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Income Tax Appellate Tribunal, “C”, BENCH MUMBAI
Before: SHRI SANJAY GARG & SHRI RAMIT KOCHAR
O R D E R आदेश आदेश आदेश Per Sanjay Garg, Judicial Member : The present appeal has been preferred by the assessee against the order of CIT(A), dated 21-5-2012. 2. The assessee through its grounds of appeal
has agitated the addition of income made by the Assessing Officer (hereinafter referred to as the AO) at the hands of the assessee on account of deemed dividend u/s.2(22)(e) of the Income Tax Act.
3. Brief facts of the case are that the assessee is an individual deriving income from salary, house property and other sources. The assessee was having major shareholding in 3 companies namely; (i) M/s.Anachem Instruments India P.Ltd. (ii) M/ s. Advance Scientific Equipment P.Ltd. & (iii) M/s. Star Earth Minerals P.Ltd. During assessment proceedings, from the replies filed by the assessee, the AO noticed that M/s. Anachem Instruments India P.Ltd. had advanced an amount of Rs.31,00,000/- on 16.12.2008 to M/s. Advance Scientific Equipment P. Ltd. and M/s.
Advance Scientific Equipment had also advanced an amount of Rs.15,00,000/- on 17.01.2009 and Rs.20,00,000/- on 19.01.2009 (totaling Rs. 35 lakh) to M/s. Star Earth Minerals P.Ltd. The AO also noticed that the assessee was having more than 50% shareholdings in all these companies. The AO asked the assessee as to why the loan received from M/s. Anachem Instruments India P.Ltd. and M/s. Advance Scientific Equipment P.Ltd. should not be treated as deemed dividend as per provisions of section 2(22)(e) of the Act. The assessee furnished to the AO the balance sheet and P&L account of these two companies and also submitted that the said inter-corporate transactions were in the nature of loan. The AO considered that as per provisions of section 2(22)(e) of the Act, any loan deposit given by a company to another company having a common share holder who is holding not less than 10% of the voting power or to any concern in which such shareholder is a member or a partner and in which he has special interest, such loans deposited is to be deemed to be a dividend from the accumulated profits of the payer company. The AO held that if the conditions laid down in the section dealing with the issue of deemed dividend are fulfilled, the loans or deposit received by any assessee from the company in which the assessee is having substantial interest, and even if, there are repayments of the loan, such loan or deposit will have to be treated as deemed dividend. The AO held that the receipt of loan and substantial holding of the assessee in the shares of M/s. Anachem Instruments India P.Ltd., M/s. Advance Scientific Equipment P.Ltd. & M/s. Star Earth Minerals P.Ltd. was an accepted fact. In respect of accumulated profits, M/s.
Anachem Instruments India P.Ltd. had reserves and surplus amounting to Rs.28,40,948/- as on 31.03.2009 and Rs.20,42,863/- as on 31.03.2008.
Similarly, M/s. Advance Scientific Equipment P.Ltd. had reserves and surplus of Rs.1,51,81,196/- as on 31.03.2009 and Rs.1,51,70,953/ - as on 31.03.2008. The assessee had not brought anything on record to prove that there was no profit available to the said companies as on the date of advancing of loans. In the facts and circumstances, the AO held that the loan of Rs.66,00,000/- was deemed dividend in the hands of the assessee u/s.2(22)(e) of the Act. The AO added back the same into the income of the assessee.
Being aggrieved by the order of AO, assessee preferred appeal before the CIT(A); however, the ld. CIT(A) vide impugned order upheld the finding of AO. Being aggrieved, the assessee has come in appeal before us. Ld. AR of the assessee, before us, has submitted that though the 5. assessee has been a director and shareholder holding more than 50% shares in the above stated three closely held companies but the said three closely held companies had no cross holding of shares i.e. none of the companies hold shares in other two companies. The 3 companies had regular business transaction with each other. He has further submitted that all the three companies owed to the assessee certain amounts such M/s M/s. Star Earth Minerals P.Ltd owed to the assessee a sum of Rs.1,69,60,000/-, similarly M/s. Advance Scientific Equipment P.Ltd. owed to the assessee Rs.33,43,845/- and M/s. Anachem Instruments India P.Ltd. owed to the assessee a sum of Rs.4,07,414/-, however, the accumulated profits of M/s. Advance Scientific Equipment P.Ltd were at Rs.1,18,33,747/- and that of M/s. Anachem Instruments India P.Ltd. at Rs.19,73,863/- and that of M/s. Star Earth Minerals P.Ltd. at Rs.(-)50,29,833/-. The assessee further explained that M/s M/s. Anachem Instruments India P.Ltd. deposited a sum of Rs.31 lakhs with M/s.
