TMI Blog2006 (3) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... t purposes. Only few exceptions are given in which these advances do not fall within the category of deemed dividend. In the instant case, assessee has taken a plea that the advances and loans were given in the ordinary course of its business, but, nothing is placed on record to establish that the substantial part of the business of the lender-company i.e., SVMIPL was lending of money. Whereas, CIT(A) has given a categorical finding in the light of profits earned by the lender-company i.e., SVMIPL and has held that the gross receipt of the lender-company were to the tune of Rs. 7,80,69,819 out of which only Rs. 4,38,835 was accounted for interest receipt. During the course of hearing, nothing had been placed before us on behalf of the assessee to establish that the substantial part of the business of the lender-company is of lending money. In these circumstances, we agree with the finding of the CIT(A) that the assessee does not fall within any exemption clause. Once the Legislature has defined the words 'accumulated profit', no other meaning of accumulated profits can be inferred or interpreted. In the instant case, though the Revenue is required to compute the accumulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been assailed on the following grounds: A. Assessment of Rs. 1,51,25,647/- being trade advance received from Standard Vishwas Marble Industries Pvt. Ltd. as deemed dividend income under section 2(22)(e). 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in facts and in law in confirming the action of the Assessing Officer of assessing a sum of Rs. 1,51,25,647/- out of the receipt by way of a trade advance from M/s. Standard Vishwas Marble Industries Pvt. Ltd. for goods to be supplied and services to be rendered to them as dividend. 2. The addition of Rs. 1,51,25,647/- may please be deleted and/or substantially reduced. B. Addition of Rs. 1,76,40,000/- in respect of alleged unexplained cash credits of various parties by invoking the provisions of section 68 of Income-tax Act, 1961. 3. On the facts and in the circumstances of the case, the learned CIT(A) erred in facts and in law in confirming addition of Rs. 1,76,40,000/- made on account of alleged cash credits in computation of total income. 4. The appellant prays that the addition of Rs. 1,76,40,000/- may please be deleted. C. Disallowances of Interest Rs. 5,37,635/- 5. On the facts and in the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and not to common shareholders in both these companies. As stated earlier, assessee-company is not a shareholder in the said company and, therefore, prima facie, there is no case for invocation of the provisions of section 2(22)(e) of the I.T. Act 1961. 4. Having noticed that there are common shareholders of the two concerns and Mr. Kirti Kapadia and Ms. Tanuben Kapadia hold more than 10% of the equity shares of M/s. Standard Vishwas Marble Industries Pvt. Ltd. and more than 20% of equity shares of the assessee-company, the Assessing Officer held that the assessee is a concern in which shareholders of M/s. Standard Vishwas Marble Industries Pvt. Ltd. holding more than 10% of equity shares, have got substantial interest within the meaning of Explanation 3(b) below section 2(22) of the Income-tax Act (hereinafter called as an 'Act') and as such, the provision of section 2(22)(e) are duly attracted. The Assessing Officer, accordingly, made an addition of Rs. 1,51,25,647 /- as deemed dividend income under section 2(22)(e) of the Act. The Assessing Officer has also dealt with the second objection of the assessee in this regard that advances were made to the assessee by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t each of the payment made when the payee is not already a creditor constitute advance. It is only when the payee is creditor of the payer that the payments can be construed as repayment of debt not falling in the category of payment by way of advance or loan. Hence, payment made even in running account when the payee has debit balance all along are hit by section 2(22)(e) of the Income-tax Act. In support of this proposition, the CIT(A) has placed reliance upon the judgment of the jurisdictional High Court in the case of CIT v. P.K. Badiani [1970] 76 ITR 369 (Bom.) which was later on confirmed by the Apex Court in the case of P.K. Badiani v. CIT [1976] 105 ITR 642. 6. With regard to the objection on account of accumulated profits, the CIT(A) has observed that the payment by way of loan and advances to the assessee is started from 14-10-1996 and the total amount during the year was Rs. 1,51,25,647 /- . The major amounts were paid in the last quarter of the year. Rs. 50 lakhs was paid on 10-1-1997, another sum of Rs. 50 lakhs was paid on 18-1-1997 and Rs. 24 lakhs was paid on 31-3-1997. The profits of M/s. Standard Vishwas Marble Industries Pvt. Ltd. for the year ending 31-3-1997 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgments: 1. CIT v. V. Damodaran [1980] 121 ITR 572 (SC) 2. P.K. Badiani's case 3. Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) 4. CIT v. H.K. Mittal [1996] 219 ITR 420 (All.) 5. CIT v. Nagindas M. Kapadia [1989] 177 ITR 393 (Bom.) 6. R. Dalmia v. CIT [1982] 133 ITR 169 (Delhi) 7. M.B. Stock Holding (P.) Ltd. v. Asstt. CIT [2003] 84 ITD 542 (Ahd.) 8. The learned DR on the other hand has invited our attention to the provisions of section 2(22)(e) of the Income-tax Act with the submissions that any payment by a company, not being a company in which the public is substantially interested, of any sum by way of advance or loan to a shareholder, or to any concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by any such company on behalf of or for the individual benefit or of any such share-holder to the extent to which the company in either case possesses accumulated profits. Undisputedly, there is a common shareholding between the assessee as well as lender company. The revenue authorities has given a categorical finding that Mr. Kirti Kapadia and Ms. Tanuben Kapadia held more than 10% of the equity shares of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated profits, it has to be worked out as per Explanation 2 and it includes all profits of the company up to the date of distribution or payment or liquidation. Since there was sufficient accumulated profits at the end of the third quarter to meet this advance given to the assessee, the Assessing Officer has rightly treated the entire advance to be a deemed dividend in the hands of the assessee. 10. Having carefully examined the orders of the lower authorities in the light of rival submissions, we find that there was common shareholdings between the assessee and the lender company viz., SVMIPL. The learned counsel for the assessee has simply raised the dispute that provisions of section 2(22)(e) can only be invoked when the advance or payments are made the shareholders of a company. But, this is not a correct position of law. According to provisions of section 2(22)(e) of the Income-tax Act, dividend includes any payment by a company, not being a company in which the public are substantially interested, of any sum whether as representing a part of the asset of the company or otherwise made after 31st day of May, 1987 by way of advance or loan to a shareholder, being a person who is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that undisputedly, the shareholders of the lender-company Mr. Kirti Kapadia and Mrs. Tanuben Kapadia were holding more than 10 per cent of the equity shares in the lender-company i.e., SVMIPL and these shareholders also held more than 20 per cent of the equity shares in the assessee-company. Being a common shareholdings in both the companies, the assessee's case falls within the category No. 2 as discussed above. The lower authorities are given a categorical finding in this regard and nothing is placed on behalf of the assessee to rebut this finding. We, therefore, have no hesitation in holding that provisions of section 2(22)(e) were rightly invoked by the revenue authorities on the advance given to the assessee. In this section, it has not been distinguished whether these advances are the trade advances or for different purposes. Only few exceptions are given in which these advances do not fall within the category of deemed dividend. In the instant case, assessee has taken a plea that the p advances and loans were given in the ordinary course of its business, but, nothing is placed on record to establish that the substantial part of the business of the lender-company i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new Income-tax Act, 1961 was introduced substituting the old Act and relevant provisions relating to the accumulated profits in section 2(22)(e) of the Income-tax Act, 1961. In order to neutralize the decisions holding that accumulated profits in section 2(6A) of 1922 Act do not include current profits, the expression accumulated profits was defined in 1961 Act so as to include the current profits up to the date of distribution or payment . Explanation 2 to section 2(22) lays down that the expression accumulated profits in sub-clauses (a), (b), (d) and (e) shall include profits of the company up to the date of distribution or payment referred to in those sub-clauses and sub-clause (c) shall include all profits of the company up to the date of liquidation, but, shall not where the liquidation is consequent on compulsory acquisition of its undertaking by the Government or a Corporation owned or controlled by the Government under any law for the time being in force, includes any profits of the g company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Through Explanations 1 and 2 below section 2(22)(e) of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately preceding the previous year in which such acquisition took place). 