DCIT, Kottayam V. Sri.N.Rajagopal, Kottayam

ITA 144/COCH/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81331 (ITAT-COCHIN)
• Duration Of Justice: 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2014
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 24-07-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 28-03-2014
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Assessee Lawyers: A GOPALAKRISHNAN
• Keywords: Unexplained expenditure; Question of law; Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NO.144/COCH/2014 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOTTAYAM. VS. SHRI N. RAJAGOPAL, CHENGANATTU MADATHIL, ERAVINELLOOR P.O., KOTTAYAM-686011 [PAN: AAAO 3695C] (REVENUE -APPELLANT) (ASSESSEE-RESPONDEN T) REVENUE BY SHRI K.K. JOHN, SR. DR ASSESSEE BY SHRI A. GOPALAKRISHNAN, CA DATE OF HEARING 24/07/2014 DATE OF PRONOUNCEMENT 05/09/2014 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 28- 11-2013 PASSED BY THE LD. CIT(A)-IV, KOCHI FOR THE ASSESSMENT YEAR 2009-10. 2. THE GROUND FOR OUR CONSIDERATION IS WITH REGARD TO DELETION OF ADDITION OF RS. 32,74,635/- AND RS. 23,16,678/- BY INVOKING THE PROVISIONS OF SEC. 2(22)(E) OF THE I.T. ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT REVISED RET URN WAS FILED BY THE ASSESSEE ON 09-10-2009 AT AN INCOME OF RS. 17,72,32 0/- AND ASSESSMENT HAS I.T.A. NO.144 /COCH/2014 2 BEEN COMPLETED AT AN INCOME OF RS. 76,21,591/-. THE ASSESSING OFFICER MADE ADDITIONS ON ACCOUNT OF: (1) UNEXPLAINED EXPENDITURE : RS. 50,000/- (2) INCOME CLAIMED TO BE AGRICULTURE : RS. 1,64,000/- (3) DEEMED DIVIDEND FROM CEYANNAR CHEMICALS LTD.: RS.32,74,635/- (4) DEEMED DIVIDEND FROM CEYANNAR CHEMICALS LTD.: RS.23,16,678/- AGGRIEVED BY THESE ADDITIONS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) AND SUBMITTED BEFORE THE CIT(A) THAT AN AMOUNT OF RS.32 ,74,635/- WAS ADDED TOWARDS DEEMED DIVIDEND INVOKING THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT. THIS AMOUNT COLLECTED BY THE ASSESSEE FROM THE CUST OMERS OF THE COMPANY IN WHICH THE ASSESSEE IS A SHAREHOLDER NAMELY CEYANNAR CHEMICALS PVT. LTD. (CCPL) IN PURSUANCE OF A RESOLUTION PASSED BY THE COMPANY AND KEPT AS AN IMPREST CASH, WITH THE BANK IN THE NAME OF THE ASSESSEE, AS A TEMPORARY LOAN TAKEN BY THE ASSESSEE FROM CCPL DESPITE THE FACT THAT THE EN TIRE MONEY COLLECTED AND KEPT AS IMPREST CASH WAS DEPOSITED IMMEDIATELY IN THE SA VINGS BANK ACCOUNT IN THE NAME OF THE ASSESSEE. THE ASSESSEE DID NOT DERIVE ANY BENEFIT FROM THE AMOUNT SO COLLECTED AS IT WAS KEPT IN THE SAVINGS BANK ACC OUNT THROUGHOUT TILL THE DATE THE SAID AMOUNT WAS FINALLY REMITTED TO THE COMPANY WITHIN THE GAP OF SHORT PERIODS. 4. REGARDING THE AMOUNT OF RS. 23,16,678/- ADDED T O INCOME AGAIN AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE ACT, THE ASSESSING OF FICER OBSERVED THAT IN THE I.T.A. NO.144 /COCH/2014 3 BOOKS OF THE CEYANNAR CHEMICALS P. LTD. THREE ACCOU NTS OF THE ASSESSEE ARE MAINTAINED. THEY ARE SHRI N. RAJAGOPAL, LIC A/C, S HRI N. RAJAGOPAL REMUNERATION ACCOUNT AND N. RAJAGOPAL A/C. THE ASS ESSEE WAS ASKED TO PREPARE CONSOLIDATED ACCOUNT OF THIS STATEMENT TO D ETERMINE IF THE PROVISIONS OF SEC. 2(22)(E) WAS ATTRACTED. IN THE CONSOLIDATED AC COUNT THERE WAS A CREDIT BALANCE OF RS.699253/- AND 369487/- AT THE BEGINNIN G AND END OF THE YEAR. THE ONLY CREDITS DURING THE YEAR IS THE REMUNERATION. THERE ARE WITHDRAWALS FROM THIS ACCOUNT DURING THE COURSE OF THE YEAR AND THE FIRST DEBIT BALANCE STARTED ON 16-09-2008. THEREFORE ANY AMOUNT GIVEN BY THE COM PANY AFTER THIS DATE IS A DEEMED DIVIDEND. THE DEEMED DIVIDEND IS RS.40941+2 275737 OR RS.2316678/- AND NO CREDIT CAN BE GIVEN FOR THE REMUNERATION CRE DITED TO THE ACCOUNT AFTER 16-09-2008 AS TEMPORARY LOANS EVEN IF RETURNED IS T O BE ASSESSED TO TAX. 4.1 THE ASSESSEE ALSO REQUESTED THAT CREDIT FOR THE AMOUNT STANDING IN THE BOOKS OF THE COMPANY UNDER THE HEAD IRC LOAN ACCOUN T SHOULD ALSO BE INCLUDED WHILE WORKING OUT THE DIVIDEND INCOME. IRC (INDIA RUBBER COMPANY) IS A CONCERN IN WHICH THE ASSESSEE IS A PARTNER. THE AS SESSEE CLAIMED THAT THE COMPANY HAD BEEN INSTRUCTED BY HIM TO MAKE PAYMENTS ON HIS BEHALF THROUGH THIS ACCOUNT ONLY. HOWEVER, THE COMPANY CREATED SE PARATE ACCOUNTS IN HIS NAME AND ONLY AT THE END OF THE YEAR THE WITHDRAWALS IN THE ACCOUNT WAS ADJUSTED. THE ASSESSEE THEREFORE PREPARED ANOTHER STATEMENT I N WHICH THE PAYMENTS FROM THE FIRM WAS ALSO INCLUDED AND AS PER THIS STATEMEN T THE DEEMED DIVIDEND WAS I.T.A. NO.144 /COCH/2014 4 RS.507093+185984 OR RS.693077/-. ACCORDING TO THE ASSESSING OFFICER, THE ACCOUNT IN THE BOOKS OF THE FIRM IS IN THE NAME OF IRC LOAN ACCOUNT. IT IS THEREFORE CLEARLY A LOAN TAKEN BY THE COMPANY FROM THE FIRM. THE FIRM AND THE COMPANY ARE TWO DIFFERENT ENTITIES AND THE ASSESSEE AND THE FIRM CANNOT BE EQUATED WITH EACH OTHER. THEREFORE THE REQUEST OF THE ASSESSEE CANNOT BE CONSIDERED. 