M/S THANJAVUR COMMERECE PVT; LTD.,,NAGPUR vs A,C.I.T CENT CIR. 1(2), NAGPUR

Income Tax Appellate Tribunal, NAGPUR BENCH, NAGPUR

Before: SHRI V. DURGA RAO & SHRI K.M. ROY, ACCOUNTANT, MEMBER

For Appellant: Shri Sachin V. Luthra

For Respondent: Shri Harshad S. Vengurlekar

IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH, NAGPUR

BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI K.M. ROY, ACCOUNTANT, MEMBER

ITA no.182/Nag./2016 (Assessment Year : 2011–12) Thanjavur Commerce Pvt. Ltd. 216, Devi Kripa Society ……………. Appellant Wardhaman Nagar, Nagpur 440 002 PAN – AABCT8675J v/s Asstt. Commissioner of Income Tax ……………. Respondent Central Circle–1(2), Nagpur Assessee by : Shri Sachin V. Luthra Revenue by : Shri Harshad S. Vengurlekar

Date of Hearing – 14/05/2025 Date of Order – 15/05/2025

O R D E R PER K.M. ROY, A.M.

The instant appeal by the assessee is emanating from the impugned order dated 29/01/2016, passed by the learned Commissioner of Income Tax (Appeals)–3, Nagpur, [“learned CIT(A)”], for the assessment year 2011–12, confirming the addition made by the Assessing Officer treating the loan repayment received from M/s. Mansa Agro Pvt. Ltd. as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 ("the Act") on the following grounds:–

The assessee has raised following grounds:–

“1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the addition of ` 13,92,098, made by the Assessing Officer under section 2(22)(e) of the Act.

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Any other ground of appeal that may be raised at the time of hearing of the appeal.”

Facts in Brief:– During the year, the assessee was engaged in business of financing mainly two and four wheeler finance. On 30/09/2011, the return of income was filed by the assessee under section 139(1) of the Income Tax Act, 1961 ("the Act") disclosing total income of ` 33,22,800. A search under section 132 of the Act, was carried out at the office premises of the assessee company as well as the residential premises of the Directors and family members in the group cases of Shree Agrawal Coal India Pvt. Ltd, Nagpur on 16/03/2011. The assessee was also searched during the action. The case was selected for compulsory scrutiny by the Assessing Officer as stated in the assessment order and notice under section 143(2) was issued on 12/09/2012. Against the returned income of ` 33,22,800, under section 139(1), on 28/02/2013, the Assessing Officer concluded the assessment under section 144 determining the assessed income of ` 2,73,97,760. Aggrieved with the same, the assessee has filed appeal before the learned CIT(A). Subsequently, order under section 154 was passed on 17/05/2013 rectifying the addition of deemed dividend and the addition was restricted to ` 13,92,098. The assessee being aggrieved filed appeal before the first appellate authority.

The learned CIT(A) after considering the written submissions of the assessee dated 27/11/2013 confirmed the action of the Assessing Officer by citing the below in Para–24 of the impugned order dated 29/01/2016. The relevant findings of the learned CIT(A) are extracted below:–

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“24. I have considered the assessment order, remand report and submission of the assessee. The assessee's reliance on judgments in his submission is also considered. It is seen that the addition made by the AO of Rs.7742491/- in the assessment order was revised to Rs.13,92,098/- in the order u/s 154 dated 17.05.2013. The argument made by the AO in the original submission and the submission in response to remand report has no merit. As rightly pointed out by the AO in the remand report the company which has given the loan to assessee company is M/s Mansa Agro Food Processing Pvt. Ltd. relating to which the deemed dividend of Rs.13,92,098/- has been computed in the rectification order. M/s Mansa Agro Food Processing Pvt. Ltd. is not a finance company and lending of money is not a substantial part of business o9f this company. Therefore, the transaction is not covered in the exemptions laid out in sub clause (ii) of Sec 2(22)(e) of the I.T. Act. As per exceptional clause, dividend does not include "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." The advance/ loan in question is not given by M/a Mansa Agro Food Processing Pvt. Ltd. in the ordinary course of its business. The assessee has not disputed the fact that lending of money is not a substantial part of the business of M/s Mansa Agro Food Processing Pvt. Ltd. In view of the above, the addition of Rs. 13,92,098/- after rectification made by AO on account of deemed dividend is confirmed accordingly.”

