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TMI Blog2018 (3) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... 77/- out of which a sum of Rs. 17,60,219/- was borrowed during the year from M/s. Yarlagadda Exports Pvt. Ltd. in which the assessee is one of the Directors and having more than 10% shareholding in that company. Out of the outstanding amount of Rs. 45,16,977/- a sum of Rs. 17,60,219/- was borrowed during the year. Since the assessee is having substantial interest in the lending company, the A.O. has called for explanation from the assessee as to why the amount of Rs. 45,16,977/- should not be treated as deemed dividend u/s 2(22)(e) of the Act. The assessee explained in response to the A.O's questionnaire, that the amount was borrowed from the company as a loan and making the repayment of loan along with interest at the bank rate and he did not get any extraordinary benefit out of such borrowings. Therefore, submitted that that it is a pure loan transaction and should not be treated as deemed dividend u/s 2(22)(e) of the Act. However, the A.O. was not convinced with the explanation offered by the assessee, since the assessee is holding more than 10% of share holding and there are substantial profits in the company. The A.O. treated the entire loan amount as deemed dividend u/s 2(22) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances to avoid payment of tax. Therefore with the said background kept in mind, it is clear that section 2(22)(e) of the Act, which is in pair material with sub-clause(e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits, which distributed by closely held Companies in the form of Loans. The purpose being that the persons who manage such closely held companies should not arrange their affairs in a manner that they assist the share holders' money in the form of in advance or loan, in avoiding the payment of taxes, by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders. At the same time, by granting advance, if the business purpose of the company is served, which is not the sum, which otherwise would have distributed as dividend cannot be brought within the deeming provisions of treating such advance as deemed dividend. It is to be ascertained that what is purpose of such advance and any such advance is arising out during the course of business or out of business expediency. 1. I humbly request you to pay kind attention to the following decided case laws with the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r hand, the Ld. Counsel for the assessee submitted that the assessee is an individual deriving salary income and for the purpose of financial requirements of the company the assessee had mortgaged his assets in the bank and given personal guarantee and hence the assets of the assessee are blocked as security to the amounts advanced to the company and there were no assets available to the assessee to make personal borrowings. The assessee was constructing a house for which the funds were required, hence, the assessee has taken a loan from the company periodically for construction of his house. The entire loan amount is repaid along with interest, therefore, the Ld. A.R. argued that this is a pure loan transaction which should not be held as a deemed dividend u/s 2(22)(e) of the Act. Since the entire amount was paid along with interest and requested uphold the order of the Ld.CIT(A). 7. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. In this case, the assessee has taken a loan from the company for construction of house. The assessee had mortgaged his properties for availing credit limits by the company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with sanction letters and the properties provided by the appellant as collateral security to obtain loans from the said banks is tabulated below. Date of sanction Name of the bank Name of the borrower Credit facility (Rs.) Property mortgaged 23.3.2004 State Bank of Hyderabad, Siripuram junction, Vizag M/s. Sampath Vinayak Steels Pvt. Ltd. 30 lakhs Agricultural land 10.2.2006 State Bank of Hyderabad, Siripuram junction, Vizag M/s. Sampath Vinayak Steels Pvt. Ltd. 100 lakhs 4 storyed building on 555 sq.yds situated at Rajendranagar, Vizag in the name of (a) Hari Prasad Bhararia (b) Shivlal Bhararia (brothers) Renewal State Bank of Hyderabad, Siripuram junction, Vizag M/s. Sampath Vinayak Steels Pvt. Ltd. 100 lakhs 4 storyed building on 555 sq.yds situated at Rajendranagar, Vizag in the name of (a) Hari Prasad Bhararia (b) Shivlal Bhararia (brothers) 7.11.2007 The Dhanalakshmi Bank, VIP Road, VizaG M/s. Sampath Vinayak Steels Pvt. Ltd. 150 lakhs (1) 4 storyed building on 555 sq.yds. situated at Rajendranagar, Vizag in the name of (a) Hari Prasad Bhararia (b) Shivlal Bhararia (brothers) (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a resolution authorizing the assessee to obtain from the company interest free deposit up to Rs. 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 Rs. 20,75,000 by way of security deposit. Out of the amount, a sum of Rs. 20 lakhs was subsequently returned by the assessee to the company. In the assessment made for 1999¬2000 the Assessing Officer added the sum of Rs. 20,75, 000 as deemed divi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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