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TMI Blog2007 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was acting as conduit for the same ? (2) If the answer is in the affirmative, whether in view of the blending of credit balances aggregating to Rs. 60,61,54,638 could it be inferred that no part of the loan of Rs. 1,88,96,202 to the assessee could have come from the credit balance of Rs. 26,24,12,222 in the name of the company, SISICOL or would it be inferred that 44 per cent. of the loan would have come from the above credit balances on proportionate basis ?" 3 The hon'ble President of Income-tax Appellate Tribunal exercising his power under section 255(4) of the Act referred the matter to the Third Member, the then Senior Vice President, Shri V. Dongzathang. He heard both the party's counsel at length and after going through the orders of the learned Members, who heard this appeal initially, passed the order dated March 26, 1998. It appears that the Department feeling aggrieved from the findings recorded by the learned Third Member filed Miscellaneous Application No. 13/Alld/1998 pointing out that the learned Third Member has not fully answered the points of difference in the questions raised before him. The learned Third Member, after hearing the standing counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emitted by the firm to SISICOL could not be regarded as a loan or advance but it is a debt. According to him, a loan or advance contemplates an outflow of money from the company to the shareholder. There was no direction by the company SISICOL to the firm to advance the sum of money to the assessee. There is, therefore, no reason to treat the amount as loan or advance. It was also held by him that it cannot be inferred that any part of the loan given by the firm to the assessee forms part of the amount due to SISICOL by the firm especially having regard to the fact that the debt due by the firm represents only 44 per cent. of the total funds of the firm and there were sufficient other funds available with the firm for advancing the loan to the assessee. The learned Judicial Member further noted that in the past also the firm has advanced loans to the assessee but no such assessment to tax has been made by him invoking the provisions of section 2(22)(e) of the Act in any of the earlier years. According to the learned Judicial Member, a sum of Rs. 26,24,12,223 primarily represents collection of the last two months due to be remitted by the firm to SISICOL. There is, therefore, no nex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned authorised representatives also supported the respective orders of the learned Judicial Member/learned Accountant Member. 8 After hearing the representatives at length and after going through the record, the Third Member opined that point of difference cannot be answered on the basis of material brought on record, as they were said to be insufficient for coming to a definite conclusion. First of all, it was noted that nature of the account of the assessee has not been looked into nor was it clear how the firm, M/s. Sahara India was advancing huge amount without any proportionate capital, profit or reserve in the account nor was any security obtained. About letters written by the assessee to M/s. Sahara India for loan, the learned Third Member opined that it was not clear in what capacity Shri Subrata Roy requested M/s. Sahara India to give loan on the date he wrote letters and the same was to be ascertained. He also was of the opinion that the arrangement made by the assessee with M/s. Sahara India and SISICOL has to be looked into to see how these transactions can be carried out without following any normal formalities for transaction of business and that aspect has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stance of the assessee, Shri Subrata Roy. It was not a case where agency account as standing in the books of M/s. Sahara India, firm showing a credit balance in the account of SISICOL was adjusted against the said loan given to the assessee. The loan given to the assessee, as mentioned hereinabove, was separately shown in the assets side of the balance-sheet of the firm in Schedule C-I and the remittance thereof was also made to the company through account payee cheque by the firm which cheques were drawn on the behest of the borrower, i.e., the assessee and this remittance was debited to the loan account of the assessee. He further pointed out that the credit balances standing in the current account of the partners were only on account of accumulated loss suffered by the firm in the earlier years and during the year the profit sharing of Shri Subrata Roy, the assessee in the firm, M/s. Sahara India itself amounted to Rs. 2,80,64,386 which was far in excess of the amount of loan given to him of Rs, 1,88,96,202. 