a phani holder and his income is below ₹ 2 lakhs per annum. So only the agricultural land will be registered in the name of Mr.Veerappa. Payment to the land owners will be made by us directly and if any cash component involved will also be bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased a vast tract of land at Gottegere, developed it into residential layouts and sold them out and profits in ranges of ₹ 2.7 lakhs to ₹ 70 lakhs from the AYs 2001-02 to 2006-07, however, he had shown a loss of ₹ 66 lakhs from Gottigere project for the AY 2007-08. From the above, the AO had reasoned that the assessee had purchased the properties for his own business and not for the company. He had also listed out the alleged loans and advances received by the assessee from BDPL of ₹ 1.41 crores, ₹ 4.69 crores, ₹ 6.63 crores and ₹ 19.68 crores for the AYs 2002-03, 03-04, 04-05 and 06-07 respectively. - In this connection, it is more appropriate to have a glimpse of the ruling of the Hon ble Apex Court in the case of S.A. Builders v. CIT reported in 288 ITR 1 (SC) wherein the Hon ble Court, in its infinite wisdom, had observed thus The expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lands in his individual capacity, but, at the same time he was not forbidden under any law to use his acumen-ship in the field of real estate business to procure vast agricultural lands on behalf of BDPL by using the name and services of Veerappa as a conduit thereby maneuvering to out-wit the provisions of KLR Act - stuck two mangoes in one stone. (i) With regard to the AO s assertion that the claim of the assessee that he had entered into a procurement agreement dt.11.2.2002 etc., was contrary to his statement on oath wherein he had stated that it was not possible for him or the company to acquire agricultural land as per KLR Act etc., there are to aspects which require careful study, namely: (a) The Procurement Agreement dt: 11.2.2002 was entered into between the assessee and BDPL and as per this agreement the assessee had agreed to act as procurement agent of agricultural land for and on behalf of BDPL. When the agreement was entered into in the year 2002 the assessee had agreed to act as procurement agent of agricultural land. (b) When his statement was recorded at the end of the year 2006, he had stated that As per the rules of KLR Act, neither I nor the companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f as he had exceeded the limit of buying the agricultural lands under K.L.R. Act, he had explored or devised the other avenue of buying the lands for the company by using Veerappa as a conduit. No prudent businessman being an individual or a registered firm or a company, as the case may be - lie down at home as he was not entitled to go for a buying spree of agricultural lands in his name due to ceiling of K.L.R Act. He shall explore the other possible avenues by using his expertise in the field to furtherance his fortune. The assessee being a prudent person in the real estate field for decade as conceded by the Revenue, he must have utilized the name and services of Veerappa in procuring the agricultural lands for the company. - Unwittingly, the AO himself had admitted that the assessee was indulged in the business of purchase and sale of land in his individual capacity and, thus, the Revenue had duly recognized that the assessee was in the real estate business. Since the provisions of K.L.R. Act came in the way of the assessee to purchase of any agricultural lands in a vast scale on behalf of BDPL, this must have prompted the assessee to bring Veerappa into picture as his co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 procedure laid down by the Hon ble Supreme Court, whether the funds received was during the course of business or otherwise. As the transaction took place during the course of business and in the business exigency, we are of the firm view that the ratio laid down by the Hon ble Supreme Court in the case of S.A. Builders cited supra is absolutely applicable to the facts of the issue on hand. (q) In the case of Ms. P Sarada v. CIT reported in 229 ITR 444 (SC), the issue before the highest judiciary of the land was that Whether, the withdrawals made by the assessee from Universal Radiators Private Limited totaling ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is -what is the purpose of such advance? If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may be treated as deemed dividend , but, if it is otherwise, the amount given cannot be branded as advances within the meaning of deemed dividend under section 2 (22) (e). In rendering this decision, the Hon ble High Court had placed reliance in the decision of the case of CIT v. Raj Kumar (2009) 318 ITR 462 (Del), CIT v. Ambassador Travels (P.) Ltd. (2009) 318 ITR 376 and CIT v. Nagin Das M. Kapadia (1989) 177 ITR 393)(Bom). We herebelow reproduce the relevant portion of the case CIT v. Creative Dyeing and Printing P. Ltd. for reference: Before us, the learned counsel for the appellant/Revenue has contended that the present case is a case of deemed dividend inasmuch as M/s. Pee Empro Exports Pvt. Ltd. has given a loan to the assessee-company but the lending company, namely, M/s. Pee Empro Exports Pvt. Ltd. is not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ro Exports Pvt. Ltd. to the assessee-company in the subsequent years for the job work of printing and dyeing which is done by the assessee-company for M/s. Pee Empro Exports Pvt. Ltd. We find that the Tribunal in the present case has very extensively dealt