TMI Blog2009 (9) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt was delivered by VALMIKI J. MEHTA, J. - This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act) is preferred by the revenue against the order dated 9.5.2008 of the Income Tax Appellate Tribunal (hereinafter referred to as the I.T.A.T.) whereby the Tribunal has held that the payment of an advance for a commercial purpose to the assessee company by its sister concern M/s Pee Empro Exports Pvt. Ltd. is not deemed dividend under Section 2(22)(e) of the Act. 2. The facts of the case are that the respondent is engaged in the business of dyeing and printing of cloth and was acting as an ancillary unit of M/s. Pee Empro Exports Pvt. Ltd. for the last several years. Both the assessee company and M/s. Pee Empro Exports Pvt. Ltd. have common shareholders/directors Mr. P.S. Uppal, Mr. P.M.S. Uppal, Mr. Surinder Uppal and so on. M/s. Pee Empro Exports Pvt. Ltd. also has a 50% shareholding in the assessee company. The said M/s. Pee Empro Exports Pvt. Ltd. in order to increase its export business and to compete with the international standards in garment exports had suggested modernization and expansion of the plant and machinery of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the lending of money is a substantial part of the business of the company." 5. Before us, the learned counsel for the appellant/revenue has contended that the present case is a case of deemed dividend in as much 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 into the business of money lending as required by Section 2(22)(e)(ii). The counsel for the respondent, on the other hand, has referred to two recent Division Bench judgments of this Court reported as C.I.T. Vs. Raj Kumar, 2009 (181) Taxman 155 and CIT Vs. Ambassador Travels (Pvt.) 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 in as much 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). 6. Before we refer to the rival contentions of the parties, we would like to reproduce the following finding of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as advance simplicitor 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 dividend under section 2(22)(e). Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by a company in the ordinary course 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)(c ). 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" 10. 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 bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under: "10.3 A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. 10.4 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 pari material 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. 10.5 If this purpose is kept in mind then, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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