ACIT, NEW DELHI vs. SH. ASHOK KUMAR GARG, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘A’: NEW DELHI BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER ITA No. 2917/Del/2013 Assessment Year: 2009-10 Assistant Commissioner of Vs. Sh. Ashok Kumar Garg, Income Tax, Circle-1(1), N-3, Kailash Colony, New Delhi New Delhi (PAN: AAGPG8032N) (Appellant) (Respondent) Appellant by : Sh. K.K. Jaiswal, DR Respondent by : Sh. Ved Jain, Adv. Date of hearing: 09.09.2015 Date of pronouncement: 23.09.2015 ORDER PER INTURI RAMA RAO, A.M.: This is an appeal filed by the Revenue directed against the order of CIT(A)-IV, New Delhi, dated 27.02.2013, passed for the assessment year 2009- 10. The assessee has raised the following grounds of appeal: i. Whether the learned CIT(A) has erred on facts and in law in deleting the addition of Rs. 53,29,843/- on account of deemed dividend u/s 2(22)(e) ignoring the fact that the advances had not been made in the ordinary course of business expediency and the assessee had been regularly repaying the amount received from the company. ii. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 2. Brief facts of the case are that the respondent assessee is an individual deriving income from salary from the company, namely, M/s A.K.G. Industries

2 Ltd. The return of income for the assessment year 2009-10 was filed on 11.01.2005 declaring total income of Rs. 88,89,010/-. Against the said return of income, the assessment was completed under Section 143(3) of the Income-tax Act, 1961 (for short “the Act”) vide order dated 30.12.2011, at a total income of Rs. 1,42,98,853/-. During the course of assessment proceedings, the Assessing Officer noticed that the assessee owns a sum of Rs. 53,29,843/- to M/s A.K.J. Industries Pvt. Ltd., which is a substantial shareholders and director. Therefore, the Assessing Officer was of the opinion that the said amount was in the nature of deemed dividend and therefore brought to tax in the hands of the assessee under the provisions of Section 2(22)(e) of the Act. Being aggrieved by this addition, the assessee preferred an appeal before the learned CIT(A)-IV, New Delhi, who vide order dated 27th February, 2013, deleted the addition vide para 5.3, which reads as under: “5.3 I have carefully considered the submission of the appellant and perused the order passed by the AO. The Assessing Officer has made the addition by invoking the provisions of Section 2(22)(e) of the Act. As per this provision, a payment by way of advance or loan to a shareholder is deemed to be income of such shareholder. Further any transaction in the ordinary course of company’s activity with the shareholder is not considered to be a loan or advance hit by provisions of Section 2(22)(e) of the Act. On going through the facts, I notice that it is an admitted position that the appellant was director of M/s A.K.G. Industries Ltd. The appellant is also drawing salary of Rs. 30 lac per annum from the company. The appellant was a full time employee of this company and he being such an employee in the preceding year and continues to be an employee in the subsequent year. On the opening day of the accounting year, the appellant was to receive a sum of Rs. 24,15,610/- from the company. It is also a fact that salary is being credited to this account of Rs. 7,50,000/- per month. The debit balance has arisen in this account only, of which the Assessing Officer has considered it to be a deemed dividend. This account of the appellant with the company cannot be considered to be a loan or advance

3 hit by the provisions of Section 2(22)(e) of the Act. It is also an admitted fact that this loan or advance has been adjusted subsequently against the salary due to the appellant. Thus, it is not a case where the loan or advance was taken and it has been later on returned by the shareholder. 5.3.1 As regards the contention of the Assessing Officer that the account has been named as ‘A.K. Garg Loan Account’, it is a settled position that the account in substance has to be seen and not the name. On going through the account it is quite clear that this account is a salary account of the appellant. The issue before me is an appreciation offacts and on going through the account and the facts, as analyzed hereinabove, I am of the considered view that this account is in the normal course of the business activity between the employer and the employee and accordingly the provisions of Section 2(22)(e) of the Act shall not be applicable in respect of the debit balance arising in the account of the employee. My above view also gets support from the judgment of the jurisdictional Delhi High Court in the case of CIT Vs. Raj Kumar, 318 ITR 462 (Del) and CIT Vs. Creative Dyeing and Printing Pvt. Ltd., 318 ITR 476 (Del.) whereby the Delhi High Court has held that the amount received by the assessee as an advance against future supply was a trade advance and not a deemed dividend under Section 2(22)(e) of the Income Tax Act. Accordingly, I hold that the amount received by the appellant is advance against future salaries was in the normal course of business and not a deemed dividend under Section 2(22)(e) of the Income Tax Act. Being aggrieved by the above order, the Revenue is before us with the present appeal. 3. Learned Sr. DR argued that once the money is received from the company in which the assessee had a substantial interest, the transaction is treated as a deemed dividend under the provisions of Section 2(22)(c) of the Act. Therefore, the CIT(A) was not justified in deleting the addition. 4. On the other hand, the learned counsel for the respondent assessee submitted that the respondent assessee was drawing a salary @ Rs. 7,50,000/- per month from M/s A.K.J. Industries Ltd. This salary is credited to current account maintained in the name of assessee in the books of account of the said

