TMI Blog2008 (4) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... profits. The assessee is not the shareholder of M/s. PIPL, but it is the concern in which the shareholder of M/s. PIPL, Mr. Gaurang Gandhi holds more than 20 per cent of equity share capital. Therefore, the provisions of section 2(22)(e) are very much applicable. Whether the Assessing Officer was empowered to interpolate the entries of the trading account in the current account? - Section 145 entrusts the Assessing Officer not only with the right but also a duty to consider whether or not the books disclose the true state of accounts and whether the correct income can be deduced therefrom and to proceed according to his judgment on this question. The Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd.[ 1990 (12) TMI 2 - SUPREME COURT] , has held that section 145 confers sufficient power upon the officer-nay it imposes a duty upon him-to make such computation in such manner as he determines for deducing the correct profits and gains. In view of the same, we uphold the action of the Assessing Officer in treating the entries of the trading account as entries of financial transaction account after considering the nature of transactions. In the case on hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following grounds of appeal : 1. The learned CIT(A)-IV on the facts and in the circumstances of the case erred in confirming the order passed under s. 143(3) of the Act by the AO assessing total income at Rs. 1,19,13,449 and determining speculation loss of Rs. 1,27,26,924. 2. The learned CIT(A)-IV on the facts and in the circumstances of the case erred in upholding the additions made by the AO of Rs. 65,56,631 being deemed dividend in terms of s. 2(22)(e) of the Act. 3. The learned CIT(A)-IV on the facts and in the circumstances of the case erred in confirming that the assessee company is engaged in the business of trading in shares and Explanation to s. 73 of the Act is applicable and allocating an amount of Rs. 1,27,26,924 to the speculation business by apportioning an amount of Rs. 1,38,51,924 being interest paid to bank and claimed as deduction from business income. 4. The learned CIT(A)-IV on the facts and in the circumstances of the case erred in upholding the addition of Rs. 11,25,000 being interest on interest-free advances to Shri Gaurang Gandhi of Rs. 75,00,000. 2. Brief facts of the case are that the assessee is a company who filed its return of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as on 28th March., 2003 there is a receipt of Rs. 51,90,168 and as on 29th March, 2003 and 30th March, 2003 the assessee has received Rs. 10,80,000 and Rs. 2,98,000 respectively from PIPL. Accordingly, he held that during the asst. yr. 2003-04 the assessee company has received advances of a total of Rs. 65,66,631 (Rs. 51,90,168 + Rs. 10,80,000 + Rs. 2,86,463) from PIPL. He brought this amount to tax in the hands of the assessee under s. 2(22)(e) of the Act as deemed dividend. Aggrieved, assessee filed an appeal before the CIT(A) who confirmed the order of the AO. The assessee is in second appeal before us. 3. The learned counsel for the assessee Shri Salil Kapoor submitted that the assessee and PIPL were the clients of each other. He submitted that PIPL was a share broker of Bombay Stock Exchange and the assessee was a stock broker of National Stock Exchange and was into the broking of Government securities also and upto 2002 PIPL was the client of the assessee company. In view of the same, the assessee was maintaining two accounts with PIPL i.e. trading account and current account i.e. financial transaction account. He drew our attention to pp. 13 to 15 of the paper book wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholder or the said concern by a company in the ordinary course of its business, only where the lending of money is substantial part of the business of the company. In this case the substantial part of the business of PIPL was not lending of money and, therefore, the advances given to the assessee to discharge its liabilities are loans and liabilities and deemed dividend under s. 2(22)(e) of the Act. He placed reliance upon the decision of the Supreme Court in the case of Smt. Tarulata Shyam Ors. vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC) wherein it has been held that the assessee's income was taxable on the sums received by him as loans and advances during the relevant period from the profit of the company of which he was a shareholder, even though at the end of the relevant year, no advance and loan were due to the company by the assessee, as a result of credit made in his favour in his account. He also placed reliance upon the decision of the Bombay High Court in the case of CIT vs. P.K. Badiyani (1970) 76 ITR 369 (Bom), wherein the Hon'ble High Court while interpreting the phrase accumulated profits in s. 2(6A)(e) of 1922 IT Act held that the accumulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay K. Shah (2005) 197 CTR (Cal) 563 : (2005) 277 ITR 128 (Cal) which has been reversed by the Supreme Court in its decision reported in (2007) TIOL p. 57. Thus, the said decision cannot be applied to the facts of the case before us. 5. Having heard both the parties and having considered their rival contentions and the material on record, the basic question that