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TMI Blog2010 (11) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... ially engaged in money lending - The entire events, to put it in a nut-shell, make explicitly clear that the intention of the assessee was to earn profits from the above venture and basically on a commercial exigency - it is clear that sub-clause (e) of section 2(22) of the Act, which is parimateria with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans - AO was not justified in invoking the provisions of s.2 (22)(e) of the Act in the case of the assessee for the assessment years under dispute - Decided in favor of the assessee - ITA Nos. 442 to 444/Bang/2010 - - - Dated:- 4-11-2010 - George George K, A. Mohan Alankamony, JJ. B.P. Sachin Kumar, CA, for the Appellant Swathi S. Patil, CIT-II(DR), for the Respondent ORDER Bench: These appeals of the assessee company are directed against the consolidated order of the Ld. CIT (A)-VI, Bangalore, in ITA Nos: 269, 270 and 253/ACIT CC 2(3)/CIT (A)-VI/2008-09 dated: 2.2.2010 for the assessment years 2004-05, 2005-06 and 2006-07 respectively. 2. The assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 341 (SC) wherein the issue before the Hon'ble Court was that of the block assessment (search and seizure) proceedings u/s 158BD of the Act. 5.1. In the instant case, the issue, in brief, was that there was an action u/s 132 of the Act in the case of Bagmane Developers Pvt. Ltd. [BDPL] on 14.9.2006 wherein certain documents belonging to its groups were unearthed. Consequently, a Notice u/s 153A r.w.s.153C of the Act was issued by invoking the provisions of s.153C of the Act. This action of the AO has been hotly contested by the assessee. 5.2. We shall have a glance of what section 153C of the Act precisely says: "153C (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the assessing officer having jurisdiction over such other person and that assessing officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce or loans will not suffer deemed dividend. The provisions cover all kinds of loans and advances. What has been given to the assessee is only covered by way of an advance or loan and for which the benefit has also been enjoyed by the assessee. Section 2 (22) (e) does not distinguish financial loans and advances and non-financial loans and advances made to shareholders. 3.11. From the discussions above, it is clear that the loans received by the assessee company from M/s. Bagmane Developers Pvt. Ltd comes under the purview of section 2(22)(e) of the Income-tax Act. Therefore, the loans received by the assessee during the relevant period from M/s. Bagmane Developers Pvt. Ltd. is treated as 'deemed dividend' under section 2(22)(e) of the Income-tax Act, 1961 and taxed accordingly." 6.1. The AO, for similar reasons, assessed the unsecured loans given by [BDPL] to the assessee to the extent of Rs.5,55,48,334/-, Rs.2,07,10,359/- and Rs.1,75,81,391/- respectively for the AYS under challenge. 6.2. Taking into account the reasoning of the AO in his impugned orders, the forceful contentions put forth by the Ld. A R during the course of appellate proceedings and also various jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .45.03 crores upto the AY 07-08 from Motorola for the occupation of a portion of property at STPI developed by BDPL, but, the assessee was not benefited in any way by the receipt of amounts by BDPL. However, BDPL was the beneficiary by the transfer as more tenants ventured to occupy the BDPL's property after Motorola. This clearly exhibits that the transaction entered into between the assessee and BDPL was at arms length basis with a sole intention of earning profits from this venture on a commercial expediency. The transaction had taken place during the course of business and for the purposes of business only and this was well outside the ambit of deemed dividends; - It was not for the AO to diktat as to how a businessman to conduct his business as it was rather a prerogative of the assessee as to how to run his/its business based on the ground realities; - Rely on the case laws: (a) S.A. Builders v. CIT 288 ITR 1 (SC); (b) CIT v. Sassoon David 118 ITR 261 (SC); (iii) the AO's novel reason for rejecting the agreement was that it was not found at the time of search. It was not as if the search party was expected to record/seize every paper on which it lays its h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of by the AO. (b) Nagindas Kapadia 177 ITR 393 (Bom) (c) Ambassador Travels 173 Taxman 407 (Del) (d) Ardee Finvest (P) Ltd. 79 ITD 547 (ITAT, Delhi Bench) and (e) Seasmist Properties Pvt. Ltd. 1 SOT 142 (Mum) were held to be not applicable because the schedule to the Balance sheets reflect those amounts as 'unsecured loans' and, therefore, it was not in the nature of any trade advance or any payment made in connection with business of the company giving the loan; - case laws relies on- (a) CIT v. Creative Dyeing and