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TMI Blog2008 (4) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1,27,26,924 to the speculation business by apportioning an amount of Rs. 1,38,51,924 being interest paid to bank and claimed as deduction from business income. 4. The learned CIT(A)-IV on the facts and in the circumstances of the case erred in upholding the addition of Rs. 11,25,000 being interest on interest-free advances to Shri Gaurang Gandhi of Rs. 75,00,000. 2. Brief facts of the case are that the assessee is a company who filed its return of income declaring a total loss of Rs. 84,95,102 on 1st Dec., 2003. During the assessment proceedings under s. 143(3), the AO noticed from the perusal of the audit report that the assessee has received a loan of Rs. 14,69,893 from M/s Pioneer Intermediaries (P) Ltd. (PIPL) which is the balance as on 31st March., 2003. He observed that the maximum loan outstanding during the year was at Rs. 19,80,333. The AO called for the list of the shareholders of the assessee company as well as of PIPL. He observed that one Shri Gaurang Gandhi held more than 20 per cent of the equity share capital of the assessee company and also held more than 10 per cent of equity share capital of PIPL. Thus, he came to the conclusion that provisions of s. 2(22)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach other. He submitted that PIPL was a share broker of Bombay Stock Exchange and the assessee was a stock broker of National Stock Exchange and was into the broking of Government securities also and upto 2002 PIPL was the client of the assessee company. In view of the same, the assessee was maintaining two accounts with PIPL i.e. trading account and current account i.e. financial transaction account. He drew our attention to pp. 13 to 15 of the paper book which contain the entries relating to the trading account and pp. 17 to 19 of the paper book which relate to the financial transaction account. He submitted that in September, 2002 the assessee surrendered NSE card and some of the assessee's liabilities were discharged by PIPL and the assessee's account was debited. He submitted that the AO has picked up only four entries from the trading account and put them in the current account and treated them as deemed dividend under s. 2(22)(e). He submitted that it is not open to the AO to treat such entries in his own fashion. According to him, the entries should be understood as the parties understood in their business relationships and in the case on hand as both the parties tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich he was a shareholder, even though at the end of the relevant year, no advance and loan were due to the company by the assessee, as a result of credit made in his favour in his account. He also placed reliance upon the decision of the Bombay High Court in the case of CIT vs. P.K. Badiyani (1970) 76 ITR 369 (Bom), wherein the Hon'ble High Court while interpreting the phrase "accumulated profits" in s. 2(6A)(e) of 1922 IT Act held that the accumulated profit means profits which have been accumulated before beginning of the accounting year where the account being a mutual, open and current account, every debit, i.e. every payment by a company to the assessee may not be a loan and to be treated as a loan, every amount paid must make a company a creditor of the assessee for that amount. It was further held that the position as regards each debit will have to be individually considered, because it may or may not be a loan and the two basic principles are that only a loan which would include the other payments mentioned in s. 2(6A)(e) of 1922 Act can be deemed to be dividend and that too only to the extent that the company has at the date of payment accumulated profits after deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 (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;" 6. From the above, it is seen that any payment made by a company in which public are not substantially interested, out of its accumulated profits, to a shareholder or to any concern in which such a shareholder is a member or partner and has substantial interest, by way of loan or advance is deemed dividend income of the recipient. In this case, undisputedly assessee is the recipient of the loan from M/s PIPL. It is also not disputed that M/s PIPL has accumulated profits. The assessee is not the shareholder of M/s PIPL, but it is the concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and even if the account between the assessee and PIPL is not outside the purview of s. 2(22)(e) whether the amount paid by PIPL against outstanding debts are to be considered as loans and advances; (b) whether the payments in respect of regular business transactions reflected in the said accounts are to be held as loans; (c) whether the occasional excess payment made by PIPL on account of the assessee company could be treated as in the nature of loans and advances; (d) whether the business profits of the current year need to be treated as part of accumulated profit as business profits cannot be computed on the day-to-day basis; (e) whether the statutory reserve maintained under the Reserve Bank of India Act, 1934 could be treated as part of the accumulated profits; and (f) whether the successive loans/advances paid by PIPL to the assessee company need to be successively reduced from the accumulated profits or not ? The Tribunal after considering the facts of the case and the judicial precedents has held that payment made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, it was outside the regular business activity of the assessee company. The decision of the Tribunal in the case of N.H. Securities Ltd. (supra) would apply to only those transactions which are entered into the books of accounts as regards regular business transactions and even if any excess payment is made on account of regular business, the claim cannot be considered as loans and advances. In the case on hand the assessee had received payment in excess of the regular transactions with PIPL in order to discharge its liabilities and therefore the transactions would fall within the purview of s. 2(22)(e) of the IT Act. However, we are in agreement with the learned counsel for the assessee that only the net amount and on the days when the credit is in excess has to be considered for the purpose of deemed dividend under s. 2(22)(e) of the IT Act and only that part of the amount which has been paid by PIPL to discharge the liability of the assessee company in excess of what it is due to pay to the assessee company for its regular business transactions, is to be considered as deemed dividend under s. 2(22)(e) of the Act. We, accordingly, direct the AO to recompute the deemed divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and hence this amount is to be given as a deduction out of the profits from speculation business only and as the assessee has not declared any profit or loss from the speculation business, the bank interest debited to the P&L a/c is assessed as speculation loss. Aggrieved assessee filed an appeal before the CIT(A), who confirmed the order of the AO by relying upon the decision of his predecessor in the assessee's own case for the asst. yr. 2002-03. 12. Having gone through the material on record as well as the decision of the Tribunal in the assessee's own case for the asst yr. 2002-03 cited supra, we find that the Tribunal has considered the fact that the assessee has only a single transaction of purchase of shares without any further trading activity at all and, therefore, the provisions of Explanation to s. 73 do not apply. It was held that no material has been brought on record by the Revenue that the purchase of shares in question constituted a separate, independent business of the assessee and even if it is accepted that the purchase of shares by the assessee on its own account constituted a different line of business, from that fact alone, it does not follow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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