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TMI Blog2011 (2) TMI 1482X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Ram Saran Mittal 5,020 5,02,000 20.08% Shri Mukesh Mittal 8,485 8,48,500 33.94% Shri Sanjeev Mittal 9,245 9,24,500 36.98% Others 2,250 2,25,000 9.00% 25,000 25,00,000 100.00% The constitution of the assessee firm as on 31st March, 2006 was as under : Name of partner Percentage Shri Ram Saran Mittal 40% Shri Mukesh Mittal 30% Shri Sanjeev Mittal 30% 100% 3. He accordingly, asked the assessee to explain why under these facts, the provisions of s. 2(22)(e) may not be applied for the sum of ₹ 80,00,000 paid by M/s Atul Generators (P) Ltd. to the assessee. The assessee contended that the provisions of s. 2(22)(e) are not applicable for the reason that M/s Atul Generators (P) Ltd. has given a floating security deposit to the assessee due to heavy capital cost incurred by the latter. The security deposit was made in the regular course of business and not for the individual benefit of the shareholders. M/s Atul Generators (P) Ltd. entered into a contract with M/s Gas Authority of India Ltd. for supply of natural gas and it was under an obligation to off-take 80 per cent of the quantity of the gas as minimum guarantee. The assessee had generators wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of s. 2(22)(e) and added in the hand of the assessee. 4. Before the CIT(A), the assessee contended that the AO has completely ignored the undisputed fact that the assessee possesses electric furnace which is used exclusively for its business while M/s Atul Generators (P) Ltd. is having natural gas connection allotted as a mandatory requirement in terms of Supreme Court's order for industries within the Taj Trapezium Zone. M/s Atul Generators (P) Ltd. had to purchase 7,500 SCM of natural gas per day as per agreement between Atul Generators (P) Ltd. and GAIL. They have to make the payment for 80 per cent of the contracted quantity'whether used or not. In order to make use of the gas supplied, M/s Atul Generators (P) Ltd. decided to put up its own electric furnace and for this purpose placed orders for purchase of gas based generators from Jakson Ltd. (an unrelated concern of the assessee). They also advanced a sum of ₹ 5,00,000 to M/s Jakson Ltd. In the meantime, U.P. Pollution Control Board and District Industries Centre on the basis of the directives of Hon'ble Supreme Court did not grant permission to set up new furnaces in Taj Trapezium Zone. M/s Atul Gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts and credited the account of the company on account of the manufacturing expenses which primarily are electric charges paid as per the agreement. Thus, the AO was not justified in treating the said amount of security as loan or advance, an essential ingredient for invocation of s. 2(22)(e) of the Act. 5. The AO has categorically observed that the assessee has not taken any work for M/s Atul Generators (P) Ltd. He failed to appreciate the contention of assessee that the firm had made investment in the generators which were to be used for the generation of electricity out of the gas supply obtained from GAIL by M/s Atul Generators (P) Ltd. and they were under a compulsion to pay minimum charges as per the agreement with GAIL. Repudiating the other observation of the AO that the relationship between assessee firm and M/s Atul Generators (P) Ltd. is symbiotic and not unilateral, therefore, both the concerns are getting advantage by way of this business transaction and in case any security is required, it is to be required from both the sides because one concern is providing gas supply and other concern is allowing its generators for the purpose of generating electricity, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly of the generators and also accepted security deposit from M/s Atul Generators (P) Ltd. It is also proved on record that the funds placed at the disposal of assessee were utilised for other business requirements including payment as excise duty and even repayment of term loan to the bank. The rates of power were mutually agreed considering the interest-free security deposit of ₹ 80 lacs furnished to the assessee by M/s Atul Generators (P) Ltd. On the strength of these arguments, the Authorised Representative for the appellant contended that the provisions of s. 2(22)(e) have wrongly been invoked. Reliance is placed on the following decisions : (a) CIT vs. P.K. Badiani (1970) 76 ITR 369 (Bom); (b) CIT vs. Nagindas M. Kapadia (1989) 75 CTR (Bom) 161 : (1989) 177 ITR 393 (Bom); (c) CIT vs. Ambassador Travels (P) Ltd. (2008) 220 CTR (Del) 475 : (2008) 8 DTR (Del) 108; (d) Jhamu U. Sughand vs. Dy. CIT (2006) 100 TTJ (Mumbai) 1034 : (2006) 99 ITD 1 (Mumbai); (e) Dy. CIT vs. Lakra Brothers (2007) 106 TTJ (Chd) 250 : (2007) 162 Taxman 170 (Chd)(Mag); (f) CIT vs. Raj Kumar (2009) 23 DTR (Del) 304; (g) CIT vs. Creative Dyeing & Printing (P) Ltd. (2010) 229 CTR (Del) 250 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd within the provisions of s. 2(22)(e) or not, it would be better to discuss the provisions of s. 2(22)(e) of the IT Act, 1961. 10. Sec. 2(22)(e) as amended w.e.f. 1st April, 1988 reads as under : "(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." 11. This section which is equivalent to s. 2(6A)(e) of the IT Act, 1922 was for the first time introduced by the Finance Act, 1955 which stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholder who is a registered and a beneficial holder of shares holding 10 per cent voting power. 