2006 (7) TMI 526 - AT - Income Tax

Deemed dividend - assessment completed u/s 143(3) - nature and character of the payments - loans or advances - accumulated profit - day-to-day basis - mutual, open and current account operated between the parties - HELD THAT - It is to be seen that payments made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course of business carried on by both the parties could not be treated as deemed dividend for the purpose of section 2(22)( e ). The deeming provisions of law contained in section 2(22)( e ) apply in such cases where the company pays to a related person an amount as advance or a loan as such and not in any other context. The law does not prohibit business transactions between related concerns, and, therefore, payments made in the ordinary course of business cannot be treated as loans and advances. Therefore, in the light of decision in the case of Nagindas M. Kapadia 1988 (12) TMI 89 - BOMBAY HIGH COURT ), we hold that payments made by a company in the course of carrying on of its regular business through a mutual, open and current account to a related party do not come under the purview of section 2(22)( e ) of the Act. The payments are in the nature of payments other than advances and loans. The payments in the present case were made by PIL in settlement of its accounts with the assessee-company in the ordinary course of business where the assessee-company is acting as the broker of PIL in carrying on the business of purchase and sale of shares. The payments were made by PIL either in settlement of existing debts or on account. Therefore, we hold that the payments made by PIL to the assessee-company through the mutual, open and current account involved in the present case were the payments made in the ordinary course of business and, therefore, do not come under the purview of section 2(22)( e ). Thus, we delete the addition made by the assessing authority as deemed dividend u/s 2(22)( e ) of the Act - In result, the appeal filed by the assessee is partly allowed.

Issues Involved:
1. Applicability of section 2(22)(e) regarding deemed dividend.
2. Validity of invoking section 142(2A) for extending the period of limitation.
3. Disallowance of donations.
4. Levy of interest under sections 234B and 234C.
5. Exemption under section 10(33) for dividend income.
6. Disallowance of penalty paid to NSE.
7. Disallowance of interest attributable to borrowed funds.

Detailed Analysis:

1. Applicability of Section 2(22)(e) Regarding Deemed Dividend:
The primary issue was whether the payments made by M/s. Panther Investrade Ltd. (PIL) to the assessee-company (NHSL) constituted deemed dividend under section 2(22)(e). The Assessing Officer (AO) treated the payments as deemed dividend due to common shareholding by Shri Kirtikumar N. Parekh in both companies. The AO added Rs. 21,02,77,135 as deemed dividend. The CIT(A) partially upheld this but excluded Rs. 21,87,500 related to the share premium account. The Tribunal held that the payments were made in the ordinary course of business and not as loans or advances. Therefore, they did not fall under section 2(22)(e). The addition of Rs. 21,02,77,135 was deleted.

2. Validity of Invoking Section 142(2A) for Extending the Period of Limitation:
The assessee contested the invoking of section 142(2A) by the AO, alleging it was done to extend the period of limitation. The Tribunal did not delve into this issue in detail as the main issue regarding deemed dividend was decided on its merits, rendering this ground less relevant.

3. Disallowance of Donations:
The assessee challenged the disallowance of Rs. 8,68,081 related to donations. The Tribunal upheld the disallowance, stating that donations are an appropriation of income and not deductible in computing taxable income.

4. Levy of Interest Under Sections 234B and 234C:
The assessee raised objections to the levy of interest under sections 234B and 234C, both on the quantum and the lack of opportunity to be heard. The Tribunal noted that the interest is consequential and would be subject to the deletion of the addition of Rs. 21,02,77,135. The legal contention against the levy of interest was rejected based on the precedent set by the Delhi Special Bench in Motorola Inc. v. Dy. CIT.

5. Exemption Under Section 10(33) for Dividend Income:
The Revenue contested the CIT(A)'s decision that Rs. 5,05,886 was exempt under section 10(33) read with section 115-O. The Tribunal upheld the CIT(A)'s decision, noting that the law does not distinguish between dividends received by a trader and an investor. The condition for exemption is that the receipt must be in the nature of dividends.

6. Disallowance of Penalty Paid to NSE:
The Revenue challenged the deletion of Rs. 6,80,129, a penalty paid to the National Stock Exchange (NSE). The Tribunal upheld the CIT(A)'s decision, stating that the penalties were for technical violations of NSE's internal rules and not for contravention of any law or public policy. Thus, the expenditure was allowable.

7. Disallowance of Interest Attributable to Borrowed Funds:
The Revenue also contested the deletion of Rs. 16,56,000, which the AO attributed to interest-bearing loans used for interest-free advances. The CIT(A) found no evidence from the AO that loan funds were used for non-business purposes. The Tribunal upheld the CIT(A)'s decision, presuming that interest-bearing loans were used for business purposes in the absence of contrary evidence.

Conclusion:
The Tribunal partly allowed the assessee's appeal by deleting the addition of Rs. 21,02,77,135 as deemed dividend and upheld the CIT(A)'s decisions on other grounds. The Revenue's appeal was dismissed in its entirety.

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