Deputy Commissioner of Income Tax, Central Circle-II, Mangalore V. Shri.P.M.A.Razak, Mangalore

ITA 1637/BANG/2016

AI Insights

The case involves an appeal by the Deputy Commissioner of Income-tax against the order of the CIT(A) which had deleted the addition made by the AO under section 2(22)(e) of the Income-tax Act, 1961. The AO had treated the amount withdrawn by the assessee, a substantial shareholder in M/s. Plama Developers Pvt. Ltd., as deemed dividend. The CIT(A) reversed this decision, leading to the revenue's appeal. The Tribunal, after considering the submissions and relevant case laws, partly allowed the appeal, sustaining the addition but limiting it to the amount of accumulated profits.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 129276 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2023
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 28-08-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 11-09-2016
• Other Referred Cases: Tarulata Shyam & Ors. Vs CIT (SC) 108 ITR 345, Navneet Lal C. Jhaveri Vs K.K. Sen (1965) 56 ITR 198 (S.C), Ghanshyambhai Ambalal Thakkar v. DCIT (2017) 85 taxmann.com 49 (Gujarat), CCIT-III Vs. Sarva Equity (P) Ltd. (2014) 44 taxmann.com 28 (Karnataka), CIT v. Raj Kumar (2009) 181 Taxman 155 (Delhi), Chandrasekhar Maruti v. ACIT 10(2) (2016) 71 taxmann.com 239 (Mumbai-Trib.), CIT Kolkata-1 v. Gayatri Chakraborty (2018) 94 taxmann.com 244 (Calcutta)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Question of law; Deemed dividend; Set aside; Liquidation; Capital Gains
• Section: 142(1); 2(22)(e); 143(1); 13; 22

Judgement Text

ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore IN THE INCOME TAX APPELLATE TRIBUNAL “C’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.1637/Bang/2016 Assessment Year: 2013-14 Deputy Commissioner of Income-tax Central Circle-II Mangalore Vs. Shri P.M.A. Razak HC-12, His Grace Apartments Martin Paes Road Hat Hill Mangalore PAN NO : ABYPR9231M APPELLANT RESPONDENT Appellant by : Shri Saravanan, D.R. Respondent by : Smt. Sheetal, A.R. Date of Hearing : 29.08.2023 Date of Pronouncement : 30.08.2023 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by revenue is directed against order of CIT(A) dated 28.6.2016 for the assessment year 2013-14. The revenue originally came in appeal before this Tribunal vide following grounds: (I) The Ld. CIT(A) has failed to appreciate the fact that the additions have been made by the Assessing Officer on a clear finding that the assessee has overdrawn monies from his loan creditor's account in the books of the Company where he is substantial share-holder. (II) The Ld. CIT(A) has erred in holding that the assessee has given loan to the Company M/s Plama Developers Ltd and not the other way around, when the facts are clear that the assessee has availed the loans during the financial year which were repaid before the year ending. (III) The Ld. CIT(A) has failed to appreciate the findings of the Apex Court in the case of Tarulata Shyam & Ors. Vs CIT (SC)108 ITR 345 wherein it was held that even the case where loan advanced to a shareholder was re-paid within the financial year, it shall still be deemed as ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 2 of 24 dividend u/s 2(22)(e). If the assessee comes under the letter of law, he has to be taxed, however great the hardship may appear to the judicial mind to be. As the facts on hand are similar to that of case of Tarulata Shyam vs CIT(Supra), the CIT(A) should have upheld the additions made by the Assessing Officer. (IV) The Ld. CIT(A) has failed to appreciate that all the following conditions have been satisfied to hold the loan as deemed dividend U/s 2(22)(e) in the hands of the appellant: a. that the company in question is the one in which the public are not substantially interested; b. that the borrower is a shareholder exceeding the prescribed limit on those dates when the loans were advanced; c. that the loan advanced to a shareholder by the company can be deemed to be dividend as the company possessed accumulated profit at the date of the loan; d. that the loan has not been advanced by the company in the ordinary course of its business as the company is not in the business of money lending itself; (V) For these and such other grounds that may be urged at the time of hearing the orders of ld. CIT(A) may be set aside and that of assessing officer may be restored. 2. The Tribunal disposed of this appeal of revenue vide order dated 31.8.2017. Against this revenue went in appeal before the jurisdictional High Court in ITA No.64/2018. The Hon’ble High Court disposed of this appeal vide judgement dated 9.1.2023 by holding as follows: “8. We have carefully considered the rival contentions and perused the records. 