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TMI Blog2010 (11) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... Developers (P) Ltd [BDPL] were in the course of business activities and that the amounts received were not in the nature of loans and advances ; (iii) the CIT(A) erred in directing the AO to compute the current year s profit; (iv) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act. 3. With regard to the conclusion of assessment u/s 143(3) r.w.s. 153C of the Act which was sustained by the Ld. CIT (A), it was contended by the ld. A R that the provisions of s.153C of the Act were not attracted to the assessee since nothing incriminating relating to the assessee have been found at the time of search, that only the regular books of accounts were found and seized during the course of search and, therefore, the AO ought not to have proceeded to invoke the provisions of s.153C of the Act and that the ld. CIT (A) had grossly erred in out-rightly rejecting the case laws on which the assessee had placed strong reliance. It was, therefore, pleaded that the order of AO was opposed to law which requires to be summarily annulled. 4. The Ld. D R was vehement in her submission that the AO was within his domain to invoke the provisions of s.153C of the Act which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proceedings u/s 153C of the Act illegal etc doesn t hold water since the provisions of s.153C (1) of the Act make it explicitly clear that 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 . 5.3. In view of the above, we are of the considered view that the AO was well within his realm to resort to issue of notice u/s 153C of the Act and, accordingly, the assessee s objection is not sustainable and, accordingly, dismissed. 6. With regard to the assessee s grievance in applying the provisions of s.2 (22) (e) of the Act by the AO and treating the amounts received under contractual terms as loans for the AY under dispute, the issue, in brief, was that during the course of assessment proceedings, the AO noticed that Sri Raja Bagmane who was the beneficial owner of the shares holding of 99% shares in the case of BDPL was also holding substantial interest in the assessee company in terms of s.2 (32) of the Act i.e., the beneficial owner of share in the assessee company carrying not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent appeal. 7.1. During the course of hearing, the stand of the authorities below was vehemently contested by the Ld. AR with his submission, the substance of which is summarized as under: - the amounts paid by BDPL were in the normal course of business and, therefore, what was taken by the assessee from BDPL was not a loan or advance. Amounts given to sister concerns were for allotment of built-up area in the buildings which they develop; - the sister concerns were nothing but the Special Purpose Vehicles [SPV] formed by the promoters to arrange funds for different projects being executed by them. Equity partners look or project specific SPV to invest as they would not generally invest in holding company for obvious reasons because of existing loan commitments, tax dues arising out of past transactions, pending legal issues etc. The banks also have per company exposure to fund their projects. By creating more companies, promoters will be in a position to raise more funds from banks. This commercial fitness and business exigency had promoted the assessee to create more companies; - the moment BDPL decided to allocate funds, it entered into an agreement with the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts shareholders was unfounded as the same was utilized only to make the maximum possible efforts for investments in land and would like to conserve the resources and, thus, distribution of dividends would be its last priority, particularly when there were huge borrowals; - the AO s presumption that the funds taken with no interest or end date by the assessee was one of the factors which led to prove that it being an advance or loan was unfounded since the amount was held by the assessee for procurement of properties on behalf of the company and as such there was no question of paying any interest; - according to the AO, the only exception was in respect of money advanced by a company carrying on money lending business. The question of exception will crop up only after considering the vital question as to whether the amount was an advance or a loan or otherwise. A number of case laws relied on by the AO were not applicable for the reasons that (a) ACIT v. Smt. Lakshmi Kutti Narayanan 112 TTJ 396 (ITAT Kochi) The main issue in that case was that book entries were relating to earlier years. But the principle laid down therein had been lost sight of by the AO. (b)N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was rightly treated them as deemed dividend in the hands of the assessee by bringing it to tax net under the head income from Other Sources . The learned first appellate authority had, after due consideration of rival submissions, substantiated the AO s action which vindicated the stand of the AO on this point. It was, therefore, vehemently urged that the action of the authorities below requires to be upheld. 8. We have carefully considered the rival submissions, diligently perused the relevant records, the various judicial pronouncements on which either party had placed their faith and also the voluminous paper books in volumes [I, II, III IV running into hundreds of pages in its group of cases] furnished by the Ld. AR during the course of hearing proceedings. 8.1. On a critical examination of the relevant impugned assessment order, the reasons for having arrived at such a conclusion that those amounts were to be treated as deemed dividends u/s 2 (22)(e) of the Act for the AY under dispute, can be categorized as under: - the assessee in its Balance Sheet had reflected a liability of ₹ 1,25,000/- to BDPL in Schedule 2 had shown those amounts under the head u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd party shall advance funds to the first party from time to time for acquiring the properties and shall finance the construction till such time the first party is able to secure finance from the banks for the project or find an investor for the project. 