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TMI Blog2016 (7) TMI 1007X X X X Extracts X X X X X X X X Extracts X X X X ..... essment in that case was of ‘undisclosed income’, on the basis of a dairy seized in search, and which revealed the source of funds invested by the assessee in bonds, tracing the source thereof (on the basis of the said diary) to two concerns, and which had been, in turn, released funds by the payer company in which (the assessee) had substantial interest. It was on that basis that the provision of section 2(22)(e) became applicable - Decided against assessee - I.T.A. No. 1065/Mum/2016 - - - Dated:- 18-7-2016 - Shri Sanjay Arora, AM And Shri Pawan Singh, JM For the Appellant : Shri N. R. Agarwal For the Respondent : Shri Ashok Jha ORDER Per Sanjay Arora, A. M. This is an Appeal by the Assessee directed against the Order under section 263 of the Income Tax Act, 1961 ( the Act hereinafter) by the Commissioner of Income Tax-11, Mumbai ( CIT for short) dated 23.2.2016 setting aside her assessment for the assessment year (A.Y.) 2011-12 vide order dated 14.2.2014. 2. The facts of the case are that the assessee, an individual, and her husband, Shri Vivek V. Samant (VVS), both individually hold substantial voting power (i.e., in excess of 10%) during the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presentative (AR), the assessee s counsel, while confirming that there was no dispute as regards the primary facts/data, i.e., the shareholding and the amounts lent, raised several arguments. The main thrust of these arguments was that no benefit had been derived by the assessee or had arisen to her by these loans. The same were, in fact, repaid during the relevant year itself and, further, with interest. There was thus no occasion to or scope for the application of section 2(22)(e) under the circumstances. On a query by the Bench in respect of no such condition of extension of benefit, i.e., in the section (per its relevant part), he would advert to the decision by the Hon ble Apex Court in CIT vs. Mukundray K. Shah [2007] 290 ITR 433 (SC), wherein it upheld the application of sec.2(22)(e) on a finding by the Tribunal that the company MKSEPL , a partner in two firms, MKF (in with assessee had interest at 16%) and MKI , had advanced ₹ 5.99 crs. to the firms, and which had been utilized by the assessee for the purchase of (RBI) bonds, so that the monies had been diverted for the benefit of the assessee holding more than 10% voting power in MKSEPL. Under these circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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) . (ia) (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e), to the extent to which it is so set off. (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). We may next set out the law in the matter as ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/exceptions being provided for in the impugned provisions (of ss. 2(6A)(e) and 12(1B)), as by way of restriction on their scope to transactions of/by companies, in which public is not substantially interested, with its major shareholders, i.e., holding over a threshold (10%) voting power therein; exclusion of transactions in the ordinary course of business where the payer-company is in the business of money-lending; and, thirdly, making the deeming (of the loan/advance or payment) as dividend subject to and, further, to the extent of, accumulated profits of such company, all of which were regarded as necessary and suitable safeguards. That the provision may cause hardship in some cases was considered as irrelevant (for determining the question of legislative competence). The argument with regard to the loan being interest bearing, and of it having been repaid since, were advanced and considered as not valid grounds for excluding the loan or advance given from the purview of or for the purpose of deeming the same as dividend (refer pgs. 208-210), which we may reproduce for ready reference: The loan may carry interest and the said interest may be received by the company; but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est, the shareholder enjoys the use of the money, and in the process the payment of due tax is evaded. That is the assumption made by the legislature in making this provision. How can it be urged that either the shareholder who is taxed, or the other shareholders who deliberately make the advance to a colleague of theirs, are unfairly dealt with by the impugned provision. (pg. 210) (emphasis, ours) It was also clarified that the condition of accumulated profits would be as on the date of the loan or advance (pg.202). In Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC), it was sought to be argued that the fiction of the provision extended only to a loan or advance that remains outstanding as at the end of the previous year in which the same was taken. The incongruity of the provision was sought to emphasized with reference to sub- clause (iii) of section 2(6A)(e) of the 1922 Act (corresponding to section 2(22)(e)(iii) of the Act), so that where a shareholder has repaid the loan/advance, he cannot avail the set off and, further, multiple loans, since repaid, i.e., prior to the availment of the next loan/advance, are liable to be added separately in computing deemed divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the conditions for the application of the provision. The assessee s contention with regard to the loan being repaid during the year - the opening and closing balance (at ₹ 88 lacs and ₹ 60 lakhs for YIEPL and YCPL respectively) being the same, or of interest having been charged to YBPL, the payee company, would be of no moment in view of the decisions in Navnit Lal C. Jhaveri (supra) and Tarulata Shyam (supra). Then, it is said that the opening balance is to be excluded. Sure enough, it is only the sums received during the relevant year that could be charged as deemed dividend for that year. So however, we find that the amount, reckoned by the ld. CIT at ₹ 182 lacs and ₹ 10 lacs for YIEPL and YCPL respectively, is only without considering the opening balance, i.e., represents only the amounts paid during the year, and toward which we have perused the copies of account of both the payer (lender) and the payee (borrower) companies (PB pgs. 1-5/also refer table at para 2 above). Then it is said that the amounts lent are actually inter-corporate deposits (ICDs). No evidence toward the same has been brought on record or led at any stage, with the ld. AR fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an or advance is given by a company (in which the public is not substantially interested) to a shareholder who beneficially owns shares therein to the extent not less than 10% of the voting power therein; or b) a loan or advance is given by such a company to any concern in which such shareholder has substantial interest (explained as entitling him to a beneficial interest in 20% of its income); or c) any payment is made by such a company on behalf of, or for the benefit of, such a shareholder. The loan or advance or payment is, under such circumstances, to be deemed as dividend to the extent the paying company has accumulated profits, the exception being where the lending company is in the business of money lending. We have already noted satisfaction of all the required conditions in the present case, as well as of the lending companies being not in the money lending business, so that exceptions to the provision are excluded. It is clearly limb (b) supra that is attracted in the present case, and which does not provide for a further requirement to show that the monies were intended for the benefit of such shareholder. There is nothing in the decision to suggest such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, made relying on the decisions in Universal Medicare (P) Ltd. (supra) and Bhaumik Colour (P). Ltd. (supra), nor has any been brought to our notice. We may further add that our decision is also in harmony with the law as explained in Walchand Co. Ltd. vs. CIT [1975] 100 ITR 598 (Bom) (where the loan was for a short period of 23 days) and CIT vs. Badiani (P.K.) [1970] 76 ITR 369 (Bom) (providing for a notional reduction in the accumulated profits on repayment of loan/advance), also noted with approval in Tarulata Shyam (supra). The assessee has, we may add, placed a number of decisions by the Tribunal on file, to some of which reference was also made during hearing. We have decided the appeal on the basis of the clear provision of law, and as further explained and understood by the Apex Court, meeting the arguments advanced and distinguishing the decision by the said court on which reliance is sought to be placed before us. We do not therefore consider it necessary to encumber this order any further by discussing those decisions. Suffice to say that we have perused the same, finding our decision as not inconsistent therewith and, further, consistent with the law as explained by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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