13. From a careful reading of these Explanations, we are of the view that there is no ambiguity in the definition of accumulated profits given in these Explanations and for the purpose of sub-clause (e), the accumulated profits include all profits of the company up to the date of distribution or payment referred to in sub-clause (e). Only capital gains arising before the 1st day of April, 1946 or after 31st day of March, 1948 and before 1st day of April, 1956 are to be excluded from the accumulated profits determined after the date of distribution or payment. Whatever judgments were referred before us, they all relates to the pre-amendment periods i.e., Income-tax Act, 1922 in which section 2(6A) deals with the accumulated profit and accumulated profit was defined through series of judgments of the Apex Court and various High Courts. But, to nullify the impact of these judgments, the amended provisions were brought in the new Act 1961 in which the expression accumulated profit has been defined in unequivocal terms. We have also examined the commentaries of Chaturvedi Pithisaria 5th Edition of Pages 178 and 179 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hardship may appear to the judicial mind to be. In the light of all these judicial pronouncements, if we examine the facts of the instant case, we would find that through Explanation 2, the Legislature has defined the word accumulated profit in an unequivocal terms and there is no ambiguity therein. Whatever judgments are relied on, they pertain to the old provisions in which the accumulated profits were not defined and the definition of accumulated profits were developed through various judicial pronouncements. We have also carefully examined the order of the Tribunal in the case of M.B. Stock Holding (P.) Ltd. which were rendered on 27th December, 2001 in which the Tribunal has examined Explanation to section 2(22)(e) of the Act in the light of judgment of the Apex Court in the case V. Damodaran, but, did not look to the object of introduction of Explanation 2 to section 2(22)(e) of the Income-tax Act and the Tribunal has drawn an inference that the Legislature has no intention to override the decision of Supreme Court in the case of V. Damodaran, whereas, the facts are otherwise. In the original provisions of section 2(6A)(c) of the Income-tax Act, 1922, the accumulated profit w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h credit in the shape of loan from 470 parties for which the maximum amount outstanding at any time during the years works out to be Rs. 21,94,89,158 /- . The assessee was asked to file the confirmations for loans taken by the assessee with GIR Nos. In response to that, assessee has furnished the confirmations out of which it was found that 151 parties are not assessed to tax. The assessee was accordingly asked to furnish the bank statements, source of loan/acceptance wherever GIR Nos. is not furnished. During the course of assessment proceedings it was stated on behalf of the assessee that it is very difficult for the assessee to furnish these details and request the department to issue commissions/summons as applicable. Further, vide letter dated 3-1-2000 it was stated on behalf of the assessee that assessee was in possession of part confirmations from the Bhavnagar parties. Some confirmations were furnished before the Assessing Officer. It was also furnished to the Assessing Officer vide letter dated 1-2-2000 that assessee-company has completely stopped the business activity of the Bhavnagar and the local parties are not responding nor extending any co-operation. The Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained cash credit. The Assessing Officer has only proceeded to make enquiries with regard to 151 parties, out of 470 creditors. It was further contended before the Assessing Officer that the enquiry was conducted at the fag end of the year and the assessee was not given sufficient time to file confirmations of the creditors. The contention of the assessee were not appreciated by the CIT(A) and he confirmed the additions. 18. Now, the assessee is before us and invited our attention to the assessment order and the enquiries conducted by the DDI, Bhavnagar, with the submissions that when the report was confronted to the assessee, the assessee sought time from the Assessing Officer to furnish the confirmations etc. of the creditors. Since the assessment was going to be time-barred, the Assessing Officer concluded the enquiry and made the additions. From careful perusal of the orders of the lower authorities, we find that the assessee was not given sufficient time to prove these cash credits as the enquiry with regard to the cash creditors was initiated in January or February when the assessment is going to be time-barred on 31st March. Since most of the creditors belong to Bhavnagar, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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