5. ON APPEAL, THE CIT(A) OBSERVED THAT THE PROVISIO NS OF SECTION 2(22)(E) SAYS THAT ANY PAYMENT BY A COMPANY .. BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDERPUTS EMPHASIS ON THE WORD PAYMENT W HICH MEANS PAYMENT AS A DIRECT ACT OF SAYING. TO THIS EXTENT PAYMENT SHOU LD BE A POSITIVE ACT OF PHYSICAL TRANSFER OF MONEY BY THE COMPANY TO THE SHAREHOLDER . THEN SUCH PAYMENT EXCLUDES ANY EXTENDED MEANING OF PAYMENT WHICH IS N OT TAKEN FROM THE COMPANY DIRECTLY, WHICH IS A FACT IN THE INSTANT CA SE THAT THE ASSESSEE DIRECTOR, INSTEAD OF ACCEPTING ANY MONEY DIRECTLY FROM THE CO MPANY, HE HAS BEEN COLLECTING THE OUTSTANDING DEBTS OF THE COMPANY FRO M VARIOUS CUSTOMERS. IN ALL PRACTICAL CONSIDERATION, IT APPEARS THAT THIS IS A CASE OF GENUINE BUSINESS CIRCUMSTANCES WHERE THE DIRECTOR HAS BEEN REALIZING THE COMPANYS ARREARS WITH HIS CONTINUOUS EFFORTS. 6. THE CIT(A) OBSERVED THAT IN THE PROCESS OF SUCH COLLECTION, HE HAS NOT BEEN DERIVING ANY INDIVIDUAL BENEFIT OUT OF SUCH MO NEY, WHICH HAVE BEEN I.T.A. NO.144 /COCH/2014 5 COLLECTED ON BEHALF OF THE COMPANY. IT IS OBSERVED THAT THESE TRANSACTIONS DO NOT FALL WITHIN THE AMBIT OF DEFINITION OF SECTION 2(22 )(E) OF THE ACT AS THIS IS NOT A CASE WHERE THE PAYMENT IS BEING DIRECTLY MADE BY TH E COMPANY TO ITS SHAREHOLDER, AND AS SUCH, THE VERY DEPOSIT IN THE A SSESSEES BANK ACCOUNT WOULD NOT PARTAKE THE CHARACTER OF A LOAN OR ADVANCE, AS POSITIVE AND DIRECT ELEMENT OF PAYMENT FROM THE COMPANY IS MISSING IN THIS CASE. ACCORDINGLY, THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 7. REGARDING THE ADDITION OF RS. 23,16,678/-, THE C IT(A) OBSERVED THAT FIRST OF ALL THERE HAS BEEN A MISTAKE BY WHICH THE ACCOUN TANT HAS INSTEAD OF TAKING THE FIRMS ACCOUNT, HAS DEBITED THE ACCOUNT OF THE ASSESSEE IN THE BOOKS OF THE COMPANY. SECONDLY, THE APPLICABILITY OF THE PROVISI ONS OF SEC. 2(22)(E) IN THE INSTANT CASE, COULD ONLY HAPPEN THROUGH THE FIRM IR C. THE ASSESSING OFFICER HAS NOT BROUGHT OUT THE FIRM IRC, WHICH IS HAVING SUBST ANTIAL INTEREST IN THE COMPANY, IF IT IS SO, THERE IS FORCE IN THE CONTEN TION OF THE ASSESSEE THAT THE CONSOLIDATED ACCOUNT SHOULD HAVE CONSIDERED THE ACC OUNT OF THE FIRM ALSO, IN ORDER TO FIND OUT THE NET DEBIT OR CREDIT BALANCES. AS THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT HAS BEEN INVOKED BY THE ASSESSI NG OFFICER NOT ON THE BASIS OF THE AUDIT REPORT OR THE BALANCE SHEET FILED AS ON 3 1-03-2009. THESE TRANSACTIONS CAME TO THE NOTICE OF THE ASSESSING OFFICER BY GOIN G THROUGH THE CASH STATEMENT CALLED FOR AND FILED BY THE ASSESSEE. AS PER THE R EVISED CASH STATEMENT FILED, THE DEPOSITS AND WITHDRAWALS HAVE BEEN EXAMINED BY THE ASSESSING OFFICER. BUT I.T.A. NO.144 /COCH/2014 6 DURING THE COURSE OF EXAMINING SUCH DEPOSITS AND WI THDRAWALS, THE ASSESSING OFFICER HAS FAILED TO OBSERVE THE FACTUAL DETAILS S UBMITTED BY THE ASSESSEE AND HAS CALCULATED THE NET DEBIT BALANCE BY CALLING FOR CONSOLIDATED ACCOUNTS AND STATEMENT BY MERGING THE THREE ACCOUNTS OF THE ASSE SSEE IN THE BOOKS OF THE COMPANY. TO THIS EXTENT, ACCORDING TO THE CIT(A), THE ASSESSEE HAS VALID REASONS THAT THE CONSOLIDATED ACCOUNTS SHOULD INCLU DE THE ACCOUNT OF THE FIRM ALSO, IN THE BOOK OF THE COMPANY, THEN, INSTEAD OF DEBIT BALANCE, THERE WILL BE ONLY A CREDIT BALANCE. FURTHER, SINCE THE ASSESSEE HAS BEEN MANAGING THE BUSINESS ACTIVITIES OF THE FIRM AS WELL AS OF THE C OMPANY, THE TRANSACTIONS OF WHICH ARE IN THE NATURE OF CURRENT AND OPEN TRANSAC TION THEN ANY DEPOSIT IN THE ACCOUNT CANNOT PARTAKE THE CHARACTER OF A LOAN OR A DVANCE. HE OBSERVED THAT THE ASSESSING OFFICER HAD FAILED TO APPRECIATE THE FACTS OF THE CASE IN APPLYING THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT AS IT IS NOT APPLICABLE IN VIEW OF THE EXPLANATIONS GIVEN BY THE ASSESSEE. THAT THE TRANSA CTIONS ARE OF THE NATURE OF CURRENT ACCOUNT AND ALL THE FOUR ACCOUNTS NEED TO B E MERGED TO SEE WHETHER THERE HAS BEEN ANY DEBIT BALANCE. FURTHER, SUCH DEP OSIT SHOULD BE EITHER A LOAN OR ADVANCE IN CLEAR TERMS WITHOUT ANY AMBIGUITY. A CCORDINGLY, THE CIT(A) DELETED THE ADDITION ON ACCOUNT OF SUM OF RS. 23,16 ,678/-. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 8. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER AND ALSO RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF TARULATHA SHYAM VS. I.T.A. NO.144 /COCH/2014 7 CIT, 108 ITR 345 WHEREIN IT WAS HELD THAT PAYMENT B Y A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC WERE SUBSTANTIALLY INTE RESTED WITHIN THE MEANING OF SECTION 23A OF 1922 ACT, OF ANY SUM BY WAY OF ADVAN CE OR LOAN TO A SHAREHOLDER, NOT EXCEEDING THE ACCUMULATED PROFITS POSSESSED BY THE COMPANY WAS TO BE DEEMED AS HIS DIVIDEND U/S. 2(6A)(E) READ WITH SEC. 12(1B) OF THE ACT, 1922, EVEN IF THAT ADVANCE OR LOAN WAS SUBSEQUENTLY REPAI D IN ITS ENTIRETY DURING THE RELEVANT PREVIOUS YEAR IN WHICH IT WAS TAKEN. EVEN IF SUCH TEMPORARY LOAN IS RETURNED, THE DEEMING PROVISION WILL APPLY. FURTHE R HE RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF MISS P. SA RADA VS. CIT, 96 TAXMAN 11 (SC) WHEREIN IT WAS HELD AS UNDER: SECTION 2(22) OF THE INCOME TAX ACT, 1961 DEEMED DIVIDENDS ASSESSMENT YEAR 1973-74. ASSESSEE-SHAREHOLDER HAD OVERDRAWN HER ACCOUNT IN COMPANYS BOOK BETWEEN 03-07-1972 TO 22- 03-1973. ON 31-03- 1973, HER ACCOUNT WAS CREDITED BY DEBITING