11 Learned counsel for the assessee further drawn our attention to the order of the learned Judicial Member and relied on the same. He submitted that the Bench is entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before him. The other observation which has been made by the learned Third Member were neither agitated by the Assessing Officer nor by the learned Commissioner of Income-tax (Appeals) nor any argument was placed before the Bench by the respective representatives of the parties. The learned Third Member is expected to examine whatever material is on record and the question is to be answered accordingly. - 15 After considering all the facts and circumstances, we have no option but to refer the points of difference as emerged from the order of the respective Members who heard the appeal and except replacement of word "credit" to the word "debit" in question No. 1, no other material change is required. Accordingly, we are referring the points of difference to the hon'ble President under section 255(4) of the Act for necessary action and point of difference are annexed separately. ORDER OF THIRD MEMBER 16 VIMAL GANDHI ( President ). On account of difference between the hon'ble Members of the B-Bench, Allahabad (subsequently jurisdiction transferred to the Lucknow Bench), the following questions have been referred to me for consideration as a Third Member under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The amount was added to the income of the assessee. 18 On further appeal, the learned Commissioner of Income-tax (Appeals) held that SISICOL had given loan to a concern in which the appellant had a substantial interest, i.e., firm, M/s. Sahara India. The provisions of section 2(22)(e) were applied in view of its amendment with effect from May 31, 1987, for the assessment year 1988-89 to include concerns in which share holder is a member or partner. The learned Commissioner of Income-tax (Appeals) upheld the addition. 19 The assessee carried the matter in appeal to the Appellate Tribunal. After hearing both the parties, the hon'ble Members of the Bench proposed separate orders. The learned Judicial Member decided the issue in favour of the assessee. 20 In holding that a sum of Rs. 1,84,19,305 was not deemed dividend, the learned Judicial Member gave the following reasons 21 The assessee is the managing director of the closely-held company, SISICOL. The principal business of the company is to accept deposits from public under various schemes launched by the company from time to time. The company has 290 offices throughout the country and is carrying on this activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicial Member held that the fiction in section 2(22)(e) has to be interpreted as not to go beyond the legislative intention in creating such fiction, although it must serve the purpose for which it was created. 26 In paragraph 29, the learned Judicial Member again reiterated the conditions for applicability of section 2(22)(e), namely : (a) the payments should be made by the company by way of advance or loan; (b) such payments should be made either to the shareholder or on his behalf for his individual benefit. 27 In the case in hand, the firm has extensive regular financial dealings with the company and is accredited with the task of collecting deposits under the scheme of the company. No time limit is fixed by the party for remittance of collection made by the firm on behalf of the company. It might be an act of business necessity, prudence or commercial expediency not to specify any time limit for remittance of collection. The learned Judicial Member was reluctant to read anything between the lines for providing no time limit. 28 The learned Judicial Member thus proceeded to consider the question whether credit balances lying with the firm can be treated as loan or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entirely different from normal loan and advance appearing at page 30 of the relevant accounts. 31 The learned Judicial Member further noted that on the facts and circumstances of the case, loan of Rs. 1.88 crores given to the assessee by the firm could not have been treated as advance out of Rs. 26.24 lakhs payable by the firm to the company. The firm had sufficient funds from other sources which fact was also noted by the learned Commissioner of Income-tax (Appeals) in paragraph 4 of his order. The total fund available with the firm at the relevant time stood at Rs. 60,61,54,638, which, of course, included Rs. 26.24 crores payable to SISICOL. The detail of Rs. 60,61,54,638, the amount payable is noted at page 25 of the order. Therefore, on facts, it could not be said that loan of Rs. 1.88 crores given by the firm to the assessee was part of credit balances of the company with the firm. The learned Commissioner of Income-tax (Appeals) held that 44 per cent. of availability of funds with the firm can be said to belong to the company. But such an inference, according to the Judicial Member, could not be drawn without providing specific link or direct nexus between two figures. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the organisation had as many as 290 branches all over the country whose collection exceeded on an average more than Rs. 10 crores per month, most of the collection coming from the remote area. In such a situation, time taken in remitting collections on quarterly basis could not be said to be unfair, unjust or impracticable. Deposits were made by hundreds and thousands of persons from hundreds of centers and, therefore, in making accounts, reconciliation, trial balances and in providing other details of collection and remittance, time would be taken. Therefore, two to three months are taken in remitting the amount. The learned Judicial Member did not agree with the view that Rs. 1.88 crores advanced by the firm to the appellant came out of credit balance of Rs. 26.24 crores. This conclusion stood disapproved as funds exceeding Rs. 60 crores referred to supra were available with the firm. The Revenue's case was further not supported by other facts. The learned Judicial Member noted the details of loan advanced by the firm and found that on April 25, 1991, a sum of Rs. 20 lakhs was advanced by the firm to the assessee. This could not have come out of the credit balance of Rs. 26.