2015 (1) TMI 403 - HC - Income Tax

Deemed dividend - Trade advances - Receipt of advances from sister concern - Whether any payment by a company by way of advance or loan to a shareholder or to any concern made under Section 2(22) (e) of the Income Tax Act, 1961, to the extent to which the company possessed the accumulated profits includes a trade advance and constitutes deemed dividend - Held that - purpose of the insertion of sub-clause (e) of Section 2(22) of the Act was to bring within the tax net accumulated profits which are distributed by closely held companies to his shareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-O of the Act. 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 payment of tax by having these companies pay or distribute money in the form of advance or loan. Loan or advance given to the shareholders or to a concern, under normal circumstances would not qualify as dividend. If such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder, in such an event, by the deeming provisions, such payment by the company is treated as dividend. It is so made by legal fiction created under Section 2(22)(e) of the Act. Even if the accumulated profit which ought to have been paid to the shareholders as the dividend paid to a sister concern for the purpose of acquisition of capital assets or as a consideration for the goods received which is required for carrying on the business, it would not fall within the definition of Section 2(22)e of the Act as the object was not to pay the said amount to the shareholders after avoiding payment of dividend distribution tax under Section 115-O of the Act. In that view of the matter, it is not possible to accept the interpretation sought to be placed by the revenue. Having regard to the plain words used in clause (e) to any concern , when the amount is paid or when any payment is made to a concern, the tax is levied on the concern and not on the shareholders. As far as this question is concerned, this Court following the judgment of the Bombay High Court in the case of Commissioner of Income Tax vs Universal Medicare (P) Limited reported in 2010 (3) TMI 323 - BOMBAY HIGH COURT has categorically held that when any payment is made by a company to any concern, which falls under clause (e), the tax is leviable on the shareholder only and not on the concern - Therefore, the finding recorded by the Tribunal that, these advances made by the BDPL to the sister concern as well as to its shareholder do not constitute deemed dividend under Section 2(22)(e) of the Act, is legal and valid and do not call for any interference. - Decided in favour of assesse.

Issues Involved:
1. Whether a payment by a company by way of advance or loan to a shareholder or any concern under Section 2(22)(e) of the Income Tax Act, 1961, constitutes deemed dividend.
2. The validity of proceedings under Sections 153C and 153A of the Income Tax Act.
3. Interpretation of the term "dividend" under the Companies Act and Income Tax Act.
4. Applicability of Section 2(22)(e) to trade advances.
5. The scope of the term "advance" and "loan" in the context of Section 2(22)(e).

Issue-wise Detailed Analysis:

1. Whether a payment by a company by way of advance or loan to a shareholder or any concern under Section 2(22)(e) of the Income Tax Act, 1961, constitutes deemed dividend:
The core issue was whether advances made by M/s. BDPL to its sister concerns and a substantial shareholder constituted deemed dividends under Section 2(22)(e) of the Income Tax Act. The Court observed that the amounts were advanced for acquiring agricultural land, which was then converted for non-agricultural purposes and transferred back to the company. The Tribunal concluded that these funds were provided during the course of business and were not unsecured loans. Therefore, the provisions of Section 2(22)(e) did not apply as the transactions were business-related and not for the individual benefit of the shareholder.

2. The validity of proceedings under Sections 153C and 153A of the Income Tax Act:
The assessees challenged the initiation of proceedings under Sections 153C and 153A on the grounds that the Assessing Authority's satisfaction was not recorded in writing, as required by the Supreme Court in Manish Maheshwari v. Assistant Commissioner of Income Tax. However, since the primary liability to pay tax was negated, the Court did not delve into this issue further, leaving it open for adjudication in an appropriate forum.

3. Interpretation of the term "dividend" under the Companies Act and Income Tax Act:
The term "dividend" under the Companies Act is defined to include any interim dividend payable to registered shareholders. Under the Income Tax Act, Section 2(22) defines "dividend" to include any payment by a company by way of advance or loan to a shareholder or a concern in which the shareholder has a substantial interest, to the extent of accumulated profits. The Court emphasized that the intention behind this provision was to prevent companies from distributing accumulated profits as loans or advances to avoid dividend distribution tax.

4. Applicability of Section 2(22)(e) to trade advances:
The Court referred to several judgments, including those from the Delhi and Calcutta High Courts, which clarified that trade advances given for the benefit of the company do not fall within the ambit of deemed dividends under Section 2(22)(e). The Court held that advances made for commercial transactions, such as acquiring land for business purposes, do not constitute deemed dividends. The principle of noscuntur a sociis was applied, meaning that the words "advance" and "loan" should be interpreted in the context of their association with each other.

5. The scope of the term "advance" and "loan" in the context of Section 2(22)(e):
The Court explained that while a loan generally involves repayment with interest, an advance may or may not include such an obligation. The term "advance" in Section 2(22)(e) should be interpreted in the context of avoiding dividend distribution tax. Payments made as trade advances or for acquiring capital assets, which benefit the company, do not fall within the purview of deemed dividends. The Court emphasized that a literal interpretation leading to absurd results should be avoided, and a purposive interpretation should be adopted.

Conclusion:
The Court concluded that the advances made by M/s. BDPL to its sister concerns and the substantial shareholder did not constitute deemed dividends under Section 2(22)(e) of the Income Tax Act. Consequently, the appeals by the revenue were dismissed, and the appeals by the assessees were disposed of, with the substantial question of law answered in favor of the assessees. The Court also upheld the Tribunal's finding that the advances were business-related and not unsecured loans.

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