with legislative intention of introducing section 2(22)(e) and has referred to such legislative intention by reference to Supreme Court judgment in the case of Navnit Lal C. Javeri v. K.K. Sen AAC [1965] 56 ITR 198 where a similar provision of the Income-tax Act, 1922, i.e., section 2(6A)(e) was in issue by reproducing the relevant para in Navnit Lal C. Javeri s case (supra) as under :- In dealing with Mr. Pathak s argument in the present case, let as recall the relevant facts. The companies to which the impugned section applies are companies in which at least 75 per cent of the voting power lies in the hands of other than the public, and that means that the companies are controlled by a group of persons allied together and having the same interest. In the case of such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest had paid various amount to Kapadia. The Tribunal had found that Kapadia had business transactions with the company and on verification of the accounts, the Tribunal deleted the amounts which were relating to the business transactions and which finding was upheld by the High Court. In the present case the Tribunal on considering decisions in various cases held as under : From the ratio laid down in above cases and on the basis of judicial interpretation of words, loans or advances , it can be held that section 2(22)(e) can be applied to loans or advances simpliciter and not to those transactions carried out in course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may be treated is deemed dividend , but if it is otherwise, the amount given cannot be branded as advances within the meaning of deemed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not, however, have a bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions do not fall within section 2(22)(e), we need not to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that is all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar s case [2009] 318 ITR 462 (Delhi); [2009] 181 Taxman 155. This Court in Raj Kumar s case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under (page 473) : A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(22)(e). The present appeal is, therefore, dismissed. 13.5. Further, we would like to point out that Section 2(22)(e) brings in a deeming fiction. It provides in certain circumstances an advance or loan is treated as dividend in the hands of the shareholder. Advances and loans have to be interpreted in its true sense. Any payment made out of business expediency does not fall within the ambit of advances and loans, though the accounting entries are passed as such. The true nature of the transaction has to be seen as to whether the transaction is attributable to be a loan or an advance. In construing a deeming fiction, it is not to be extended beyond the purpose for which the deeming fiction is created or beyond the language of the section. In interpreting a deeming fiction, the intention of the Legislature has to be given due importance. The fiction should not be extrapolated beyond the purpose for which the legislation is brought in. On interpretation of a legal fiction, it was held in Controller of Estate Duty v. Krishna Kumari Devi (173 ITR 561) that the Court should ascertain the purpose for which the fiction is created and after doing so, assume all facts which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entary evidence; (iv) the authorities allegation that the journal entries passed in various assessment years in the case of BDPL resulted into the personal benefit to the assessee etc., will not hold water unless it has been proved so with documentary evidence; (iv) no doubt, BDPL was not engaged in the business of money lending and, thus, it could be termed that the amounts so received come under the ambit of s. 2(22)(e) of the Act provided the amounts were in the nature of advance or loan. Incidentally, this has not been implicitly proved by the Revenue; (v) the clinching evidence in the form of an agreement entered into with BDPL as produced by the assessee has not been rebutted with any concrete proof. The onus rather placed at the doorstep of the Revenue has not been duly discharged; 13.5. To sum up, 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 years 2002-03 to 2007-08 under dispute. The Ld. CIT (A) s stand in upholding the findings of the AO was also not justifiable for the reasons recorded supra. It is ordered accordingly. 14. The issue of applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of Himachal Pradesh in the case of Suresh Gaggal v. ITO reported in (2009) 222 CTR (HP) 96 had held that - Once the assessee writes off the debt as irrecoverable, his claim for deduction cannot be rejected on the ground that the debt has not been established to have become irrecoverable. The aforesaid position is also supported by the amendment made to s.36(2) w.e.f. 1st April, 1989 and any doubt, if remaining, has been clarified by Circular No.551 dated: 23rd January, 1990. (iii) The Hon ble Bombay High court, in the case of CIT v. Star Chemicals (Bombay) P. Ltd. reported in (2009) 313 ITR 126 (Bom), in its wisdom had held that under section 36(1)(vii) of the Income-tax Act, 1961 and Circular No.551 dated January, 23, 1990 if the assessee had written off the debt as a bad debt that would satisfy the purpose of the section. (iv) The Hon ble Supreme Court of India, in the case of T.R.F. Ltd. v. Commissioner of Income Tax held that After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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