4 Company. He submitted that there were continuous transactions between the respondent assessee and the said company on account of salary and advance salary and the assessee also paid money to the company as and when required for business purposes of the said company. Therefore, the said account is in the nature of current account and the transactions have been done in the ordinary course of business of the said company and therefore, the provisions of Section 2(22)(e) are not applicable. In this connection, he relied on the following decisions of the Tribunal: M/s Percy Peshotan Batlivala Vs. ITO, ITA No. 4487/Del/2010, Dt. 20th i. July, 2012; 2012 (9) TMI –ITAT, Delhi Ishwar Chand Jindal Vs. ACIT, ITA No. 4967/Del/2012, dt, 29th May, ii. 2015; 2015 (8) TMI 119 – ITAT, Delhi iii. CIT Vs. Sh. Raj Kumar, [2009] 318 ITR 462 (Delhi) He further submitted that the order passed by the CIT(A) does not suffer from any legal infirmity therefore should be sustained. 5. We heard the rival submission and perused the material on record. On perusal of the copy of ledger account of the assessee with M/s A.K.J. Industries Ltd. extracted in the assessment order, it is clear that there were continuous transactions of receipt and payment of money to the assessee by the said company. There are some debit balance and after some time it was converted into credit balance and finally at the end of accounting year, there was a debit balance of Rs. 53,28,853/-. Out of this, there were entry made on 31st March, 2009 towards TDS payable of Rs. 29,51,460/-. Thus, there are mutual transactions between the said company and the assessee throughout the year.

5 Therefore, in our considered opinion, this account is in the nature of a current account, and moreover, the salary payable is also credited in this account and wherever there are payments in excess of the salary, it was submitted that it was an advance salary received from the company. Therefore, in our considered opinion, these transactions one in ordinary course of business of the said company, cannot be treated as deemed dividend. The reliance is placed on the following judgments: i. CIT Vs. Raj Kumar, 318 ITR 462 (Del.) ii. CIT Vs. Ambassador Travels (P.) Ltd., 318 ITR 376 (Del.) iii. CIT Vs. Creative Dyeing and Printing (P.) Ltd., 318 ITR 476 (Del) iv. Pradip Kumar Malhotra Vs. CIT, 38 ITR 538 (Cal.) v. CIT Vs. International Land Development Pvt. Ltd., ITA No. 1296, 1297/Del/2013, Dt. 02.02.2012 The ratio laid down in the above cases is followed by a coordinate bench of ITAT, Delhi in the case of M/s Percy Peshotan Batlivala Vs. ITO (supra), wherein the Bench held as follows: “We have heard the rival parties and have gone through the material placed on record. From the facts and circumstances of the case, we have observed that the debit balance in the account of assessee at a given point of time is not in the nature of loan or advance. But, it is a running account wherein the assessee had taken the amount as adjustable against future salaries which were being credited to his account monthly. Therefore, following various judicial pronouncements as relied upon by Ld. AR, we are of the view that advance was not in the nature of loan and hence cannot be treated as deemed dividend u/s 2(22)(e) of the Act. In view of the above, the appeal filed by the assessee is allowed.” 6. A coordinate bench of ITAT, Delhi in the case of Ishwar Chand Jindal Vs. ACIT, ITA No. 4967/Del/2012, dt, 29th May, 2015; 2015 (8) TMI 119 – ITAT,

