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TMI Blog2006 (7) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer in finalising the impugned assessment is a sum of Rs. 21,02,77,135 made under section 2(22)(e) as deemed dividend. 4. The assessee-company (referred to as 'NHSL', for short) is having regular transactions with another company M/s. Panther Investrade Ltd. (referred to as 'PIL', for short). The Assessing Officer in the course of verifying the accounts of the assessee-company found that the personal account of PIL reflected in assessee's ledger accounts speaks of regular transactions in between them. On further enquiry, the Assessing Officer found that the assessee-company, NHSL and the other company PIL stand in relation to each other falling under the provisions of section 2(22)(e) for the reason that one Shri Kirtikumar N. Parekh is having substantial shareholding in both the companies over the limit prescribed under the provisions of section 2(22)(e) of the Income-tax Act. Shri Kirtikumar N. Parekh is holding 5,32,980 shares of assessee-company NHSL which works out to more than 20% of the shareholding. Shri Kirtikumar N. Parekh is also holding 3,205 shares of the other company PIL which is more than 10% of the shareholding. Therefore, the Assessing Officer held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of deemed dividend. He found that a sum of Rs. 21,87,500 belonged to share premium account reflected in the balance-sheet of PIL and, therefore, it would not form part of the accumulated profit as share premium account cannot be utilised for distribution of dividend. Therefore, the CIT(A) deleted the said amount of Rs. 21,81,500 and confirmed the balance. It is against the above that the assessee has come in second appeal before us. 9. The Assessing Officer has also made certain other disallowances and additions in the course of assessment relating to exemption under section 10(33) being dividends, penalty paid to NSE, interest attributable to borrowed funds but stated to be used for giving interest-free advances, etc. 10. In respect of the above disallowances/additions made by the assessing authority, the CIT(A) accepted the contentions of the assessee and held that the amount of Rs. 5,05,886 is to be treated as dividend within the meaning of section 10(33) read with section 115-O and, therefore, exempt from tax. He also deleted the addition of Rs. 6,80,129, made by the assessing authority on the ground of penalty charged by NSE. The CIT(A) also held that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcutta High Court in Mukundray K. Shah v. CIT [2005] 277 ITR 128 at P. 133 to explain the characteristics of the provisions of law contained in section 2(22)(e). He referred to the said judgment and stated that the said section applies to three categories of cases. The first category relates to any payment made by a company, in which public are not substantially interested, by way of loans or advances to a shareholder having not less than 10% voting power. The second category relates to any payment of such a company to any concern in which such shareholder is a member having substantial interest not less than 20% of the voting power of such concern. The third category is the payment of any such company on behalf or for the individual benefit of any such shareholder, who enjoys the necessary voting power. He also stated that in all these three categories, the extent of the deemed dividend is confined to the accumulated profits available in the hands of such company. 16. The learned senior counsel stated that in the light of the above statutory scenario, the present case may be examined under the second category of cases already mentioned. He stated that Shri Kirtikumar N. Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of those indebtedness. 3. PIL is a non-banking finance company whereas the assessee-company is a broker. It is the regular business of PIL to purchase shares and securities for the purpose of investment as well as for the purpose of trading. The assessee-company, as a broker, purchases shares and securities on behalf of PIL on its direction and when such shares are purchased, the accounts of PIL are debited and when payments are received from PIL, it accounts are credited. It is very clear that in such circumstances, the payments were made by PIL to pay off the debts already existed and it was only settling the accounts in its ordinary course of business. Such payments made by PIL to the assessee-company cannot be treated as a loan or advance. 4. The Hon'ble Bombay High Court in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 393 and the Hon'ble Delhi Bench of the Tribunal in the case of Asstt. CIT v. Global Agencies (P.) Ltd. [2004] 1 SOT 510 have held that such regular business transactions did not amount to loans or advances. 