9911796707
TMI Blog2009 (5) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... out hereinbelow and had with the consent of counsel appearing for both parties heard the submissions with a view to finally adjudicate upon the same. The substantial question of law on which the appeal was admitted is as follows:- "Whether trade advances given to the assessee by CEI can be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961?" 3. For the purposes of adjudication of the appeal the following relevant facts require to be noted. 3.1 The assessee who is a proprietor of a concern by the name of M/s Premier Engineering Corporation is in the business of manufacturing customized kitchen equipment. The assessee is also the Managing Director and holds nearly 65% of the paid-up share capital of Continental Equipment India (Pvt.) Ltd. (in short 'CEI'). 3.2 A substantial part of the business of the assessee, which is nearly 90%, is obtained through CEI. For this purpose CEI would pass on the advance received from its customers to the assessee to execute the job work entrusted to the assessee. 3.3 During the scrutiny of the return of the assessee for the assessment year in issue, the Assessing Officer on going through the balance sheet filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be treated as loans or advance within the meaning of Section 2(22)(e) and this was what the Tribunal had done." 3.6 Furthermore, the Assessing Officer placed reliance on the judgment of the Supreme Court in P. Sarada (supra) and observed that the legal fiction had got triggered as soon as the assessee received dividend, irrespective of the fact whether or not that there was an ultimate adjustment or repayment, as it would not alter the fact that the assessee had received dividend from CEI during the accounting period. In coming to this conclusion the Assessing Officer also took into account the communication received from CEI with respect to confirmation of balance as on 31.03.1996 which indicated that the assessee had received a sum of Rs 8,35,000/- out of a total of Rs 14,59,770/- in the form of interest free loan. Based on this communication the Assessing Officer noted that the said amount i.e., Rs 8,35,000/- was received by the assessee from CEI on the following dates:- Date on which loan given Amount 14.02.1996 2,50,000/- 16.02.1996 5,00,000/- 16.02.1996 35,000/- 17.02.1996 50,000/- 3.7 The Assessing Officer also went on to hold, based on the copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of advance, applied the judgment of the Bombay High Court in the case of Nagindas M. Kapadia (supra) and came to the conclusion that amounts received with respect to purchase of material could not be brought within the ambit of Section 2(22)(e) of the Act. The relevant portion of the judgment on which reliance was placed being apposite is extracted below:- "The Tribunal has, on going through the details of the account, found that payments other than the payment of Rs 28,500 in the assessment year 1968-69 and other than Rs 10,000 in the assessment year 1969-70 were made as advances towards the purchases to be made by the company from the assessee. Accordingly, the Tribunal held that only the sum of Rs 28,500 in the assessment year 1968-69 and Rs 10,000 in the assessment year 1969-70 represented payments or advances within the meaning of section 2(22)e) of the Income-tax Act and could be treated as deemed dividend income." 4.3 Accordingly, the CIT(A) deleted the addition of Rs 12,28,517/-. 5. The Revenue being aggrieved preferred an appeal to the Tribunal. The Tribunal after examining the record and upon considering the submissions made by both sides sustained the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 2(22)(e) of the Act was wide as it took within its fold any payment which was received by a shareholder from a company in which public are not substantially interested and in which he holds more than 10% of the shares. The learned counsel for the Revenue placed reliance on the order of the Assessing Officer to contend that a substantial amount out of the said sum, that is, Rs 8,35,000/- was not received by the assessee to give effect to a commercial transaction. She further contended that the judgment of the Bombay High Court i.e., Nagindas M. Kapadia (supra) was not in favour of the assessee; as a matter of fact, if at all, the ratio of the judgment supported the stand of the Revenue. It was the learned counsel's submission that, in any event, even if the finding of the CIT(A) and the Tribunal is accepted to be correct trade advances would also fall within the ambit of Section 2(22)(e) of the Act. 7. As against this the learned counsel for the assessee placed great reliance on the findings and the observation of both the CIT(A) and the Tribunal. It was contended by the learned counsel that in so far as the nature of the payment is concerned there is a finding of fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 percent 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 (hereinafter 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." 9. A bare perusal of the aforementioned provision would show that a payment would acquire the attributes of a dividend within the meaning of the said provision if the following conditions are fulfilled:- (i) The company making the payment is one in which public are not substantially interested. (ii) Money should be paid by the company to a shareholder holding not less than ten percent (10%) of the voting power of the said company. It would make no difference if the payment was out of the assets of the company or otherwise. (iii) The money should be paid either by way of an advance or loan or it may be "any payment" which the company may make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he funds of the company under the guise of loans without attracting super-tax liability. The Australian and Canadian laws contain special provisions for the treatment of such loans as income of the shareholder in suitable cases. It is clear that the grant of such loans is capable of being used as a device to evade the objective of profit retention by the company. We recommend, therefore, that the law should be amended so as to empower the income-tax authorities to treat loans and advances to directors and shareholders of such companies as dividends, where they are satisfied that they are made out of the accumulated profits of the company. It will also be necessary to secure that, when such loans and advances are set off against dividends subsequently declared, they are not taxed as dividends a second time. We suggest that the law on the subject be modelled on the lines of a similar provision included in clause 2(c) (iii) of the Income-Tax (Amendment) Bill, 1951." (emphasis is ours) 10.2 The Finance Minister in his Budget Speech while introducing the Finance Bill acknowledged the fact that the insertion of clause (e) to Section 2(6A) in the 1922 Act was being brought about based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he money as loan: it generally carries an interest and there is an obligation of re-payment. On the other hand, in its widest meaning the term 'advance' may or may not include lending. The word 'advance' if not found in the company of or in conjunction with a word 'loan' may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term 'advance'. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson vs 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 & Paper Mills ltd vs Collector of Central Excise: AIR 1991 SC 754 and State of Bombay vs Hospital Mazdoor Sabha AIR 1960 SC 610. 10.6 It is important to note that Rohit Pulp (supra) was the case dealing with taxation. In brief in the said case the assessee was seeking to take benefit of an exemption notification. The Department d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terpretation, therefore, should be taken recourse to". 11. A close examination of the judgment of the Bombay High Court in the case of Nagindas M. Kapadia (supra) would show that the Court excluded from the ambit of 'dividend', monies which the assessee had received towards purchases. In our view both the CIT(A) and the Tribunal have correctly appreciated this aspect of the matter in the said judgment of the Bombay High Court. The relevant portion of the judgment of the Bombay High Court which sets out this aspect of the matter is already extracted by us in the narrative give by us hereinabove. We are also in agreement with the view of the Tribunal that the judgment of the Supreme Court in the case of Ms. P. Sarada (supra) and Smt. Tarulata (supra) has no applicability to the present case. Both the judgments establish the principle that once the payment made to a shareholder is deemed as dividend then the mere fact that it is repaid would not take it out of the ambit of the tax net. In the instant case, however, a discussion with respect to which has been made hereinabove, the issue is whether the payment received by the shareholder would at all fall within the four corners of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