ACCOUNT OF ONE M, ANOTHER SHAREHOLDER WHO HAD ALLEGEDLY WRITTEN ON 3-4-1972 T O COMPANY TO MAKE AVAILABLE ADVANCE TO ASSESSEE FROM HIS CREDIT. WHE THER ADVANCES MADE BY COMPANY TO ASSESSEE WOULD HAVE TO BE TREATED AS DEE MED DIVIDENDS PAID ON DATES WHEN WITHDRAWALS WERE ALLOWED TO BE MADE A ND SUBSEQUENT ADJUSTMENT OF ACCOUNT MADE ON VERY LAST DAY OF ACCO UNTING YEAR WOULD NOT ALTER POSITION THAT ASSESSEE RECEIVED NOTIONAL DIVI DENDS ON VARIOUS DATES. HELD, YES. HE FURTHER RELIED ON THE JUDGMENT OF THE JURISDICT IONAL HIGH COURT OF KERALA IN THE CASE OF SMT. THANKAMMA OOMMEN VS. ACI T IN I.T.A. 5/2013 DATED 15/01/2014 AGAINST THE TRIBUNAL ORDER IN I.T.A. 688 /COCH/2010 DATED 20-07- 2012 WHEREIN IT WAS HELD THAT SINCE THE TRIBUNAL AN D THE FIRST APPELLATE AUTHORITY HAVE CONSIDERED THE ENTIRE FACTS OF THE CASE AND CO NFIRMED THE ORDER OF THE I.T.A. NO.144 /COCH/2014 8 ASSESSING OFFICER, THERE WAS NO QUESTION OF LAW FOR CONSIDERATION IN THIS CASE AS THERE WAS NO MATERIAL TO INDICATE THAT THE ASSESSEE WAS ENTITLED FOR THE BENEFIT OF EXCLUSION UNDER THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT AND DISMISSED THE APPEAL OF THE ASSESSEE. 9. ON THE OTHER HAND, THE LD. AR SUBMITTED THAT THE SUM OF RS. 32,74,635 TREATED AS DEEMED DIVIDEND WAS NEITHER A LOAN NOR A N ADVANCE RECEIVED FROM CCPL. THE SUM COLLECTED FROM THE CUSTOMERS OF CCPL WAS NOT FOR THE INDIVIDUAL BENEFIT OR PERSONAL NEEDS OF THE ASSESSEE. THE ASSE SSEE COLLECTED THE SAID SUM OF RS.32,74,635/-FROM THE CUSTOMERS OF CCPL, WHO WE RE IN ARREARS IN SETTLING THEIR DUES TO THE COMPANY FOR A LONG TIME. IT WAS O NLY A TRANSACTION UNDERTAKEN BY THE ASSESSEE FOR AND ON BEHALF OF THE COMPANY. SUCH COLLECTION WAS MADE IN PURSUANCE OF A RESOLUTION PASSED BY THE BOARD OF DI RECTORS OF THE COMPANY IN THEIR MEETING HELD ON 03-04-2008. THE ENTIRE AMOUNT THUS COLLECTED WAS IMMEDIATELY DEPOSITED IN THE SAVINGS BANK ACCOUNT M AINTAINED IN THE NAME OF THE ASSESSEE WITH ICICI BANK/AXIS BANK. WITHDRAWAL S MADE FROM THESE SAVINGS BANK ACCOUNTS WERE IMMEDIATELY GIVEN TO CCPL ON THE SAME DATE. THE ACCOUNT OF THE RESPECTIVE CUSTOMERS WERE CREDITED IN THE BO OKS OF CCPL IMMEDIATELY. HENCE THE ASSESSEE WAS KEEPING THE AMOUNTS COLLECTE D AS AN IMPREST CASH FOR AND ON BEHALF OF CCPL. THE ENTIRE AMOUNT COLLECTED AT ANY PARTICULAR POINT OF TIME WAS ALWAYS KEPT IN THE BANK ACCOUNT OF THE ASS ESSEE. THE LD. AR SUBMITTED THAT NO PART OF THE AMOUNT WAS UTILIZED A T ANY POINT OF TIME FOR THE I.T.A. NO.144 /COCH/2014 9 PERSONAL PURPOSE OR INDIVIDUAL BENEFIT OF THE ASSES SEE. ACCORDINGLY, THE SAID SUM OF RS. 32,74,635/- COULD NOT BE TREATED AS AN ADVAN CE OR A LOAN AS THE TRANSACTIONS WERE IN THE ORDINARY AND NORMAL COURSE OF BUSINESS OF THE COMPANY CCPL. 10. ACCORDING TO THE LD. AR, IT WAS NOT CORRECT ON THE PART OF THE ASSESSING OFFICER TO TREAT THE DEBIT BALANCE ON CERTAIN DATES FOR AN AMOUNT OF RS.23,156,678/- DETERMINED BY CONSOLIDATING THE TRA NSACTIONS IN THREE ACCOUNTS MAINTAINED BY CCPL FOR THE ASSESSEE. THE ASSESEE A LSO ENTERED INTO CERTAIN OTHER TRANSACTIONS ALSO FOR AND ON BEHALF OF THE FI RM INDIA RUBBER AND CHEMICALS (IRC) IN WHICH HE WAS A PARTNER. THE TRANSACTIONS I N THE THREE ACCOUNTS, CONSIDERED BY THE ASSESSING OFFICER, INCLUDED THE T RANSACTIONS ENTERED FOR AND ON BEHALF OF IRC ALSO. THE AGGREGATE OF SUCH TRANSACTI ONS MADE ON BEHALF OF IRC WAS RS.19,61,176/-. CONSEQUENTLY, THE COMPANY CCPL , IN ITS BOOKS, HAD TRANSFERRED THE SUM OF RS. 19,61,176/- AT THE END O F THE YEAR ON 31-03-2009 TO THE ACCOUNT OF THE FIRM IRC. FOR THE PURPOSE OF DE TERMINING THE NET DEBIT BALANCE, THE TRANSACTIONS RELATING TO IRC AMOUNTING TO RS.19,61,176/- SHOULD BE EXCLUDED. THE BALANCE IN THE CONSOLIDATED STATEMEN T OF ACCOUNT AFTER SUCH MERGER OF FOUR ACCOUNTS WAS SHOWING CREDIT ALWAYS A ND HENCE THE BALANCE OF THIS ACCOUNT WAS NOT A LOAN OR ADVANCE. THE ASSESS ING OFFICER DID NOT CONSIDER THIS IMPORTANT FACT. I.T.A. NO.144 /COCH/2014 10 11. WITHOUT PREJUDICE TO THE ABOVE FACTUAL POSITION , THE LD. AR SUBMITTED THAT THESE THREE ACCOUNTS MAINTAINED IN THE NAME OF THE ASSESSEE WITH CCPL, ARE CURRENT AND RUNNING ACCOUNTS AND NOT A LOAN OR ADVA NCE ACCOUNT. ACCORDING TO THE LD. AR THE CHARACTER AND NATURE OF THE TRANSACT IONS IN THE THREE ACCOUNTS ARE OPEN, CURRENT, MUTUAL AND RUNNING CLOSELY RELATED T O THE NORMAL BUSINESS OPERATIONS OF THE COMPANY. THE ASSESSEE RECEIVED P AYMENTS AGAINST REMUNERATION, INTEREST, REIMBURSEMENT OF EXPENSES I NCURRED FOR THE COMPANY, AND FOR MEETING THE EXPENDITURE FOR DIFFERENT BUSIN ESS PURPOSES ON BEHALF OF THE COMPANY. THE ASSESSEE RECEIVED PAYMENTS FOR AND ON BEHALF OF THE COMPANY IRC ALSO. THE VALUE OF THOSE TRANSACTIONS AMOUNTIN G TO RS.19,61,176/- SHOULD BE EXCLUDED. THE LD. AR SUBMITTED THAT THE ASSESSE E HAD OFFERED THE INCOME BY WAY OF SALARY AND REMUNERATION FROM CCPL, INTEREST ETC. IN THE LIGHT OF THE ABOVE FACTS , SUCH OCCASIONAL DEBIT BALANCES IN THE THREE ACCOUNTS COULD NOT BE TREATED AS A LOAN OR ADVANCE WITHIN THE MEANING OF SEC. 2(2 2)(E) OF THE ACT. THUS, THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER WRONGLY CONCLUDED THAT THE DEBIT BALANCE IN THE THREE ACCOUNTS, WITHOUT EXCLUDING TH E TRANSACTIONS RELATING TO THE FIRM IRC FOR RS. 19,61,176/- WAS A TEMPORARY LOAN/A DVANCE TO ERRONEOUSLY INVOKE THE PROVISIONS OF SECTION 2(22)(E) TO TREAT THE SAID SUM OF RS.23,16,678/- AS DEEMED DIVIDEND. ACCORDING TO THE LD. AR, THE A SSESSING OFFICER SHOULD HAVE EXCLUDED THE TRANSACTIONS UNDERTAKEN ON BEHALF OF I RC TO COMPUTE THE NET DEBIT BALANCE. I.T.A. NO.144 /COCH/2014 11 12. