TMI Blog2012 (9) TMI 1130X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the file of the company M/s. Shital Fibres Ltd. 2. That the Ld. CIT(A) erred in confirming the addition of ₹ 1,39,45,384/- made by A.O. on account of deemed dividend. 3. The Ld. CIT(A) has erred in not appreciating the difference between loan account and a mutual, open and current account especially when the assessee had lien over funds obtained by the company from P.N.B as overdraft. His credit balance in account in the books of the company M/s. Shital Fibres Ltd. was ₹ 1,93,11,583/- as against Debit balance of ₹ 1,39,45,384/- during the previous year. 4. Any other ground that may be taken up at the time of hearing. 3. The Revenue in their appeal in ITA No.146(Asr)/2011 has raised following grounds of appeal for deleting the penalty by the ld. CIT(A) under section 271(1)(c) of the I.T.Act, 1961: 1. That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in law in deleting the penalty of ₹ 43,92,796/- imposed by the AO u/s 271(1)(c) of the I.T.Act, 1961. 2. That, it is prayed that the order of the ld. CIT(A) be set-aside and that of the A.O. restored. 3. That the appellant requests for leave to add or amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the prevision year a prerequisite for raising or applying the statutory provision. Therefore, even though the loan was not outstanding as of the year end, it should be treated as deemed dividend. The above decision of the Apex Court is squarely applicable to the facts of the case. Irrespective of the fact whether the loan was squared up at the end of the year the provision of section 2(22)(e) of the IT Act, 1961 are attracted at the time of advance of loan being made to the shareholder. Accordingly, the peak debit amount of ₹ 1,52,06,934/- advanced by the company, the assesee as on 11-06-2002 is liable to be treated as deemed dividend u/s. 2(22) ( e) of the I.T Act, 1961. From the details filed by the assessee, it is seen that the assessee is having a credit balance in another a/c with the company at ₹ 12,61,550/- as on beginning of the previous year which remained outstanding throughout the year. Therefore, the net advance from the company would come to ₹ 1,55,06,934 (-) ₹ 12,61,550/-+ ₹ 1,39,45,384/- and the same is treated as deemed Dividend u/s. 2 (22)(e) of the Income-tax Act, 1961 and is added to the income. The assessee is also treated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for the individual benefit of specified shareholder to the extend to which company possesses accumulated profit constitutes deemed dividend and as such liable to tax in the hands of such shareholder. This section provides: i) That it applies to a closely held company and not to company in which public are substantially interested; ii) That such company has made a payment by way of loan or advance to the shareholder or to certain concern in which the shareholder has s substantial interest; iii) Or that the such company has made payment on behalf of such shareholder; iv) Or that such company has made payment for the individual benefit of such share holder. The aforesaid payments then be treated as deemed dividend in the hands of shareholder and can be taxed as such. However the scope of deemed dividend is restricted to payments to the extend of accumulated profits. The section would not apply in case the company does not have accumulated profits. 3. It is o doubt true that section 2(22)(e) of the Act is a deeming provision. It is a settled rule of interpretation of a fiction that court/authority must ascertain for what purpose the fiction is created, and after asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also true that the transactions noted by the assessing officer appear in the name of M/s. Shital International which is a proprietary concern of the assessee. Therefore both were related concerns and apparently the conditions necessary for invoking the provisions of section 2 (22)(e) are satisfied so far these parameters are concerned. However for invoking he provisions of section 2(22)(e) of the Act, the Department is required to establish that payment made by a company to the share holder or to a concern in which he has a substantial interest fall into the nature and character of loans or advances as there is no allegation of the department that the company has made payments on behalf of the assessee for his individual benefit. Now the material question which requires to be decided in this case is whether the entries appearing in the account of Shital International in the books of account of the company are in the nature and character of loan or advances so as to fustify the invocation of section 2 (22)(e) of the Act. The assessing officer has nowhere explained as to how these entries were in the nature of loans. The A.O. has merely referred to the statutory audit report in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be and make a demand for it. The court also noticed the difference between a 'loan' and 'deposit' under the Limitation Act. The court observed while articles 19 and 21 the Limitation Act provide for the period within which a suit for recovery of a loan can be filed, article 22 deals with the period of limitation for suits for recovery on account of a deposit. The Hon'ble High Court observed that 'loans' and 'deposits' being different in legal terms and by applying the strict rule of interpretation it could not be said that there was a violation of provisions of section 269T of the Act because the transactions of loans were not included in section 269T of the Act. In the present case also section 2(22)(e) which is deeming provision must receive a strict Interpretation. Since this section does not include the transactions of deposits, the same cannot be extended to cover transaction of deposits. There, the A.O. was not correct in summarily concluding that these were transactions of loans without actually demonstrating that these were so in the legal terms. 