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quity and fair approach would be to arrive at a figure on a particular day and a particular loan by including the profit on that day on proportionate basis but in the light of his main finding, there was no need to undertake this exercise. Accountant Member's proposed order 40 The learned Accountant Member disagreed with the order proposed by the learned Judicial Member. He took into account sub-clause (ii) of section 2(22)(e) of the Act which provides that dividend does not include an advance or loan made to a shareholder or a concern of the shareholder in the ordinary course of its business where the lending of money is sub stantial part of business of the company. The learned Accountant Member also considered Circular No. 495, dated September 22, 1987, of the Central Board of Direct Taxes ([1981] 168 ITR (St.) 87) where the above provisions were explained. The Accountant Member concluded that the "concern" included a firm. 41 The learned Accountant Member observed that the Assessing Officer did not take recourse to the amended provisions of section 2(22)(e) and considered only the application of payment of loan or advance to the shareholders only. It is noted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in the case of Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 and two other cases of the Gujarat High Court wherein the above decision of the apex court was relied upon and followed. The learned Accountant Member was of the view that apparently two transactions, first being from the company, SISICOL, to the agent firm, M/s. Sahara India, and the second being from the agent firm to the assessee was, in fact, one transaction only. The cases relied upon by the assessee were held to be not applicable as in those cases, the question of lifting the corporate veil or the question of "conduit" was not considered. The above question which was very material, according to the learned Accountant Member, was somewhat considered in the case of M. D. Jindal v. CIT [1987] 164 ITR 28 (Cal). In that case, the assessee and his wife were only directors of the company dealing in iron materials. In the course of construction of plots, iron rods were supplied by the company to the assessee and his wife. It was held that through supply of iron rods, the company benefited the assessee and that arrangement was made to circumvent the provisions of section 2(22)(e) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28 (Cal). 49 The learned Accountant Member further held that M/s. Sahara India did not have adequate resources and therefore advancement of loan to the assessee could not be treated as an independent transaction. In this connection, reference was made to the balance-sheet of the firm as on March 31, 1992, which showed that the partner's capital was nearly Rs. 42,000 only. 50 The learned Accountant Member concluded that the provision of section 2(22)(e) was applicable in this case with the following observations "A further perusal of schedule of notes on accounts to the balance-sheet of M/s. Sahara India contains note No. 4 as below: 'Interest payable to Sahara India Savings Investment Corporation Ltd. and Sahara India Mutual Benefit Co. Ltd. for the year 1991-92 has riot been accounted for during the year as it shall be accounted for as and when paid. As such balance of these companies are subject to pending reconciliation.' Thus, the interest payable to SISICOL was neither being paid nor being accounted for. This is an instance of the advantage being derived by the firm from SISICOL. 39. On the other hand, the company, SISICOL, had share capital of Rs. 2,95,87,800 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted. He accordingly held that the decision relied upon by the assessee had no application to the facts of the case and were distinguishable. The learned Accountant Member further noted that 44 per cent. of the total funds with the assessee-firm belonged to SISICOL. He noted the provisions of section 155 of the Indian Contract Act and although held that the said section was not applicable yet analogy in the section is useful and deserves to be adopted. The same was adopted in the following observations "I hold further that only 44 per cent, of Rs. 1,88,96,202 i.e., Rs. 83,14,329 will be treated as having come from the assessee SISICOL as a loan to the assessee-shareholder. The Assessing Officer is directed to carry out consequential calculations." 52 On the question of computation of deemed dividend based on accumulated profit of the company, the learned Accountant Member agreed with the learned Judicial Member but gave some directions as to how deemed dividend was to be worked in the hands of the assessee. 53 On account of difference in approach of two learned Members, the issue has been referred to me under section 255(4) of the Income-tax Act for resolving the controv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act. Therefore, any indirect loans are not covered by the provision. Shri Pardiwala placed reliance on the decision of the Calcutta High Court in the case of Nandlal Kanoria v. CIT [1980] 122 ITR 405. 