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Income Tax Appellate Tribunal, MUMBAI “G” BENCH : MUMBAI
Before: SHRI B.R. BASKARAN & SHRI RAJ KUMAR CHAUHAN
Date of Hearing : 05-12-2024 Date of Pronouncement : 05-02-2025 O R D E R PER B.R. BASKARAN, A.M : The Revenue has filed this appeal challenging the order dt.14-06-2024 passed by the Ld. Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [„Ld.CIT(A)‟] and it relates to AY. 2016-17. The Revenue is aggrieved by the decision of the Ld.CIT(A) in holding that the reopening of assessment u/s. 147 of the Income Tax Act, 1961 („the Act‟) is not valid and further holding that the addition made by the AO u/s. 2(22)(e) of the Act is liable to be deleted.
2. The facts relating to the case are stated in brief. The assessee is an individual and he filed his return of income for the year under consideration declaring a total income of Rs.94.42 lakhs. The assessment was completed by the AO u/s.143(3) of the Act accepting the total income returned by the assessee.
2.1. Subsequently, on verification of the assessment record, it was noticed that the assessee is a shareholder and director in a closely held company named M/s. Amrik Singh and Sons Crane Service Pvt. Ltd. (hereinafter referred to as “company”), wherein he held 10% of its shares. It was further noticed that the assessee has taken unsecured loan of Rs. 62.58 crores from the above said company and the said company was having reserves and surplus of Rs. 45.18 crores. Hence, the AO took the view that the loan taken by the assessee is required to be assessed as “deemed dividend” u/s 2(22)(e) of the Act. Accordingly, he entertained the belief that the income has escaped assessment in the hands of the assessee for AY 2016-17. Accordingly, the AO reopened the assessment of that year by issuing notice u/s. 148 of the Act on 31-03- 2021. In response thereto, the assessee filed the return of income belatedly on 10-12-2021 declaring the very same earlier total income of Rs. 94.42 lakhs. The assessee did no e-verify the said return and accordingly, the AO treated the return of income filed by the assessee as a invalid return. Thereafter, the AO issued notice u/s. 142(1) of the Act asking for details and the assessee also filed reply. But the AO considered them to be incomplete. Accordingly, the AO held that the loan taken by the assessee from the above said company has to be assessed as deemed dividend u/s 2(22)(e) of the Act. However, in terms of sec.2(22)(e) of the Act, he restricted the amount of deemed dividend to the extent of Reserves and Surplus amount of Rs.45.18 crores, as against loan amount of Rs.62.58 crores.
3. In the appeal filed before the Ld.CIT(A), the assessee challenged the validity of reopening of assessment and also the validity of addition made u/s. 2(22)(e) of the Act. The Ld.CIT(A) was convinced with the contentions of the assessee on both issues. Accordingly, he held that the reopening of assessment is not valid. On merits, the Ld.CIT(A) held that the loan taken by the assessee was for the benefit of the above said company only and not for personal benefit. Accordingly, he held that the same is not liable to be assessed deemed dividend u/s. 2(22)(e) of the Act. Aggrieved by the order passed by the Ld.CIT(A), the Revenue has filed this appeal.
We shall first proceed to address the issue contested on merits. We shall first refer to the provisions of sec. 2(22)(e) of the Act, which reads as under:- “2(22) "dividend" includes— ………..………………….. (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 to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965; (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; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Explanation 1.—The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place. Explanation 2A.—In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation. Explanation 3.—For the purposes of this clause,—(a)"concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;(b)a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ; A perusal of the provisions of sec. 2(22)(e) of the Act would show that the payments made by way of advance or loan by a closely held company to its shareholders holding not less than 10% of its share capital are treated as deemed dividend liable to tax. However, the amount to be assessed shall be restricted to the extent of “accumulated profits”. Suppose a shareholder has taken loan of say, Rs.1000/-, but the accumulated profit of closely held company was Rs.500/- only, then the deemed dividend will be Rs.500/- only. If the accumulated profit is say, Rs.2000/-, then the entire loan of Rs.1000/- will be assessed as
In the instant case, there is no dispute that the “company” is a closely held company and the assessee is holding 10% of its shares. Hence, the provisions of sec.2(22)(e) of the Act would be attracted, if the assessee takes any loan from the company and the said loan is liable to be assessed as deemed dividend. However, the loan taken by the assessee exceeds the amount of accumulated profit, then the deemed dividend will be restricted to the extent of the amount of accumulated profits. In the instant case, the loan amount has exceeded the amount of accumulated profits and hence, the AO has restricted the deemed dividend to the extent of accumulated profits in terms of sec. 2(22)(e) of the Act.