7. Now the question arises what is the meaning of a 'loan' and an ' advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imple words the payment made by the assessee to the company during the period from 11.11.2002 to 18.02.2003 far exceeded the payments received by the assessee during the period from 02.04.2002 to 11.06.2002. There are about 200 entries in his account which show that it is a running account for the mutual accommodation of the parties and not a loan account. It is not the case of the Department that there was a written or implied contract to bring these transactions between the purview of loans. On the other hand, the assessee any the company were parking their surplus funds with each other as 'deposits' for their mutual benefits. 9. It is also relevant to point out that in the year 1999, the company was badly in need of availing of higher credit limit from the bank. But the company had no properly to pledge with the bank as collateral security. Tat this stage in assessee came forward to pledge his own properties so that the company may avail of higher credit limit which was badly required by the company for the purpose of its business. To be specific assessee pledged the following properties: 1 Equitable mortgage of land and building measuring 8 k 8 marla situated at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition to the same here was a separate account in the name of assessee in the books of the company where company owed an amount of ₹ 12,61,550 throughout the year. Therefore, there was no intention of advancing any 'loan' to assessee out of accumulated profits. This only shown that these were not loans as alleged by the department but these were deposits in the mutual, open current account for the mutual benefit of each other. Therefore the provision of section 2(22)(e) are not attracted to this case. 10. Further, as discussed earlier, the account between the assessee and the company is mutual, open and current in nature. There are more than200 entries. Sometimes there is a debit balance and in the latter part there is huge credit balance. Therefore no part of running account could be treated as loan as the account is moving one and the balance reflected in that running account is momentary in nature and subject to frequent charges. In this regard attention is invited to the provision contained in schedule to Limitation Act, 1963 to explain the distinction provided by the statute between mutual, open, current account and loan account for the purpose of limitation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company by way of advance or loan to a shareholder out of the accumulated profits is to be deemed as divided even if that advance or loan, was subsequently period in its entirely during the relevant previous year in which it was taken. In that case there was no dispute about the fact that the amount given by the company to the shareholder was in the nature of loan. Therefore, the court was not required to determine whether the transactions were in the nature and character of loans or not. The Hon'ble court held that such loan would fall within the purview of section 2(22)(e) irrespective of the fact that such loan was returned before the close of the accounting year itself. In the present case the main controversy relates to the impugned transaction which is not in the nature of loans or advances. These are transactions in the mutual, running and current open account where surplus funds were kept as deposits for the mutual benefit of each other. Therefore the judgment relied upon by the revenue is not at all applicable to the facts of the present case. 13. further, without prejudice and independent of the view that impugned transaction were not in the nature of loans or ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; in the case of ACIT vs.. Smt. G. Sreevidya in ITA No.1270(MDS) of 2011 dated 28.06.2012 reported in (2012) 24 Taxman .com 75 (Chennai) Trib., which is exactly on the identical issue in hand before the Bench in the case of the present assessee. The Ld. counsel for the assessee read the said decision of the coordinate Bench in the case of ACIT vs. Smt. G. Sreevidya (supra) and invited our attention to the explanation submitted before the ld. CIT(A) that the assessee did not receive any payment in the nature of loan or advance from the company. Thus, the provisions of section 2(22)(e) of the Act are not attracted. He invited our attention to para 9 being the explanation given before the ld. CIT(A) that the company M/s. Shital Fabrics Ltd. was badly in need of availing of higher credit limit from the bank and the company had no property to pledge with the bank as collateral security. At this stage, the assessee came forward to pledge his own properties so that company might avail of higher credit limit. The assessee pledged four properties mentioned in the explanation and the written submissions before the ld. CIT(A) mentioned hereinabove. There was a mutual agreement with