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Income Tax Appellate Tribunal, “E ” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI C.N. PRASAD
सुनवाई क� तार�ख / Date of Hearing :07.07.2016 घोषणा क� तार�ख /Date of Pronouncement :21 .09.2016 आदेश / O R D E R
PER C.N. PRASAD, JM:
This appeal is filed by the Revenue against the order of the Ld. CIT(A)- 29, Mumbai dated 30.09.2014 pertaining to assessment year 2008-09.
2 C.O. No. 91/M/2016 2. The Revenue in its appeal challenged the order of the Ld. CIT(A) in deleting the addition of Rs. 1,12,56,000/- made u/s. 2(22)(e) of the Act.
Brief facts are that the assessee who is an individual engaged in the business of trading in shares filed return of income on 30.3.2009 declaring total income of Rs. 11,66,460/-. The assessment was completed u/s. 143(3) r.w. section 147 of the Act dated 28.3.2013 determining total income of the assessee at Rs. 1,24,22,460/- and while completing the assessment addition of Rs. 1,12,56,000/- was made as deemed dividend u/s. 2(22)(e) of the Act. In the course of assessment proceedings, the Assessing Officer noticed from the balance sheet of the assessee that he has shown unsecured loan from M/s. Equisearch Broking Pvt. Ltd (EBPL). Similarly, on perusal of the ledger account of EBPL in the books of the assessee he found that the assessee received money on various dates during the financial year 2007-08 relevant to A.Y. 2008-09. He also noticed that assessee was holding 66.91% of shares of EBPL therefore, Assessing Officer required the assessee to explain as to why the loans received from EBPL should not be treated as deemed dividend under the provisions of Sec. 2(22)(e) of the Act.
3.1. In response to the query of the Assessing Officer, the assessee submitted that these amounts were received in the normal course of business of buying /selling of shares as per client-broker relationship with EBPL. It was submitted by the assessee that the brokerage and other charges were paid to EBPL by the assessee for carrying on the trades as per Contract Note issued to the assessee by EBPL. Therefore, it was contended by the assessee that since the amounts were received in the normal course of buying and selling shares, it 3 C.O. No. 91/M/2016 would not fall within the definition of deemed dividend u/s. 2(22)(e) of the Act. The Assessing Officer without appreciating the submissions of the assessee treated the amounts received from EBPL as deemed dividend in the hands of the assessee.
On appeal, the Ld. CIT(A) deleted the addition made by the Assessing Officer towards deemed dividend u/s. 2(22)(e) of the Act holding that the money received was in the course of normal business transactions between the assessee and EBPL. He also observed that the money has been received from the company and has again gone back to the same company on the same day as a part of business transaction. Therefore, he held that the transactions were in the normal course of business therefore the provisions of Section 2(22)(e) are not attracted.
The Ld. Departmental Representative vehemently supports the orders of the Assessing Officer. He further submits that the company and individual are separate entities and the assessee received monies from the company in the capacity of Director and therefore in a way it is in direct distribution of profits of the company. Therefore, he submits that the Assessing Officer has rightly invoke the provisions of Sec. 2(22)(e) of the Act.
The Ld. Counsel for the assessee supporting the order of the Ld. CIT(A) submits that the transactions between EBPL and assessee are in the course of business of purchase and sale of shares. The assessee is having a running account with EBPL for the purpose of his business of purchase and sale of shares and therefore the provisions of Sec. 2(22)(e) have no application. Placing reliance on the decisions in the case of CIT Vs Parle Plastics Ltd and Another (332 ITR 63) (Bom) and 4 C.O. No. 91/M/2016 in the case of CIT Vs Suraj Dev Dada (367 ITR 78) (P&H) he submits that when the assessee has running account with the company, the provisions of Sec. 2(22)(e) are not attracted unless it is shown that the assessee was misusing funds by taking it out from the company by way of loan or advances instead of dividends to avoid paying taxes by the company.