Advance Scientific Equipment P.Ltd. and M/s Advance Scientific Equipment P.Ltd. further deposited a sum of Rs.35 lakhs with M/s. Star Earth Minerals P.Ltd. as inter-corporate deposits. Ld. AR has further submitted that the said deposits were not gratuitous as the interest was being charged at the market rate. The deposits were in the nature of inter- corporate deposits made for business consideration. He has stated that the inter-corporate deposits does not fall within the mischief of section 2(22)(e) of the Act. Ld. AR has further vehemently contended that no benefit had accrued to the assessee out of the above transactions and that there was no evidence that above said transactions were made on behalf of the assessee or for the benefit of the assessee. He has further summited alternatively without prejudice to the above pleas, that even for the sake of arguments, if the deposits were assumed to be dividend, even then, the accumulated profit in M/s. Anachem Instruments India P.Ltd. were only Rs.19,73,863/- and at the best the addition could have been restricted to Rs.19,73,863/- instead of Rs.31 lakhs. Ld. AR has further submitted that even otherwise advance made by M/s. Anachem Instruments India P.Ltd. amounting to Rs.31 lakhs was forming part of the advance to M/s. Advance Scientific Equipment P.Ltd. amounting to Rs.35 lakhs and at the most the net amount of Rs.35 lakhs can only be taxed u/s.2(22)(e) of the Income Tax Act. But the AO wrongly taxed the aggregate of the entire amount involved in the transactions amounting to Rs.66 lakhs as deemed dividend u/s.2(22)(e) of the Act.
On the other hand, ld. DR has relied upon the findings of lower authorities and has contended that in view of the specific provisions of Section 2(22)(e) of the Act, the above transactions squarely fall within the mischief of deemed dividend as per the definition of dividend provided u/s.2(22)(e) of the Act and, thus, the AO has rightly taxed the said amount in the hands of the assessee.
We have considered rival contentions and also gone through the record. To understand the entire context of the transactions and whether the payment made by the closely held companies to each other would constitute deemed dividend u/s.2(22)(e) of the Act. We deem it proper to reproduce the relevant definition of dividend as provided u/s.2(22)(e) of as provided under the Income tax Act 1961:
“2.Definitions. In this Act, unless the context otherwise requires,— (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;”
We would also like to reproduce the definition of dividend as it stood under the old Act i.e. Indian Income Tax Act, 1922 (in short the ‘ Act, 1922’). Section 2(6A)(e) of the said Act provided as under:-
" 'Dividend ' includes—... (e) any payment by a company, not being a company, in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or other wise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case, possesses accumulated profits; but dividend does not include—....... (ii) any advance or loan made to a shareholder 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 clause (e), the extent to which it is so set off." Thus, the inclusive definition of "dividend" takes in the payments to which clause (e) of section 2(6A) refers and makes them dividend for the purpose of the Act. Section 12(1) provides that the tax shall be payable by an assessee under the head "Income from other sources" in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads). Section 12(1B) provides : "any payment by a company to a shareholder by way of advance or loan which would have been treated as a dividend within the meaning of clause (e) of sub-section (6A) of section 2 in any previous year relevant to any assessment year prior to the assessment year ending on the 31st day of March, 1956, had that clause been in force in that year, shall be treated as a dividend received by him in the previous year relevant to the assessment year ending on the 31st day of March, 1956, if such loan or advance remained outstanding on the first day of such previous year." Both these provisions, viz., section 2(6A)(e) and section 12(1B), were introduced in the Act by the Finance Act, 1955 (15 of 1955), which came into operation on the 1st of April, 1955.”
We would like to mention here that u/s.2(6C) of the Act, 1922, income includes dividend. Similarly under the Income Tax Act, 1961 (in short the ‘Act,1961’), Section 2(24)(a) states that income includes dividend.
Now, if we compare the definition of dividend as provided under the old Act of 1922 with the present Act of 1961, we find that the definition of dividend under the relevant provisions of both the Acts is almost identical.