6 Delhi, referring the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Arvind Kumar Jain, ITA No. 589/11, dt. 30.09.2011, held as follows: “6. Learned counsel for the appellant hammered the fact that the amount was shown by the assessee himself in his books of accounts as “unsecured loan” and, therefore, the order of the Assessing Officer was correct. 7. It is trite law that mere nomenclature of entry in the books of accounts is not determinative of the true nature of transaction. See Commissioner of Income Tax vs. India Discount Co. Ltd. 75 ITR 191 (SC), Commissioner of Income Tax vs. Provincial Farmers (P) Ltd. 108 ITR 219 (Cal) and KCP Ltd. vs. CIT 245 ITR 421. In the present case after going through the relevant evidence as well as current account maintained between the parties, it has been established that the payment made were the result of trading transaction between the parties and the amount was not given by way of loan or advance.” 11. From the aforesaid, it is now trite law that nomenclature cannot be a basis to conclude that the business transactions between the two entities constitute deemed dividend under section 2(22)(e) of the Act. The Hon’ble Delhi High Court in the case of CIT vs. Rajkumar (supra) has held as under: “A close examination of the judgment of the Bombay High Court in the case of Nagindas M. Kapadia (supra) would show that the Court excluded from the ambit of 'dividend', monies which the assessee had received towards purchases. In our view both the CIT(A) and the Tribunal have correctly appreciated this aspect of the matter in the said judgment of the Bombay High Court. The relevant portion of the judgment of the Bombay High Court which sets out this aspect of the matter is already extracted by us http://www.itatonline.org ITA No.4967/Del /2012 ITA No.2002/D/2013 Assessment Year : 2005-2006 8 in the narrative give by us hereinabove. We are also in agreement with the view of the Tribunal that the judgment of the Supreme Court in the case of Ms. P. Sarada (supra) and Smt. Tarulata (supra) has no applicability to the present case. Both the judgments establish the principle that once the payment made to a shareholder is deemed as dividend then the mere fact that it is repaid would not take it out of the ambit of the tax net. In the instant case, however, a discussion with respect to which has been made hereinabove, the issue is whether the payment received by the shareholder would at all fall within the four corners of provisions of Section 2(22)(e) of the Act. Having held otherwise, the said judgments of the Supreme Court, in our view, will have no applicability to the facts of the instant case. 12. In view of the above, the question of law as framed by us is answered in favour of the assessee and against the Revenue. We hold that trade advance does not fall within the ambit of the provisions of Section 2(22)(e) of the Act. Resultantly, the appeal is dismissed. There shall be, however, no order as to costs.” 12. Also in the case of CIT vs. Creative Dyeing and Printing (P) Ltd. (supra) it was held as under: “The counsel for the appellant has very strenuously urged that neither the Tribunal nor the judgment of this Court in Rajkumar's case(supra) deals with that part of the definition of deemed dividend under Section 2(22)(e) which states that deemed dividend

7 does not include an 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 [Section 2(22)(e)(ii)] i.e. there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee company would therefore be covered by Section 2(22)(e)(ii) and consequently payments even for business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of Section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot however, have bearing on interpretation of the main provision of Section 2(22)(e) and once it is held that the business transactions does not fall within Section 2(22)(e), we need not to go further to Section 2(22)(e)(ii). The provision of Section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that's all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of Section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislative intention of introducing Section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar's case(supra). This Court in Raj Kumar's case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under: "10.3 A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. 10.4 Therefore, if the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is pari material with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. 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 the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. 10.5 If this purpose is kept in mind then, in our view, the word 'advance' has to be read in conjunction with the word 'loan'. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term 'advance' may or may not include lending. The word 'advance' if not found in the company of or in conjunction with a word 'loan' may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term 'advance'. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the of Angus Robertson v. George Day (1879) 5 AC 63 by observing "it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them" and our Supreme Court in the case of Rohit Pulp and Paper

8 Magnum International Ltd.ls Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610." 12. Therefore, we hold that the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assessee company and M/s. Pee Empro Exports Pvt. Ltd. was not such to fall within the definition of deemed dividend under Section 2(22)(e). The present appeal is therefore dismissed.” 13. Having regard to the above factual and judicial position the addition made and sustained of Rs. 51,92,469/- is deleted.” 7. The reasoning adopted by the CIT(A) while allowing this appeal is in parity with the ratio laid down in the cases supra. Thus, we do not find any reason to interfere in the order of the CIT(A). Hence, the appeal filed by the Revenue is dismissed as such. 8. In the result, the appeal filed by the Revenue is dismissed. The decision is pronounced in the open court on 23rd September, 2015.

Sd/- Sd/- (BEENA A. PILLAI) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 23rd September, 2015. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi