9911796707
TMI Blog2014 (9) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... 16,678/- Aggrieved by these additions, the assessee went in appeal before the CIT(A) and submitted before the CIT(A) that an amount of Rs. 32,74,635/- was added towards deemed dividend invoking the provisions of sec. 2(22)(e) of the Act. This amount collected by the assessee from the customers of the company in which the assessee is a shareholder namely Ceyannar Chemicals Pvt. Ltd. (CCPL) in pursuance of a resolution passed by the company and kept as an imprest cash, with the bank in the name of the assessee, as a temporary loan taken by the assessee from CCPL despite the fact that the entire money collected and kept as imprest cash was deposited immediately in the Savings Bank Account in the name of the assessee. The assessee did not derive any benefit from the amount so collected as it was kept in the Savings Bank Account throughout till the date the said amount was finally remitted to the company within the gap of short periods. 4. Regarding the amount of Rs. 23,16,678/- added to income again as deemed dividend u/s. 2(22)(e) of the Act, the Assessing officer observed that in the books of the Ceyannar Chemicals P. Ltd. three accounts of the assessee are maintained. They are Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in the instant case that the assessee director, instead of accepting any money directly from the company, he has been collecting the outstanding debts of the company from various customers. In all practical consideration, it appears that this is a case of genuine business circumstances where the Director has been realizing the company's arrears with his continuous efforts. 6. The CIT(A) observed that in the process of such collection, he has not been deriving any individual benefit out of such money, which have been collected on behalf of the company. It is observed that these transactions do not fall within the ambit of definition of section 2(22)(e) of the Act as this is not a case where the payment is being directly made by the company to its shareholder, and as such, the very deposit in the assessee's bank account would not partake the character of a loan or advance, as positive and direct element of payment from the company is missing in this case. Accordingly, the CIT(A) deleted the addition made by the Assessing officer. 7. Regarding the addition of Rs. 23,16,678/-, the CIT(A) observed that first of all there has been a mistake by which the accountant has instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DR relied on the order of the Assessing officer and also relied on the judgment of the Hon'ble Supreme Court in the case of Tarulatha Shyam vs. CIT, 108 ITR 345 wherein it was held that payment by a company not being a company in which the public were substantially interested within the meaning of section 23A of 1922 Act, of any sum by way of advance or loan to a shareholder, not exceeding the accumulated profits possessed by the company was to be deemed as his dividend u/s. 2(6A)(e) read with sec. 12(1B) of the Act, 1922, even if that advance or loan was subsequently repaid in its entirety during the relevant previous year in which it was taken. Even if such temporary loan is returned, the deeming provision will apply. Further he relied on the judgment of the Hon'ble Supreme Court in the case of Miss P. Sarada vs. CIT, 96 Taxman 11 (SC) wherein it was held as under: "section 2(22) of the Income Tax Act, 1961 - Deemed dividends - Assessment year 1973-74. Assessee-shareholder had overdrawn her account in company's book between 03-07-1972 to 22-03-1973. On 31-03- 1973, her account was credited by debiting account of one 'M', another shareholder who had allege ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. Accordingly, the said sum of Rs. 32,74,635/- could not be treated as an advance or a loan as the transactions were in the ordinary and normal course of business of the company CCPL. 10. According to the Ld. AR, it was not correct on the part of the Assessing Officer to treat the debit balance on certain dates for an amount of Rs. 23,156,678/- determined by consolidating the transactions in three accounts maintained by CCPL for the assessee. The assesee also entered into certain other transactions also for and on behalf of the firm India Rubber and Chemicals (IRC) in which he was a partner. The transactions in the three accounts, considered by the Assessing Officer, included the transactions entered for and on behalf of IRC also. The aggregate of such transactions made on behalf of IRC was Rs. 19,61,176/-. Consequently, the company CCPL, in its books, had transferred the sum of Rs. 19,61,176/- at the end of the year on 31-03-2009 to the account of the firm IRC. For the purpose of determining the net debit balance, the transactions relating to IRC amounting to Rs. 19,61,176/- should be excluded. The balance in the consolidated statement of account after such merger of four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls. The shareholders of the CCPL, belong to a family of two brothers. The Managing Director of CCPL was Shri C.N. Rajendran Nair. He expired suddenly in 2007. Late Shri Rajendran Nair was managing the day to day affairs of CCPL. Consequent upon the sudden and sad demise of the Managing Director, CCPL, faced certain difficulties in recovering the dues from certain customers. The company did not succeed in collecting the dues for a long period through the efforts of regular employees and sales representatives. It was felt that the assessee, the new Managing Director Shri N. Rajagopal should personally contact these defaulting customers on a continuous basis to recover the money due to the company, CCPL. Accordingly, the Board of Directors of CCPL in their meeting held on 03-04-2008 authorised the assessee to meet the customers of the company and collect the amount due to the company against the sale of the products. The Board also gave a mandate to the assessee to keep the amount to be collected from the customers as an imprest cash on behalf of the company and to account and remit the money to the company or and in the names of the respective customers as and when he returns to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on behalf of the company and for the benefit of the company only. The amount so collected was deposited immediately in one of the Saving Bank