ACIT CENTRAL CIR. 6(4), MUMBAI vs. SHRI AJAY VIRENDRA ARORA, MUMBAI

"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the fact that the assessee held beneficial share holding and voting power of 81% in D'Decor Home Fabrics Private Limited, whose accumulated profit as on 31.03.2017 was Rs.296,42,12,262/-, and the ledger account of the assessee in the books of D'Decor Exports Private Limited showed payments made to assessee and third parties on his behalf (by D'Decor Exports Private Limited) of Rs.23,97,43,607/-, which is nothing but 'loans and advances', hence the same ought to be treated as 'deemed dividend' as per the provisions of Section 2(22)(e) of the Income tax Act, 1963."

"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the account of the assessee in the books of D'Decor Exports Private Limited as shifting, current and/or running account, referring to Section 19 of the Limitation Act, 1963, and not loans and advances, however, the Limitation Act, 1963, only refers to limitations periods (of suits, appeals and applications) and its computation and does provide definition of shifting, current and/or running account."

"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in relying upon Section 19 of the Limitation Act, 1963, to hold that the account of the assessee in the 3 Shri Ajay Virendra Arora books of D'Decor Exports Private Limited as shifting, current and/or running account, which does not provide definition of the same."

"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not considering the decisions of the Hon'ble Supreme Court in the case of Tarulata Shyam & Ors. Vs. CIT(SC) 108 ITR 345 and Sarada Vs. CIT (SC) 229 ITR 444."

The facts in brief are that, assessee has been showing salary income in the capacity of a Directors in; D‟ Decor Home Fabrics Pvt. Ltd., Home Idea Curtain Fabrics and Home Idea Upholstery Pvt. Ltd. The assessee has also shown income from house property, capital gains and other sources. The return of income was filed on 31.10.17 declaring total income of Rs. 31,04,19,290/-. Later on a search and seizure action was carried out in the case of D‟ Décor Group on 06.03.2018 in which assessee was also covered.

In so far as issue on deemed dividend is concerned, Ld. AO has noted that from the perusal of the ledger account of the assessee in the books of D‟ Decor Home Fabrics Pvt. Ltd., wherein assessee was holding 84.5% of shares, that the assessee has received loans and advances for some aggregating Rs. 23,97,43,607/- during the relevant year. He also noted that the 4 Shri Ajay Virendra Arora company had accumulated profits for the year was Rs. 2,96,42,12,262/-. In response to the show cause notice issued by the AO that as to why the loans and advances received from the company wherein assessee is having beneficial shareholding should not be treated as deemed dividend u/s 2(22)(e), assessee submitted that he has only one ledger account in the books of D‟ Decor Home Fabrics Pvt. Ltd. (DDHF) involving about 201 transactions which includes payments made by the assessee to DDHF at various occasions having his credit balances in the books of DDHF. At various occasions, DDHF has made direct payments to the assessee or payments made to third parties on his behalf leaving the debit balance in the books of DDHF in the name of assessee and at few instances, the payments were made to the family members of the assessee. The assessee‟s contention was that since there are regular transaction in the current or running account and not in the nature of advance loan within the meaning of section 2(22)(e). Assessee has also relied upon various decisions. Ld. AO after referring to the provision of section 2(22)(e) and how it is attracted in the case of the assessee, held that all the conditions as provided in the section are 5 Shri Ajay Virendra Arora applicable. The working of the deemed dividend based on various transactions appearing in the books of the company is as under:-

Accordingly, he treated an amount of Rs. 23,97,43,607/- as advance given by DDHF to the assessee as deemed dividend and taxed the same u/s 2(22)(e).

Ld. CIT(A) after considering the findings given by the AO and submissions given by the assessee, deleted the said addition after observing as under:-

After referring to various judgments, Ld. CIT(A) held that provision of deemed dividend u/s 2(22)(e) has no application in the case of the assessee.

Ld. DR submitted that here in this case there is no dispute that huge advances were given to the assessee and assessee being majority and beneficial shareholder, therefore all these advances are in the nature of deemed dividend. It is running or current account does not make difference and on various occasions, the credit balance was in the favour of the assessee, i.e., company owed more from the assessee during the year. However, at the end, there was a debited balance only. He thus, strongly relied on the order of AO.