Under the old Act (i.e. Act of 1922), any payment by company in which the public is not substantially interested, any sum by way of advance or loan to a shareholder or any payment by any such company on behalf of or for the benefit of the shareholder to the extent to which such company possesses accumulative profits, is to be deemed as dividend at the hands of such shareholder. However, under the new Act (i.e. Act of 1961), the shareholder of such a company must be having a substantial interest or holding which should be not less than 10% of the voting power. The another condition that has been added is that the ‘payment by such a company to any concern in which such shareholder is a member or a partner in which he has a substantial interest’ has been added which find place between the words “…..advance or loan to a shareholder…..”. and the words “….or for the individual benefit, of any such shareholder….” We find that the words “to any concern in which such shareholder is a member or a partner…..” are sandwiched between the first condition of payment to such a shareholder directly and the second condition of payment made to any company on behalf, or for the individual benefit, of any such shareholder. A perusal of the definitions as provided under the Old Act (i.e. the Act of 1922) and the New Act (i.e. the Act of 1961) and even a careful perusal of the definition provided under the new Act alone, would reveal 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 shareholder enjoys for simply on account of being a person who is the beneficial owner of shares. The purpose is to bring within the tax net accumulated profits which were distributed by closely held companies to its shareholders in the form of loans to avoid payment of dividend distribution tax u/s.’115 O’ of the Act, 1961. Thus, the gratuitous loan or advance given by a company to its shareholders would come within the purview of section 2(22) but not to the cases where the loan or advance is given in course of business or out of business expediency or in return to an advantage conferred upon the company by such shareholder.
The Hon’ble Supreme Court in the case of “Navnit Lal C. Javeri vs. K. K. Sen”, Appellate Assistant Commissioner of Income Tax, reported in (1965) 56 ITR 198 (SC) while analyzing the relevant provisions of Section 2(6A)(e) of the Act of 1922, has observed that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. These three kinds of payments are:
(i) payments made to the shareholder by way of advance or loan ; (ii) payments made on his behalf ; and (iii) payments made for his individual benefit.
However, under the New Act (i.e. the Act of 1961), under Section 2(22)(e) to constitute deemed dividend, following conditions can be summed up :-
(i) payments by way of advance or loan to a beneficial or a shareholder, having shareholding not less than 10% of voting power; or (ii) to any concern in which such shareholder is a member or a partner having substantial interest therein; (iii) payment made on his behalf, and (iii) payments made for his individual benefit.
A perusal of the above comparison reveals beyond doubt that the purpose and object of the provisions vide which the dividend has been defined and included into the income of the shareholder remains the same i.e. to bring within the tax net accumulated profits which are distributed by closely held companies to his shareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-O of the Act.
The Hon’ble Karnataka High Court in the case of “Bagmane Constructions (P) Ltd. & Ors. Vs. CIT & Anr.,” (2015) CTR (Kar) 338 has discussed at length the purpose and object of the provisions of Section 2(22)(e) in new the Act. In the aforesaid case, while relying upon the decision of Hon’ble Supreme Court in the case of “K.P. Varghese v. ITO”
[1981] 131 ITR 597, the Hon’ble High Court has observed that the task of interpretation of a statutory enactment is not a mechanical task. It is an attempt to discover the intent of the Legislature from the language used by it and such attempt must always be made. Though it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing; but statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning. The Hon’ble Karnataka High Court, thus, observed that it is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction. The Hon’ble High Court further observed that the Hon’ble Apex Court again explained the meaning of a deeming provision under the Income Tax Act in the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711, which reads as under:—
"The legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field."
The Hon’ble High Court further relied upon the decision of Hon’ble Delhi High Court “CIT v. Raj Kumar” [2009] 318 ITR 462(Delhi) and Hon’ble Kolkata High Court in the case of “Pradip Kumar Malhotra Vs. ITO” (2011)
338 ITR 538 (Cal), and has observed that the combined meaning of the various clause of provisions of section 2(22)(e) of the Act is to mean that the payments included as deemed dividend would mean the gratuitous payments to a shareholder meant to avoid the taxation of Income u/s.115O of the Act. The Hon’ble High Court (supra) further relied upon the decision of Hon’ble Delhi High Court in the case of CIT Vs. Ankitech (P) Ltd. & Ors. (2012) 340 ITR 14 (Del) and reproduced the relevant part of the decision of the Hon’ble Delhi court( supra) as under:
“22. The Delhi High Court in the case of “CIT Vs. Ankitech (P) Ltd. & Ors.” (2011) 242 CTR (Del) 129 : (2011) 57 DTR (Del) 345 : (2012) 340 ITR 14 (Del), explaining the meaning of the word
‘‘concern’’ found in the provisions as well as Expln. (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.'
