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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SANJAY ARORA, AM & SHRI PAWAN SINGH, JM
O R D E R Per Sanjay Arora, A. M.: This is an Appeal by the Assessee directed against the Order under section 263 of the Income Tax Act, 1961 (‘the Act’ hereinafter) by the Commissioner of Income Tax-11, Mumbai (‘CIT’ for short) dated 23.2.2016 setting aside her assessment for the assessment year (A.Y.) 2011-12 vide order dated 14.2.2014.
The facts of the case are that the assessee, an individual, and her husband, Shri Vivek V. Samant (VVS), both individually hold substantial voting power (i.e., in excess of 10%) during the relevant year in three companies in which public is not substantially interested, i.e., YBPL, YCPL and YIEPL, as under:
(A.Y. 2011-12) Namita V. Samant vs. CIT % shareholding % shareholding Accumulated Sr. Name of the concern of Sh. Vivek D of Namita V. profits as on No. Samant Samant 31.3.2010 Yasham Bio Science Pvt. 1 40% 20% Ltd. (YBPL) Yasham Cemphar Pvt. 2 84% 16% Rs.1,25,65,608/- Ltd. (YCPL) Yasham Importers & 3 Exporters Pvt. Ltd. 55.71% 18.57% Rs.2,61,39,865/- (YIEPL) YBPL had during the relevant year taken unsecured loans from YCPL and YIEPL, as under, both of which had accumulated profits (as at 31.3.2010), i.e., as at the beginning of the relevant year, in excess of the amounts lent:
Sr. Name of the party from whom loan taken Loans during the No. year 1 Yasham Cemphar Pvt. Ltd. Rs.10,00,000/- 2 Yasham Importers & Exporters Pvt. Ltd. Rs.1,82,00,000/- Total Rs.1,92,00,000/- It was under these circumstances, drawing support from the decisions in CIT vs. Universal Medicare (P) Ltd. [2010] 324 ITR 263 (Bom) and Asst. CIT vs. Bhaumik Colour (P). Ltd. [2009] 27 SOT 270 (Mum)(SB), held by the ld. CIT, in exercise of his revisionary powers u/s. 263 of the Act, that the amounts lent are liable to be deemed as dividend u/s. 2(22)(e) in the hands of the assessee. Aggrieved, the assessee is in appeal, raising the following grounds:
‘1. The learned CIT erred in invoking s. 263 of the Income Tax Act by stating that earlier order passed by A.O. is erroneous & prejudicial to the interest of the assessee.
2. The learned CIT erred in directing the A.O. to tax loans taken by M/s. Yasham Bio Science Pvt. Ltd. from two companies, i.e., Yasham Chemphar Pvt. Ltd. & Yasham Importer & Exporter Pvt. Ltd. without appreciating the facts of the case.’
3. Before us, the ld. Authorised Representative (AR), the assessee’s counsel, while confirming that there was no dispute as regards the primary facts/data, i.e., the shareholding and the amounts lent, raised several arguments. The main thrust of these arguments was that no benefit had been derived by the assessee or had arisen (A.Y. 2011-12) Namita V. Samant vs. CIT to her by these loans. The same were, in fact, repaid during the relevant year itself and, further, with interest. There was thus no occasion to or scope for the application of section 2(22)(e) under the circumstances. On a query by the Bench in respect of no such condition of extension of benefit, i.e., in the section (per its’ relevant part), he would advert to the decision by the Hon’ble Apex Court in CIT vs. Mukundray K. Shah [2007] 290 ITR 433 (SC), wherein it upheld the application of sec.2(22)(e) on a finding by the Tribunal that the company ‘MKSEPL’, a partner in two firms, ‘MKF’ (in with assessee had interest at 16%) and ‘MKI’, had advanced Rs.5.99 crs. to the firms, and which had been utilized by the assessee for the purchase of (RBI) bonds, so that the monies had been diverted for the benefit of the assessee holding more than 10% voting power in MKSEPL. Under these circumstances, the Hon’ble Court upheld the order by the tribunal confirming the application of s.2(22)(e), reversing that of the Hon’ble High Court, which had earlier held otherwise. Reliance in this context was also placed by him on the decision in the case of Bagmane Constructions Pvt. Ltd. vs. CIT (in dated 16.9.2014/copy on record). The ld. Departmental Representative (DR), on the other hand, relied on the impugned order.