However, it is the contention of the assessee that he has not taken any loan or advance for his personal benefit from the above said company and these loan transactions were undertaken for the purposes of business of the above said company. The purpose and nature of transactions undertaken between the assessee and the above said company were explained by the assessee as under:-
It was submitted that the above said company wanted to expand its business by importing Cranes and leasing them out. However, it did not have sufficient surplus funds for importing Cranes. Hence, the company approached HDFC bank seeking term loans/ Letter of Credit facility (LC). The bank agreed to offer LC facility for which it insisted for security in the form of “fixed deposit receipts”, over which the Bank would create lien. It is stated that the assessee herein is 77 years old and accordingly, he, being a senior citizen, is eligible for higher rate of interest. Hence the company decided to make Fixed Deposits in the name of the assessee with the very same HDFC bank by using its own funds, so that it could earn higher rate of interest. Accordingly, the above said company transferred funds to the account of the assessee and the same was used by the assessee to make Fixed Deposits in his name. The very same fixed deposit receipts were again given by the assessee to the bank as security for sanctioning LC facility to the company. With the help of LC facility, the above said company could import cranes and expand its business.
As noticed earlier, the Ld CIT(A) accepted the above said contentions of the assessee. He also took support of the decision rendered by Hon‟ble High Court of Calcutta in the case of Pradip Kumar Malhotra vs. CIT (2011)(15 taxmann.com 66)(Cal) and also the decision rendered by Hon‟ble High Court of Karnataka in the case of CIT vs. N S Narendra (2021)(129 taxmann.com 335)(Kar). Accordingly, the Ld CIT(A) held as under:- “In the light of the above, it is clear that the loan/advance advanced to the appellant was given for the benefit of the company in which the appellant held substantial interest. In the light of above submission made and after perusal of the documents submitted and taking into account the entire conspectus of this case and relying on the judicial pronouncements, I see no reason to uphold with the findings of the assessing officer on account of deemed dividend u/s 2(22)(e) amounting to Rs.45,18,36,451/-. Hence, this ground of appeal is Allowed.”
The Ld.DR submitted that the fact would remain that the assessee has received loans from the closely held company and hence the same would fall within the meaning of deemed dividend under sec.2(22)(e) of the Act. He submitted that the Ld.CIT(A) has granted relief to the assessee by placing reliance on the decision rendered by Hon‟ble High Court of Calcutta in the case of Pradip Kumar Malhotra vs. CIT (supra) and also the decision rendered by Hon‟ble High Court of Karnataka in the case of CIT vs. N S Narendra (supra). However, both the decisions did not consider the decision rendered by Hon‟ble Supreme Court in the case of Smt Tarulata Shyam vs. CIT (1977)(108 ITR 345)(SC), wherein it was held that the repayment of loan will not affect the operation of sec.2(22)(e) of the Act. The Ld.DR also relied upon the Circular No.19/2017 dated 12-6-2017 issued by CBDT, wherein the CBDT has accepted the decisions rendered by Hon‟ble High Courts that the trade advances given to a shareholder will not attract the provisions of sec.2(22)(e) of the Act. The Ld D.R submitted that, in the instant case, the assessee has not received any trade advance. Accordingly, he contended that the loan taken by the assessee cannot be considered as trade transactions falling outside the purview of sec.2(22)(e) of the Act. The Ld D.R further submitted that the Ld CIT(A) has admitted certain additional evidences and did not confront them with the assessing officer in terms of Rule 46A of I T Rules. Accordingly, he submitted that there is violation of the above said rules, in which case, the impugned order passed by Ld CIT(A) is liable to be quashed. In support of this contention, the Ld A.R placed his reliance on the decision rendered by Jodhpur bench of ITAT in the case of ACIT vs. Mohar Singh (2011)(16 taxmann.com 37)(Jodhpur).
