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Income Tax Appellate Tribunal, DELHI BENCH: ‘SMC-1’ NEW DELHI
Before: SMT DIVA SINGH
Date of Hearing 05.09.2016 Date of Pronouncement 04.11.2016 ORDER The present appeal has been filed by the assessee assailing the correctness of the order dated 08.12.2014 of CIT(A), Faridabad pertaining to 2007 – 08 assessment year on the following ground:-
1. “That on the facts and the circumstances of the case the Ld.C.I.T Appeals, Faridabad was not justified in confirming the addition of Rs.11,55,937/- on account of “Deemed Dividend” u/s 2(22)(e) of the Income Tax Act, 1961.
That the appellant prays to add, amend and delete any ground of appeal
.”
2. The Ld. AR at the time of hearing, inviting attention to order dated 27.01.2016 in in the case of Sh.Nalin Gupta vs ACIT pertaining to 2007-08 assessment year submitted that the point at issue is fully covered in favour of the assessee by the aforesaid order of the ITAT.
2.1. Relying upon the said order, it was submitted that the CIT(A), Faridabad in the facts of that case vide order dated 04.03.2015 had confirmed the addition made by way of a disallowance on identical facts and circumstances. In the facts of that I.T.A .No.-867/Del/2015 case also, it was submitted another Director of M/s Prescomec Auto Company Private Limited had a running account with the said company and he withdrew an amount of Rs.50 Lacs from the said company. As a result of which he had a debit balance of Rs.8,84,029/- which amount was treated as deemed income under section 2(22)(e). The contention of the assessee therein was also identical namely that he alongwith his other family members had furnished personal guarantees to the bank for enabling the assessee company to obtain a Bank guarantee and the company passed a resolution on 16.06.2005 authorizing the Directors to avail temporary advances for the personal requirement to the extent of Rs.50 Lacs each, in lieu of their providing personal guarantee for the loan and credit facilities available to their assessee company. Hence section 2(22)(e) of the Act it has been held was not attracted. Inviting attention to the order of the ITAT, it was submitted that the facts were identical in as much that in para 3 of the said order it had been noted that the assessee had availed of working capital limits from the Citi Banks Rs.2.5 crores. The Citi Bank had insisted on personal guarantees of the Directors of the Company. The Directors gave personal guarantees. In lieu of such an act of giving personal guarantees the Company Prescomec Auto Co.Pvt.Ltd. permitted the Directors to make temporary drawings of advances to the maximum extent of Rs.50 lakhs.
2.2. Accordingly, it was submitted that relying upon the decision of the Calcutta High Court in the case of Pradeep Kumar Malhotra vs CIT-V, (WB) (2011) 15 Taxman.com 66 (Calcutta) and ACIT vs Smt.G.Sreevidya (2012) 24 Taxmann.com 75 (Chennai) the issue is fully covered in favour of the assessee.
I.T.A .No.-867/Del/2015
The Ld. Sr.DR considering the facts on record though relied upon the impugned order, however, could not cite any reason why the decision of the ITAT should not be followed.