the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. CIT(A) in the case of Smt. Tarulata Shyam Others vs. CIT 108 ITR 345 cannot be made applicable in the present case since the facts in that case are distinguishable because the amount given by the company in the case of shareholders was in the nature of loan and it was not in dispute. The dispute before the court in the said case was whether any payment by a company by way of advance or loan to a shareholder out of the accumulated profits is to be deemed as dividend even if that advance or loan was subsequently repaid in its entirety during the relevant previous year. But in the case of present assessee, the transactions are in the form of deposits and not in the nature of loans or advances. The transactions have been carried out in the ordinary course of business as mentioned hereinabove. 10. The Ld. counsel also relied upon the decision of the Hon'ble Calcutta High Court, in the case of Pradip Kumar Malhotra vs. CIT 338 ITR 538 where any loan in return to advantage conferred by shareholder is not treated as deemed dividend u/s 2(22)(e) of the Act. The Ld. Counsel also relied upon the judgment of hon'ble Delhi High Court in the case of CIT vs. Raj kumar (2009) 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teral security for the company. The company would deposits its surplus funds with him. This contention has been sought to be raised in ground No.1 of appeal. It is pertinent to mention here that the ld. counsel had adduced no argument or evidence in support of this contention and moreover the assessee had withdrawn the additional evidence before the AO which he had filed before the AO. This fact has been recorded at para 3.3.1 of the ld. CIT(A)'s order. In view of the above, it is clear that the only basis of the assessee's claim that the payments received by the assessee were deposit is not existing on record and as such, this submission is not worth entertaining in the first place itself. The other submission in support of this contention was that in Annexure D to the Audit Report for the assessment year 2003-04, what had been shown were deposits and not loan. The ld. counsel had invited the kind attention of the Hon'ble Bench to para 3 of the assessment order in this regard. He had asserted that in the said Annexure-D, both the words loan or deposit are mentioned and the AO picked up the word 'loan' and ignored the word 'deposit' when actually t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on appreciating that the complainant i.e. the AO had himself written to the assessee in show cause notice dated 2nd March, 1987 that the said assessee had raised a loan from M/s. Summan Steel Rolling Mills and made payment for the said loan in the previous year relevant to the A.Y. 1984-85 in cash, had set aside the prosecution proceedings u/s 276E of the I.T. Act. In view of the above, it is clear that the factual matrix of the case is not at par with the assessee. Nonetheless, as submitted above, in this judgment, the Hon'ble High Court had delved into the relative meaning of the terms 'deposit' and loan which is as under: that a deposit is to be kept by the depositeee for the depositor and the loan is to be kept by the borrower for himself. Thus, I deposit my hat in the cloak room. My hat is not to be used by the depositee but is to be kept for me and returned to me on my demand' but I lend my money to a friend and he can do what he likes with it as long as he returns it to me either on demand or at some specified time. In view of such a clarity of the terms 'deposit' and 'loan' it becomes clear that the monies received by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) has passed a well- reasoned order and it may further be mentioned that the judgment of the Hon'ble Supreme Court in the case of Smt. Tarulata Shyam Ors vs. CIT reported at 108 ITR 345 clears all doubts about the applicability of the provisions of section 2(22)(e) in the facts and circumstances which are obtaining in this case. It had held that 'advance to shareholder during the relevant previous year by the company is chargeable as deemed dividend even though the loan does not remain outstanding as on last day of the previous year. If the assessee comes under the letter of law, he has to be taxed, however, great the hardship may appear to the judicial mind to be. 12. We have heard the rival contentions and perused the facts of the case. In the present case, the AO noticed that as per Audit Report in Col. No.24, the Auditors' had reported the particulars of loans or deposits. It is on the basis of the report by the Tax Auditors' in Form 3CD in Col.24, the AO had initiated proceeding to give show cause notice dated 07.02.2006 as to why loan taken from the M/s. Shital Fibres Ltd. should not be treated as deemed dividend under section 2(22)(e) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LC (DP) Rs.400 lacs Even if the additional evidence in the form of bank certificate had not been admitted, the facts are on record of the Company which were before the authorities below. The said argument and the explanation of the assessee cannot be brushed aside by the ld. CIT(A) and cannot be commented upon or disposed of that such explanation does not make impact on the applicability of section 2(22)(e) of the Act, to the facts of the present case. There is no doubt that the Company in the present case has benefited more than the assessee. As per the mutual agreement both the company and the assessee would park