The Ld.AR submitted that the funds transferred by the company to the assessee were not used for the personal benefit of the assessee, i.e., it was immediately used for making fixed deposits and the fixed deposit receipts were given to the company, so that it could furnish the same to the very same bank for getting LC facility. Similarly, upon the maturity of the fixed deposits, the assessee has immediately transferred the maturity proceeds back to the company. The Ld.AR also demonstrated the same with bank accounts of the assessee. Accordingly, he contended that the assessee has only facilitated the business of the company by lending its name and bank account, i.e., the assessee has acted as a conduit between the above said company and the Bank. Accordingly, he submitted that the assessee did not get any personal benefit from these transactions. Accordingly, the Ld A.R submitted that these transactions should not be considered as “loan or advance” falling within the meaning of the “loan or advance” mentioned in sec.2(22)(e) of the Act. Accordingly, he supported the order passed by Ld CIT(A) on this issue. With regard to the allegation of violation of Rule 46A, the assessee submitted that the AO had made detailed enquiry with regard to the loan transactions in the original assessment proceedings and hence, he was aware of the nature of those transactions. In this regard, the Ld A.R submitted copies of notices dated 08-05-2018 and 13-07- 2018 issued by the AO u/s 142(1) of the Act, wherein the AO had asked the assessee to furnish the copies of bank accounts and the complete details of income declared under the head „Income from other sources‟. The impugned transactions were available in the documents so furnished before the AO in the original assessment proceedings. He submitted that the Ld CIT(A) has considered only those documents for examining the contentions of the assessee and hence there is no violation of provisions of Rule 46A as contended by the revenue.
9. We heard rival contentions and perused the record. With regard to the contention of violation of provisions of Rule 46A of I T Rules, we find that there are merits in the submissions made by Ld A.R. As noticed earlier, the present assessment proceedings are reassessment proceedings only. The original assessment of the year under consideration has been completed by the AO u/s 143(3) of the Act. During the course of original assessment proceedings, the AO has asked for the details of bank accounts of the assessee as well as the details of income declared under the head “income from other sources”, vide two notices issued u/s 142(1) of the Act, referred above. In response thereto, the assessee has furnished the details of bank account maintained with HDFC bank, the details of fixed deposits made with that bank and also the assessee has specifically stated that the interest expenditure claimed u/s 57(iii) of the Act against interest income received from bank was in respect of advance received from the company. A perusal of the assessment order passed in the original AO has specifically stated that the assessee is a director in M/s Amrik Singh & Sons Crane Service Pvt Ltd and further notices that the assessee has declared interest income under the head Income from other sources. As noticed earlier, the interest paid to the company has been claimed against the interest income received from fixed deposits kept with HDFC bank. Thus, we notice that all the primary details were already available in the record of the assessing officer and Ld CIT(A) has considered those details and also made notices issued u/s 142(1) of the Act and the replies filed by the assessee during the original assessment proceedings as part of his impugned order. Accordingly, we are of the view that the Ld CIT(A) did not commit any violation of provisions of Rule 46A of I T Rules. Accordingly, we reject the grounds of the revenue raised on this point.
On merits, we notice from the submissions made by the assessee and also the details of bank transactions that the amount received from the company was used by the assessee to make fixed deposits. Further the maturity amount of fixed deposits has also been transferred back to the company. The assessee has also explained the purpose of making these types of transactions, viz., (a) the company wanted to avail Letter of credit facility for importing cranes, which could be used for leasing them out. (b) the Bank wanted fixed deposit receipts as security for granting LC facility. (c) the assessee, being a senior citizen, is eligible for higher rate of interest and hence the company decided to make fixed deposits in the name of the assessee. (d) Accordingly, the funds were transferred to the account of the assessee and the same was recorded as loan transaction in the books of the company and the assessee.
(e) the assessee has used those funds to make fixed deposits and the fixed deposit receipts were given back to the bank as security to the LC facility. (f) whenever the fixed deposits got matured, the maturity proceeds were transferred back to the company. A careful perusal of the above said transactions would show that the assessee was not real beneficiary of the loans so given by the company to him. It is very much noticeable that the assessee has acted as a conduit between the company and the bank in order to facilitate the business of the company. Accordingly, we are of the view, these are pure commercial transactions carried out by the company by using the name and account of the assessee. Further, these arrangements have been made only to facilitate the business of the company and thus, they are for the purposes of business of the company.