We have heard the parties, and perused the material on record. 4.1 The issue under reference, we may at the outset clarify, was not at all examined by the Assessing Officer (AO) in the assessment proceedings. His order is, thus, erroneous in-so-far it is prejudicial to the interests of the Revenue on the ground of non-application of mind and failure to make proper enquiry (refer, inter alia, Malabar Industrial Co. Ltd. vs. CIT [2000] 243 ITR 83 (SC); Toyota Motor Corporation vs. CIT [2008] 306 ITR 52 (SC); Gee Vee Enterprises vs. Addl. CIT [1975] 99 ITR 375 (Del); and Rajalakshmi Mills Ltd. Vs. ITO [2009] 121 ITD 343 (Ch.)(SB)). So, however, the ld. CIT, the competent authority, has given a definite direction to the AO to frame fresh assessment, setting aside that made in the first instance, in terms of his directions, i.e., of the loan/s amount being assessable as deemed dividend u/s. 2(22)(e) in the assessee’s hands, so that it is a decision on (A.Y. 2011-12) Namita V. Samant vs. CIT merits as well; the AO having no scope for (different) adjudication. In other words, it is incumbent on us to, therefore, issue a decision on merits of the issue as well. 4.2 We may begin by reproducing the relevant provision, as under: ‘Definitions 2. In this Act, unless the context otherwise requires,- (1) ………………. (22) dividend includes- (a) ………….. (b) …………. (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) …………. (ia) ………… (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 (A.Y. 2011-12) Namita V. Samant vs. CIT (whether or not there is a reduction of capital in the demerged company).’ We may next set out the law in the matter as explained and laid down by the Hon’ble Apex Court by referring to some of it’s decisions, which are locus classicus on the subject, as follows: In Navnit Lal C. Javeri vs. K. K. Sen, AACIT [1965] 56 ITR 198 (SC), where the challenge was to the vires of the provision of section 12(1B) r/w s. 2(6A)(e) of the Indian Income Tax Act, 1922 (hereinafter ‘the 1922 Act’), the Hon’ble Court per it’s constitutional bench upheld the constitutionality thereof, also finding the same as not violating fundamental rights guaranteed under Article 19(1)(f) and (g) of the Constitution. The scope of the relevant entry (in the Legislative lists) are not powers but fields of legislation and the widest import and significance should be attached to them. While section 2(6A), analogous to section 2(22) of the Act, defines dividend, including deemed dividend (under certain specified conditions) (both per clause (e) thereof), s.12(1B) provides for bringing the amount outstanding as on 01.4.1955, i.e., even where received or accumulated over the past years, to tax. The Hon’ble Court noted a circular by the Board providing a window whereby the provision was excepted on genuine repayments of such outstanding by 30.6.1955 (Circular No. 20 (XXI-6/55) dated 10.5.1955). The Hon’ble Court examined several precedents, including challenges to the provision of section 12B, enhancing the scope of ‘income’ to include ‘capital gains’; to section 23A(1), providing an artificial dividend payout at a minimum of 60%, lest the shortfall therein be liable to super-tax, i.e., restraining the company from accumulating its’ profit beyond 40% to build up reserves or to provide for capital expenditure; and sec. 16(3)(a) (of the 1922 Act), seeking to tax the income arising to wife and minor son/s of the assessee-individual in his hands. All these provisions were considered by the Apex Court as reasonable steps taken by the Parliament, within it’s legislative competence, toward countering tax evasion, also noting the rationale of each provision, i.e., the mischief that it was intended or designed to defeat. The word ‘income’, it opined, also making reference to the precedents which considered (A.Y. 2011-12) Namita V. Samant vs. CIT legislative competence, must receive a wide interpretation, the caveat being that there has to be a rational connection between the item taxed and the concept of income liberally construed. It also noted suitable conditions/exceptions being provided for in the impugned provisions (of ss. 2(6A)(e) and 12(1B)), as by way of restriction on their scope to transactions of/by companies, in which public is not substantially interested, with its’ major shareholders, i.e., holding over a threshold (10%) voting power therein; exclusion of transactions in the ordinary course of business where the payer-company is in the business of money-lending; and, thirdly, making the deeming (of the loan/advance or payment) as dividend subject to and, further, to the extent of, accumulated profits of such company, all of which were regarded as necessary and suitable safeguards. That the provision may cause hardship in some cases was considered as irrelevant (for determining the question of legislative competence). The argument with regard to the loan being interest bearing, and of it having been repaid since, were advanced and considered as not valid grounds for excluding the loan or advance given from the purview of or for the purpose of deeming the same as dividend (refer pgs. 208-210), which we may reproduce for ready reference: ‘The loan may carry interest and the said interest may be received by the company; but the main object underlying the loan is to avoid payment of tax. It may ultimately be repaid to the company and when it is so repaid, it may or may not be treated as part of accumulated profits. It is this kind of a well-planned device which s. 12(1B) intends to reach for the purpose of taxation.’ (pg. 208) Noting that such a device was also adopted by private companies in many other countries as well, it quoted from Simon’s Income Tax, 2nd Edition, Volume 3, para. 592, p. 341 as (at pg. 208): "Generally speaking, surtax is charged only on individuals, not on companies or other bodies corporate. Various devices have been adopted from time to time to enable the individual to avoid surtax on his real total income or on a portion of it, and one method involved the formation of what is popularly called a ‘one- man company'. The individual transferred his assets, in exchange for shares, to a limited company, specially registered for the purpose, which thereafter received the (A.Y. 2011-12) Namita V. Samant vs. CIT income from the assets concerned. The individual's total income for tax purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distribution was in his own control. The balance of the income, which was not so distributed, remained with the company to form, in effect, a fund of savings accumulated from income which had not immediately attracted surtax. Should the individual wish to avail himself of the use of any part of these savings he could effect this by borrowing from the company, any interest payable by him going to swell the savings fund; and at any time the individual could acquire the whole balance of the fund in the character of capital by putting the company into liquidation." (emphasis, ours) Continuing further, it held: ‘What Simon says about one-man company can be equally true about the controlled company whose affairs are controlled by a group of persons closely knit and having the same interest.’ (pg. 208) ‘There is no element of unfairness in the fiction, because the other shareholders have deliberately agreed to make the loan or the advance and the shareholder to whom the loan is advanced deliberately takes it with a view to assist the company to evade the payment of tax and to have the benefit of the use of the amount subject to the payment of interest. The company receives interest, the shareholder enjoys the use of the money, and in the process the payment of due tax is evaded. That is the assumption made by the legislature in making this provision. How can it be urged that either the shareholder who is taxed, or the other shareholders who deliberately make the advance to a colleague of theirs, are unfairly dealt with by the impugned provision.’ (pg. 210) (emphasis, ours) It was also clarified that the condition of accumulated profits would be as on the date of the loan or advance (pg.202). In Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC), it was sought to be argued that the fiction of the provision extended only to a loan or advance that remains outstanding as at the end of the previous year in which the same was taken. The incongruity of the provision was sought to emphasized with reference to sub- clause (iii) of section 2(6A)(e) of the 1922 Act (corresponding to section 2(22)(e)(iii) of the Act), so that where a shareholder has repaid the loan/advance, he cannot avail the set off and, further, multiple loans, since repaid, i.e., prior to the availment of the next loan/advance, are liable to be added separately in computing (A.Y. 2011-12) Namita V. Samant vs. CIT deemed dividend. These results, it was contended, were definitely unreasonable, oppressive and absurd. Further, the dividend must be treated as paid by the company on the last day of the year (in with the payment is made), as indeed was a case in section 108 of the Common Wealth Act, reading which condition into the section, it was submitted, would eliminate the ill-effects referred to earlier. The Hon’ble Court was not impressed, noting with approval the decision in the case of Navnit Lal C. Jhaveri (supra). Taxability of income was with reference to the year of receipt or accrual, so that it gets clothed with the character of income on its’ accrual or, as the case may be, receipt (pgs. 356-358). In its words: ‘The charge being on accrual or receipt the statutory fiction created by s. 2(6A)(e) and s. 12(1B) would come into operation at the time of the payment by way of advance or loan, provided the other conditions are satisfied.’ (pg. 358)
In rejecting the assessee’s appeal, the Hon’ble Court relied on the salutary principle of interpretation of statutes, further adding that once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. In its’ view, the Parliament had deliberately omitted to import the last limb of section 108(1) of the Common Wealth Act, providing instead for exclusion only for repayments made up to 30.6.1955. The controversy involved in Sarda (P.) vs. CIT [1998] 229 ITR 444 (SC) was that if the withdrawal/s made by a shareholder from his account with a company (in which he had substantial interest), which is to be regarded as a loan or advance (from the company to the shareholder), could be subsequently adjusted in the account of another shareholder, who had a credit balance with the company, thus avoiding tax. The Hon’ble Apex Court answered in the negative, relying on the principle that the legal fiction comes into play as soon as the monies were received. The fact that the assessee was stated to be maintaining a running account with payer-company was found irrelevant.