their surplus funds with each other for their mutual benefit. With this understanding the company had parked its surplus funds as 'deposits' with the assessee during the lean period. This was explained by the ld. counsel for the assessee before the ld. CIT(A) as well as before us. Therefore, there was no intention of advancing any loan to the assessee out of accumulated profits by the company, M/s. Shital Fibres Ltd. The said amount in the open, current account was in the nature of deposit and not as a loan or advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. The assessee had substantial shareholding in a private company. The assessee permitted his immovable property to be mortgaged to the bank for enabling the company to take the benefit of loan and in spite of request of the assessee the company was unable to release the property from mortgage. Consequently, the board of directors of the company passed interest-free deposit up to R.50 lakhs as and when required. During the previous year relevant to the assessment year 1999-2000, the assessee obtained from the company a sum of ₹ 20,75,000 by way of security deposit. Out of the amount, a sum of ₹ 20 lakh was subsequently returned by the assessee to the company. In the assessment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement and in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it. While articles 19 and 21 of the Limitation Act fix the period within which a suit for recovery of the loan can be filed, article 22 deals with the period of limitation for suits for money on account of deposit. 12.5. The facts in the present case are identical to the facts in the case of Asstt. Commr. of Income-tax vs. Smt. G. Sreevidya, in ITA No.1270(MDS) of 2011 for the assessment year 2006-07, dated 28th June, 2012, where the amount withdrawn from the company by the assessee even for personal purposes has not been held to be deemed dividend. For the sake of clarity, the facts of the case are reproduced as under: The present appeal has been filed by the Revenue impugning the order of the CIT(A)-V,Chennai dated 06.04.2011. 2. The facts in brie f of the case are that the assessee had filed return of income relevant to the A.Y. 2006-07 on 31.10.2006 declaring total income of ₹ 6,78,056/-. The case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s squarely covered by the judgment of the Hon'ble Supreme Court of India in the case of Miss P.Sarda v. CIT [1998] 229 ITR 444/96 Taxman 11 as well as Smt. Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC). He further relied on the judgment of the Ho'ble Madras High Court in the case of CIT vs. P.K. Abubucker [2003] 259 ITR 507/[2009]135 Taxman 77 (Mad.) 5. On the other hand, Dr. Anita Sumanth, counsel appearing on behalf of the assessee submitted that the order passed by the CIT(A) is a well reasoned and detailed order.She submitted that the amount was advanced to the assessee as per her pre-condition of granting bank guarantee and a collateral security for finding of the company. The counsel submitted that the assessee had given personal guarantee and had given collateral security to facilitate availing of credit facility by the company. At the time of extending guarantee/security the assessee had sought liberty to withdraw funds from the company as and when amount from the company and had also repaid the amounts withdrawn periodically. Therefore, the transaction between the assessee and the company was purely out of business consideration. The counsel further contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65) ii) any advance or loan made to a shareholder [ or the said concern] 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; iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub clause (e) to the extent to which it is so set off; iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 ( 1 of 1956); v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). The definition laid down by section 2(22) is inclusive and not exhaustive. The following payments of distributions by a company to its shareholder are deemed as dividends to the extent of accumulated profits of the company although these payments may not be dividends under the provisions of Companies Act: a) any distribution or release of company's assets; b) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee held that for retaining the benefit of loan availed of from the bank, if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company. The sum of ₹ 20,75,000/- could not be treated as deemed dividend. The Division Bench of the Hon'ble High Court followed the decision of the Hon'ble Delhi High Court in the case of Creative Dyeing Printing (P) Ltd (supra). In the instant case also the assessee was allowed to withdraw funds from the company as per requirement for personal purposes against the personal guarantee and the collateral security given by her to facilitate her availing of credit facility of the company. 9. It is a well settled law that loan or advance given to a shareholder by a company in which public is not substantially interested and which had accumulated profits, the amount advanced as loan to such shareholder is deemed to be dividend as per the provisions of section 2(22)(e) of the Act. However, the facts and circumstances of each case have to be scrutinized before applying the ratio of the cases holding above well settled law. In the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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