There should not be any dispute that the provisions of sec.2(22)(e) of the Act would get attracted only if the transactions fall under the category of “loans or advances”. Then, what should be the meaning of the “loans or advances”, which is contemplated in sec.2(22)(e) of the Act is the question that should arise in the minds. We notice that the said question has been answered by the Hon‟ble High Courts after considering the purpose and object of introducing sec.2(22)(e) of the Act. The Hon‟ble Delhi High Court in the case of CIT v. Ankitech (P.) Ltd. [2012] 340 ITR 14/[2011] 199 Taxman 341/11 taxmann.com 100, explaining the meaning of the word "concern" found in the provisions as well as the Explanation (3), where the meaning of the said word is expressly given, held as under:— '24. The intention behind enacting the provisions of section 2(22)(e) is that closely-held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which each shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance.'
In the case of Pradip Kumar Malhotra (supra), the Hon‟ble Calcutta High Court has also explained the context in which the meaning of loan or advance is to be understood. In this regard, it was observed as under:- “10. After hearing the learned Counsel for the parties and after going through the aforesaid provisions of the Act, we are of the opinion that the phrase "by way of advance or loan" appearing in sub-clause (e) must be construed to mean those advances or loans which a share holder enjoys for simply on account of 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; but if such loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to the company received from such a share holder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of share holders would come within the purview of Section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such share holder.”
In the case of N S Narendra (supra), the Hon‟ble Karnataka High Court agreed with the view taken by Hon‟ble Calcutta High Court referred above and observed as under:-
“7. A Division Bench of Calcutta High Court, while dealing with clause (e) of section 2(22) of the Act, held that the phrase 'by way of advance of loan' appearing in sub-clause (3) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of 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; 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 a shareholder, in such case, such advance or loan cannot be said to a deemed dividend without the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. A similar view has been taken in 'Jamuna Vernekar (supra)(IT Appeal No.43 of 2013 dated 10-2-2021) Creative Dyeing and Printing (P.) Ltd.(2009)(184 Taxman 483) and Bagmane Constructions (P.) Ltd. (supra)(2015)(57 taxmann.com 120).”
We may also gainfully rely on the decision rendered by Hon‟ble Karnataka High Court in the case of Bagmane Constructions P Ltd (2015)(57 taxmann.com 120), wherein the Hon‟ble High Court has explained as to how sec. 2(22)(e) of the Act should be interpreted. The relevant observations made by Hon‟ble High Court are extracted below:- “25. It is in this background, the word "any payment", by a company, by way of advances or loans, has to be interpreted. The attribute of a loan is that it is a positive act of lending money coupled with acceptance by the other side of the money as loan and generally carries interest and there is an obligation of repayment. The term "advance" may or may not include lending. The word "advance" if not found in the company or in conjunction with the word loan may or may not include the obligation of repayment. If it does then it would be a loan. However, the Legislature has used the expression by way of advance or loan. Therefore, both these words are used to mean different things. The principle of statutory interpretation by which a generic word receives a limited interpretation by reason of its company is well established. In such circumstance, one can legitimately draw on the noscuntur a sociis principle. In fact this latter maxim is only an illustration or specific application and broader than the maxim ejusdem generies. 26. The Apex Court in the case of State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610 has observed as under:— '9. It is, however, contended that, in construing the definition, we must adopt the rule of construction noscuntur a sociis. This rule, according to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general. The same rule is thus interpreted in Words and Phrases (Vol. XIV, p. 207): "Associated words take their meaning from one another under the doctrine of noscuntur a sociis, the philosophy of which is that the meaning of a doubtful word may be ascertained by reference to the Ejusdem Generis." In fact the latter maxim "is only an illustration or specific application of the broader maxim noscuntur a sociis". The argument is that certain essential features or attributes are invariably associated with the words "business and trade" as understood in the popular and conventional sense, and it is the colour of these attributes which is taken by the other words used in the definition though their normal import may be much wider. We are not impressed by this argument. It must be borne in mind that noscutur a sociisis merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It is only where the intention of the legislature in associating wider words with words of narrower significance is doubtful, or otherwise not clear that the present rule of construction can be usefully applied. It can also be applied where the meaning of the words of wider import is doubtful; but, where the object of