2014 (4) TMI 237 - HC - Income Tax

Deemed dividend u/s 2(22)(e) of the Act Payments towards loan or advance Whether the receipt of share application money can be treated and recorded as loan, deposits and any payment for invoking the provisions of section 2(22)(e) of the Act - Held that - The decision in CIT v. I. P. India Pvt. Ltd. 2011 (11) TMI 252 - DELHI HIGH COURT followed - the word advance has to be read in conjunction with the word loan - Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan - it generally carries an interest and there is an obligation of repayment - in its widest meaning the term advance may or may not include lending - The word advance if not found in the company of or in conjunction with a word loan may or may not include the obligation of repayment - If it does, then it would be a loan - the word advance which appears in the company of the word loan could only mean such advance which carries with it an obligation of repayment - Trade advance which are in the nature of money transacted to give effect to commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) of the Act Decided against Revenue.

Summary

Issues:
1. Interpretation of section 2(22)(e) of the Income-tax Act, 1961 regarding deemed dividend.
2. Whether share application money can be treated as a loan or deposit for invoking section 2(22)(e).
3. Application of the rule of construction noscitur a sociis in interpreting the term "advance" in the context of section 2(22)(e).

Analysis:
1. The appeal by the Revenue concerning the assessment year 2008-09 was dismissed by the Tribunal as Rs. 1,00,00,000 was received as share application money and Rs. 3,96,888 as advance against order, not falling under section 2(22)(e) of the Act. The Revenue argued that the shares were issued belatedly, questioning the claim of share application money receipt by the assessee. The Assessing Officer referred to a High Court decision, suggesting the deposit was available to the assessee for use. However, the Commissioner of Income-tax (Appeals) accepted the respondent's case based on audited accounts and balance-sheets, leading to the Tribunal affirming the findings.

2. The Tribunal referred to a previous case to determine whether share application money could be considered a loan or deposit under section 2(22)(e). The Tribunal highlighted that the Assessing Officer and Additional Commissioner did not examine this aspect while imposing penalties, leading to the acceptance that share application money was not a loan or deposit. Previous judgments were cited to support this interpretation, emphasizing that the purpose of section 2(22)(e) was to prevent tax avoidance by distributing accumulated profits as loans to shareholders, not for genuine business transactions like share application money.

3. The application of the rule of construction noscitur a sociis was discussed in interpreting the term "advance" in conjunction with "loan" under section 2(22)(e). The court emphasized that the term "advance" in this context should involve an obligation of repayment, distinguishing it from trade advances related to commercial transactions. Previous decisions were cited to support this interpretation, focusing on the purpose behind the provision to prevent tax evasion by closely held companies.

In conclusion, the judgment upheld the Tribunal's findings, emphasizing that share application money does not fall under the category of loan or deposit for invoking section 2(22)(e) of the Income-tax Act, 1961. The application of legal principles and previous judgments supported the interpretation that the purpose of the provision was to prevent tax avoidance rather than taxing genuine business transactions like share application money.