Before us, Ld. Counsel for the assessee submitted that here in this case one peculiar fact which was already on record was that, as and when there was credit balance in the account of the assessee, the assessee has paid interest @ 13.1%. Even if it is treated that assessee has taken advance or loan, but he has paid interest to the company even if such advance was for a day. The opening balance was negative and so was the closing balance as on 31st March 2017

We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material placed on record. On perusal of the ledger account of the assessee and books of the company, D‟ Decor Home Fabrics Pvt. Ltd., we find that there has been a continuous transaction whereby advances have been given to the assessee and assessee has been returning back the money to the company immediately or in the short interval. Ld. AO has treated the peak amount dated 28.10.2016 of Rs 23,97,43,607/- as deemed dividend holding that on that date there was a maximum credit balance. Even if advances have been received by the assessee from the company which can be reckoned

There are 'two' types of loans that the Company may grant to its employees including Managing Director, Whole Time Directors and Directors: a) Interest Free Loan. An eligible employees may get a loan of up to his / her three months gross salary. b) Loan with Interest. This will have the following two limits:- (i) The employees who have less than two years of confirmed, service with the Company will be entitled to a loan (including interest) of up to his / her twelve months gross salary. (ii) The employees who have two years or more of confirmed service with the company will be entitled to a loan "(including interest) of up to his / her twenty four months gross salary. Rate of Interest

(a) The rate of interest shall be decided by the CFO along with Corporate HR/Admin Department every year in the month of April. (b) The rate of interest for the year 2013-14 and onwards: Interest shall be charged at such percentage basis the State Bank of India' personal loan interest rates prevailing as on April 1 of each financial year, or such higher rate as may be decided by the approving authority, on monthly reducing balance basis.

Interest free loan (Refer paragraph 3 (a) above) will be recovered in maximum twelve equal monthly installments from the month in which the amount is paid to the employee.

The loan with interest will be recovered in maximum 24 equal monthly instalments from the month in which the amount is paid to the employee.

The HR department shall ensure that the total liability of an individual towards repayment of loan (from all sources put together) does not exceed 200% of his/her gross annual salary.

In case an employee resigns or ceases to be in the service of the company due to any reason. he/she will have to liquidate the loan outstanding against his/her name before full and final settlement of his/her dues.

The Company will have a right to adjust the loan amount from PF / Gratuity / any other dues etc. payable to an employee.

Further as submitted by Ld. Counsel, the assessee has paid interest to the company @ 13% on every credit balance appearing in the books of the company, i.e., if by the month end there is credit balance, the company has charged 13% interest per annum. Once the advance and loans are interest bearing advance and the 17 Shri Ajay Virendra Arora company has benefitted hugely from such advances, then it cannot be treated as company has given advances or loans to the benefit of the shareholders or to its detriment.

The Hon‟ble Calcutta High Court in the case of Pradip Kumar Malhotra reported in 338 ITR 538 has held that the phrase “by way of advance or loan” appearing in section 2(22)(e) must be construed to mean those advances or loans, which a shareholder enjoys for simply on account of being a partner, who is the beneficial owner of shares, but if such loan or advance is given to such shareholder as a consequence of any further consideration, which is beneficial to the Company, received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act. It was held that gratuitous loan or advance given by a Company to those classes of shareholders thus would come within the purview of section 2(22)(e) but not the cases where the loan or advance is given in return to an advantage conferred upon the Company by such shareholder. The same principle applied by the Tribunal in the case of Sangeeta Jain (supra). Thus, here in this case, the loan and advance given to the assessee is for 18 Shri Ajay Virendra Arora consideration on which the company has benefitted and therefore, following the principle laid down by the Hon‟ble Calcutta High Court, the same cannot be termed as divided income.

CBDT vide circular no. 19/2017 dated 12th June 2017 while clarifying the view to section 2(22)(e) had stated that if the advance are in the nature of commercial transaction, then same would not fall within the ambit of word „advance‟ in section 2(22)(e) of the Act. Here, the advance is in the nature of commercial transaction since that the company has received interest from such advance given. Therefore, in our view the provision of deemed dividend cannot be invoked once the company is benefitted on such transaction. On this ground, we do not find any reason for invoking deemed provision of section 2(22)(e), because there is no benefit which was given to the shareholders, i.e.,s the assessee by the company by giving such advances. Accordingly, on this reason, the addition on account of deemed dividend is deleted.

In the result, the appeal filed by the revenue stands dismissed. Orders pronounced in the open court on 22nd November, 2022. 19 Shri Ajay Virendra Arora (S. Rifaur Rahman) (Amit Shukla) Accountant Member Judicial Member मुंबई Mumbai;ददनांक Dated : 22/11/2022 Sr.PS. Dhananjay