14. Through this sub-clause, deeming fiction is created whereby the scope and ambit of the word dividend has been enlarged to bring within its cover loans granted by closely-held companies to their shareholders. In order to have a check on similar transactions, the legislation widens the scope of the term 'dividend' to include loans granted to shareholder by the closely-held companies. The word 'deemed' has not been defined anywhere in the Act. Neither has the word been used in s. 2(22)(e). Deemed dividend is therefore a legal fiction created wherein certain payments by companies are deemed to be dividends. This is a settled law in view of the decisions of apex Court in the case of State of Bombay vs. Pandurang Vinayak Chaphalkar (1953) SCR 773 that legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and cannot extend beyond their legitimate field. The legal fiction is of course to be carried to its logical conclusion, but that must be within the framework of the purpose for which it is created. The Courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are capitalized, they cannot be taken into account for the purposes of this sub-clause. Similarly, when an amount lent has already been considered fictionally to be dividend, the same amount when repaid and relent cannot again attract the fiction and be once again deemed to be dividend. Therefore, in considering the taxability of subsequent transactions, the accumulated profits should be notionally reduced by the amount of all loans and other benefits which were once deemed to be dividend. 18. Further, in order to attract the application of this clause, the person should be a shareholder and he should beneficially own at least twenty per cent of the equity capital. A shareholder means a person in whose name the shares stand in the share register of the company; therefore, if a person is merely the beneficial owner of shares, without being the registered shareholder, this clause would not apply to him. 19. Section also prescribes an exception to the above rule. Such exception applies where two cumulative conditions are satisfied : Firstly, the loan should have been made by the company in the ordinary course of its business, and Secondly, moneylending should be a substantial pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of shares". This expression used in s. 2(22)(e) both in the Act, and in the amended provisions w.e.f. 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. Therefore, decisions of the apex Court in the case of CIT vs. C.P. Sarathy Mudaliar (supra) and that of Rameshwarlal Sanwarmal vs. CIT (supra) interpreting the term "shareholder" under the IT Act, 1922, in our opinion, is equally applicable to s. 2(22)(e) as is in existence today. This provision also does not reduce the requirement of being a registered shareholder to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression "being a person who is the beneficial owner of shares" is therefore a further requirement before a shareholder can be said to fall within the parameters of s. 2(22)(e) of the Act. In the Act, s. 2(22)(e) imposes a further condition that the shareholder has also to be beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares holding 10 per cent voting power. Therefore, the expanded meaning of 'dividend' as applied to payments to even non-shareholder would be applicable if all of the following conditions are fulfilled : (a) The person is a registered shareholder of the company; (b) The person is beneficially entitled to 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 of the company; (c) The person is a member or partner in other concern; (d) The person has substantial interest in the concern referred to in cl. (c) above. 28. In the case of Dy. CIT vs. National Travel Services (2009) 31 SOT 76(Del), the Tribunal held that where a firm is only a beneficial owner of shares and the shares are registered in the names of the partners, the loan obtained by the firm from the company whose shares to the extent of 48.18 per cent are held by the partners of the firm, cannot be deemed as dividend in the hands of the firm. In case the amount received by the assessee is treated as loan and advances given by the company, this decision is squarely applicable to the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of shareholder. The deeming provision as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern and accordingly it held that deemed dividend under s. 2(22)(e) of the Act can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person. 34. We noted recently, Bombay High Court, in its decision in case of CIT vs. Universal Medicare (P) Ltd. (2011) 237 CTR (Bom) 147: (2010) 37 DTR (Bom) 409: (2010) 324 ITR 263(Bom), approved the position taken by the Special Bench decision in case of Asstt. CIT vs. Bhaumik Colour (P) Ltd. (supra) holding that the definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. It further observed that the effect of cl. (e) of s. 2(22) is to broaden the ambit of the expression 'dividend' by in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court and other regulating authorities. The assessee was operating electric furnace by using electrical power supply by UPSEB. These facts support the contention of the assessee that M/s Atul Generators (P) Ltd. had entered into an agreement with the assessee to purchase and instal gas based generators from M/s Jakson Ltd. for production of electricity, to allow credit of ₹ 5 lacs to M/s Atul Generators (P) Ltd. already advanced by them to M/s Jakson Ltd. to secure supply of power from M/s Atul Generators (P) Ltd. at concessional rate of ₹ 