We have heard the rival contentions and perused the orders of the authorities below and the case laws relied on. The Assessing Officer noticed that the assessee who is holding 66.91% of share holding of EBPL received amounts from the EBPL in the form of advance amounting to Rs. 1,12,56,000/-. EBPL is a share broking company. The Assessing Officer was of the view that the company advanced money to assessee who is having substantial share holding and therefore the provisions of Sec. 2(22)(e) are attracted to the amount advanced by the company to the assessee. It was the contention of the assessee that the amount was received in the normal course of business of buying and selling shares as per client broker relationship with EBPL, as the assessee is buying and selling shares through the company as a client. It was also the contention of the assessee that assessee was paying brokerage and charges for carrying on the trades as per Contract Notes issued by EBPL to the assessee therefore it was the contention that it is a running account between EBPL and the assessee as an individual and therefore provisions of Sec. 2(22)(e) have no application to the facts of the case. However, the Assessing Officer did not accept the contention of the assessee and treated the advance of Rs. 1,12,56,000/- as deemed dividend in the hands of the assessee. The Ld. CIT(A) considering the submissions of the assessee and the averments of the Assessing 5 C.O. No. 91/M/2016 Officer concluded that the transactions between the assessee and the EBPL are in the course of normal business transactions therefore the provisions of Sec. 2(22)(e) have no application observing as under: “ 21. The appellant in this case, admittedly, has substantial holding in the company M/s Equisearch Broking Pvt. Ltd which is 66.9%. The company is a broking company and deals in the purchase/sales of shares on behalf of its clients. Apart from being the Director in the company, the appellant has a client-broker relationship with the company and deals in the purchase/sales of shares through the company. This evident from the ledger account of the appellant in the books of the company wherein the opening balance as on 04/04/2007 of the appellant with the company stands at Rs. 94,260/- and the closing balance as on 31/03/2008 is at Rs. (44,84,240). Though most of the time, the appellant has a debit balance in the account with the company yet the fact cannot be denied that the appellant has client- broker relationship with M/s Equisearch Broking Pvt. Ltd. As a client of the company, the appellant has a running account with the company, wherein the funds have come from the company and in turn invested through the same company to carry out the transactions of purchase/sales of shares. The funds amounting to Rs. 1,12,56,000/- were given by the company to the appellant on 29/08/2007 and the appellant on the same date has transferred back the funds amounting to Rs. 1,13,40,000/- from the same account to the company M/s Equisearch Broking Pvt. Ltd for investment purposes. The entries to this effect are reflected in the bank account no. 107801000000076 of the appellant maintained with Centurian Bank. The AO has not tried to analyse the transaction completely and has not examined the route of the transaction and the purpose for which the money has been advanced and its utilization. It is not the case of the AO that the appellant has taken the money from the company and invested in the acquisition of some property which resulted in the individual benefit. The appellant has operated his account of sale/purchase of share transaction with the company as a client in individual capacity. The broking companies do give money to its clients to invest in shares, which is a routine practice. Thus it cannot be said that the company has given the appellant any gratuitous payment under the garb of loan or advance or it is a collusive transaction as stated by the AO. It's a pure commercial transaction for the sale/purchase of shares between the company and the appellant for which the appellant has paid the brokerage also to the company.
In order to invoke the provisions of section 2(22)(e), the AO need to prove further that by advancing loan/amounts to the director, he has been benefited individually by the receiving this money from the company in question and also the advancing of money has some hidden agenda. Without proving the individual benefit being taken by the shareholder, the advancing of money will not partake the character
6 C.O. No. 91/M/2016 of deemed dividend. Section 2(22)(e) only covers the payments made by way of loans/advances given for the benefit of the shareholder but the advances/payments made during normal business process cannot be said to be covered under section 2(22)(e) of the Act.
The facts mentioned above illustrates that the transactions of the appellant with the company are not that of advancing of any fixed amount of loan at any particular point of time but it had a running account with the company with overdraft facility and this facility was offered to him only in consideration for having client-broker relationship with the company. Thus the transactions of payments by the company to the appellant are in the nature of business relationship, where the payment if any has been made, looking at the business considerations of both the parties involved.
In CIT v. Raj Kumar (2009) 30 (I) ITCL 268 (Del-HC), it was held that the word advance which appears in the company of the word loan could only mean such advance which carries with it an obligation of repayment. Trade advance which is in the nature of money transacted to give effect to a commercial transaction would not, in fall within the ambit of the provisions of section 2(22)( e) of the Act.