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER GAVE A WRONG TREATMENT AS DEEMED DIVIDEND OF THE AMOUNT OF RS. 32,74,635/- RECEIVED FOR AND ON BEHALF OF THE CCPL FROM ITS CUSTOMERS AND KEPT AS IMPREST CASH AT BANK. ACCORDING TO THE LD. AR THE ASSESSEE IS A DIRECTOR AND A SHAREHO LDER IN THE COMPANY CEYANNAR CHEMICALS PRIVATE LIMITED (CCPL) HAVING 30% SHARE. CCPL IS A COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED. THE INCOME OF THE ASSESSEE INCLUDES SALARY FROM CCPL, INCOME FROM HOUSE PROPER TY, PROFITS FROM BUSINESS, INTEREST ON BANK DEPOSITS ETC. 13. THE LD. AR SUBMITTED THAT THE COMPANY IS ENGAGE D IN THE BUSINESS OF PURCHASE AND SALE OF RUBBER CHEMICALS. THE SHAREHOL DERS OF THE CCPL, BELONG TO A FAMILY OF TWO BROTHERS. THE MANAGING DIRECTOR OF CCPL WAS SHRI C.N. RAJENDRAN NAIR. HE EXPIRED SUDDENLY IN 2007. LATE SHRI RAJENDRAN NAIR WAS MANAGING THE DAY TO DAY AFFAIRS OF CCPL. CONSEQUEN T UPON THE SUDDEN AND SAD DEMISE OF THE MANAGING DIRECTOR, CCPL, FACED CERTAI N DIFFICULTIES IN RECOVERING THE DUES FROM CERTAIN CUSTOMERS. THE COMPANY DID N OT SUCCEED IN COLLECTING THE DUES FOR A LONG PERIOD THROUGH THE EFFORTS OF REGUL AR EMPLOYEES AND SALES REPRESENTATIVES. IT WAS FELT THAT THE ASSESSEE, TH E NEW MANAGING DIRECTOR SHRI N. RAJAGOPAL SHOULD PERSONALLY CONTACT THESE DEFAULTIN G CUSTOMERS ON A CONTINUOUS BASIS TO RECOVER THE MONEY DUE TO THE COMPANY, CCPL . ACCORDINGLY, THE BOARD OF DIRECTORS OF CCPL IN THEIR MEETING HELD ON 03-04-20 08 AUTHORISED THE ASSESSEE TO MEET THE CUSTOMERS OF THE COMPANY AND COLLECT TH E AMOUNT DUE TO THE I.T.A. NO.144 /COCH/2014 12 COMPANY AGAINST THE SALE OF THE PRODUCTS. THE BOAR D ALSO GAVE A MANDATE TO THE ASSESSEE TO KEEP THE AMOUNT TO BE COLLECTED FRO M THE CUSTOMERS AS AN IMPREST CASH ON BEHALF OF THE COMPANY AND TO ACCOUN T AND REMIT THE MONEY TO THE COMPANY OR AND IN THE NAMES OF THE RESPECTIVE C USTOMERS AS AND WHEN HE RETURNS TO THE HEAD OFFICE. THE ASSESSEE ACCORDING LY WITH THE MANDATE OBTAINED FROM THE COMPANY, COLLECTED VARIOUS AMOUNTS FROM DI FFERENT CUSTOMERS FOR A TOTAL SUM OF RS.32,74,635/-. 14. ACCORDING TO THE LD. AR, WITH A VIEW TO AVOID K EEPING THE MONEY IN HIS HANDS, AND TO KEEP A TRACK OF THE AMOUNTS COLLECTED AND FOR CORRECTLY ACCOUNTING LATER, THE ASSESSEE IMMEDIATELY DEPOSITED ALL THOSE AMOUNTS IN THE TWO BANK ACCOUNTS OPENED IN HIS NAME. THE ASSESSEE DID NOT USE, AT ANY POINT OF TIME ANY OF THESE AMOUNTS COLLECTED FOR HIS PERSONAL PUR POSES OR INDIVIDUAL BENEFITS. IMMEDIATELY ON EACH OCCASION OF HIS NEXT VISIT TO T HE HEAD OFFICE, THE ASSESSEE WITHDREW THE AMOUNT FROM THE SAVINGS BANK ACCOUNTS AND REMITTED THE SAME TO THE COMPANY AGAINST ACCOUNT OF THE RESPECTIVE CUSTO MERS. THUS THE ASSESSEE WAS KEEPING THE MONEY AS AN IMPREST CASH FOR AND ON BEHALF OF THE COMPANY. THE ENTIRE COLLECTIONS FROM THE CUSTOMERS OF CCPL W ERE ALWAYS KEPT DEPOSITED IN THE SAVINGS BANK ACCOUNTS, THE ASSESSEE REMITTED TH E SAME TO THE COMPANY. THUS THE ASSESSEE WAS NOT BENEFITED IN ANY MANNER P ERSONALLY FROM THE AMOUNT COLLECTED FROM THE CUSTOMERS OF THE COMPANY. I.T.A. NO.144 /COCH/2014 13 15. ACCORDING TO THE LD. AR, THE SAID AMOUNT OF RS. 32,74,635/- COLLECTED FROM THE DEFAULTING CUSTOMERS OF CCPL WAS AN IMPRES T AMOUNT KEPT IN THE SAVINGS BANK ACCOUNTS MAINTAINED WITH THE BANKS AND SUCH IMPREST AMOUNT DOES NOT TAKE CHARACTER AND NATURE OF EITHER A LOAN OR ADVANCE WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT. THE SAID S UM WAS RECEIVED BY THE ASSESSEE IN THE ROUTINE COURSE OF BUSINESS FROM THE COMPANY BY WAY OF AN IMPREST TO ENABLE THE COMPANY TO REALIZE ITS DUES F ROM THE DEFAULTING CUSTOMERS. THE RECEIPT OF MONEY FROM THE CUSTOMERS BY THE ASSE SSEE AS WELL AS REMITTING THE SAME TO THE COMPANY WAS APPROVED AND MANDATED B Y RESOLUTION PASSED BY THE BOARD OF DIRECTORS OF THE COMPANY IN THE MEETIN G HELD ON 03-04-2008. ACCORDINGLY, THE AMOUNTS RECEIVED AND COLLECTED BY THE ASSESSEE FROM THE DEFAULTING CUSTOMERS FOR A TOTAL SUM OF RS. 32,74,6 35 COULD NOT BE TERMED EITHER AS A LOAN OR ADVANCE AS ENVISAGED IN SECTION 2(22)( E) OF THE ACT. 16. THE LD. AR SUBMITTED THAT IT MAY BE APPRECIATED THAT THERE IS NO MATERIAL TO ARRIVE AT A CONCLUSION THAT THE PERMISSION TO CO LLECT THE MONEY FROM THE CUSTOMERS WAS GIVEN TO THE ASSESSEE BY THE COMPANY FOR THE BENEFIT OF THE ASSESSEE. THE ASSESSEE COLLECTED THE MONEY FROM TH E CUSTOMERS FOR AND ON BEHALF OF THE COMPANY AND FOR THE BENEFIT OF THE CO MPANY ONLY. THE AMOUNT SO COLLECTED WAS DEPOSITED IMMEDIATELY IN ONE OF THE S AVING BANK ACCOUNTS MAINTAINED IN THE NAME OF THE ASSESEE WITH ICICI BA NK AND AXIS BANK. THE ASSESSEE DID NOT WITHDRAW ANY