(A.Y. 2011-12) Namita V. Samant vs. CIT 4.3 Having transversed the settled law, we may consider the arguments raised by the assessee before us, i.e., in light of the obtaining facts of the case. Clearly, there is no dispute qua the primary facts, which are admitted, and there is, accordingly, satisfaction of the conditions for the application of the provision. The assessee’s contention with regard to the loan being repaid during the year - the opening and closing balance (at Rs.88 lacs and Rs.60 lakhs for YIEPL and YCPL respectively) being the same, or of interest having been charged to YBPL, the payee company, would be of no moment in view of the decisions in Navnit Lal C. Jhaveri (supra) and Tarulata Shyam (supra). Then, it is said that the opening balance is to be excluded. Sure enough, it is only the sums received during the relevant year that could be charged as deemed dividend for that year. So however, we find that the amount, reckoned by the ld. CIT at Rs.182 lacs and Rs.10 lacs for YIEPL and YCPL respectively, is only without considering the opening balance, i.e., represents only the amounts paid during the year, and toward which we have perused the copies of account of both the payer (lender) and the payee (borrower) companies (PB pgs. 1-5/also refer table at para 2 above). Then it is said that the amounts lent are actually inter-corporate deposits (ICDs). No evidence toward the same has been brought on record or led at any stage, with the ld. AR failing even to explain the essential difference between the two, i.e., loan or advance per se and an ICD. The copies of accounts of the payee and the payer companies in the books of each other, adverted to earlier, as well as the final accounts of the three companies (for the relevant year), clearly reflect the same as ‘unsecured loans’, which answer the description of a ‘loan’, as generally understood, being not defined under the Act. Reference in this context may also be made to Shitlal Kumar Vij v. Astt. CIT (in ITA No. 406/Asr./2009 dated 20/9/2012), wherein the tribunal refers to the dictionary (Black Law’s) meaning of the word (at para 7.1). Two, the lending companies are not in the business of lending of money. In fact, the accounts are in the nature of running accounts, with amounts being both paid and received; the payee (lendee)-company having a debit (negative) balance in the accounts of the payer-companies at all material times.
(A.Y. 2011-12) Namita V. Samant vs. CIT That is, there is nothing to show that the sums given are ICDs; to the contrary, there is material to show that they are not, but only loans or, in any case, advances. Rather, as it would appear to us, the defining attribute/s of ICDs, i.e., in contradistinction to loans and advances, having not been explained, ICDs are only a species of loans and advances. The law states ‘any loan or advance’, so that it would mean just that, i.e., a loan or advance of any nature. The argument with regard to inter-corporate deposits (ICDs) is under the circumstances misconceived and untenable, both on facts and in law. The main thrust of the assessee’s arguments, relying on the decision in Mukundray K. Shah (supra), was that whenever a loan or advance is given, the benefit clause of the provision is to be satisfied, i.e., in all cases where the provision is to be applied. We find this plea to be in complete disregard of the clear provision, which casts the extension of ‘benefit’ as a separate limb (i.e., as one of the three independent prerequisite conditions for the application of the provision), which has not been invoked in the present case, as well as the decisions by the Apex Court in Navnit Lal C. Jhaveri (supra) and Tarulata Shyam (supra). As a mere reading of the provision, language of which is clear and unambiguous, suggests and, in any case, upon a fair look and reading thereof, the provision is triggered where: a) a loan or advance is given by a company (in which the public is not substantially interested) to a shareholder who beneficially owns shares therein to the extent not less than 10% of the voting power therein; or b) a loan or advance is given by such a company to any concern in which such shareholder has substantial interest (explained as entitling him to a beneficial interest in 20% of its income); or c) any payment is made by such a company on behalf of, or for the benefit of, such a shareholder.