4. Having heard the rival submissions and perused the material available on record, I find that the assessee is also a director in the said company M/s Prescomec Autocomp Pvt.Ltd. and is also a principal shareholder. The assessee has a running account with the company in which the amount contributed by the assessee is added and the amount drawn by the assessee is reduced. During the year on 27.04.2006, 22.05.2006 and 10.06.2006 the assessee withdrew amounts of Rs.5,00,000/-, Rs.10,00,000/- and Rs.10,00,000/- respectively which led to a creation of a debit balance in the company amounting to Rs.11,55,936.84. The assessee has given personal Guarantee for availing of the working capital loan by M/s Prescomec Auto Co.Pvt. ltd. where the assessee is a Director and in terms of the aforesaid Resolution the Directors in lieu thereof the assessee too has been permitted to make temporary drawings of advances to the maximum limit of Rs.50 lakhs. It is seen that there is no change in facts and circumstances of the case. No distinguishing fact or circumstance has been canvassed by the Revenue to take a contrary view. In the absence of any distinction on facts or law respectfully following the order of the ITAT, the appeal of the assessee is allowed. The specific reasoning of the Co-ordinate bench followed is reproduced hereunder:- 3. After hearing rival contentions I find that the undisputed fact is that the assessee availed Rs.2.5 crores working capital limits from the Citi Bank. The Citi Bank had insisted on personal guarantees of the Directors of the Company. The Directors gave personal guarantees. In lieu of such an act of giving personal guarantees the Company Prescomec Auto Co.Pvt.Ltd. permitted the Directors to make temporary drawings of advances to the maximum extent of Rs.50 lakhs. Under these Page 3 of 5
I.T.A .No.-867/Del/2015 circumstances the issue before me is whether a temporary advance of Rs.8,84,029/- can be held as deemed dividends u/s 2(22)(e) of the Act. 3.1. The Hon’ble Calcutta High Court in the case of Pradeep Kumar Malhotra vs. CIT-V, (WB) (2011) 15 Taxman.com 66(Calcutta) at para 11 held as follows. “10. After hearing the Ld.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 be 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 before us, the assessee permitted his property to be mortgaged to the bank for enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from the mortgage. In such a situation, for retaining the benefit of loan availed from Vijaya Bank if decision is taken to give advance to the assessee such decision is not to give gratuitous advance to its share holder but to protect the business interest of the company.
The view we propose to take finds support from the two decision,s one of the Bombay High Court and the other of the Delhi High Court relied upon by Mr.Khaitan as indicated earlier.
We therefore, find that the authorities below erred in law in treating the advance given by the company to the assessee by way of compensation to the assessee for keeping his property as mortgage on behalf of the company to reap the benefit of loan as deemed dividend within the meaning of S.2(22)(e) of the Act.” 3.2. The Chennai A Bench of the Tribunal in the case of ACIT vs. Smt. G.Sreevidya (2012) 24 Taxmann.com 75 (Chennai) held as follows “Held: In order to attract the provisions of S.2(22)(e), the important consideration is that there should be loan/advance by a company to its shareholder. Every amount paid must make the company a creditor of the shareholder of that amount. At the same time, it is to be borne in mind that every payment by a company to its shareholders may not be loan/advance. In the present case, the amount was withdrawn by the assessee from the company only to meet her short term cash requirements. By virtue of offering
I.T.A .No.-867/Del/2015 personal guarantee and collateral security for the benefit of the company, the liquidity position of the assessee had gone down. In the strict sense if it is to be construed the amount forwarded by the company to the assessee was not in the shape of advances or loans. The arrangement between the assesse and the company was merely for the sake of convenience arising out of business expediency. In the facts and circumstances of the case, it is not appropriate to hold that the amount withdrawn by the assessee partakes the character of deemed dividend under the provisions of s.2(22)(e). The CIT(A) had rightly deleted the addition made on account of deemed dividend by the AO.” 3.3. The Ld.CIT(A), in my view, has wrongly interpreted these case laws, as being applicable, only when certain property is pledged as collateral security by the guarantor. He wrongly concluded that, as the assessee has not pledged any of his assets the propositions laid down in these case laws do not apply to the facts of this case.
In my view such interpretation is bad in law. This is not the case where a temporary advance is given to the assessee without a reciprocal business arrangements. It was not a gratuitous act. Providing personal guarantee, by itself is an act which benefitted the company by way of grant of loan and cast a legal obligation on the assessee. Providing assets as collateral security is only an act in furtherance to personal guarantee. Thus I agree with the contentions of the assessee and delete the addition in question. In the result the appeal of the assessee is allowed.”
In the result, the appeal of the assessee is allowed.
The order is pronounced in the open court on 04th of November, 2016.