9. It is not in dispute that the CIT(A) has recorded that assessee had advanced Rs.13.62 Lakhs to the company. It is also not in dispute that AO has noticed that assessee had withdrawn Rs.8.52 Crores. Thus, neither the order passed by the AO nor the CIT(A) nor the ITAT clearly show as to how much amount was advanced by the assessee and how much was repaid towards loan. In the absence of specific finding regarding repayment of loan, the amount drawn by assessee will have to be treated as dividend under Section 2(22)(e) of the Act. 10. In the facts and circumstances of the case, we are of the opinion that assessee's claim that he had given loan to the company and received corresponding payment by the company towards repayment of loan has to be correctly determined. The ITAT is the last fact finding authority. We deem it ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 3 of 24 appropriate to remand the matter to ITAT for re-consideration in the light of observations made hereinabove. In view of the above, the following: ORDER (i) Appeal is allowed. (ii) Order dated 31.08.2017 in ITA No.1637/Bang/2016 is set aside. (iii) Matter is remanded to the ITAT for reconsideration afresh. (iv) All the contentions of the parties are kept open. (v) Since the appeal is remanded, the question of law raised by the Revenue is not answered. No costs.” Hence, this appeal is listed for hearing today I e. on 29.8.2023. 3. Facts of the case are that the assessee filed return of income u/s 139 of the Income-tax Act,1961 ['the Act' for short] on 5.8.2013 declaring total income of Rs.35,11,000/-. The same was processed u/s 143(1) of the Act. Subsequently, there was search action u/s 132 of the Act conducted at the residential premises of the assessee on 9.1.2013 and notice u/s 142(1) of the Act was issued on 21.1.2015. In response to this notice, the assessee filed return of income on 18.2.2015 declaring the same income at Rs.45,11,000/- While framing assessment, the ld. AO observed that books of accounts of the assessee company M/s. Plama Developers Pvt. Ltd. (“M/s. PDL” for short) shown that its Director P.M.A. Razak’s account shown debit balance as he is holding more than 10% shares of M/s. PDL. He also pointed out that in the assessment year under consideration, there was an accumulated profit of Rs.6,02,99,218/-. Further, he analyzed Mr. P.M.A. Razak’s account in M/s. PDL’s books of accounts and worked out the component of deemed dividend as follows: ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 4 of 24 ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 5 of 24 ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 6 of 24 ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 7 of 24 ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 8 of 24 ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 9 of 24 ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 10 of 24 3.1 Accordingly, he called for the comments of the assessee on this deemed dividend u/s 2(22)(e) of the Act and after considering the same he determined the deemed dividend in the assessment year under consideration in the hands of present assessee at Rs.8,52,05,481/-. On this issue, assessee went in appeal before ld. CIT(A) who has deleted this addition. Hence, the revenue is in appeal before this Tribunal. 4. The ld. D.R. submitted that the ld. CIT(A) has wrongly observed that M/s. PDL has not given the loan to its Director P.M.A. Razak. On the other hand, the Director Mr. P.M.A. Razak given it to M/s. PDL and hence the observation of the ld. CIT(A) is incorrect that the loan given by shareholder to the company cannot be taxed as a deemed dividend. He drew our attention to the statement of computation of deemed dividend in the hands of the assessee as recorded by the AO in his assessment order at pages 12 to 18 as above. Further, he submitted that even the loan advanced by the company to a shareholder was repaid within the financial year, is also has to be considered as a deemed dividend as per section 2(22)(e) of the Act. For this purpose, he relied on the judgement of ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 11 of 24 Hon’ble Supreme Court in the case of Tarulata Shyam & Ors. Vs. CIT reported in 108 ITR 345. However, he fairly conceded that the addition may be sustained to the tune of accumulated profit in the assessment year under consideration as recorded by the ld. CO in his assessment order at Rs.6,02,99,218/-. 5. On the other hand, the ld. A.R. submitted that this is a running account between assessee and M/s. PDL company and the assessee has been advancing money to M/s. PDL as this company was facing acute financial problem. Further, she submitted that with a view to hold the company, the assessee has advanced money to M/s. PDL on regular basis which can be seen from the account copy of the assessee filed before the ld. AO, which has been reproduced by him in the assessment order at pages 4 to 11. According to the ld. A.R., the company did not make any payment by way of loan or advance to the assessee. The amount was received by assessee is not a loan or advances and which cannot be covered by the mischief of section 2(22)(e) of the Act. She also submitted that the provisions of section 2(22)(e) of the Act can be invoked only when the transaction in question given individual benefit to the shareholder. Such requirement is essentially to be fulfilled and in the present case, it has not been fulfilled. She also submitted that the transaction was carried out in normal and regular course of business of the company and the assessee has not derived any personal benefit. Hence, the provisions of section 2(22)(e) of the Act cannot be applied and the ld. AO has wrongly invoked the provisions of section 2(22)(e) of the Act and as such, the addition made by ld. AO has been deleted by ld. CIT(A). According to her, the term “loan” or “advance” as mentioned in section 2(22)(e) of the Act cannot be stretched to include even legitimate transaction carried out by present assessee in ordinary course of business where the intention is neither to give loan or advance nor to confer some individual benefit to the assessee. ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 12 of 24 According to her, the loan is something different from running account. For a loan there must be a lender, borrower, as well as a contract/agreement between the parties for the return of the loan amount. In the present case, these are missing as such, it cannot be considered as a loan between the parties, since the assessee has regularly lending money. M/s. PDL has been benefited by the action of the assessee and not vice-versa and as such it cannot be considered as a deemed dividend in the hands of the present assessee. 6. We have heard the rival submissions and perused the materials available on record. We have carefully gone through the provisions of sec. 2(22)(e) of the Act and also Explanation embedded 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. 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 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 beneficia l owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; but "dividend " does not include— (i) a distribution made in accordance with sub-clause (c) or subclause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 13 of 24 [(ia) a distribution made in accordance with sub-clause (c) or subclause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;] (ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set of f 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 the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).] Explanation 1.—The expression "accumulated profits, " wherever it occurs in this clause, shall not include capital gains arising before the1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st 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 up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include al l profits of the company up to the date of liquidation, [but shall not, where the liquidation is consequent on the compulsory acquisition 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 profits 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 o f persons or a body of individuals or a company ; (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 previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;] ” ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 14 of 24 6.1. The reading of the above provision makes is evidently clear that the law-makers wanted to bring to tax monies paid by closely held companies to their principal shareholders, in the guise of loans and advances to avoid payment of tax. The Hon'ble Supreme Court also held in the case of Navneet Lal C. Jhaveri Vs 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 disguised 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 defines 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 defined in those clauses exist in a given case, Such payments are treated as deemed dividend. This section, further, lays down exclusive situations wherein such distribution of payments are not treated as deemed dividend. In the explanations, the expression ‘accumulated profits’ has been defined vide Explanation 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. In this Explanation ‘accumulative profits’ are defined as ‘shall include 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 interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than 10% of the income of such concern. We have found it for a fact that the appellant has a shareholder. There is no dispute regarding these facts. 6.2. Sec. 2(22)(e) of the Act enacted a deeming fiction whereby the scope and ambit of the word "dividend" has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in S.2(22)(e) of the Act. It is a settled-rule of interpretation of a fiction that the Court should ascertain for what ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 15 of 24 purpose the fiction is created and after ascertaining 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 meaning than what it purports to do. The provision would necessarily be accorded, strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. Sec. 2(22)(e) has not been enacted to stifle normal business transaction carried out during the course of business. It not obviously bring 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 or loan to shareholder .... to any concern in which such shareholder is a member and in which he has a substantial interest." The basic issue to be examined in the present case is whether credit balances in the accounts can be construed 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 dispute raised before us. 6.3 In the present case, the main contention of ld. A.R. is that the running account of assessee with M/s. PDL cannot be considered as loans and advances. This issue has been addressed by Hon’ble Supreme Court in the case of Smt. Tarulata Shyam reported in 108 ITR 345, wherein held that “provisions of section 2(22)(e) of the ACt would be attracted at the point of time when the said loan was borrowed by the shareholder and it was immaterial whether loan was repaid before the end of accounting year or not”, which can be seen from the following observation of the Hon’ble Supreme Court: “This highlights the fact that the legislature has deliberately not made the subsistence of theloan or advance, or its being outstanding on the last date of the previous year relevant to the assessment year, a pre-requisite for raising the statutory fiction. In other words, even if the loan or advance ceases to be outstanding at the end of the previous year, it can still be deemed as a ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 16 of 24 “dividend” if the other four conditions factually exist, to the extent of the accumulated profits possessed by the company.” 6.4 Next argument of ld. A.R. is that this was not a loan & advances as it was a running account so as to accommodate between the parties. According to her, the running account goes out of the mischief of the provisions of section 2(22)(e) of the Act. She relied on the following judgements: (i) In case of Ghanshyambhai Ambalal Thakkar v. DCIT (2017) 85 taxmann.com 49 (Gujarat), wherein the Hon’ble Gujarat High Court has held as under: “Asses sing Offic er h as pas sed an order d isposing of the objections. H e has also filed affidavit in reply in the present p etition. H ow ever, in neither of these tw o docum ents, he has de alt with the factual ass ertion made by the petitioner vi z. that the sum in ques tion w as advanc ed by the petitioner to the c ompany and w as not recei ved by th e petiti oner from the co mpany by w ay of a loan. T he petitioner h as produced th e audit ed ac counts in the balanc e-sh eet wh ich we hav e p erused. The amount in ques tion is show n as a demand to the said com pan y. Loan is an. advance ma de b y the p etitioner to the s aid company. The stand ta ken by t he As s ess ing O ffi cer in the reaso ns record ed that such s um was r ec eiv ed b y the petitioner from the com pan y b y w ay of a loan, is thus eve n other wis e not corre ct. We hav e ther efor e pr oc eed ed on such basis. If that be s o, th e r e ason for r eop ening t he as s ess me nt complet ely lac ked val idity. The sole groun d to r eopen th e asses sment w as that the loan rec eiv ed by the petitioner from private company should b e treate d as a de emed dividend in ter ms of section 2(22 )(e) of th e Act. Wh en on facts the petitioner is able to s how that the amount in ques tion was advanc ed by the p etitioner t o the com pan y and was not rec eiv ed by th e com pany b y w ay of a loan, section 2(2 2)( e) of t he Act would ha ve no applicability. The impugn ed noti c e dated 27.03. 2017 is set as ide. Petition is allow ed and dis posed of.” (ii) In the case of CCIT-III Vs. Sarva Equity (P) Ltd. reported in (2014) 44 taxmann.com 28 (Karnataka), the Hon’ble Karnataka High Court has held as under: ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 17 of 24 “17. Section 2(22)(e) of the Act is designed to strike balance, i.e., advance or loan to a shareholder and that the word shareholder can mean only a registered shareholder. A beneficial owner of shares whose name does not appear in the Register of shareholders of the Company cannot be stated to be a shareholder. He may be beneficially entitled to the share but he is certainly not a shareholder. In other words, it is only the person whose name is entered in the Register of the shareholders of the Company as the holder of the shares who can be said to be a shareholder qua Company and not the person beneficially entitled to the shares. We are therefore, of the view that it is only where a loan is advanced by the Company to the registered shareholder and the other conditions set out in Section 2(22)(e) of the Act are satisfied, that amount of loan would be liable to be regarded as deemed dividend within the meaning of this section.” (iii) In the case of CIT v. Raj Kumar reported in (2009) 181 Taxman 155 (Delhi), the Hon’ble Delhi High Court has held as under: “A perusal of the orders passed by the Commissioner (Appeals) and the Tribunal clearly established that received by the assessee from CEI was in the nature of a trade advance. The revenue had not able to demonstrate that concurrent findings of fact arrived at by both, the Commissioner (Appeals) the Tribunal, were in any manner perverse. [Para 8] A bare perusal of section 2(22)(e) would show that a payment would acquire the attributes of a dividend within the meaning of the said provision if the following conditions are fulfilled:— (i)The company making the payment is one in which public are not substantially interested. (ii)Money should be paid by the company to a shareholder holding not less than 10 per cent of the voting power of the said company. It would make no difference if the payment was out of the assets of the company or otherwise. (iii)The money should be paid either by way of an advance or loan or it may be 'any payment' which the company may make on behalf of or for the individual benefit of any shareholder or also to any concern in which such shareholder is a member or a partner and in which he is substantially interested. (iv)And lastly, the limiting factor being that these payments must be to the extent of accumulated profits, possessed by such a company. [Para 9] ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 18 of 24 In the instant case, the submission of the revenue was that any sum paid whether forming part of assets of the company or otherwise by way of an advance to a shareholder holding more than 10 per cent of the voting power in a closely held company would be deemed as dividend. [Para 10] If the history and purpose with which the said provision was brought on to the statute book is kept in mind, it is clear that sub-clause (e) of section 2(22) which is pari materia with clause (e) of section 2(6A) of the Indian Income-tax Act, 1922, 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. [Para 10.4] If this purpose is kept in mind, then the word 'advance' has to be read in conjunction with 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, there arises the conundrum as to what meaning one would attribute to the term 'advance'. The rule of construction which answers this conundrum is noscitur a sociis.[Para 10.5] The broad principles, which emerge from the judgments of the Supreme Court with regard to the applicability of the said rule of construction, are as follows:— (i)does the term in issue have more than one meaning attributed to it, i.e., based on the setting or the context, one could apply the narrower or wider meaning; (ii)are words or terms used found in a group totally 'dissimilar' or is there a 'common thread' running through them; and (iii)the purpose behind insertion of the term. [Para 10.7] Then, one should examine as to whether based on the aforesaid tests the said rule of construction 'noscitur a sociis' ought to be applied in the instant case. (i)the term 'advance' has undoubtedly more than one meaning, depending-on the contest in which it is used; ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 19 of 24 (ii)both the terms, that is, 'advance' or 'loan' are related to the 'accumulated profits' of the company; (iii)and last but not the least, the purpose behind insertion of the term 'advance' was to bring within the tax net payments made in guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders. [Para 10.8] Keeping the aforesaid rule in mind, the word 'advance; which appears in the company of the word 'loan, can only mean such advance which carries with it an obligation of repayment. Trade advance, which is in the nature of money transacted to give effect to a commercial transaction, would not fall within the ambit of the provision of section 2(22)( e). This interpretation would alloy the rule of purposive construction with noscitur a sociis.[Para 10.9]. Therefore, the trade advance does not fall within the ambit of provisions of section 2(22)(e ). Therefore, the appeal of the revenue was liable to be dismissed. [Para 12]” (iv) In the case of Chandrasekhar Maruti v. ACIT 10(2) reported in (2016) 71 taxmann.com 239 (Mumbai-Trib.) the coordinate bench of Mumbai Tribunal has held as under: “17. 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 1612-2008 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 vice-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 ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 20 of 24 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. ................................................................................. 20. 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.” (v) In the case of CIT Kolkata-1 v. Gayatri Chakraborty reported in (2018) 94 taxmann.com 244 (Calcutta), the Hon’ble Kolkata High Court has held as under: “11. In this factual and legal perspective, in our opinion payment of the aforesaid sums to the assessee cannot be treated as dividend out of profit. No perversity has been pointed out on ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 21 of 24 behalf of the Revenue so far as such a concurrent finding of fact is concerned by the two statutory appellate fora. We are not inclined to disturb such finding of fact, which the Tribunal has backed with detailed analysis. We have reproduced earlier in this judgment the Tribunal's observations on this point. If we embark on a fresh factual enquiry into the accounts of the assessee or that of the company involved, such exercise would entail reappreciation of evidence. Such enquiry is impermissible at this stage. The Tribunal's decision thus stands confirmed by us and the question formulated by us is answered accordingly, in favour of the assessee. The appeal stands dismissed.” 6.5 In our opinion, the above judgements have no relevance to the facts of the present case. It is to be noted that, where the loan or advance is given in return to an advantage conferred upon the company by such shareholder, as to whether it is given as a trade advance as a consideration for the goods received or for purchase of capital asset or service rendered which would benefit the company advancing the loan, it would fall outside the ambit of “loan” or “advance” as contemplated u/s 2(22)(e) of the Act. We are unable to see as to how in the above decision assisted the assessee’s case which has afore-stated facts are missing. The aspect of charge of interest has been considered by the Apex Court in the case of Tarulata Shyam cited (supra) and observed as under: “In Tarulata Shyam vs. CIT [1977] 108 ITR 345 (SC), it was sought to be argued that the fiction of the provision extended only to a loan or advance that remains outstanding as at the end of the previous year in which the same was taken. The incongruity