AMOUNT FROM THIS SAVI NGS BANK ACCOUNT FOR HIS I.T.A. NO.144 /COCH/2014 14 PERSONAL PURPOSES OR INDIVIDUAL BENEFIT THE ASSESSE E WAS NOT BENEFITED IN ANY MANNER BY COLLECTING THIS MONEY AND KEEPING THE SAM E IN HIS SAVINGS BANK ACCOUNTS. BOTH THESE ACCOUNTS WERE OPENED EXCLUSIVE LY FOR THE PURPOSE OF DEPOSITING THE AMOUNTS TO BE COLLECTED FROM THE CUS TOMERS OF THE COMPANY. SUBSEQUENTLY, WHEN THE PURPOSE OF COLLECTING THE MO NEY FROM THE CUSTOMERS WAS SERVED, THE ASSESSEE CLOSED BOTH THESE ACCOUNTS . SO THESE TWO ACCOUNTS WERE OPENED BY, OPERATED AND MAINTAINED ONLY FOR TH E PURPOSE OF ASSISTING THE COMPANY IN COLLECTING THE ARREARS FROM ITS DEFAULTI NG CUSTOMERS AND FOR THE EXCLUSIVE BENEFIT OF THE COMPANY. THE AMOUNT WITHD RAWN FROM THE TWO BANK ACCOUNTS WERE IMMEDIATELY TRANSFERRED TO THE COMPAN Y ON THE SAME DATE AND CORRECTLY ACCOUNTED IN THE NAMES OF THE RESPECTIVE CUSTOMERS IN THE BOOKS OF THE COMPANY. 17. THE LD. AR DREW OUR ATTENTION TO THE MEANING OF THE TERM LOAN OR ADVANCE. IT MAY BE KINDLY RECOGNIZED THAT THE TERM LOAN OR ADVANCE AS ENVISAGED IN SEC. 2(22)(E) MEANS LENDING, DELIVERY BY ONE PARTY TO AND RECEIPT BY ANOTHER PARTY THE SUM OF MONEY UPON AN AGREEMENT , EXPRESSED OR IMPLIED TO REPAY IT. THE MIND AND INTENTION OF TWO PARTIES, NA MELY THE LENDER AND BORROWER MUST BE AS AD IDEM. IMPREST MONEY MANIFESTLY AND EVIDENTLY WAS KEPT BY THE ASSESSEE TO ENABLE THE COMPANY TO REALIZE THE DUES FROM THE DEFAULTING CUSTOMERS AND MONEY SO COLLECTED FROM THE CUSTOMERS HAS BEEN KEPT AS IMPREST AND MAINTAINED IN THE TWO SAVINGS BANK ACCOUNTS IN THE NAME OF THE ASSESSEE. I.T.A. NO.144 /COCH/2014 15 THE WITHDRAWALS FROM THE TWO ACCOUNTS WERE IMMEDIAT ELY UTILIZED TO MAKE PAYMENTS TO THE COMPANY. THE ASSESSEE DID NOT APPR OPRIATE ANY AMOUNT FROM THESE ACCOUNTS FOR HIS PERSONAL NEEDS OR INDIVIDUAL BENEFIT. THE ASSESSING OFFICER ALSO COULD NOT PROVE THAT THE ASSESSEE WAS BENEFITED IN ANY MANNER WITH THIS IMPREST MONEY. THE LD. AR SUBMITTED THAT SUCH IMPREST MONEY KEPT, FOR AND ON BEHALF OF AND FOR THE BENEFIT OF THE COMPANY , COULD NOT BE TREATED AS A LOAN OR ADVANCE TO THE ASSESSEE FOR MAKING AN ASSES SMENT AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 18. THE LD. AR SUBMITTED THAT ASCERTAINMENT OF THE NATURE OF PAYMENT IS ESSENTIAL TO DECIDE WHETHER THE MONEY KEPT BY THE A SSESSEE IS A LOAN OR DEPOSIT. THE LD. AR ALSO SUBMITTED THAT IT HAS BEEN REPEATED LY HELD IN SEVERAL DECISIONS THAT FOLLOWING FIVE CONDITIONS ARE NECESSARY TO INV OKE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT: (A) THE PAYMENT SHOULD BE BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED. (B) THE PAYMENT SHOULD BE BY WAY OF ADVANCE OR LOA N. (C) THE MONEY SHOULD HAVE BEEN UTILIZED FOR THE IN DIVIDUAL BENEFIT OR PERSONAL NEEDS OF THE SHAREHOLDER. (D) THE RECIPIENT SHOULD BE A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10 % OF THE VOTING POWER. I.T.A. NO.144 /COCH/2014 16 19. ACCORDING TO THE LD. AR IN THE PRESENT CASE UND ER APPEAL, THE SECOND AND THIRD (B&C) CONDITIONS ARE NOT FULFILLED. THE COMPA NY DID NOT MAKE ANY PAYMENT TO THE ASSESSEE. WITH A VIEW TO HELP THE COMPANY T O RECOVER THE DUES FROM THE DEFAULTING CUSTOMERS, THE ASSESSEE AGREED TO MEET T HOSE CUSTOMERS AND COLLECT THE AMOUNT DUE TO THE COMPANY FOR AND ON BEHALF OF AND FOR THE BENEFIT OF THE COMPANY. THE AMOUNT SO COLLECTED WAS IMMEDIATELY T RANSFERRED TO THE COMPANY AND ACCOUNTED IN THE BOOKS OF THE COMPANY. DURING THE INTERIM PERIOD FROM THE DATE OF RECEIPT OF THE MONEY TO THE DATE OF HANDING OVER THE SAME TO THE COMPANY, THE ASSESSEE KEPT THE AMOUNT COLLECTED AS IMPREST MONEY IN THE BANK. WITH A VIEW TO ENSURE SAFETY AND SECURITY OF THE MO NEY SO COLLECTED AND ALSO TO KEEP A RECORD OF MONEY SO COLLECTED, THE ASSESSEE D EPOSITED THE SAID AMOUNTS IN THE BANK AS AND WHEN HE RECEIVED THE PAYMENTS FROM EACH CUSTOMER. THE ASSESSEE DID NOT UTILIZE ANY PART OF THE AMOUNT COL LECTED FOR HIS PERSONAL NEEDS OR PURPOSES. 20. THE LD. AR SUBMITTED THAT THUS IT IS CLEAR THE COMPANY DID NOT MAKE ANY PAYMENT BY WAY OF LOAN OR ADVANCE TO THE ASSESSEE. THE AMOUNT SO RECEIVED BY THE ASSESSEE IS NOT A LOAN OR ADVANCE. SUCH AMOUNT WILL NOT BE COVERED BY THE MISCHIEF OF SECTION 2(22)(E). I.T.A. NO.144 /COCH/2014 17 21. THE LD. AR ALSO SUBMITTED THAT IT IS A SETTLED LAW THAT THE PROVISIONS OF SECTION 2(22)(E) CAN BE INVOKED ONLY WHEN THE TRANS ACTIONS IN QUESTION GIVE INDIVIDUAL BENEFIT TO THE SHAREHOLDERS. SUCH REQUI REMENT IS ESSENTIAL TO BE FULFILLED IN CASE OF THE ASSESSEE. 22. THE LD. AR SUBMITTED THAT THE PROVISIONS OF SEC . 2(22)(E) ARE NOT APPLICABLE TO THE SUM OF RS. 32,74,635/- RECEIVED B Y THE ASSESSEE ON BEHALF OF AND FOR THE BENEFIT OF THE COMPANY ON ACCOUNT OF BU SINESS EXPEDIENCY. THE TRANSACTION WAS IN THE NORMAL AND REGULAR COURSE OF BUSINESS OF THE COMPANY. THE ASSESSEE WAS KEEPING THE ENTIRE AMOUNT COLLECTE D IN THE SAVINGS BANK ACCOUNT AND BALANCES IN THESE ACCOUNTS WERE ALWAYS MORE THAN THE AMOUNT ACTUALLY COLLECTED FROM THE CUSTOMERS AT ANY POINT OF TIME. THE COPIES OF THE BANK STATEMENT IN RESPECT OF THE TWO SAVINGS BANK A CCOUNTS MAINTAINED WITH AXIS BANK AND ICICI BANK LTD. WERE ALREADY SUBMITTE D BEFORE THE ASSESSING OFFICER AND THE CIT(A). 