Similarly in the case of Commissioner of Income-tax v. Ankitech (P.) ltd. [2011] 11 taxmann.com 100 (Delhi), it was held that where loans and advances are given in normal course of business and transaction in question benefits both payer and payee companies, provisions of section 2(22)(e) cannot be invoked. .
The legislative intent of the introduction of the provisions of section 2(22((e) was to not to allow the companies to accumulate the profits by non declaration of the dividends and thereafter to adopt a device to get the benefit of such profits indirectly to its shareholders, by advancing a loan from the company to them which would never be repaid. By doing so the company meets an obligation of the shareholder or makes a payment for his individual benefit. Thus, the shareholder would get the benefit of the dividends, through the process of obtaining such benefit otherwise than by way of a declaration of dividend. To avoid such device of the tax evasion by the closely held companies, the provisions of section 2(22((e) were brought on the statute book.
The case of the appellant does not fits in the legislative intent of the provisions of section 2(22((e). Perusal of the Balance sheet of the M/s Equisearch Broking Pvt. Ltd as on 31/03/2008 shows that the company has profits at the end of the year at Rs. 2,12,52,051/- and it has paid the dividend also during the period under consideration to the extent of Rs. 1,36,08,0001- to the shareholders out of the above profits, which includes the Directors and the other share holders as well. The company has also paid the dividend distribution tax of Rs. 23,40,000/- for the year under consideration. These facts have been totally ignored by the AO while applying the provisions of section 2(22)(e) in the case 7 C.O. No. 91/M/2016 under consideration. In view of these facts also, the provisions of section 2(22((e) are not applicable in the instant case. The AO has only taken into consideration the inflow of money in the hands of the appellant from the company without considering the purpose and destination of such money received. The money was in fact, as stated above, was in the course of normal business transaction between the appellant and M/s Equisearch Broking Pvt. Ltd. The money has been received from the company and has again gone back to the same company on the same day as a part of business transactions. What individual benefit out of this transaction has been received by the appellant, has not been proved by the AO.
In view of the facts and circumstances as well as the judicial pronouncements cited above, in my opinion, the AO has wrongly treated the amount of Rs. 1,12,56,000/- given by MIs Equisearch Broking Pvt. Ltd to the appellant as deemed dividend by invoking the provisions of section 2(22)(e).
The above transaction of giving money to the appellant by M/s Equisearch Broking Pvt. LTD. IS A PURE commercial transaction for the sale/purchase of shares and therefore out of the purview of the provisions of section 2(22)(e). Therefore the addition made amounting to Rs. 1,12,56,000/- as deemed dividend is not justified and hence deleted”.
As could be seen from the above finding of the Ld. CIT(A) that the transactions between the assessee and the EBPL are in the course of business of purchase and sale of shares by the assessee and the assessee is having running account with the company with overdraft facility and this facility was offered to the assessee only in consideration for having client broker relationship with the company. Therefore, it was concluded that the transactions of payments by the company to the assessee are in the nature of business relationship, and the provisions of Sec. 2(22)(e) have no application. On going through the Ld. CIT(A), we do not find any valid reason to interfere with the findings as none of these findings of the Ld. CIT(A) are rebutted by the revenue with evidences. Therefore, we sustain the order of the Ld. CIT(A) in deleting the 8 C.O. No. 91/M/2016 addition made u/.s. 2(22)(e) of the Act. The appeal filed by the Revenue is dismissed. C.O. No. 91/M/2016 9. Coming to the C.O. filed by the assessee, we find that assessee has challenged the order of the Ld. CIT(A) in holding that the reopening of assessment u/s. 147 is invalid and bad in law.
The appeal is barred by limitation by one day. The assessee has filed an Affidavit explaining the reasons which caused for not filing the appeal in time.
We find from the Ld. CIT(A)’s order that the assessee initially challenged the reopening of assessment made u/s. 143(3) r.w. Sec. 147 of the Act and this ground was not pressed by the assessee at the time of hearing before the Ld. CIT(A). However, the assessee by way of cross objection now wants to challenge the reopening before the Tribunal. Since the assessee chose not to press the ground for reopening before the Ld. CIT(A) and withdrew the ground, the ground raised by the assessee now before us in the cross objection do not arise from the order of the Ld. CIT(A), therefore the same is dismissed.
In the result, the appeal filed by the Revenue and the cross objection filed by the assessee are dismissed.