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TMI Blog2016 (7) TMI 1591X X X X Extracts X X X X X X X X Extracts X X X X ..... he section 2(22)(e) of the Act. 3. For brevity we consider the facts narrated in one of the assessee's case, namely Gurbinder Singh. The facts of the case are that a survey was carried out on M/s.Rattha Overseas Company Pvt Ltd. and M/s.Roverco Apparel Co. Pvt. Ltd., on 31.08.2009. The survey action revealed that the above mentioned two companies have made payments on various dates to the Directors/Shareholders, who held substantial interest in the above mentioned companies. Accordingly original assessment s u/s.143(3) r.w.s.147 were completed by invoking sec.2(22)(e) and made an addition on account of deemed dividend for assessment years 2005-06,2006-07 & 2007-08. On appeal, Ld.CIT(A) in his common order dated 02.05.2011 granted partial relief. Aggrieved by assessee, the CIT(A) order was challenged before the ITAT. The Chennai Tribunal had passed a common order dated 17.01.2012 for assessment years 2005-06,2006-07 & 2007-08 in respect of above three assessees. The relevant directions given in the order by the ITAT are reproduced as under:- 12. We heard both sides in detail and considered the issue. It is not proper on the part of the Commissioner of Income-tax(Appeals) to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the assessment year 2008-09, we find that the materials relied on by the Commissioner of Income-tax(Appeals) were placed before him by the assessees for the first time. The assessing authority had no occasion to examine the issue in the light of those evidences, later on relied on by the assessees. Therefore, there is a clear violation of Rule 46A. In these circumstance we set aside the said orders of the Commissioner of Income-tax(Appeals) for the assessment year 2008-09 and remit back the issue to the assessing authority. The assessees are directed to produce evidences before the assessing authority to prove their cases that the amounts were paid to the assessees by the company for the purpose of acquiring properties in its name. 15. In result, we have set aside the orders of both the assessing authority and the Commissioner of Incometax(Appeals) for all the four assessment years under appeal. The files are remitted back to the assessing authority. He is directed to examine the evidences and details with reference to the issues and arrive at a lawful conclusion, before which he shall provide ample opportunities to the assessees to present their cases before him. Thereafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the last payment will be deemed to be dividend only to the extent of the balance accumulated profits. If some amount is repaid by the shareholder, the amount so repaid cannot go to augment the accumulated profits. Now let us examine the facts of the present case in the light of the principles mentioned above. 8. Two aspects need to be addressed by us. The first is, the loan given by the two companies ROCPL and RACPL or, is it given by RHPL. The second aspect is, has the Assessing Officer rightly quantified the amount of addition as envisaged in sec.2(22)(e) of the Act. The first aspect is taken up first. Admittedly, the payments were given by the two companies viz., ROCPL and RACPL. Apparently, the loans are deemed to have been given by these two companies. However, the contention of the ld. counsel is that the two companies owed certain monies to RHPL. RHPL, instead of getting its repayment directly, directed the two companies to pay the amounts to the assessee. Therefore, the argument is that the loan is deemed to have been given by RHPL and not the two companies. If the loan is deemed to have been given by RHPL, then on the date of payment RHPL had accumulated losses and hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same. The Assessing Officer shall examine : a) the dates on which the two companies had made payments to the assessee, b) when was the direction given by RHPL to the two companies to make payments to the assessee, c) the payments made prior to the direction cannot be treated as loan given by RHPL,) whether the payments which were made after the direction by RHPL, were by way of debit to the account of RHPL. If the debit to the account of RHPL is delayed even by one day, it will be treated as a loan from the two companies and hence, deemed dividend. Subsequent adjustment in the account of RHPL will not save the assessee from the mischief of sec.2(22)(e). This has been categorically held by the Supreme Court in the case of P. Sarada (supra) as observed at placitum B on page 449 of ITR 229. The Assessing Officer is directed to examine the first aspect of the matter as discussed above. 10. We now come to the second aspect which is whether the addition is correctly quantified. In our opinion, the reply is clearly in the negative. It is well established that the computation of the amount of deemed dividend is to be made on the basis of company's accumulated profits on each day a loan o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mulated profits of that company on the date of payment. In the light of the above background, AO had given effect to the above Tribunal's orders mentioned herein above for assessment years 200506,2006-07 & 2007-08 u/s.143(3) r.w.s.147 r.w.s254 on 27.03.2013. These orders of AO are challenged before the Ld.CIT(A). 3.1 On appeal, the Ld.CIT(A) observed that after examining the submissions of the ld.A.R, no evidence whatsoever has been filed before the AO to substantiate the loans and advances given by the two respective companies are in the nature of commercial transactions and failed to prove these two companies have also benefited out of loans and advances given by the assessee to the two companies under discussion. Therefore, the ratio relied by the ld.A.R in the case of ITO Ward 2(2) Vs. Smt Gayatri Chakraborth (2016) 45 ITR 197 (Kol.-Trib) is not applicable to the facts and circumstances of the assessee's case. Further he observed that jurisdictional High Court in the case of Sunil Kapoor vs. CIT 375 ITR 1 (Mad.) wherein the lordhips have discussed elaborately on the issue on hand and also discussed the effect of Supreme Court judgement in the case of Smt.Tarulata Shyam Vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al entries. These entries should be ignored. 5. On the other hand, ld.D.R submitted that provisions of the section 2(22)(e) of the Act is applicable in view of the following undisputed facts. a) There is no dispute on the fact of that the assessee holds more than 10% of the voting power in both M/s.Roverco Apparel Co. Pvt. Ltd and M/s.Rattha Overseas Company Pvt Ltd. b) It is well settled that the withdrawals made by the assessee from the companies amounts to grant of loan or advance. This fact of the matter has not been dispute by the assessee also. c) It has been brought out earlier that both the said companies in above para (a) have got accumulated profits during the relevant assessment years. According to ld.D.R, the issue is squarely covered by the judgement of the jurisdictional High Court in the case of ACIT Vs.Smt.G.Sreevidya reported in [2012] 138 ITD 427 (Chen). Further, he placed reliance in the case of CIT Vs. P.K.Badiani reported in 76 ITR 369 (Bom.) wherein held that: Amount of loan once deemed to be a dividend, amount on repayment be again credited to the fund of 'accumulated profits' and company's accumulated profits have to be ascertained at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in enacting provisions of the section 2(22)(e) of the Act. Sec.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 accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beneficially entitled to not less than twenty per cent. of the income of such concern ; 8. The reading of the above provision makes is evidently clear that the lawmakers 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 distribution of payments are not treated as deemed dividend. In the explanations, the expression 'accumulated profits' has been defined vide Explanation 2 with reference to clauses (a) (b) (d) & ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes. Further it is noted by the Jurisdictional High Court in that case that while computing the deemed dividend one has to be considered the payments made by the assessee to the company. Hence it is observed by the Court that each debit will have to be individually considered because it may or may not be a loan. The AO is, therefore, directed to verify the each debit entry on the aforesaid loan and treat only the excess amount of debit in the books of accounts of the company as a deemed dividend u/s.2(22)(e) of the Act. In other words, only those net amounts which reflected the debit side of the books of accounts of the assessee falling under the definition of the loans and advances, is with regard to these assessees in the relevant assessment years will be entitled to be taken as a deemed dividend. In other words, the AO has to compute the day to day debit balance of these assessees in the books of accounts and thereafter the AO has to arrive at average yearly balance of the debit in the books of account of each company and compare with it, accumulated profit in respect of each company and lower of these to be considered as deemed dividend in the hands of present assessee. With ..... X X X X Extracts X X X X X X X X Extracts X X X X
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