23. REFERRING TO THE SPECIFIC FACTS OF THE CASE, TH E LD. AR SUBMITTED THAT THE BANK ACCOUNTS OF THE ASSESSEE WERE ALWAYS HAVING BA LANCE MORE THAN THE AMOUNT RECEIVED FROM THE CUSTOMERS. THUS, NO PERSON AL BENEFIT WAS DRAWN BY THE SHAREHOLDERS AND THEREFORE PROVISIONS OF SEC. 2 (22)(E) COULD NOT BE APPLIED. THUS THE LD. AR CONCLUDED THAT PROVISIONS OF S. 2(2 2)(E) HAVE WRONGLY BEEN INVOKED IN THE PRESENT CASE AND, THEREFORE, ADDITIO N SHOULD BE DELETED. I.T.A. NO.144 /COCH/2014 18 24. THE LD. AR RELIED ON THE DECISION OF ITAT, CHAN DIGARH BENCH IN THE CASE OF DY. CIT VS. LAKRA BROTHERS, 162 TAXMAN 170 (CHD) . WHEREIN IT WAS OBSERVED THAT THE TERM LOAN OR ADVANCE OF SEC. 2(22)(E) CANNOT BE STRETCHED TO INCLUDE EVEN LEGITIMATE TRANSACTIONS CARRIED OUT IN THE OR DINARY COURSE OF BUSINESS WHERE THE INTENTION IS NEITHER TO GIVE A LOAN OR AD VANCE OR TO CONFER SOME INDIVIDUAL BENEFITS ON THE SHAREHOLDERS. THE LD. A R SUBMITTED THAT IN THIS DECISION, THE IMPORTANT WORDS IN THE SECTION ARE LO AN OR ADVANCE AND FOR INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. THE LOAN IS SOMETHING DIFFERENT FROM IMPREST MONEY. FOR A LOAN THERE MUST BE A TENDER, BORROWER, AS WELL AS A CONTRACT/AGREEMENT BETWEEN THE PARTIES FOR THE RETU RN OF THE LOAN AMOUNT. SIMILAR VIEWS, FINDINGS, INTERPRETATIONS AND OBSERV ATIONS HAVE BEEN GIVEN BY VARIOUS HIGH COURTS AND APPELLATE TRIBUNALS IN DECI DING IDENTICAL OR SIMILAR ISSUES. 25. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD CLAR IFIED AT THE TIME OF THE ASSESSMENT PROCEEDINGS THAT HE WAS NOT MAINTAINING A REGULAR CASH BOOK, LEDGER OR SUCH OTHER BOOKS OF ACCOUNTS TO RECORD THE TRANS ACTIONS UNDERTAKEN IN HIS PERSONAL NAME. THE COLLECTIONS FROM THE CUSTOMERS OF THE COMPANY AGAINST THE DUES WERE PROMPTLY DEPOSITED IN THE BANK AND IMMEDI ATELY ON WITHDRAWAL OF THE RESPECTIVE AMOUNTS FROM THE BANK, REMITTANCES WERE MADE TO THE COMPANY. THE ASSESSEE DID NOT UTILIZE ANY PART OF THE AMOUNT COL LECTED FROM THE CUSTOMERS FOR I.T.A. NO.144 /COCH/2014 19 HIS PERSONAL BENEFIT OR PURPOSES. THE ASSESSEE CLE ARLY EXPLAINED AND CONFIRMED BEFORE THE ASSESSING OFFICER THAT THE CASH MOVEMENT STATEMENT REGISTER TOGETHER WITH THE CASH FLOW STATEMENT WERE PREPARED AND FURN ISHED ON THE BASIS OF HIS MEMORY ON RECEIPT OF THE DIRECTIONS RECEIVED FROM T HE ASSESSING OFFICER. 26. LD. AR SUBMITTED THAT THE SUM OF RS. 32,74,635 /- RECEIVED BY THE ASSESSEE FROM THE CUSTOMERS OF THE COMPANY DOES NOT HAVE THE NATURE AND CHARACTER OF LOAN OR ADVANCE WITHIN THE MEANING OF SEC. 2(22)(E) OF THE ACT AS THE SAID SUM WAS RECEIVED AND KEPT AS IMPREST CASH WITH THE BANK AND THE ASSESSEE DID NOT UTILIZE IT FOR HIS PERSONAL PURPOS ES , BENEFITS OR NEEDS. IN FACT THE COMPANY WAS BENEFITED IMMENSELY BY THE EFFORTS OF THE ASSESSEE IN APPROACHING VARIOUS CUSTOMERS AND COLLECTING LONG P ENDING DUES AND ARREARS FROM THEM. THE AMOUNT SO COLLECTED WAS KEPT AS AN IMPREST MONEY FOR A SHORT PERIOD IN THE BANK. THEREFORE, THE LD. AR SUBMITTE D THAT BY ANY STRETCH OF IMAGINATION, SUCH MONEY KEPT AS IMPREST CASH IN A B ANK ACCOUNT CANNOT BE TREATED AS A LOAN OR ADVANCE WITHIN THE MEANING OF SEC. 2(22)(E) OF THE ACT TO ASSESS AS DEEMED DIVIDEND. 27. THE LD. AR SUBMITTED THAT THE SUM OF RS. 23,16 ,678/- APPEARING AS DEBIT BALANCE IN THE CONSOLIDATED THREE ACCOUNTS OF THE A SSESSEE IS THE NET RESULT OF A SERIES OF OPEN, MUTUAL AND CURRENT ACCOUNT TRANSACT IONS AGAINST WHICH PAYMENTS WERE RECEIVED BY THE ASSESSEE FROM THE COMPANY. SU CH AMOUNT GIVEN WERE I.T.A. NO.144 /COCH/2014 20 DEBITED TO THE ACCOUNT OF THE ASSESSEE AND THE VARI OUS AMOUNTS DUE TO THE ASSESSEE FROM THE COMPANY TOWARDS SALARY, REMUNERAT ION, INTEREST, REIMBURSEMENT EXPENSES WERE CREDITED. SUCH PAYMENT S AND THE RESULTANT BALANCE IN SUCH ACCOUNTS IS NOT A LOAN OR ADVANCE W ITHIN THE MEANING OF SEC. 2(22)(E) OF THE ACT FOR ASSESSMENT AS DEEMED DIVIDE ND. 28. FURTHER, THE LD. AR SUBMITTED THAT TO DETERMINE THE NET BALANCE IN THE ACCOUNT OF THE ASSESSEE, THE NET BALANCEOFRS.19,61, 176/-AGAINST THE TRANSACTIONS RELATING TO IRC SHOULD BE EXCLUDED AND HENCE TO BE DEDUCTED. THE LD. AR SUBMITTED THAT ALTERNATIVELY, IF THE BALANCE IN THE ACCOUNT OF THE FIRM IS ALSO TAKEN INTO CONSIDERATION, THE NET BALANCE IN THE AC COUNT OF THE ASSESSEE WILL ALWAYS SHOW A CREDIT. CONSEQUENTLY, IT WAS NOT COR RECT TO TREAT THE SUM OF RS. 23,16,678/- AS A LOAN/ADVANCE SO AS TO ASSESS THE S AME UNDER THE HEAD DEEMED DIVIDEND. HENCE FOR THESE REASONS, THE ADDITION OF RS.23,16,678/- MAY BE DELETED. 29. THE MAIN CONTENTION OF THE LD. AR IS THAT THE A SSESSEE HAS NOT OBTAINED ANY BENEFIT FROM THE RECEIPT OF MONEY ON BEHALF OF CEYANNAR CHEMICALS PVT. LTD. (CCPL) WHEREIN THE ASSESSEE IS A SHAREHOLDER. ACCO RDING TO THE LD. AR, IN PURSUANCE OF THE RESOLUTION PASSED BY THE COMPANY, THE ASSESSEE COLLECTED THE MONEY DUE TO CCPL ON BEHALF OF CCPL AND IMMEDIATELY , DEPOSITED THE SAME IN THE SB ACCOUNT OF THE ASSESSEE TILL THE DATE THE SA ME AMOUNT WAS REMITTED TO I.T.A. NO.144 /COCH/2014 21 CCPL WITHIN A SHORT PERIOD. HE ALSO INVITED OUR AT TENTION TO THE RESOLUTION PASSED BY THE BOARD OF DIRECTORS OF CCPL TO THIS EF FECT. 31. ACCORDING TO THE LD. AR, INSTEAD OF ENTRUSTING THE WORK TO AN OUTSIDER, THE ASSESSEE HIMSELF CAME FORWARD TO COLLECT THE AMOUNT ON BEHALF OF CCPL AND IT IS A BONA FIDE ACTION FOR WHICH THE ASSESSEE SHALL NOT BE PUNISHED. 32. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE HAVE CA REFULLY GONE THROUGH THE PROVISIONS OF SEC. 2(22)(E) AND ALSO EXPLANATION EMB EDDED IN THIS SECTION. THE MEANING OF THE ABOVE PROVISIONS MAKES IT CLEAR THAT THE LAW MAKERS WANTED TO BRING TO TAX MONIES PAID BY CLOSELY HELD COMPANIES TO THEIR PRINCIPAL SHAREHOLDERS. 33. BEFORE PROCEEDING FURTHER, LET US EXAMINE WHAT IS THE INTENTION OF THE LEGISLATION IN ENACTING PROVISIONS OF SECTION 2(22) (E) OF THE ACT. SECTION 2(22) (E) OF THE ACT READS AS UNDER : 2(22)(E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WH ICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER A S 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 PE RSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIX ED 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 SUC H SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTERES T (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 I.T.A. NO.144 /COCH/2014 22 WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULA TED PROFITS ; BUT 'DIVIDEND' DOES NOT INCLUDE (I) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLAU SE (C) OR SUBCLAUSE (D) IN RESPECT OF ANY SHARE ISSUED FOR FULL CASH CONSIDERA TION, WHERE THE HOLDER OF THE SHARE IS NOT ENTITLED IN THE EVENT OF LIQUIDATION T O PARTICIPATE IN THE SURPLUS ASSETS; [(IA) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CL AUSE (C) OR SUBCLAUSE (D) IN SO FAR AS SUCH DISTRIBUTION IS ATTRIBUTABLE TO THE CAP ITALISED PROFITS OF THE COMPANY REPRESENTING BONUS SHARES ALLOTTED TO ITS EQUITY SH AREHOLDERS AFTER THE 31ST DAY OF MARCH, 1964, [AND BEFORE THE 1ST DAY OF APRIL, 1 965] ;] (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 B Y 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; 1[(IV) ANY PAYMENT MADE BY A COMPANY ON PURCHASE OF ITS OWN SHARES FROM A SHAREHOLDER IN ACCORDANCE WITH TH E PROVISIONS OF SECTION 77A OF THE COMPANIES ACT, 1956 (1 OF 1956); (V) ANY DIS TRIBUTION OF SHARES PURSUANT TO A DEMERGER BY THE RESULTING COMPANY TO THE SHARE HOLDERS OF THE DEMERGED COMPANY (WHETHER OR NOT THERE IS A REDUCTION OF CAP ITAL IN THE DEMERGED COMPANY).] EXPLANATION 1.THE EXPRESSION 'ACCUMULATED PROFITS', WHEREVER IT OCCURS IN THIS CLAUSE, SHALL NOT INCLUDE CAPITAL GAINS ARISING BEF ORE THE1ST DAY OF APRIL, 1946, OR AFTER THE 31ST DAY OF MARCH, 1948, AND BEFORE THE 1 ST DAY OF APRIL, 1956. EXPLANATION 2.THE EXPRESSION 'ACCUMULATED PROFITS' IN SUB-CLAUSES (A), (B), (D) AND (E), SHALL INCLUDE ALL PROFITS OF THE COMPANY U P TO THE DATE OF DISTRIBUTION OR PAYMENT REFERRED TO IN THOSE SUB-CLAUSES, AND IN SU B-CLAUSE (C) SHALL INCLUDE ALL PROFITS OF THE COMPANY UP TO THE DATE OF LIQUIDATIO N, [BUT SHALL NOT, WHERE THE LIQUIDATION IS CONSEQUENT ON THE COMPULSORY ACQUISI TION OF ITS UNDERTAKING BY THE GOVERNMENT OR A CORPORATION OWNED OR CONTROLLED BY THE GOVERNMENT UNDER ANY LAW FOR THE TIME BEING IN FORCE, INCLUDE ANY PROFIT S OF THE COMPANY PRIOR TO THREE SUCCESSIVE PREVIOUS YEARS IMMEDIATELY PRECEDING THE PREVIOUS YEAR IN WHICH SUCH ACQUISITION TOOK PLACE]. [EXPLANATION 3.FOR THE PURPOSES OF THIS CLAUSE, (A) 'CONCERN' MEANS A HINDU UNDIVIDED FAMILY, OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY ; I.T.A. NO.144 /COCH/2014 23 (B) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PR EVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PER CENT OF THE IN COME OF SUCH CONCERN ;] 34. THE READING OF THE ABOVE PROVISION MAKES IS EVIDENTLY CLEAR THAT THE LAW- MAKERS WANTED TO BRING TO TAX MONIES PAID BY CLOSEL Y HELD COMPANIES TO THEIR PRINCIPAL SHAREHOLDERS, IN THE GUISE OF LOANS AND A DVANCES TO AVOID PAYMENT OF TAX. THE HON'BLE SUPREME COURT ALSO HELD IN THE CAS E OF NAVNEET LAL C.JHAVERI V K.K.SEN (1965) 56 ITR 198 (S.C) THAT THE PROVISIONS OF SECTION 2(22) (E) OF THE ACT MUST BE MADE APPLICABLE WHERE DIVIDEND DISGUISE D AS LOAN IS PAID BY A COMPANY. BUT, THEY HAVE ALSO HELD THAT THIS CONCEPT SHOULD NOT BE STRETCHED TOO FAR TO INVOLVE ANY ABSURDITIES. THIS SECTION DEFINE S DIVIDEND BY GIVING AN EXCLUSIVE DEFINITION. THE SUB-CLAUSES (A) (B) (C) ( D) AND (E) ARE DIFFERENT TYPES OF PAYMENTS. IF THE SAME ARE MADE IN THE CONDITIONS DE FINED IN THOSE CLAUSES EXIST IN A GIVEN CASE, SUCH PAYMENTS ARE TREATED AS DEEM ED DIVIDEND. THIS SECTION, FURTHER, LAYS DOWN EXCLUSIVE SITUATIONS WHEREIN SU CH DISTRIBUTION OF PAYMENTS ARE NOT TREATED AS DEEMED DIVIDEND. IN THE EXPLANAT IONS, THE EXPRESSION ACCUMULATED PROFITS HAS BEEN DEFINED VIDE EXPLANAT ION 2 WITH REFERENCE TO CLAUSES (A) (B) (D) & (E) . SINCE WE ARE CONCERNED WITH CLAUSE (E) OF SECTION 2(22) OF THE ACT, EXPLANATION 2 WOULD BE RELEVANT. I N THIS EXPLANATION ACCUMULATIVE PROFITS ARE DEFINED AS SHALL INCLUD E ALL PROFITS OF THE COMPANY UPTO THE DATE OF DISTRIBUTION OR PAYMENT REFERRED TO IN SUB-CLAUSE (E). VIDE EXPLANATION 3, IT IS PROVIDED THAT A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL I.T.A. NO.144 /COCH/2014 24 INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS TH AN 20% OF THE INCOME OF SUCH CONCERN. WE HAVE FOUND IT FOR A FACT THAT THE APPEL LANT HAS A SHAREHOLDER. THUS, WE HAVE FOUND IT FOR A FACT THAT ONLY DUE TO BUSINE SS NECESSITY AND EXPEDIENCY, THE ASSESSEE AGREED TO COLLECT DUES FROM CUSTOMERS OF THE COMPANY. 