56 The finding of the learned Accountant Member in the proposed order that amount of loan could be calculated on pro rata basis was erroneous, it cannot be argued that out of every rupee, 44 per cent, was loan or advance by the company to the assessee. Shri Pardiwala relied upon the decision in the case of CIT v. Coimbatore Salem Transport P. Ltd. [1966] 61 ITR 480 (Mad). He argued that direct nexus between the shareholder and the loan has to be established. He further quoted the decision in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC). The principle of piercing the veil would apply only if there was no existence of firm or firm was just held to be benamidar of the company, but here existence of firm or of company has not been doubted by the Revenue authorities. There is no finding that firm is benamidar of the assessee. The learned Commissioner of Income-tax (Appeals) had made a case that the amended provisions were applicable. Payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was taken as loan from the firm, Sahara India (hereinafter referred to as "the firm") and the said firm had advanced, the same out of funds of several crores belonging to other concerns. The detail of the above amount payable by the firm has been noted in the orders of the Revenue authorities as well as in the proposed orders of the learned Members and are not in dispute. The learned Judicial Member, for the reasons already noted, has decided the issue in favour of the assessee. The learned Accountant Member, on the other hand, held that 44 per cent. of Rs. 1,88,96,202 was payment by way of loan or advance by SISICOL to the assessee through the conduit of the agent firm, M/s. Sahara India, the arrangement being a device. 60 In my considered opinion, the issue should be considered in the light of the latest decision of the hon'ble Supreme Court in the case of CIT v. Mukundray K. Shah [2007] 290 ITR 433 (SC); [2007] 8 RC 717. In the said case, the assessee was the shareholder of MKTPL was also a partner in two firms MKF and MKI. Their Lordships held that the Tribunal was right in holding on examination of the cash flow statement, that MKSEPL had made payments to MKF and MKI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable with the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting section 2(22)(e) of the Act." 62 In upholding the decision of the Assessing Officer and the Tribunal, their Lordships of the Supreme Court also noted the decision of hon'ble Madras High Court in the case of CIT v. L. Alagusundaram Chettiar [1977] 109 ITR 508 wherein the import of the word "payment" in the similar pro vision was considered and it was held that the payment by the company to Karuppiah Chettiar was for the benefit of the assessee, the managing director of the company, arid was, therefore, assessable as a dividend in the hands of the assessee. Their Lordships noted that the court had held that the basic test to be applied in such cases is not whether the loan given is a benefit but whether the payment by the company to Karuppiah Chettiar was for the benefit of the assessee who was the managing director of the paying company. Following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of the excess. Therefore, the position as regards each debit will have to be individually considered, because it may or may not be a loan. The two basic principles are, that only a loan, which would include the other payments mentioned in section 2(6A)(e), can be deemed to be dividend and that too only to the extent that the company has at the date of the payment 'accumulated profits' after deducting therefrom all items legitimately deductible therefrom. 21. As regards questions Nos. 3 and 4, Mr. Rajgopal contended that the debit balance, if any, at the last date of the assessee's accounting year April 1, 1957, to March 31, 1958, should be taken as the amount to be treated as dividend and as the assessee's account is on the last day to his credit, no amount can be deemed to be dividend. As already pointed out, the position has to be ascertained at the date of each payment by the company to the assessee and this contention must, therefore, be rejected. If Mr. Rajgopal's contention was to be accepted, the result would be that if a shareholder borrows a large amount during the year, but repays it on the last day of the year, it would not be considered to be a loan, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 18(5) of the Act. Hence, a loan given to a Hindu undivided family cannot be considered as a loan advanced to a 'share holder' of a company." 67 It is, therefore, quite well-settled that the burden is on the Revenue to prove that case is falling within the mischief of the deeming provision, which is required to be strictly construed. 