5. There are also certain payments made by PIL on behalf of the assessee-company. Such transactions made by PIL on behalf of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween as other payments and loan payments. A payment as such should be in the character of a loan. This proposition has been followed also by ITAT Delhi Bench in the case of Ardee Finvest (P.) Ltd. v. Dy. CIT [2001] 79 ITD 547 . In the present case, there are so many such payments made by PIL to the assessee-company on account but the payments occasionally exceeded the amounts payable by PIL to the assessee-company at the moment of such payments. On that way the personal account of PIL occasionally showed credit balances in the accounts of the assessee-company. In the light of the above legal position, such excess amounts paid to the assessee-company cannot be regarded as loans or advances. If such excess amounts are also reduced, the remaining amount that could be considered for the discussion whether they are loans or advances would be reduced to Rs. 1,17,02,010. 8. The learned senior counsel submitted that without prejudice to the argument of the assessee-company that payments made between the related concern in the ordinary course of the business carried on by them cannot be treated as payment of loans or advances so as to attract the deeming provisions of section 2(22)(e), st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explaining the nature of the deeming provisions contained in section 2(22)(e), the characteristic features of the payments made by PIL to the assessee-company and after identifying the amounts to be excluded from the ambit of loans and advances if at all necessary, the learned senior counsel referred to the second limb of his contention on section 2(22)(e) in respect of "accumulated profits". He explained that "accumulated profits" is defined in Explanation 2 to section 2(22) to mean all profits of the company up to the date of payment referred to in clause (e). The learned counsel explained that the Explanation 2 to section 2(22), as it appears in the Income-tax Act, 1961, was not there in the corresponding section 2(6A) of the Income-tax Act, 1922, as noted by the Hon'ble Supreme Court in CIT v. V. Damodaran [1980] 121 ITR 572, it was settled by a long line of judicial pronouncements that the words "accumulated profits" in section 2(6A) of the Income-tax Act, 1922 cannot be construed to include current profits. He explained that all that Explanation 2 in section 2(22)(e) in the Income-tax Act, 1961, does is to include any "accumulated profits", profit or income which had accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not ordinarily be applicable. Such ordinary, popular and natural meaning need not be sidelined unless there is anything contrary to the context or the subject-matter. Current year income from house property or capital gains gained during the year or interest or dividend income attributable to that year is ascertainable on a particular date and those items could form part of the accumulated profits for the purpose of section 2(22)(e), unlike business profit. If any other view is adopted on this point, it will lead to absurdity as it would be not only improbable but impossible to work out the profit of a business on a particular day within the year for the reason that there is no concept of daily profit in the case of business income. In the case of a business, various closing and adjusting entries are required to be passed at the close of the accounting year and necessary provisions are to be provided in the accounts like gratuity liability on the basis of actuarial valuation, etc. If the business profit is also to be worked out on the date of payment of deemed dividend for the purpose of section 2(22)(e), a company would be called upon to obtain the actuarial valuation on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which a company could distribute it to its shareholders. Therefore, the statutory reserve credited in terms of the Reserve Bank of India Act, 1934 needs to be excluded from the computation of "accumulated profit" for the purpose of computation provided under section 2(22)(e). 26. The learned senior counsel submitted that if these factors are taken into consideration, the accumulated profits amount would be Rs. 65,03,731 being the Reserves & Surplus and any other amount of income other than business income which is ascertainable as accrued or received by the date of payment of each of the amount of deemed dividend. 27. The learned senior counsel summarised his propositions in the following lines : 1. PIL has not advanced any loans or advances to the assessee-company as the account running between PIL and the assessee-company is mutual, open and current. 2. Without prejudice to the above basic proposition, the maximum amount that could be regarded as loan is Rs. 1,17,02,010. 3. In the alternative, the maximum amount that could be regarded as loan does not exceed Rs. 3,86,81,885. 