THANKAMMA OOMMEN vs. THE ASSISTANT COMMISSIONER OF INCOME TAX

The Department had re-opened the assessment for the assessment year 2003-2004, intere alia, observing that M/s. Thottakkad Estates (P) Ltd., Mannar, has advanced a loan to Sri. K.C. Oommen, its Managing Director, amounting to Rs. 69,50,432/-, which is deemed dividend in the hands of the said K.C. Oommen under Section 2(22)(e) of the Income-tax Act. It is observed that the deemed dividend escaped assessment and hence the assessment is required to be re-opened.

The assessee objected to the same by contending that from 1996-1997 onwards, Thottakkad Estates (P) Ltd., was providing loans to Mannar Chit Fund, a proprietary concern of the assessee, and the returns along with relevant accounts were being filed by both the company as well as late Sri. K.C. Oommen showing the particulars of loan and other details. It is also contended that the amounts in question were advanced to M/s. Mannar Trust Fund, a proprietary concern of the assessee, as part of the money lending business of Thottakkad Estates (P) Ltd. In fact, Thottakkad Estates Limited had sold their property and they have not shown any income from agricultural operations. The assessing officer found that the Managing Director of the Company was the only person to whom the company advanced money and the company was fully engaged in activities like investment in shares and debentures and money lending was not its regular activity. In the said circumstances, the aforesaid amount was considered as deemed dividend and was treated as the income of the assessee.

The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), who confirmed the order passed by the assessing officer. On further appeal before the Tribunal, the Tribunal also concurred with the said view.

The appellant has raised the following questions of law in the memorandum of appeal: “(i) Whether Assessing Officer was right in reopening assessment, when assessee had disclosed fully and truly all material facts in all the years, and no new material was brought to light to the satisfaction of assessing officer and income escaped if any, was on account of mistake on the part of the assessing officer so as to warrant a change of opinion? (ii) Whether the assessing officer was justified in re- opening/assessing the assessee after four years from the assessment year in question without satisfying Section 149 of the Income-tax Act? (iii) Whether reassessment done after 4 years is sustainable, when the precondition of failure on the part of the assessee to make full and true disclosure is mandatory? (iv) Whether reassessment can be made sustainable when assessee was able to produce all documents to show that he is entitled to claim exemption as provided in clause (ii) of Section 2 (22)(e) of Income-tax Act? (v) Whether a composite order rejecting assessees’ objections and making reassessment without giving an opportunity to the assessee to pursue further remedy on rejection of objections is sustainable? (vi) Whether when the nature of money advanced by the assessee are not from accumulated profits, can such advance be classified as deemed dividend? (vii) Whether in the facts of the case, the money given as a loan to the Trust can be regarded as deemed dividend especially in the light of Section 2(22)(ii) of Income-tax Act 1963?”

As far as grounds (i) to (iii) are concerned, the matter is covered by the judgment of the Supreme Court in Asst. C.I.T. v. Rajesh Jhaveri Stock Broker (P) Ltd., 291 ITR 500. Insofar as the original assessment is not completed, it cannot be stated that an opinion was formed earlier to attract any limitation. Therefore, the short question to be considered in the above appeal is whether the alleged loans given by the company M/s. Thottekkad Estates (P) Ltd., to Sri. K.C. Oommen or the the proprietary concern of M/s. Mannar Trust Fund, is a deemed dividend. There is no dispute about the fact that the dividend includes any payment by a Company by way of advance or loan to a share holder, who is the beneficial owner of shares who is holding not less than 10% of the voting power or to any concern in which such share holder is a member or a partner and in which he has substantial interest or under other circumstances as stated in Section 2(22)(e). However, the argument of the learned counsel for the appellant is that the amount advanced is excluded as per the provision contained under Section 2(22)(e)(ii), which reads as under: “(22) “dividend” includes-- xx xx (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. xx xx”

The question is whether the company was dealing in lending of money or dealing in the business of lending of money and whether such business amounts to a substantial part of the business of the company. The learned counsel for the appellant placed reliance on the judgment of the Supreme Court in The Commissioner of Income-tax, Nagpur v. M/s. Sutlej Cotton Mills Supply Agency Ltd., (1975) 2 SCC 538. Reference is made to paragraph 10 to contend that it is not necessary to constitute trade that there should be a series of transactions, both of purchase and of sale. A single transaction of purchase and sales outside the assessee’s line of business may constitute as adventure in the nature of trade. Even if the activity is not repeated or continued, nevertheless it constitutes a transaction which is an adventure in the nature of trade. On this basis, it is contended that even if the company had given loan only to one person during the relevant time, it amounts to a substantial business of the company. We do not think that the facts involved in the above judgment of the Supreme Court has any application to the facts on hand. This is an instance where the only beneficiary of the loan was the Managing Director. It is not in dispute that after 1996, the company has not shown any income from agricultural operations. There is no material to indicate that it has any income from money lending business also. There is a clear finding by the assessing officer as well as the appellate authorities that the company basically invest in shares and debentures and earns income by way of interest and dividend. Therefore, when the assessing officer forms an opinion based on the materials on record that the company was fully engaged in activities like investing in shares and debentures and earns income by way of interest and dividend, in the absence of any other materials, a different finding is not possible. It is also not disputed that during the relevant time, the company had not given any loan to any other person other than the Managing Director. Certain materials had been produced to indicate that subsequent to the assessment year, certain loans were given to other persons. Such persons were all employees who were connected with the company. Since the Tribunal and the first appellate authority have considered the entire facts of the case and confirmed the order of the assessing officer, we do not think that any question of law arises for consideration in this case as there is no material to indicate that the appellant is entitled for the benefit of exclusion as stated in Section 2(22)(e)(ii) of the Income- tax Act. Under these circumstances, we do not think that the questions of law narrated by the appellant arise for consideration in this appeal. In the result, the appeal is dismissed. Manjula Chellur, Chief Justice. A.M. Shaffique, Judge. Tds/ [] P.S to Judge.