Further in Para 24 of the order in the said case of “Bagmane Constructions (P) Ltd. & Anr.” (supra), the Hon’ble Karnataka High Court has held that the purpose of insertion of sub-clause (e) of Section 2(22) of the Act was to bring within the tax net accumulated profits which are distributed by closely held companies to his shareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-O of the Act. Loan or advance given to the shareholders or to a concern, under normal circumstances would not qualify as dividend. 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 within the meaning of the Act. Para 24 of the aforesaid decision of the hon’ble Karnataka High Court which is most relevant in the context of the matter for the sake of convenience and completeness is reproduced as under :-
“24. Therefore, from the aforesaid judgments, it is clear that the purpose of the insertion of sub-clause (e) of Section 2(22) of the Act was to bring within the tax net accumulated profits which are distributed by closely held companies to his shareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-O of the Act. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding payment of tax by having these companies pay or distribute money in the form of advance or loan. Loan or advance given to the shareholders or to a concern, under normal circumstances would not qualify as dividend. 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 within the meaning of the Act. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such 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. It is so made by legal fiction created under Section 2(22)(e) of the Act. Thus, the definition of dividend has been enlarged, and that loan or advances given under the conditions specified under this provision would also be treated as dividend. 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. The intention behind the provisions of section 2(22)(e) of the Act is to tax dividend in the hands of shareholders.”
The Hon’ble High Court further while relying upon the decision of the Hon’ble Supreme Court in the case of “State of Bombay & Ors. Vs. The Hospital Mazdoor Sabha & Ors.”, AIR 1960 SC 610, has observed that ‘noscitur a sociis’ is a mere 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. The Hon’ble High Court in para 27of the order has observed as under :-
“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.”
The Hon’ble High Court, thus, relying upon the various case laws, has held that the purpose and object of Section 2(22)(e) of the Act is to avoid payment of dividend distribution tax u/s.115-O of the Act and such payments by a company certainly would constitute deemed dividend, however, any trade advance in the course of business would not fall within the ambit of section 2(22)(e) of the Act. The Hon’ble High Court (supra) while relying upon another decision of the Hon’ble Apex Court in the case of LIC of India Vs. Retired LIC Officers Association (2008) 3 SCC 321, has observed that each word employed in a statue must take colour from the purport and the object for which it is used. The Principle or purposive interpretation should be taken recourse to. If a literal interpretation is given to the said words, it would mean that 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 Hon’ble High Court, thus, relied upon various case laws and vide para 29 of the said decision, has rejected the contention of revenue that the payment by a company by way of any advance or loan made to a shareholder would be out of the purview of Section 2(22)(e) of the Act, only if lending of money is a substantial part of the business of the company. The Hon’ble High Court has observed that the question of looking into the aforesaid provision would arise only when all the conditions prescribed in clause (e) of sub-s.2(2) of section 22 are complied with. If the payment is made by way of trade or business, advance or loan, clause (c) of sub-s.(2) of s.22 of the Act is not at all attracted.
Now, in the light of the aforesaid proposition of law laid down by the Hon’ble Karnataka High Court (supra) while relying upon various decisions of the Hon’ble Supreme Court and Hon’ble Delhi High Court as well as Hon’ble Kolkata High Court, we examine the facts of the assessee in the present case. Admittedly, the assessee is a director in three closely held companies. It is also undisputed fact that the company M/s.
Anachem Instruments India P.Ltd. paid Rs.31 lakhs to M/s. Advance Scientific Equipment P.Ltd. which in turn paid a sum of Rs.35 lakhs to M/s. Star Earth Minerals P.Ltd. The assessee has explained that M/s.