of the provision was sought to emphasized with reference to sub-clause (iii) of section 2(6A)(e) of the 1922 Act (corresponding to section 2(22)(e) (iii) of the Act), so that where a shareholder has repaid the loan/advance, he cannot avail the set off and, further, multiple loans, since repaid, i.e., prior to the availment of the next loan/advance, are liable to be added separately in computing deemed dividend. These results, it was contended, were definitely unreasonable, oppressive and absurd. Further, the dividend must be treated as paid by the company on the last day of the year (in with the payment is made), as indeed was a case in section 108 of the Common Wealth Act, reading which condition into the section, it was submitted, would ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 22 of 24 eliminate the ill-effects referred to earlier. The Hon'ble Court was not impressed, noting with approval the decision in the case of Navnit Lal C. Jhaveri (supra). Taxability of income was with reference to the year of receipt or accrual, so that it gets clothed with the character of income on its' accrual or, as the case may be, receipt (pgs. 356-358). In its words: 'The charge being on accrual or receipt the statutory fiction created by s. 2 (6A)(e) and s. 12(1B) would come into operation at the time of the payment by way of advance or loan, provided the other conditions are satisfied.' (pg. 358) In rejecting the assessee's appeal, the Hon'ble Court relied on the salutary principle of interpretation of statutes, further adding that once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. In its' view, the Parliament had deliberately omitted to import the last limb of section 108(1) of the Common Wealth Act, providing instead for exclusion only for repayments made up to 30.6.1955. The controversy involved in Sarda (P.) vs. CIT [1998] 229 ITR 444 (SC) was that if the withdrawal/s made by a shareholder from his account with a company (in which he had substantial interest), which is to be regarded as a loan or advance (from the company to the shareholder), could be subsequently adjusted in the account of another shareholder, who had a credit balance with the company, thus avoiding tax. The Hon'ble Apex Court answered in the negative, relying on the principle that the legal fiction comes into play as soon as the monies were received. The fact that the assessee was stated to be maintaining a running account with payer-company was found irrelevant.” 6.6 Further, the contention of the ld. A.R. is that the transaction with the company as reflected in the ledger account were mainly based on mutual understanding. She contended that it was actually in the nature of running account for which provisions of section 2(22)(e) of the Act are not applicable. After having pursued the entries appearing in the said ledger account reproduced by the ld. AO in his order, we find it difficult to accept this contention of the ld. A.R. for the assessee. As it is clearly evident from the said entries, the balance in the running account was increased day by day, further loans has been given by assessee company to the Directors from time ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 23 of 24 to time and it was squared up at the end of the financial year and the money advanced by each other is not in the ordinary course of business of the assessee as the assessee is not engaged in money lending activities and the amount advanced is also not said to be for buying and selling of goods or rendering of services. More so, there is nothing brought on record on behalf of the assessee to show any nexus between the amount so advanced and the transaction involving any supply of materials or services rendered. It may be true that amount which remained payable during the year under consideration was ultimately settled against the amount receivable by M/s. PDL on account of actual payment by assessee or vice-versa and it cannot lead to conclusion that section 2(22)(e) of the Act cannot be applied as held by Hon’ble Supreme Court in the case of Tarulata Shyam cited (supra). We, therefore, find no merit in the contention of ld. counsel for the assessee that the amount in question was having any nexus with the business of M/s. PDL. On the other hand, going by the treatment given by M/s. PDL itself to the said amount in its books of accounts, it was purely in the nature of loan received by assessee, which was covered by section 2(22)(e) of the Act. Accordingly, we reverse the finding of the ld. CIT(A) on this issue and restore that of ld. AO. However, the quantum of deemed dividend cannot exceed the amount of accumulated profit in the beginning of the assessment year and it should be equal to accumulated profit i.e. as on 1.4.2013 which is at Rs.6,02,99,218/- or closing balance at the end of the financial year 2012-13 i.e. on 31.3.2013. Thus, assessee will get partial relief and addition to the tune of Rs.6,02,99,212/- is sustained. ITA No.1637/Bang/2016 Shri P.M.A. Razak, Mangalore Page 24 of 24 7. In the result, the appeal of the revenue is partly allowed. Order pronounced in the open court on 30th Aug, 2023 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 30th Aug, 2023. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(Judicial) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.