Printing Pvt. Ltd. 318 ITR 476 (Del); (b) NH Securities Ltd. v. DCIT 11 SOT 302 (Mum) (v) merely because the sum was shown as unsecured loan in the books of accounts cannot be concluded that it was deemed dividend. It was a settled law that in book-keeping, the entries in the books of accounts cannot go to decide the ambit of taxation Relies on- (a) Fort Properties Pvt. Limited 208 ITR 232 (Bom) (b) Kedarnath Jute Manufacturing co. Ltd. 82 ITR 363 (SC) (c) Kasturi Estates (P) Ltd. 62 ITR 578 (Mad) (d) G.Venkataswami Naidu 35 ITR 594 (SC) (e) Sultan Brothers 51 ITR 353 (SC) (f) CIT v. Express Newspapers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares have been disclosed in the Balance Sheets of Raja Bagmane and Smt. Vasundhara Raja as on 31.3.2006. Even an immovable property can be transferred for a consideration paid, promised, partly paid and partly promised as per s.54 of the Transfer of Property Act. Further, there was a running account of Smt. Vasundhara Raja in books of Raja Bagmane and, therefore, the consideration due was debited to her account. Similarly, in the account of Raja Bagmane in the books of Smt. Vasundhara Raja, credit entries were passed and thus, there was nothing amiss about it; (x) Raja Bagmane was not having 10% shareholding in the assessee company throughout the year. For the applicability of s.2 (22)(e), it was necessary that the share-holder should have 10% equity share capital in both the concerns - the concern which lent the money and the concern to whom money had been lent. Though Raja Bagmane did hold more than 10% share in BDPL throughout the year, he did not hold 10% share in the assessee company throughout the year. It is settled law that the relevant share holder should not only be a registered share holder but a person having beneficial interest. Thus, the provisions of s.2 (22)(e) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and non-financial loans and advances made to shareholders. Thus, the loans received by the assessee company from BDPL come under the purview of section 2(22)(e) of the Act and, accordingly treated as 'deemed dividend' under section 2(22)(e) of the Act. 8.2. The Ld. CIT (A) had, more or less reiterated what was narrated in the impugned assessment orders and sheltering himself in the finding of the Hon'ble Supreme court in the case of Ms. P. Sharada v. CIT reported in 229 ITR 445, upheld the action of the AO in invoking the provisions of s.2(22)(e) of the Act for the AYs under dispute. 8.3. In taking into consideration of the reasoning of the AO as well as the first appellate authority in invoking the provisions of s.2 (22) (e) of the Act which has been hotly contested by the assessee through its Ld. A R referred supra, we are of the considered view that- (1). The assessee came into existence at the behest of BDPL to provide fit-outs in Tech. park of BDPL as per the requirements of Motorola, a prime prospective tenant of BDPL, according to which; due to business exigencies and contingency, BDPL had agreed to provide the required funds to the assessee to go ahead with the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had brought any credible documentary evidence on record to suggest that the said MOU was an 'afterthought' or planted etc., it cannot be subjected to scanning. There would be no takers of the assessing officer's another theory that the agreement produced had no evidentiary value unless it was registered. In this connection, we would like to point out that no agreement needs to be registered to prove its sanctity unless it is proved otherwise with documentary evidence. Even a verbal agreement between the parties (not even reduced in writing on a plain paper) has its holiness as vouched by judiciary. Simply because the MOU executed on a stamp paper not registered with the authorities concerned cannot, in our considered view, be a sole reason to suspect its very bona fide or its legitimacy. (3). The advance received from BDPL by the assessee without any interest or end date was one of the reasons for the AO to arrive at a conclusion that it was nothing but an advance or loan. This perception of the AO was totally misconceived and without any basis as the MOU had made it amply clears that "BDPL shall place funds with BLFPL from time to time' and that these funds have been earmarked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Creative Dyeing and Printing Pvt. Limited 318 ITR 476 (Del) ruled that section 2 (22) (e) of the Act can be applied to 'loans' or 'advances' simpliciter and not to those transactions carried out in the course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is -what is the purpose of such advance? If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may be treated as 'deemed dividend', but, if it is otherwise, the amount given cannot be branded as 'advances' within the meaning of deemed dividend under section 2 (22) (e). In rendering this decision, the Hon'ble High Court had placed reliance in the decision