the legislature in using wider words is clear and free of ambiguity, the rule of construction in question cannot be pressed into service. As has been observed by Earl of Halsbury, L.C., in Corporation of Glasgow v. Glasgow Tramway and Omnibus Co. Ltd. [(1898) AC 631 at p. 634] in dealing with the wider words used in Section 6 of Valuation of Lands (Scotland) Act, 1854, "the words 'free from all expenses whatever in connection with the said tramways' appear to me to be so wide in their application that I should have thought it impossible to qualify or cut them down by their being associated with other words on the principle of their being ejusdern generis with the previous words enumerated". If the object and scope of the statute are considered there would be no difficulty in holding that the relevant words of wide import have been deliberately used by the legislature in defining "industry" in Section 20(j). The object of the Act was to make provision for the investigation and settlement of industrial disputes, and the extent and scope of its provisions would be realised if we bear in mind the definition of "industrial dispute" given by Section 2(k), of "wages" by Section 2(rr), "workman" by Section 2(s), and of "employer" by Section 2(g). Besides, the definition of public utility service prescribed by Section 2(m) is very significant. One has merely to glance at the six categories of public utility service mentioned by Section 2(m) to realise that the rule of construction on which the appellant relies is inapplicable in interpreting the definition prescribed by Section 2(j).' 27. In this background when we look at the aforesaid provision, it is clear that any payment made by a company by way of advance or loan has to be understood in the context of the object with which the said provision is introduced. Though the legislature has introduced 'advance' as well as 'loan' which are two different words, the meaning of each of those words have to be understood in the context in which they are used. Each word takes its colour from the other. The meaning of the word 'advance' is to be understood by the meaning of the word loan which is used immediately thereafter. Associated words take their meaning from one another under the doctrine of noscuntur a sociis the philosophy of which is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it. This rule, according to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a. less general. In the case of a loan, money is advanced generally on payment of interest. In other words the loan advanced has to be repaid with interest. In the case of an advance also, the element of repayment is there but such a repayment may be with interest or without interest. Therefore, when the said two words are used in the aforesaid provision with the purpose of levying tax, if the intention of such advance or loan is to avoid payment of dividend distribution of tax under Section 115-O of the Act., such a payment by a company certainly constitutes a deemed dividend. But if such a payment is made firstly not out of accumulated profits and secondly even if it is out of accumulated profits, but as trade advance as a consideration for the goods received or for purchase of a capital asset which indirectly would benefit the company advancing the loan, such advance cannot be brought within the word 'advance' used in the aforesaid provision. The trade advance which is in the nature of money transacted to give effect to commercial transactions would not fall within the ambit of the provisions of Section 2(22)(e) of the Act.
In this context, it is useful to refer to the judgment of the Apex Court in the case of LIC of India v. Retd. LIC Officers Association [2008] 3 SCC 321where it was held that each word employed in a statute must take colour from the purport and the object for which it is used. Principle of purposive interpretation should be taken recourse to. If a literal interpretation is given to the said words, it means all trade advances are to be taxed as deemed dividend. If such an interpretation is placed, it would lead to absurdity. That was not the intention of the legislature in enacting the aforesaid provision. Even if the accumulated profit which ought to have been paid to the shareholders as the dividend paid to a sister concern for the purpose of acquisition of capital assets or as a consideration for the goods received which is required for carrying on the business, it would not fall within the definition of Section 2(22)(e) of the Act as the object was not to pay the said amount to the shareholders after avoiding payment of dividend distribution tax under Section 115-O of the Act. In that view of the matter, it is not possible to accept the interpretation sought to be placed by the revenue.
The learned Counsel for the revenue pointed out clause (ii) of Section 2(22)(e) which expressly provides that any payment by a company by way of any advance or loan made to a shareholder or the concern in the ordinary course of business where the lending of money is a substantial part of the business of the company and if the case of the assessee does not fall under the said provision, the said advance constitutes dividend. The question of looking into the aforesaid provision would arise only when all the conditions prescribed in (e) of Sub-Section (2) of Section 22 are complied with. If a payment is made by way of trade or business, advance or loan, clause (e) of Sub-section (2) of Section 22 of the Act is not at all attracted and the question of applying the aforesaid clause (ii) would not arise and therefore, we do not see any substance in the said contention.”