68 One of the contentions advanced before me and accepted by the learned Judicial Member is that no loan or advance is shown by the company to the shareholder-assessee in the books. It may be a debt but not loan from company to firm or to the assessee. Reliance has been placed on the decision of Bombay Steam Navigation Co. (1953) P. Ltd. [1965] 56 ITR 52 (SC) and on several other decisions to contend that there should be outflow of funds. However, in my considered opinion, the problem cannot be resolved by merely answering the question on consideration of entries in books of account. I have note the above decided cases where addition was sustained in the hands of the assessee although as per entries in the books of account, the assessee was not shown to have received any loan or advance. On facts and circumstances of the case, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of section 2(22) (e), notional or artificial income is being assessed through a fiction and the burden is on the Revenue to establish that a transaction falls within the scope of the pro vision would have no meaning. Therefore, the Revenue cannot rest its case merely on presumption. It has to base its case on material on record. In this respect, the learned Judicial Member has held that there is no material on record to show that funds of the company were utilized by the firm to advance loan to the assessee. The firm had advanced loan of Rs. 1,88,96,202 out of total funds of more than Rs. 60 crores belonging to different parties available with the firm. The Revenue has not shown that the above factual finding suffers from any legal infirmity. 70 The learned Accountant Member, on the other hand, has held that the two transactions one from the company SISICOL to the firm and the second "firm" to the "assessee" should be treated as one. But the learned Accountant Member has not given justification or referred to any material on which the above inference is based. The firm admittedly has a legal existence separate and independent of the company. It is shown to have carried ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd breadth of the country and that time was taken in making accounts, reconciliation, trial balances and in providing other details of collection and in remittance of money to SISICOL. Having regard to the huge turnover, two months cannot be said to be unreasonable. This is what the learned Judicial Member has recorded and my attention has not been drawn to any material, which would show that such a finding on facts of the case, could not he recorded. The factual finding has also not been shown to be erroneous. A device cannot be presumed, it has to be established by bringing on record facts and circumstances from which a reasonable inference of device could be drawn. No such attempt appears to have been made here. 71 Out of the three cases noted by their Lordships of the Supreme Court, the case of Nandlal Kanoria v. CIT [1980] 122 ITR 405 (Cal) is closer to the facts involved in the present case. In the said case, the assessee was the shareholder of a sugar company. During the previous year, relevant to the assessment year 1969-70, the assessee obtained two loans, one of Rs. 75,000 on July 30, 1968, and the second of Rs. 2 lakhs on September 2, 1968, from his proprietor co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o construe the said section by importing the expression 'directly or indirectly' in connection with the expression 'by way of advance or loan to a share holder' as appearing in section 2(22) (e) of the Act of 1961 But the same conclusion was not arrived at in respect of the subsequent loan of Rs. 2,00,000 from Indira Co. to the assessee. The Tribunal noted that before this amount was advanced, Indira Co. had not only received Rs. 4,80,000 from the company but also another sum of Rs. 1,25,000 from United Provinces Sugar Co. Ltd. These two amounts received from two different sources blended in the hands of Indira Co. and out of the blended fund a sum of Rs. 2,00,000 was advanced to the assessee. The Tribunal refrained from drawing the further. conclusion that Rs. 4,80,000 paid by the said company to Indira Co. or any part thereof was meant for the benefit of the assessee. We have been unable to appreciate the observations of the Tribunal in this connection and its conclusions as to the situs of the debt or the shifting of entries in the books of Indira Co. or the relevancy of the same in the controversy before us. We hold that the said sum of Rs. 2,00,000 lent by Indira ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion, which is not based on any material. 73 The learned Accountant Member was prepared to accept that inference of advancement of funds of the company to the assessee would not have been drawn if the firm had sufficient capital of its own to advance the loan of Rs. 1.86 crores to the assessee. In my considered opinion, there is no material difference whether the assessee made advance out of its own funds or out of funds belonging to others. In both the situations, funds of the company were not utilized for advancing loan to the assessee and, therefore, the provisions of section 2(22)(e) of the Income-tax Act are not applicable. 74 The other decision of the Madras High Court in the case of L. Alagusundaram Chettiar [1977] 109 ITR 508 is not applicable as facts involved in that case were quite different. One apparent difference between the two cases is the efforts made by the Assessing Officer to establish the case that payment to Karuppiah Chettiar was for the benefit of the assessee share holder. In this connection, the Assessing Officer called the assessee and Shri Karuppiah Chettiar and subjected them to lengthy cross-examination regarding the purposes for which lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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