of the case of CIT v. Raj Kumar (2009) 318 ITR 462 (Del), CIT v. Ambassador Travels (P.) Ltd. (2009) 318 ITR 376 and CIT v. Nagin Das M. Kapadia (1989) 177 ITR 393)(Bom). We herebelow reproduce the relevant portion of the case CIT v. Creative Dyeing and Printing P. Ltd. for reference: "Before us, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act." The counsel for the revenue has also further stated that it is not in dispute that the monies which have been advanced to the assessee-company by M/s. Pee Empro Exports Pvt. Ltd. have not to be repaid but have to be adjusted against the dues payable by M/s. Pee Empro Exports Pvt. Ltd. to the assessee-company in the subsequent years for the job work of printing and dyeing which is done by the assessee-company for M/s. Pee Empro Exports Pvt. Ltd. We find that the Tribunal in the present case has very extensively dealt with legislative intention of introducing section 2(22)(e) and has referred to such legislative intention by reference to Supreme Court judgment in the case of Navnit Lal C. Javeri v. K.K. Sen AAC [1965] 56 ITR 198 where a similar provision of the Income-tax Act, 1922, i.e., section 2(6A)(e) was in issue by reproducing the relevant para in Navnit Lal C. Javeri's case (supra) as under:- "In dealing with Mr. Pathak's argument in the present case, let as recall the relevant facts. The companies to which the impugned section applies are companies in which at least 75 per cent of the voting power lies in the hands of other than the public, and that means th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the Bombay High Court in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 393 (Bom) in which it was held that business transactions are outside the purview of section 2(22)(e) of the Act. In the said case, the company in which Kapadia was having substantial interest had paid various amount to Kapadia. The Tribunal had found that Kapadia had business transactions with the company and on verification of the accounts, the Tribunal deleted the amounts which were relating to the business transactions and which finding was upheld by the High Court. In the present case the Tribunal on considering decisions in various cases held as under: "From the ratio laid down in above cases and on the basis of judicial interpretation of words, 'loans' or 'advances', it can be held that section 2(22)(e) can be applied to 'loans' or 'advances' simpliciter and not to those transactions carried out in course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is what is the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(22)(e)(ii) and consequently payments even for the business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot, however, have a bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions do not fall within section 2(22)(e), we need not to go further to section 2(22)(e)(iiction 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar's case [2009] 318 ITR 462 (Delhi); [2009] 181 Taxman 155. This Court in Raj Kumar's case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under (page 473): "A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of inserti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 2(22)(e). The present appeal is, therefore, dismissed. " (iii) A similar view has been reiterated in the case of NH Securities Limited v. DCIT - 11 SOT 302 (Mum). (iv) The entries made in the books of account cannot go to decide the ambit of taxation. In this regard, the Hon'ble Apex Court in the case of Kedarnath Jute Manufacturing Co., Ltd v. CIT (Central) Calcutta 82 ITR 363 (SC) had ruled that - (v) The Hon'ble ITAT (SB) in the case of ACIT v. Bhaumik Colour (P) Ltd. 120 TTJ 865 (Mum), after due consideration of the rival submissions and also the finding of the earlier Bench, the Hon'ble Special Bench was pleased to observe thus- "41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows: On the first question: Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The expression 'shareholder' referred to in s. 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applied unless the legislature introduces a further deeming provision to the effect that the joint family which is the beneficial owner of the shares shall be deemed to be the registered shareholder of the company. Having regard to the words "payment by way of loan or advance" employed in section 2(6A)(e), we are of the view that there should be an outgoing or flow of money from the company to the shareholder so as to attract the said provision. Some light is thrown by the provision in section 205(5) of the Companies Act, 1956, which provides that no dividend shall be payable except in cash, the only exception being the issue of fully paid up bonus shares or the payment towards unpaid call monies on any shares held by the members. In this case, there cannot be any dispute that the sum of Rs.1,65,000 cannot be treated as an advance, for it is not an amount paid towards any other amount due