Before us, during the course of the hearing, the learned Counsel, Shri Sachin V. Luthra, appearing on behalf of the assessee came up with a strong rebuttal of the stand taken by the authorities below invoking the provisions of section 2(22)(e) of the Act on the grounds that -

“The assessee is registered as NBFC. The assessee had given short term loan to Mansa Agro Pvt Ltd - Rs 28,42,550/- in AY 2010-11 & Rs 4,42,550/- in AY 2011-12. The assessee had given this loan in Ordinary course of Business as money lending is only business of the assessee Covered as exception u/s 2(22)(e)(ii) of the IT Act. The Mansa Agro has returned this loan of Rs. 32,85,100/- to the assessee in AY 2011-12. But AO and CIT (A) had added this repayment of loan as Deemed Dividend stating that Mansa is not doing financing business, & hence it cannot lend money. Kindly-note that Mansa Agro had not given loan / advance to the assessee but infact it was repayment of existing loan given by the assessee, Covered u/s 2(22)(e) (ii) of the IT Act. This fact is stated by statutory auditor in Tax Audit report as loan repaid by Mansa Agro Pvt. Ltd. of Rs. 32,85,100/- in Balance Sheet of TCPL, where it is shown as "Advance received back "and in audited balance sheet Annexure to Note 8(b) of Schedule 13. The AR also filed ledger accounts in his paper book. Copy of the same is enclosed in the paper book.

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Section 2(22)(e) is a deeming provision which creates a legal fiction. In order to appreciate the scope of its applicability and the conditions which are required to be satisfied, it would be appropriate to reproduce hereunder the provision of this section. The section reads as under: "Any payment by a company not being a company in which the public are substantially interested, of any sum (whether 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 beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holdings 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 (herein after in this cause referred to as the said concern) or any payment by any such company on behalf or for the individual benefit of any such shares holder to the extent to which the company in either case process accumulated profits." A bare reading of this section shows that certain specified payments made by a company to a specified shareholder or to a concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by any by any such company on behalf or for the individual benefit of specified shareholder to the extend to which company possesses accumulated profit constitutes deemed dividend and as such liable to tax in the hands of such shareholder. This section provides: i) That it applies to a closely held company and not to company in which public are substantially interested; ii) That such company has made a payment by way of loan or advance to the shareholder or to certain concern in which the shareholder has s substantial interest; iii) Or that such company has made payment on behalf of such shareholder; iv) Or that such company has made payment for the individual benefit of such share holder. It is no doubt that section 2(22)(e) of the Act is a deeming provision. It is a settled rule of interpretation of a fiction that court/authority must ascertain for what purpose the fiction is created, and after ascertaining the purpose, the court has to assume all facts which are incidental to the giving effect to that fiction. However, it will not be given a wider meaning then that it purports to do. Reliance in this regard is placed on the judgement of Hon'ble Allahabad High Court in the case of CED Vs. Krishan Kumari Devi 173 ITR 561. In the case of D.K.Jain Vs. State of Haryana (1995) suppl (1) SCC 349, the Hon'ble Supreme Court has held that a statutory fiction cannot be extended beyond the purpose. Similar view was taken by the apex court in the case of CIT Vs. C.P. Sarthy Mudaliar 83 ITR 170 and of kerela high Court and in the case of P.V. John 181 ITR 1. Thus, it clear that before the deeming provision of the Act is invoked, the purpose for enacting the section must be clear and borne in mind. However for invoking he provisions of section 2(22)(e) of the Act, the Department is required to establish that payment made by a company to the