falls for our consideration is whether the provisions of s. 2(22)(e) are attracted at all ? Let us then examine the provisions of s. 2(22)(e). Sec. 2(22)(e) is reproduced as under : (e) 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 assets of the company or otherwise) (made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on behalf of the other company. The Tribunal had considered the facts of the case and had come to the conclusion that the provisions of s. 2(22)(e) were applicable as far as the relationship between the parties is concerned. As regards the application of the provisions of s. 2(22)(e) are concerned where the transactions are reflected in the accounts of the related concerns, and as to what is the amount of payment by way of loans and advances and what is the accumulated profit for the purpose of s. 2(22)(e), the Tribunal also considered (a) whether the payment made by PIPL i.e. other company reflected in the accounts maintained by the assessee company was a mutual, open and current account and if so, would come under the provisions of s. 2(22)(e) and even if the account between the assessee and PIPL is not outside the purview of s. 2(22)(e) whether the amount paid by PIPL against outstanding debts are to be considered as loans and advances; (b) whether the payments in respect of regular business transactions reflected in the said accounts are to be held as loans; (c) whether the occasional excess payment made by PIPL on account of the assessee company could be treated as in the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which the definition of deemed dividend applies, the Supreme Court has not given any adverse finding. In view of the same, the decision of the Supreme Court in the case of Mukundray K. Shah (supra) will not adversely affect the decision of the Tribunal in the case of N.H. Securities Ltd. (supra). However, we find that the facts and circumstances of the case in N.H. Securities (supra) and the case on hand are different. In the case of N.H. Securities Ltd. (supra) there was a running account between the parties and on certain days there was excessive sales, whereas in the case on hand it is an admitted fact that M/s PIPL had advanced amounts for meeting the liabilities of the assessee company and not as excessive advances for the services and, therefore, it was outside the regular business activity of the assessee company. The decision of the Tribunal in the case of N.H. Securities Ltd. (supra) would apply to only those transactions which are entered into the books of accounts as regards regular business transactions and even if any excess payment is made on account of regular business, the claim cannot be considered as loans and advances. In the case on hand the assessee had rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to s. 73 applies only to a company whose business consists of purchase and sale of shares. However, the AO was not satisfied with the said explanation and held that the shares of M/s Shonkh Technologies Ltd. were shown by the assessee as its business stock and were not held as investment and, therefore, there need not be a series of transactions as long as the business is in existence. Thus, he held that Explanation to s. 73 is applicable to the facts of the case. Thereafter, he proceeded to examine the P L a/c of the assessee and observed that the entire interest of Rs. 1,38,51,924 was towards the loan taken for purchase of shares of M/s Shonkh Technologies Ltd. and, therefore, there is a direct nexus between the amount borrowed and the investment in shares and hence this amount is to be given as a deduction out of the profits from speculation business only and as the assessee has not declared any profit or loss from the speculation business, the bank interest debited to the P L a/c is assessed as speculation loss. Aggrieved assessee filed an appeal before the CIT(A), who confirmed the order of the AO by relying upon the decision of his predecessor in the assessee's own case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in shares which is stock-in-trade of the share trading business. He submitted that having held so, it cannot be said that interest-free advance is out of interest-bearing funds. He placed reliance upon the decision of the Bombay High Court in the case of CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) that the view taken by the AO that the assessee could have decreased the extent of its borrowing by calculating its outstanding and, therefore, would not be entitled to claim interest paid by it on borrowed capital is not capable of being sustained and further in view that the assessee had diverted the capital borrowed by it for making advances to its sister concern is squarely wrong on the facts of the case and is not capable of being sustained. 15. The learned Departmental Representative, on the other hand, strongly supported the orders of the authorities below. 16. We find that both the AO as well as the CIT(A) have held that the interest paid was towards the loan taken for purchase of shares. As long as the nexus between the interest-bearing funds and the interest-free advances is not established, the disallowance cannot be made. We find that this issue is covered b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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