by the company to the assessee-family. The only question then is whether the said sum represents the payment by way of loan by the company to the assessee-family. Having regard lo the setting in which the said clause (e) of section 2(6A) occurs, it is not possible to say that the payment con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he share-holding of Raja Bagmane in the assessee's company, the AO, after analyzing the assessee's contentions, had observed in his impugned order for the assessment year 2006-07 thus - "3.18. On careful consideration of the above, it appears that Smt Vasundhara Raja is not in a position to pay off Rs.4,91,94,263/- for the shares transferred by her husband. As already discussed above, there was no transfer of funds either by way of cash or cheque for transfer of the shares and it was made by book entries only. It therefore appears that the intention of Shri Raja Bagmane of transferring the shares to his wife is not real and is only arrangement or a colourable device to circumvent the provisions of section 2(22)(e) of the Income-tax Act, 1961. A careful examination of the facts of the case indicates that there was not a real transfer of share and it was only a colourable device to reduce the number of shares by Raja Bagmane so that he is not treated as a shareholder having a substantial interest in the company and, thereby, avoid the taxability of deemed dividend. But in reality, he was still having substantial interest in the company and had total control over the company. In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;" From the above wordings, two important aspects are to be noticed, namely, (i) concern other than company ; and (ii) at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern. Thus, in the present case, none of these two aspects are attracted. (7) Turning our attention to the case laws on which the AO had placed strong reliance which has been ratified by the Ld. CIT (A) in his impugned order. (i) in the case of Ms.P Sarada v. CIT reported in 229 ITR 445 (sic) 444 (SC), the issue before the highest judiciary of the land was that Whether, the withdrawals made by the assessee from Universal Radiators Private Limited totaling Rs.93,027 can be assessed in the hands of the assessee under section 2(22)(e) of the Act the year 1973-74 ? After due consideration of the facts of the case, the Hon'ble Court was pleased to rule that- "The withdrawals made by the appellant from the company amounted to grant of loan or advance by the company to the shareholder. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is that the company in question must be one in which the public are not substantially interested within the meaning of section 23A as it stood in the year in which the loan was advanced. The second condition is that the borrower must be a shareholder at the date when the loan was advanced; it is immaterial what the extent of his shareholding is. The third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit at the date of the loan. This is an important limit prescribed by the relevant section. The fourth condition is that the loan must not have been advanced by the company in the ordinary course of its business. In other words, this provision would not apply to cases where the company which advances a loan to its shareholder carries on the business of money-lending itself; and the last condition is that the loan must have remained outstanding at the commencement of the shareholder's previous year in relation to the assessment year 1955-56." With due respects, we would like to point out that none of the three conditions prescribed by the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(e). As a result of globalization during the recent past, various giant infrastructure projects have sprung up and many are in the pipeline. Multi-various activities are involved in promoting these giant projects. All these activities collectively strive to complete the projects. Each activity is distinct in character. For each activity, different kinds of commercial agreements and technical agreements are required. The financial structure of every activity differs. The risk and reward involved in every activity also differs. In order to meet such complex constraints, the flagship company/the promoter may create various distinct entities being special utility vehicles (SUV) to deal in each of these activities independently. The promoter along with these SUV jointly works to complete the over-all project. In such situation, funds being the bloodline for all these entities, flow from one entity to the other. Such transfer of funds arising out of commercial expediency may not be in the nature of advances or loan in all circumstances. 8.6. Taking into account the rival submissions, the facts and circumstances of the issue as deliberated upon in the fore-going paragraphs and also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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