Accounts maintained in the name of the assesee with ICICI Bank and Axis Bank. The assessee did not withdraw any amount from this Savings Bank Account for his personal purposes or individual benefit The assessee was not benefited in any manner by collecting this money and keeping the same in his Savings Bank Accounts. Both these accounts were opened exclusively for the purpose of depositing the amounts to be collected from the customers of the Company. Subsequently, when the purpose of collecting the money from the customers was served, the assessee closed both these accounts. So these two accounts were opened by, operated and maintained only for the purpose of assisting the company in collecting the arrears from its defaulting customers and for the exclusive benefit of the company. The amount withdrawn from the two bank accounts were immediately transferred to the company on the same date and correctly accounted in the names of the respective customers in the books of the company. 17. The Ld. AR drew our attention to the meaning of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany and accounted in the books of the company. During the interim period from the date of receipt of the money to the date of handing over the same to the company, the assessee kept the amount collected as imprest money in the bank. With a view to ensure safety and security of the money so collected and also to keep a record of money so collected, the assessee deposited the said amounts in the bank as and when he received the payments from each customer. The assessee did not utilize any part of the amount collected for his personal needs or purposes. 20. The Ld. AR submitted that thus it is clear the company did not make any payment by way of loan or advance to the assessee. The amount so received by the assessee is not a loan or advance. Such amount will not be covered by the mischief of section 2(22)(e). 21. The Ld. AR also submitted that it is a settled law that the provisions of section 2(22)(e) can be invoked only when the transactions in question give individual benefit to the shareholders. Such requirement is essential to be fulfilled in case of the assessee. 22. The Ld. AR submitted that the provisions of sec. 2(22)(e) are not applicable to the sum of Rs. 32,74,635/- re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttances were made to the company. The assessee did not utilize any part of the amount collected from the customers for his personal benefit or purposes. The assessee clearly explained and confirmed before the Assessing Officer that the cash movement statement register together with the cash flow statement were prepared and furnished on the basis of his memory on receipt of the directions received from the Assessing Officer. 26. Ld. AR submitted that the sum of Rs. 32,74,635/- received by the assessee from the customers of the company does not have the nature and character of loan or advance within the meaning of sec. 2(22)(e) of the Act as the said sum was received and kept as imprest cash with the bank and the assessee did not utilize it for his personal purposes , benefits or needs. In fact the company was benefited immensely by the efforts of the assessee in approaching various customers and collecting long pending dues and arrears from them. The amount so collected was kept as an imprest money for a short period in the bank. Therefore, the Ld. AR submitted that by any stretch of imagination, such money kept as imprest cash in a bank account cannot be treated as a loan or advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wanted to bring to tax monies paid by closely held companies to their principal shareholders. 33. Before proceeding further, let us examine what is the intention of the legislation in enacting provisions of section 2(22) (e) of the Act. Section 2(22) (e) of the Act reads as under : "2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, 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 ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; but "dividend" does not include-- (i) a distribution made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, 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 ;]" 34. The reading of the above provision makes is evidently clear that the law- makers wanted to bring to tax monies paid by closely held companies to their principal shareholders, in the guise of loans and advances to avoid payment of tax. The Hon'ble Supreme Court also held in the case of Navneet Lal C.Jhaveri V K.K.Sen (1965) 56 ITR 198 (S.C) that the provisions of section 2(22) (e) of the Act must be made applicable where dividend disguised as loan is paid by a company. But, they have also held that this concept should not be stretched too far to involve any absurdities. This section defines dividend by giving an exclusive definition. The sub-clauses (a) (b) (c) (d) and (e) are different types of payments. If the same are made in the conditions defined in those clauses exist in a given case, Such payments are treated as deemed dividend. This section, further, lays down exclusive situations wherein such distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned, there is no dispute raised before us. 36. In our opinion, the amount received by the assessee can neither be treated as loan or advance for the purposes of S. 2(22)(e). A loan is granted for temporary use of money or temporary accommodation. In the instant case, such basic features which characteristics, a loan transaction are conspicuous by their absence. Therefore, the amount, in the instant case, cannot be construed as a loan. 37. Having regard to the aforesaid, the assessee submitted that the arrangement under consideration is neither in nature of a loan nor an advance, as contemplated and required for application of section 2(22)(e) of the Act, nor there was any attempt to evade tax by the company and/or the shareholder rather it was at arms length and was not intended for any personal benefit or enjoyment of the appellant instead the arrangement has worked to the detriment of the appellant therefore, the additions cannot be sustained, both on facts and in law. The debts collected by the assessee in the ordinary course of business for business expediency could not be covered under the provisions of section 2(22) (e) of the Act. In our opinion, the addition of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