11. On completion of the construction on the properties acquired, the first party shall assign the area on the basis of cost + 5% margin to the second party for the amounts paid by the second party to the first party pursuant to the above arrangement entered. The allotment of space is irrevocable. In this connection, the first party shall in close co-ordination with the second party freeze the cost of project per sq. feet and shall allow the representatives of the second party for periodical access to its accounts. As could be seen from the agreement cited supra, the purpose intended and the terms and conditions have been duly earmarked. This has neither been disputed by the AO nor the first appellate authority. The AO s sole objection was that such amounts have been shown under the head liability in its balance sheet. In this connection, we would like to point out that the funds flown through from BDPL to the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. (3) The AO s another contention was that the assessee was unable to substantiate its claim that the funds were given for business exigencies and was in the nature of contractual payments. In this connection, we would like to mention here that the balance-sheet, journal entries in the books of account amply make it clear that the funds were provided during the course of business. (4) The other reasoning of the AO which was ratified by the learned first appellate authority that the alleged non-registered agreement was produced before the AO only on 15.12.2008 which was nothing but an after thought and so on and so forth. It may not be out place to bring on record that the assessee had in fact produced the evidence in the midst of assessment proceedings and, thus, this could not be a sound reason to put the very existence of the agreement itself under the scanner. (5) In a nut-shell, the authorities below have failed to bring on record any credible documentary evidence to nail the action of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the issue on hand. (8) The AO had placed reliance on the ruling of the Hon ble Apex Court in the case of CIT v. Mysodet (P) Ltd. (1999) 237 ITR 35 (SC) to drive home his point. We have diligently perused the observation of the Hon ble Court wherein it was ruled that A perusal of section 2(22)(e) shows that for the purpose of the Act, any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend. Since the Act has not provided for any other definition of the word dividend except the ones enumerated in section 2(22), it should be construed that this definition would be applicable to all provisions which contain the term dividend in the Act. With respects, we would like to mention here that the Hon ble Court had observed on a perusal of s.2 (22)(e) that any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend. The literally meaning of any sum of money by way of advance or loan to its shareholders, it is deemed to be a dividend whereas in the case on hand, the amounts received were in the normal course of business and for the business e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of BDPL and the funds so provided for the sole benefit of BDPL and NOT to individual benefit of a shareholder and, therefore, the question of applicability of the provisions of s.2 (22)(e) of the Act doesn t arise. 8.4. We are, therefore, of the considered view that the case laws relied on by the authorities has no relevance to the present issue. 8.5. The Hon ble Delhi High Court in its recent judgment in the case of CIT v. Creative Dyeing and Printing Pvt. Limited reported in 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 mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expansion, no advance could have been made to it or that Pee Empro Exports would not have distributed as dividend to its shareholders. Thus, but for the advances, the amount of advances could not have reached assessee at all. We therefore, delete the additions as made by the Assessing Officer as the amount received by assessee is not deemed dividend within the meaning of section 2(22)(e) of the 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 [1965] 56 ITR 198 where a similar provision of the Income-tax Act, 1922 i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the controlling group consisting of shareholders have deliberately, decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company; but the main object underlying the loan is to avoid payment of tax..... . The Tribunal has also referred to the judgment of the Bombay High Court in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 3931 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2(22)(e)(ii)], i.e., there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money-lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would, therefore, be covered by section 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 bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions does not fall within section 2(22)(e), we need not to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that is all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). We feel that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Angus Robertson v. George Day [1879] 5 AC 63 by observing it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610. Therefore, we hold that the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assessee-company and M/s. Pee Empro Exports Pvt. Ltd. was not such to fall within the definition of deemed dividend under section 2(22)(e). The present appeal is, therefore, dismissed. 8.6. Further, s. 2(22)(e) brings in a deeming fiction. It provides in certain circumstances an advance or loan is treated as dividend in the hands of the shareholder. Advances and loans have to be interpreted in its true sense. Any payment made out of business expediency does not fall within the ambit of advances and loans, though the accounting entries are passed as such. The true nature of the transaction has to be seen as to whether the transaction is attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs, we are of the firm view that (i) The assessee had furnished the required documentary evidence by means of an agreement entered into and that the amounts received during the course of business and due to business exigency; (ii) the nomenclature advance , perhaps inadvertently shown in the balance sheets shall not alter the character of the purpose for which the amounts received; (iii) the sweeping remark of the authorities below that the agreement entered into by the parties concerned was an after-thought, will not stand the testimony of law unless it has been backed with clinching documentary evidence; (iv) the authorities allegation that the journal entries passed in the case of BDPL resulted into the personal benefit to the assessee etc., will not hold water unless it has been proved so with documentary evidence; (v) no doubt, BDPL was not engaged in the business of money lending and, thus, it could be termed that the amounts so received come under the ambit of s. 2(22)(e) of the Act provided the amounts were in the nature of advance or loan. Incidentally, this has not been implicitly proved by the Revenue; (vi) the clinching evidence in the form of an a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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