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share holder or to a concern in which he has a substantial interest fall into the nature and character of loans or advances as there is no allegation of the department that the company has made payments on behalf of the assessee for his individual benefit. Now the material question which requires to be decided in this case is whether the entries appearing in the books of account of the company are in the nature and character of loan or advances so as to justify the invocation of section 2 (22)(e) of the Act. The assessing officer has nowhere explained as to how these entries were in the nature of loans for the individual benefit. The A.O. has merely referred to the statutory audit report in form no. 3CD where the Auditors have indicated the amounts of loan from the company because there is only one column for the same. But it does not mean that these amounts were loans or advances in the legal sense. Moreover, items (a) and (b) of column 24 in the statutory audit report in form no. 3CD refers to particulars of each loan or deposit from and to related concerns. Therefore it was not correct on the part of the assessing officer to make a casual reference to the audit report and jump to the conclusion that impugned transactions were in the nature of loans. The said amount received was in fact repayment of loan from the related concern. Thus he pleaded that the addition is unwarranted.”

The learned Counsel for the assessee further stated that the transaction is repayment of loan given in earlier year. Therefore, the transaction is not covered in the exceptions of section 2(22)(e) of the Act, as it is not a fresh receipt of loan, as laid in sub clause (ii). He thus pleaded that the addition is unwarranted and merits full deletion.

The learned Departmental Representative, Shri Sandipkumar Salunke, relied on the concurrent findings of the authorities below and submitted that the same needs no interference.

We have carefully considered the rival submissions, attentively perused the relevant records, various judicial pronouncements on which the either party had placed their faith and also the paper book furnished by the learned Counsel for the assessee during the course of hearing proceedings. In taking

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into consideration of the reasoning of the Assessing Officer as well as the first appellate authority in invoking the provisions of section 2(22)(e) of the Act which has been fiercely contested by the assessee through its learned Counsel for the assessee as referred to supra, we are of the considered opinion that the assessee, an NBFC, had provided a loan in the ordinary course of business, which was subsequently repaid by the borrower during the year under consideration. The repayment of a loan cannot be deemed as an advance or loan given by the borrower to the lender. Repayment of a loan is a discharge of an existing liability and does not create a new loan or advance for the purposes of section 2(22)(e). Therefore, repayment cannot qualify as deemed dividend under the section. The learned CIT(A) has incorrectly treated a bona fide repayment of unsecured loan as deemed dividend, which is contrary to the legal provisions. The statutory audit report and the assessee's books of account bank statements support the fact that the amount in question was a repayment of loan amount, not an advance, further reinforcing that the provisions of section 2(22)(e) are inapplicable. Since the transaction does not fall under section 2(22)(e), the addition made by the Assessing Officer and confirmed by the learned CIT(E) is unsustainable. The authorities below had miserably failed to analyse the true perspective of the transaction. Repayment of loan advanced in earlier years cannot tantamount to extension of fresh loan, because it is merely clearing off the past dues. Disclosure in audit report is not sacrosanct and the same should be corroborated with the entries in the books of account coupled with objective analysis and thorough application of mind. In the facts and

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circumstances of the case, the learned CIT(A) was not justified in confirming the action of the Assessing Officer in treating the said repayment of loan as deemed dividend under section 2(22)(e) of the Act. The Assessing Officer is accordingly directed to delete the addition. In light of the above findings, the addition of ` 13,92,098, made under Section 2(22)(e) of the Act is deleted. Grounds raised by the assessee are thus allowed.

In the result, appeal by the assessee is allowed. Order pronounced in the open Court on 15/05/2025

Sd/- Sd/- V. DURGA RAO K.M. ROY JUDICIAL MEMBER ACCOUNTANT MEMBER NAGPUR, DATED: 15/05/2025 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Nagpur; and (5) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Sr. Private Secretary ITAT, Nagpur

M/S THANJAVUR COMMERECE PVT; LTD.,,NAGPUR vs. A,C.I.T CENT CIR. 1(2), NAGPUR