35.. SEC. 2(22)(E) ENACTED A DEEMING FICTION WHEREBY THE SCOPE AND AMBIT OF THE WORD 'DIVIDEND' HAS BEEN ENLARGED TO BRING WITH IN ITS SWEEP CERTAIN PAYMENTS MADE BY A COMPANY AS PER THE SITUATIONS EN UMERATED IN S.2(22)(E). IT IS A SETTLED-RULE OF INTERPRETATION OF A FICTION TH AT THE COURT SHOULD ASCERTAIN FOR WHAT PURPOSE THE FICTION IS CREATED AND AFTER ASCER TAINING THE PURPOSE, THE COURT HAS TO ASSUME ALL FACTS WHICH ARE INCIDENTAL TO THE GIVING EFFECT TO THAT FICTION. SUCH A DEEMING FICTION WOULD NOT BE GIVEN A WIDER M EANING THAN WHAT IT PURPORTS TO DO. THE PROVISION WOULD NECESSARILY BE ACCORDED, STRICT INTERPRETATION AND THE AMBIT OF THE FICTION WOULD NOT BE PRESSED B EYOND ITS TRUE LIMITS. SEC. 2(22)(E) HAS NOT BEEN ENACTED TO STIFLE NORMAL BUSI NESS TRANSACTION CARRIED OUT DURING THE COURSE OF BUSINESS. IT NOT OBVIOUSLY BRI NG WITHIN ITS LIMITED PURVIEW COLLECTION OF DEBTS FROM CUSTOMERS SO TO ENSURE THE SPEEDY RECOVERY OF TRADE DEBTS. THE SECTION, BY INDICATING A DEEMING FACTION , 'WOULD BEING WITHIN ITS SWEEP ANY PAYMENT BY A COMPANY 'BY WAY OF ADVANCE O R LOAN TO SHAREHOLDER .... TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBE R AND IN WHICH HE HAS A SUBSTANTIAL INTEREST.' THE BASIC ISSUE TO BE EXAMIN ED IN THE PRESENT CASE IS I.T.A. NO.144 /COCH/2014 25 WHETHER CREDIT BALANCES IN THE ACCOUNTS CAN BE CON STRUED AS 'ADVANCE' OR 'LOAN' BY THESE COMPANIES. IN SO FAR AS OTHER INGREDIENTS AS REQUIRED TO BE FULFILLED UNDER S. 2(22)(E) ARE CONCERNED, THERE IS NO DISPUT E RAISED BEFORE US. 36. IN OUR OPINION, THE AMOUNT RECEIVED BY THE ASSE SSEE CAN NEITHER BE TREATED AS LOAN OR ADVANCE FOR THE PURPOSES OF S. 2 (22)(E). A LOAN IS GRANTED FOR TEMPORARY USE OF MONEY OR TEMPORARY ACCOMMODATION. IN THE INSTANT CASE, SUCH BASIC FEATURES WHICH CHARACTERISTICS, A LOAN TRANSA CTION ARE CONSPICUOUS BY THEIR ABSENCE. THEREFORE, THE AMOUNT, IN THE INSTANT CASE , CANNOT BE CONSTRUED AS A LOAN. 37. HAVING REGARD TO THE AFORESAID, THE ASSESSEE SU BMITTED THAT THE ARRANGEMENT UNDER CONSIDERATION IS NEITHER IN NATUR E OF A LOAN NOR AN ADVANCE, AS CONTEMPLATED AND REQUIRED FOR APPLICATION OF SEC TION 2(22)(E) OF THE ACT, NOR THERE WAS ANY ATTEMPT TO EVADE TAX BY THE COMPANY A ND/OR THE SHAREHOLDER RATHER IT WAS AT ARMS LENGTH AND WAS NOT INTENDED F OR ANY PERSONAL BENEFIT OR ENJOYMENT OF THE APPELLANT INSTEAD THE ARRANGEMENT HAS WORKED TO THE DETRIMENT OF THE APPELLANT THEREFORE, THE ADDITIONS CANNOT BE SUSTAINED, BOTH ON FACTS AND IN LAW. THE DEBTS COLLECTED BY THE ASSESSEE IN THE ORDINARY COURSE OF BUSINESS FOR BUSINESS EXPEDIENCY COULD NOT BE COVERED UNDER THE PROVISIONS OF SECTION 2(22) (E) OF THE ACT. IN OUR OPINION, THE ADDITION OF RS. 32,74,635/- WHICH WAS COLLECTED BY THE ASSESSEE ON BEHALF OF CCPL IN PURS UANCE OF RESOLUTION PASSED BY I.T.A. NO.144 /COCH/2014 26 THE COMPANY AND DEPOSITED IN THE ASSESSEES BANK AC COUNT FOR A SHORT PERIOD WHICH IS A TEMPORARY LOAN AND TO THE EXTENT OF AMOU NT REMITTED TO THE CCPL, CANNOT BE CONSIDERED AS DEEMED DIVIDEND IN THE HAND S OF THE ASSESSEE. IN OTHER WORDS, ONLY THAT PORTION OF THE AMOUNT WHICH WAS UN SETTLED AS ON 31-03-2009, I.E., THE CLOSING DAY OF THE COMPANYS ACCOUNT FOR F.Y. 2008-09, IS TO BE CONSIDERED AS DEEMED DIVIDEND IN THE HANDS OF THE A SSESSEE UNDER SECTION 2(22)(E) OF THE I.T. ACT. 38. NOW COMING TO THE OTHER ISSUE OF RS. 23,16,678/ - ADDED TO THE INCOME U/S. 2(22)(E), IT WAS CONTENDED BY THE ASSESSEE THA T THERE ARE THREE ACCOUNTS IN THE NAME OF THE ASSESSEE IN THE BOOKS OF CCPL WHICH IS A TEMPORARY LOAN AND APPLYING THE PRINCIPLE LAID DOWN IN THE EARLIER PAR A, WE DIRECT THE ASSESSING OFFICER TO CONSIDER THE CONSOLIDATED NET BALANCE IN ALL THESE THREE ACCOUNTS IF THESE ACCOUNTS ARE IN THE INDIVIDUAL CAPACITY OF TH E ASSESSEE, AND ONLY THAT OUTSTANDING BALANCE IN THE BOOKS OF CCPL IF ANY, SH OULD BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE U/S. 2(22)(E) OF THE I.T. ACT. THE ACCOUNT RELATING TO THE FIRM IRC IS TO BE CONSIDERED SEPARA TELY IF THAT FIRM IS HAVING SUBSTANTIAL INTEREST IN CCPL AND DECIDE AFRESH IN A CCORDANCE WITH LAW. I.T.A. NO.144 /COCH/2014 27 39. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED ACCORDINGLY ON 05-09-2014. SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 5/9/2014 GJ COPY TO: 1. SHRI N. RAJAGOPAL, CHENGANATTU MADATHIL, ERAVINEL LOOR P.O., KOTTAYAM-686011. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOTTAYAM. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-IV, KOCH I. 4. THE COMMISSIONER OF INCOME-TAX, KOTTAYAM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T. COCHIN