LOAN IN RETURN TO ADVANTAGE CONFERRED BY SHAREHOLDER NOT DEEMED DIVIDEND

[Mr. M. GOVINDARAJAN]

In ‘Pradip Kumar Malhotra V. Commissioner of Income Tax’ – 2011 -TMI - 204888 - CALCUTTA HIGH COURT the appellant has substantial shareholding in a private company called Sumoson Exports (P) Limited.   The appellant has his immoveable property which was let out to the said company on monthly rent. During 1987 the appellant permitted the company to provide the said property as collateral security to Vijaya Bank for the company to obtain loan from the bank.

As such the property was mortgaged to the bank.  During December 1987 the Board of Directors of the company passed a resolution authorizing the appellant to obtain from the company interest free deposit up to Rs.50 lakhs as and when required for making available the said property as collateral security to the bank for the loan facility enjoyed by the bank.

Since the appellant required funds for his personal needs and security including education of his son abroad, he requested the company to purchase the said property or to release the same so the appellant could sell it to some other person.  The company wanted to purchase the said property but due to financial constraints it could not do so.  The bank also did not agree to release the property unless the same was replaced by another property by way of security.  The same was not possible for the company and requested the appellant to let the said property remain under mortgage and as already resolved the appellant was permitted to draw up to Rs.50 lakhs interest free in installments so as not to jeopardize the business of the company.

The appellant received a sum of Rs.10 lakhs as advance rent which was to be adjusted against the rent payable to the appellant by the company.  After the adjustment on31.3.1998 the amount of advance rent stood reduced to Rs.7,88,795/-.  The Assessing Officer treated the said amount as deemed dividend under Section 2(22)(e) of the Act.  On appeal the appellant succeeded.  The Revenue filed appeal before the Tribunal and contended that the Assessing Officer was not given any notice regarding hearing of the appeal before the Commissioner of Income Tax (Appeals) and as such the provisions of Section 250(1) were violated. The Tribunal restored the appeal to the Commissioner (Appeals) to decide the case on merits after giving reasonable opportunity of being heard to both parties.

The appellant for the second time obtained a sum of Rs.20,75,000/- by way of security deposit. Out of this a sum of Rs.20 lakhs was returned by the appellant in the financial year 200-01.   The Assessing Officer added the sum of Rs.20,75,000/- as deemed dividend under Section 2(22)(e) for the assessment year 1999-2000.  On appeal the Commissioner (Appeals) deleted the said addition of Rs.20,75,000/-.  The Revenue preferred an appeal before the Tribunal.  The Tribunal set aside the order of the Commissioner (Appeals) and remanded the matter to him during the hearing.  But on 23.04.2003 the Tribunal upheld the order of the Assessing Officer.  The appellant filed a miscellaneous application for rectification order and the Tribunal held that there was no mistake which required rectification and the Tribunal could not review its earlier decision.                

Against both orders of the Tribunal the appellant filed the present appeal before the High Court. The appellant submitted that the amount of payment made by the company in favor of the appellant as a consequence of the fact that he has allowed his property to be mortgaged by the company before a bank, the said amount given by the company cannot be said to be a deemed dividend within the meaning of Section 2(22)(e) of the Act.  The only question that arised for determination is whether the amount of Rs.20,75,000 released by the company in favor of the appellant can be said to be a deemed dividend within the meaning of Section 2(22)(e) of the Act.  The Court analyzed the provisions of Section 2(22)(e) of the Act.

The High Court is of the opinion that the phrase ‘by way of advance or loan’ appearing in sub-clause © must be construed to mean those advances of loans which a shareholder enjoys for simply on account of 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 10% of the voting power; but 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.   Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of Section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholders.

In the present case the assessee permitted to be mortgaged to the bank foe enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from the mortgage.  In such a situation, for retaining the benefit of loan availed of from Vijaya Bank if decision is taken to give advance to the assessee such decision is not to give gratuitous advance to its shareholder but to protect the business interest of the company.  The High Court thus held that the authorities below erred in law in treating the advance given by the company to the assessee by way of compensation to the assessee for keeping his property as mortgage on behalf of the company to reap the benefit of loan as deemed dividend within the meaning of Section 2(22) (e) of the Act.