4. Whatever may be the amount that could be regarded as loans and advances in the light of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ravindra D. Amin v. CIT [1994] 208 ITR 815 in support of the various arguments advance the payments made by a company to a shareholder are in the nature of advances or loans or if the payment is made to a third party on behalf of a shareholder or for his benefit, then there should not be any difficulty in treating that payment as dividend in the hands of the shareholder. The learned standing counsel explained that each and every payment made by a company needs to be treated as independent payment without looking into any other aspects of the case. Every payment for that matter should be treated as payment of loan or advance and in that way susceptible to the provisions of law contained in section 2(22)(e)( i) of the Act. 31. The learned standing counsel also relied on the decision of the Bombay High Court in the case of Walchand & Co. Ltd. v. CIT [1975] 100 ITR 598 that any payment made by such company of a sum by way of loan or advance to a shareholder or any payment by such company on behalf of such shareholder or for the individual benefit of such shareholder is to be treated as dividend and for the purpose of describing the payment as loan or advance even a hand loan for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of section 2(22)(e), whether the amounts paid by PIL against outstanding debts are to be considered as loans/advances? (iii)Whether payments in respect of regular business transactions reflected in the said account are to be held as loans/advances? (iv)Whether the occasional excess payment made by PIL on account to the assessee-company could be treated as in the nature of loans/advances? (v)Whether the business profits of the current year need to be treated as part of accumulated profits as business profits cannot be computed on a day-to-day basis? (vi)Whether the statutory reserve maintained under the provisions of section 45-IC of the Reserve Bank of India Act, 1934 could be treated as part of the accumulated profits? (vii)Whether the successive loans/advances paid by PIL to the assessee-company need to be successively reduced from the accumulated profits or not? 34. First we will examine the basic contention raised by the learned senior counsel that a mutual, open and current account operated between the parties will not come under the purview of section 2(22)(e). We refer back to the provisions of Limitation Act, 1963, referred to by the learned senior counsel to poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt made by the company falls under section 2(22)(e) or not. Where a company pays to its shareholder any amount against repayment of an existing loan or advance or against purchase or availing of service or paying on account on any other ground, such payments made in the ordinary course of carrying on of the business of that company cannot be brought under the purview of section 2(22)(e). That is why section 2(22)(e) provides that any payment by a company by way of advance or loan to a shareholder alone is to be considered for the purpose of deemed dividend. The above legal propositions are further made clear by the Bombay High Court in the case of Nagindas M. Kapadia (supra). In the said case, the assessee was a shareholder having substantial interest in the company for the purpose of section 2(22)(e). The assessee also carried on a proprietary business. The company had maintained a running account in the name of the proprietary business run by the shareholder. In the assessment years 1968-69 and 1969-70, the running account disclosed cash payments by the company to the assessee at Rs. 1,31,672 and Rs. 3,86,000 respectively which were held to be deemed dividend under section 2(22)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, in the facts and circumstances of the case 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). 39. In the facts and circumstances of the case we delete the addition of Rs. 21,02,77,135 made by the assessing authority as deemed dividend under section 2(22)(e) of the Act. 40. As the issue raised in this appeal regarding the deemed dividend has been decided on the basic question regarding the character of a mutual, open and current account, it is not necessary for us to indulge in adjudicating other various legal grounds raised by the assessee in this appeal. 41. Another ground raised by the assessee-company is regarding the direction of the Assessing Officer given to the assessee-company under section 142(2A). As the main issue involved in this appeal has been decided on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for contravention of any law of the land. These are all violations made by the assessee in the course of carrying on of its business as a share broker and not relating to violation of any law or opposed to public policy. The penalties were imposed by NSE for technical violations of its internal rules of business. Therefore, there is no reason to disallow the said expenditure. The CIT(A) has rightly deleted the disallowance. 48. The third ground raised by the Revenue is that the CIT(A) has erred in deleting the addition of Rs. 16,56,000 made by the Assessing Officer as interest attributable to interest bearing loans taken by the assessee but disbursed as interest free loans and advances. The CIT(A) has considered the issue in detail at pages 10, 11 & 12 of his order. The CIT(A) has found the Assessing Officer himself has verified and found that loan funds were not utilised by the assessee for giving any interest free loans and advances. The CIT(A) had asked for a remand report from the Assessing Officer on this point. The Assessing Officer has not given any adverse finding which is specific, against the assessee even in the remand report. When the Assessing Officer has not pointed ..... 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