2 per unit and, on the other hand, for such business expediency, M/s Atul Generators (P) Ltd. was to furnish refundable interest-free security deposit to the assessee. Thus on account of this commercial transaction, M/s Atul Generators (P) Ltd. paid ₹ 80 lacs to the assessee as interest-free refundable security deposit which was refunded subsequently by the assessee to M/s Atul Generators (P) Ltd. In our opinion, the AO was not justified in treating the said security deposit as loan and advance without bringing any evidence to the contrary on record that the transaction entered into by the assessee with M/s Atul Generators ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ster concern having an ancillary unit of both the assessee and sister company striving for export and made to international standard was not regarded to be deemed dividend under s. 2(22)(e). Rajasthan High Court also taken the same view in the case of CIT vs. Hotel Hilltop (2008) 217 CTR (Raj) 527: (2008) 5 DTR (Raj) 46: (2009) 313 ITR 116(Raj). 38. Even the security deposit cannot be regarded to fall within the mischief of the provisions of s. 2(22)(e) of the IT Act, 1961. In the case of Asstt. CIT vs. Global Agencies (P) Ltd. (2004) 87 TTJ (Del)1086, Tribunal held that security deposit by exporters with assessee, buying agent of foreign principal in India to ensure quality of goods exported after securing clearance from the principal and linked with the endorsement of letter of credit cannot be treated as loan or advance for purposes of s. 2(22)(e). In the case of Subrata Roy Sahara vs. Asstt. CIT (2007) 109 ITD 1(Lucknow)(TM), the Tribunal held that when loan granted to managing director by firm holding funds on behalf of company as collection agent, the loan was not held to be deemed dividend as there was no linkage that the funds were exclusively advanced out of the funds col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. 42. It may be mentioned that in a contrary decision of Madras High Court in the case of CIT vs. P.K. Abubucker (2003) 185 CTR (Mad) 558: (2004) 135 Taxman 77(Mad), where X, holding more than 10 per cent equity share capital in A (P) Ltd., let out a property to A (P) Ltd. under an agreement, advance rent received from the company was held to be covered within the purview of this sub-clause, even if the amount was received under the lease agreement (not as a shareholder but as a landlord) or even if it has to be adjusted against future rent. 43. Loan or advance would include not only loan or advance made by a company to its shareholder but also the debit balance arising in a running account [CIT vs. Mrs. Maya B. Ramchand (1986) 53 CTR (Bom) 66: (1986) 162 ITR 460(Bom), Sadhana Textiles Mills (P) Ltd. vs. CIT (supra)]. In CIT vs. P.K. Badiani (supra), the Bombay High Court, while dealing with the running account of the assessee with the company observed as under : "Now, the assessee's account for 1st April, 1957 to 31st March, 1958, shows that there are credits as well as debits. What has to be ascertained is whether the debits are 'loans' so that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ambit of this sub-clause. 46. Mere book entries do not constitute payment by the company as held by the Madras High Court in CIT vs. Smt. Savithiri Sam (1998) 144 CTR (Mad) 17: (1999) 236 ITR 1003(Mad). In this case, on death of a shareholder, debit balance standing in his account was transferred to account of his wife. Department wanted to tax it as deemed dividend. High Court held it could not be done so by observing : "It is difficult to introduce another fiction in respect of the words 'payment by the company' by construing even a transfer entry as amounting to payment." 47. In G.R. Govindarajulu Naidu & Anr. vs. CIT (1973) 90 ITR 13(Mad), call money was due from the assessee and the company debited the account of the assessee with ₹ 1,65,000, being the call money that was due. The question was whether the sum of ₹ 1,65,000 could be assessed as deemed dividend. The High Court held that it is only a book adjustment in company's accounts under which assessee became a debtor and company a creditor. Since there was no cash payment, provisions of s. 2(6A)(e) of the IT Act, 1922 corresponding to s. 2(22)(e) could not apply in view of s. 205(5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a creditor between the party giving money and the party receiving money. But in the case of a deposit, the delivery of money is usually at the instance of the giver and it is for the benefit of the person who deposits the money'the benefit normally being earning of interest from a party who customarily accepts deposits. Deposits could also be for safe-keeping or as a security for the performance of an obligation undertaken by the depositor. In the case of a loan, however, it is the borrower at whose instance and for whose needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the person who lends the money may also stand to gain thereby by earning interest on the amount lent. Ordinarily, though not always, in the case of a deposit, it is the depositor who is the prime mover, while in the case of a loan, it is the borrower who is the prime mover. The other and more important distinction is in relation to the obligation to return the money so received. In the case of a deposit which is payable on demand, the deposit would become payable when a demand is made. In the case of a loan, however, the obligation to repay the amount arises imme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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