2004 (8) TMI 323 - AT - Income Tax

Deemed dividend - Applicability of Section 2(22)(e) to the amount received - Interpretation of the term deposit versus loan or advance u/s 2(22)(e) - HELD THAT - Sec. 2(22)(e), as explained by the CBDT in the said circular, is clearly not attracted to the facts of the present case. As per the agreement between the assessee and Silvasa, the assessee was to lease its bungalow to a new company to be formed. Silvasa agreed to contribute in the said proposed new company, for purchasing machinery and equipment and setting up a studio at the said bungalow. Silvasa further agreed to deposit with the assessee immediately on signing the MOU, to show its bona fides. As per the agreement, in the event of the proposed project not coming through, the MOU was to stand cancelled and the assessee was to refund the deposit to Silvasa. It did so happen. All these facts remain unrebutted. From this factual matrix, it is evident that the provisions of s. 2(22)(e) are, in no way, applicable. It is the objective of s. 2(22)(e) to tax shareholders intending to avoid dividend tax. Non-shareholders cannot be taxed taking recourse to this section. The Hon'ble Allahabad High Court, in CIT vs. H.K. Mittal 1995 (12) TMI 39 - ALLAHABAD HIGH COURT , has held that the chief ingredient of dividend as defined in s. 2(22)(e) is that the recipient should be a shareholder on the date the loan was advanced and if such fact does not stand established, the advance cannot be taken as deemed dividend. In that case, the fact that the assessee was not a shareholder had not been challenged. As such, no question of law was held to have arisen. Likewise, in the present case, the assessee is not a shareholder of Silvasa. So, s. 2(22)(e) is inapplicable. The Hon'ble Supreme Court has held in CIT vs. Shaan Finance (P) Ltd. 1998 (3) TMI 8 - SUPREME COURT , inter alia, that in interpreting a fiscal statute, the Court cannot proceed to make good the deficiencies if there be any. It must interpret the statute as it stands and in case of doubt, in a manner favourable to the taxpayer. So, while taxing notional income, the provisions relating to deemed dividend, like the ones comprised in s. 2(22)(e) of the IT Act, need to be interpreted, not loosely, as the lower authorities have chosen to do, but strictly. An advance, as opposed to a deposit, is something paid to a person before it is due. Here, however, the amount in question was certainly not paid before it was due. The agreement between the assessee and Silvasa is categorical in this regard. Also, the factum of such payment in the manner alleged is not refuted by the Revenue. The authorities have just dubbed it as an advance which by no means it is. So, the case looked at from any angle, the provisions of s. 2(22)(e) have been misconstrued and misapplied. The amount of Rs. 2,33,31,427 was received by the assessee-company from M/s Silvasa Estates (P) Ltd. in pursuance of the memorandum of understanding arrived at between them on 9th Feb., 1997, as a deposit and not as a loan or an advance. Conclusion The Tribunal concluded that the provisions of s. 2(22)(e) were misapplied. The amount received was a deposit, not a loan or advance. The appeal was allowed, and the addition was deleted.

Summary

Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act to the amount received by the assessee.
2. Interpretation of the term "deposit" versus "loan or advance" under Section 2(22)(e).

Summary:

1. Applicability of Section 2(22)(e):
The assessee challenged the CIT(A)'s order confirming the addition of Rs. 11,06,475 u/s 2(22)(e) of the Income Tax Act. The assessee argued that the amount of Rs. 2,33,31,427 received from Silvasa Estates (P) Ltd. was a deposit as per the MoU dated 9th Feb., 1997, and not a loan or advance. The AO noted that the intended new business did not start, and the amount remained with the assessee. The AO observed that the provisions of s. 2(22)(e) were applicable as the directors had substantial interest in both companies. The CIT(A) upheld the addition, stating the dominant intention was to avoid distribution of dividend.

2. Interpretation of "Deposit" vs. "Loan or Advance":
The assessee contended that the amount was a deposit, not a loan or advance, and thus, s. 2(22)(e) was not applicable. The MoU specified the amount as a deposit to show bona fides for a new business venture. The assessee returned the deposit when the project was deemed unfeasible. The Tribunal noted that s. 2(22)(e) applies to loans and advances, not deposits. The provisions are deeming fictions meant to prevent tax evasion on dividends by closely-held companies. The Tribunal cited various judicial pronouncements distinguishing deposits from loans or advances, emphasizing strict interpretation of deeming provisions.

Conclusion:
The Tribunal concluded that the provisions of s. 2(22)(e) were misapplied. The amount received was a deposit, not a loan or advance. The appeal was allowed, and the addition of Rs. 11,06,475 was deleted.