Advance Scientific Equipment P.Ltd. is a parent company, which is an Indian representative of foreign manufacturer of analytical instruments, which are usually supplied to industries like Cement, Chemical, Petroleum, University, Educational Institutions, Hospitals, Government Laboratories etc. After imports of the machinery and equipments, the company does the installation and commissioning of instruments. The company either directly or through its agents provides maintenance services of instruments. For getting the orders, company has to provide demonstration of equipment at user’s site and prove feasibility of instrument to the intended buyer. For that purpose, buyers usually provide their samples and parameters to satisfy their requirement and confirm specifications. The another company, namely, M/s. Star Earth Minerals P.Ltd provides scientific and technical services to M/s. Advance Scientific Equipment P.Ltd. @ Rs.3 lakhs per month. M/s. Star Earth Minerals P.Ltd. provides services such as demonstration of instrument to prospective customers of M/s. Advance Scientific Equipment P.Ltd., and carries out analysis of samples provided by customers and provides information required by the customers. M/s. Star Earth Minerals P.Ltd. is having a well equipped laboratory with analytical equipments with qualified staff in this respect. The nature of business of M/s. Anachem Instruments India P.Ltd. is the sale of instruments and after sale service. It is mainly dealing with and rendering of services of installation, commissioning and after sale services of analytical instruments supplied by M/s. Advance Scientific Equipment P.Ltd., such as installation of instrument, providing onsite training to the users of instruments, providing annual maintenance services. For these services M/s. Anachem Instruments India P.Ltd. raises its bills on M/s. Advance Scientific Equipment P.Ltd.; It has been further explained in the statement of facts that during the financial year 2008-09, M/s. Anachem Instruments India P.Ltd. received the outstanding amount from, M/s. Advance Scientific Equipment P.Ltd. amounting to Rs.39,95,907/-. Since the said amount was not immediately required by M/s. Anachem Instruments India P.Ltd., a sum of Rs.31 lakhs was kept as inter-corporate deposit on 16-12-2008 with M/s. Advance Scientific Equipment P.Ltd. and interest was credited in account amounting to Rs.96,450/-. So far as transaction of Rs.35 lakhs as advance by M/s. Advance Scientific Equipment P.Ltd. is concerned, it has been explained that during the year M/s. Star Earth Minerals P.Ltd. raised bills totaling to Rs.39,70,800/- on M/s. Advance Scientific Equipment P.Ltd. A sum of Rs.4,08,992/- was deducted by the said Advance Scientific Equipment Pvt. Ltd. towards tax, thus, a sum of Rs.35,61,808/- was outstanding. A sum of Rs.35 lakhs was received by M/s. Star Earth Minerals P.Ltd.. which the company treated as inter-corporate deposit instead of treating the same as payment against the bills outstanding.
Ld. AR in this respect has relied upon the balance sheet of M/s.
Advance Scientific Equipment P.Ltd. and M/s. Anachem Instruments India P.Ltd. Ld. AR of the assessee has further relied upon the paper book at page 5 to show that there were other transactions also and that the M/s.
Advance Scientific Equipment P.Ltd. had a running account in the books of M/s. Anachem Instruments India P.Ltd. In this respect, ld. AR relied upon the entry dated 3-4-2007 by which M/s. Anachem Instruments India P.Ltd. has made a payment of Rs.5 lakh to M/s. Advance Scientific Equipment P.Ltd. on 17-4-2007, by which an amount of Rs.35,000/- had been paid to M/s. Advance Scientific Equipment P.Ltd. through proper banking channel. Further there are entries dated 20-12-2007 and 24-12- 2007 in relation to certain transaction of Rs.38,3209/- and Rs.23,5436/- respectively on account of some sales of shares/spare parts. There is a running ledger account of M/s. Advance Scientific Equipment P.Ltd. in the books of M/s. Anachem Instruments India P.Ltd., wherein there is continuous exchange of transactions. There are almost more than 40 entries of debit and credit of the amounts. Ld.AR has further relied upon the page 11 of the paper book and has submitted that the M/s. Star Earth Minerals P.Ltd. had raised bills in the year ending 31-3-2009 in respect of sales made to M/s. Advance Scientific Equipment P.Ltd. He has further relied upon page 12 to 16 that the assessee had a running account with these companies and these companies owed money to the assessee as narrated in the initial paras of this order.
Ld. AR has further invited our attention to para 2.3 of the impugned order of the CIT(A), wherein ld. CIT(A) has himself observed that the assessee himself had not received any loan/advance from these companies. Ld. CIT(A) further in para 2.3(b) of the order has also discussed that during the year, these companies were having various business transactions and having running accounts with each other. The CIT(A) in the impugned order has categorically observed that there were various inter-se transactions between the companies and that as on 16- 12-2008 M/s. Anachem Instruments India P.Ltd. had to receive Rs.48,12,600/- from M/s Advance Scientific Equipment P.Ltd.; further that M/s. Advance Scientific Equipment P.Ltd. made certain payments to M/s.
Anachem Instruments India P.Ltd. and that as on 1-12-2008 the debit and credit amount was same and thus, on the said date nothing was receivable or payable by M/s. Anachem Instruments India P.Ltd. from M/s.