The Hon‟ble jurisdictional Bombay High Court has also examined the provisions of sec.2(22)(e) of the Act in the case of CIT vs. Universal Medicare P Ltrd (2010)(324 ITR 263)(Bom), wherein it was held as under:- “8. Clause (e) of section 2(22) is not artistically worded. For facility of exposition, the contents can be broken down for analysis : (i) Clause (e) applies to any payment by a company not being a company in which the public is substantially interested of any sum, whether as representing a part of the assets of the company or otherwise made after the 31 May, 1987; (ii) Clause ( e) covers a payment made by way of a loan or advance to (a) a shareholder, being a 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 (b) any concern in which such shareholder is a member or a partner and in which he has a substantial interest; (iii) Clause (e) also includes in its purview any payment made by a company on behalf of or for the individual benefit, of any such shareholder; (iv) Clause (e) will apply to the extent to which the company, in either case, possesses accumulated profits. The remaining part of the provision is not material for the purposes of this appeal. By providing an inclusive definition of the expression 'dividend', section 2(22) brings within its purview items which may not ordinarily constitute the payment of dividend. Parliament has expanded the ambit of the expression 'dividend' by providing an inclusive definition.
In order that the first part of clause (e) of section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten per cent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest…..” A perusal of the law relating to sec.2(22)(e) of the Act, as explained by the High Courts would show that the provisions of sec.2(22)(e) of the Act would get attracted only if the payment is made as advances or loans, which a shareholder would enjoy for simply on account of 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. However, if such loan or advance is given to such shareholder on a commercial consideration and for the benefit of the company, such advance or loan cannot be said to a deemed dividend within the meaning of sec.2(22)(e) the Act. Further, it is mandatory that the payment made should fall under the category of Loans or Advances as contemplated in sec.2(22)(e) of the Act.
In the instant case, the purpose of transferring money by the company to the assessee has been well explained. The same would show that these transactions have been carried on by the parties for the purposes of business of the company for commercial purposes. We noticed that the assessee has not been given loan simply on account of being a shareholder holding not less than 10% of the shares. The assessee has been used as a facilitator for entering the transaction between the company and the bank. Thus, the assessee has not received loan for his personal benefit, but allowed his name and bank account used by the company for complying with the terms and conditions prescribed by the bank for granting LC facility. Hence, we are of the view that the said transactions of transferring funds to the account of the assessee by way of loan, which in turn was used to make fixed deposits, which were given as security to the bank would clearly show that these transactions are not for the personal benefit of the assessee and they are commercial transactions entered for the purposes of business of the company only. Accordingly, we are of the considered view that these loans would not fall under the category of “loans or advances” intended in sec.2(22)(e) of the Act.
15. In the Circular No.19/2017 dated 12-6-2017 issued by the CBDT, it is specifically accepted that the trade advances/commercial transactions would fall outside the purview of sec.2(22)(e) of the Act. The paragraphs 2.1 and 3 of the circular are relevant here and the same read as under:-
“2.1 Some illustrations/examples of trade advances / commercial transactions held to be not covered under section 2(22) (e) of the Act are as follows: i. Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do not to fall within the definition of deemed dividend under section 2(22) (e) of the Act. (CIT vs. Creative Dyeing & Printing Pvt. Ltd. Delhi High Court). ii. Advance was made by a company to its shareholder to install plant and machinery at the shareholder’s premises to enable him to do job work for the company so that the company could fulfil an export order. It was held that as the assessee proved business expediency, the advance was not covered by section 2(22)(e) of the Act. ( Pr. CIT Vs Dr. Amrik Singh Basra (Punjab & Haryana High Court) iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22) (e) of the Act. (CIT, Agra vs Atul Engineering Udyog, Allahabad High Court).
In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in section 2(22)(e) of the Act. Accordingly, henceforth, Though the illustrations/examples given in the above said Circular related to the trade advances, the undertone of the circular is that the payments made which are in the nature of commercial transactions will not fall within the meaning of „loans or advances‟ mentioned in sec.2(22)(e) of the Act, as they are not for the personal benefit of the concerned shareholder and further, they are for the purposes of business of the company.
In view of the foregoing discussions, we are of the view that the provisions of sec.2(22)(e) are not attracted to the payments received by the assessee from the company. Accordingly, we uphold the order passed by Ld CIT(A) on the merits of the addition made u/s 2(22)(e) of the Act.
The Ld.CIT(A) has held that the reopening of assessment is not valid. The revenue is also contesting the above said decision of Ld CIT(A). Since we have upheld the decision rendered by Ld CIT(A) on merits of the addition, the above said legal issue will be rendered academic in nature. Accordingly, we decline to adjudicate the same and accordingly, we leave it open.
In the result, the appeal of the Revenue is dismissed.