The loan or advance or payment is, under such circumstances, to be deemed as dividend to the extent the paying company has accumulated profits, the exception being where the lending company is in the business of money lending. We have already noted satisfaction of all the required conditions in the present case, as well (A.Y. 2011-12) Namita V. Samant vs. CIT as of the lending companies being not in the money lending business, so that exceptions to the provision are excluded. It is clearly limb (b) supra that is attracted in the present case, and which does not provide for a further requirement to show that the monies were intended for the benefit of such shareholder. There is nothing in the decision to suggest such a benefit being required to be shown in all cases. In the facts of that case, it was limb (c) supra that was applied. The assessee- respondent in Mukundray K. Shah (supra) did not in fact have substantial interest in both the concerns, MKF and MKI, so that limb (b) could not, in any case, be applied. In fact, the assessment in that case was of ‘undisclosed income’, on the basis of a dairy seized in search, and which revealed the source of funds invested by the assessee in bonds, tracing the source thereof (on the basis of the said diary) to two concerns, and which had been, in turn, released funds by the payer company in which (the assessee) had substantial interest. It was on that basis that the provision of section 2(22)(e) became applicable, and which was upheld by the Hon’ble Court. The reliance on the said decision is, thus, completely misplaced. Apart from Mukundray K. Shah (supra), the assessee places reliance on Bagmane Constructions (P) Ltd. (supra). The question of law that arises for and considered by the Hon’ble Court was: “Whether any payment by a company by way of advance or loan to a shareholder or to any concern made u/s. 2(22)(e) of the Income Tax Act, 1961, to the extent to which the company possessed the accumulated profits includes a trade advance and constitutes deemed dividend?”. The Hon’ble Court after noting some precedents held that where the loan or advance is given in return to an advantage conferred upon the company by such shareholder, as where it is given as a trade advance as a consideration for the goods received or for purchase of a capital asset which would benefit the company advancing the loan, it would fall outside the ambit of ‘loan’ or ‘advance’ as contemplated u/s. 2(22)(e). We are unable to see as to how the said decision assists the assessee’s case which, as afore-stated, is a case of loan (or advance) per se. The aspect of charge of interest (on loan or advance) has already been considered by the (A.Y. 2011-12) Namita V. Samant vs. CIT Apex Court as irrelevant, and which, being charged in the instant case itself proves the loan (advance) to be not a trade advance. Rather, where the advance is in the course of a commercial transaction between the advancing and the advancee- company, it is not a loan or advance proper for it to be regarded as a loan or advance u/s. 2(22)(e).
In view of the foregoing, we find no infirmity in the impugned order, made relying on the decisions in Universal Medicare (P) Ltd. (supra) and Bhaumik Colour (P). Ltd. (supra), nor has any been brought to our notice. We may further add that our decision is also in harmony with the law as explained in Walchand & Co. Ltd. vs. CIT [1975] 100 ITR 598 (Bom) (where the loan was for a short period of 23 days) and CIT vs. Badiani (P.K.) [1970] 76 ITR 369 (Bom) (providing for a notional reduction in the accumulated profits on repayment of loan/advance), also noted with approval in Tarulata Shyam (supra). The assessee has, we may add, placed a number of decisions by the Tribunal on file, to some of which reference was also made during hearing. We have decided the appeal on the basis of the clear provision of law, and as further explained and understood by the Apex Court, meeting the arguments advanced and distinguishing the decision by the said court on which reliance is sought to be placed before us. We do not therefore consider it necessary to encumber this order any further by discussing those decisions. Suffice to say that we have perused the same, finding our decision as not inconsistent therewith and, further, consistent with the law as explained by the Apex Court as well as the Hon’ble jurisdictional High Court per their judicially binding decisions. We decide accordingly, and the assessee fails.