Advance Scientific Equipment P.Ltd. and vica-versa.. The facts itself reveal that these companies were carrying on inter-se transactions and were having running accounts, the amounts were paid and returned also and that no part of the said amount was attributed to the shareholders.
The nature of business of the three companies is connected with each other and that are depending upon each other for their business and there are mutual transactions which these companies use to do for the financial help of each other for the purpose of business expediency.. All the more, the most important fact is that the assessee had to receive amounts from M/s. Advance Scientific Equipment P.Ltd. and M/s. Star Earth Minerals P.Ltd. but, in fact, no amount has been received by the assessee. Even otherwise, if the assessee had to receive certain amount from the said company, then under such circumstances, any payment, which is not more than that such company owes to the assessee, made by the said company to the assessee will not constitute deemed dividend u/s.2(22)(e) of the act. The other important issue is that the payments were not gratuitous or for the benefit of the shareholder. There is also merit in the contention of ld. AR that same amount was routed in the chain of transactions i.e. amount of Rs.31 lakhs by M/s. Anachem Instruments India P.Ltd. to M/s. Advance Scientific Equipment P.Ltd. and in turn M/s.
Advance Scientific Equipment P.Ltd. paid the amount of Rs.35 lakhs to parent company. Under such circumstances it cannot in any manner be held that the assessee had received the benefit of Rs.66 lakhs i.e. the total amount of transaction. Under the circumstances, there is merit also in the alternate contentions raised by the assessee.
As held by Hon’ble Karnataka High Court and other High Courts and Hon’ble Supreme Court, the object and purpose of Section 2(22)(e) is to check escapement of tax u/s.155-O but in this case the facts reveal beyond doubt that the transactions in question were out of business requirements between the said three companies which were having running accounts with each other. The assessee has not received any direct or indirect individual benefit out of these transactions.
The Hon’ble Supreme Court in the case of “S.A.Builders Vs. CIT”
(2007) 288 ITR 1 (SC) in the context of expenditure allowable u/s.37 of the Act has observed that what is to be seen as to whether the assessee advanced loan to its sister concern or a subsidiary as a measure of commercial expediency. The Hon’ble Supreme Court has further held that “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. The Hon’ble Supreme Court has further explained the explanation “commercial expediency” as under :-
The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”
Hon’ble Supreme Court has further held that it is not necessary that loan amount should be exclusively used in the business of the assessee.
However, requirement is that it should be used for the purpose of business expediency. Though, the above observations have been made by the Hon’ble Supreme Court in the context of Section 37 of the Act, yet, the proposition as to when the amount was advanced or paid in the case was out of any commercial expediency or in the course of business and were not gratuitous payments for the benefit of the shareholders, then, applying the same analogy, such payments made through inter-corporate transactions between the parties cannot be treated deemed dividend at the hands of the assessee-shareholder.
The coordinate Visakhapatnam Bench in the case of “M.
Amareswara Rao Vs. DCIT” {2016] 16 taxmann.com 15(Visakhapatnam Trib) has observed that a careful study of the provisions of Section 2(22)(e) make it clear that the Legislature wanted to bring to tax the amount paid by closely held companies to their principle shareholders to avoid dividend distribution tax and that the provisions of section 2(22)(e) of the Act must be made applicable, wherein the dividend is paid in the guise of loan or advance to avoid tax. But to apply the provisions of Section 2(22)(e) of the Act, an honest attempt is to be made to understand, whether the impugned amount is a loan or advance within the meaning of said section.
As discussed above, in the light of the various case laws and the purpose and object of Section 2(22)(e) of the Act as held by the Hon’ble Supreme Court as well as High Courts and in view of the facts and circumstances, payments made through inter-se transactions between the companies cannot be termed as any gratuitous payment to the assessee shareholder and, thus, the provisions of Section 2(22)(e) are not applicable in this case. In view of this, the appeal of the assessee is allowed and the additions made by the lower authorities u/s.2(22)(e) in the hands of the assessee are hereby deleted.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on this 15/06/2016.
Sd/- Sd/- (SANJAY GARG ) (RAMIT KOCHAR ) सद�य / ACCOUNTANT MEMBER सद�य / JUDICIAL MEMBER लेखा सद�य �याियक �याियक सद�य लेखा लेखा लेखा सद�य सद�य �याियक �याियक सद�य सद�य मुंबई Mumbai; �दनांक Dated 15/06/2016 �.कु.िम/pkm, िन.स/ PS आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�(अपील) / The CIT(A), Mumbai. 4. आयकर आयु� / CIT