Mr. Muktar Shamshuddin Shaikh, Margao V. Asst. Commissioner of Income Tax, Margao

ITA 21/PAN/2013

• Counselvise Citation: 2124114 RSA 2013
• Duration Of Justice: 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 08-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHA DESAI
• Assessee Lawyers: SHRINIVAS NAYAK
• Keywords: Business income; Period of limitation; Deemed dividend; Time period of passing order; Revised return
• Section: 139(5); 131; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 18 /PNJ/201 3 : (ASST. YEAR - 20 08 - 09 ) MRS. SHAMSHUN MUKHTAR SHAIKH G28, PHOENIX ESTATE, GOGAL, MARGAO, GOA. PAN : AHEPS3521P (APPELLANT) VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO, GOA. (RESPONDENT) ITA NO. 19 /PNJ/201 3 : (ASST. YEAR - 20 07 - 08 ) MRS. SHAMSHUN MUKHTAR SHAIKH G28, PHOENIX ESTATE, GOGAL, MARGAO, GOA. PAN : AHEPS3521P (APPELLANT) VS. A DDL . COMMISSIONER OF INCOME TAX, MARGAO RANGE , MARGAO, GOA. (RESPONDENT) ITA NO. 20 /PNJ/201 3 : (ASST. YEAR - 20 07 - 08 ) MR. MUKHTAR SHAMSHUDDIN SHAIKH G28, PHOENIX ESTATE, GOGAL, MARGAO, GOA. PAN : AHEPS3514Q (APPELLANT) VS. A DDL . COMMISSIONER OF INCOME TAX, MARGAO RANGE, MARGAO, GOA. (RESPONDENT) ITA NO. 21 /PNJ/201 3 : (ASST. YEAR - 20 08 - 09 ) MR. MUKHTAR SHAMSHUDDIN SHAIKH G28, PHOENIX ESTATE, GOGAL, MARGAO, GOA. PAN : AHEPS3514Q (APPELLANT) VS. A SST . COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO, GOA. (RESPONDENT) APPELLANT BY : SHRI SHRINIVAS NAYAK, CA RESPONDENT BY : SMT. ASHA DESAI, DR DATE OF HEARING : 25 / 04 /2013 DATE OF PRONOUNCEMENT : 14 / 0 6 /2013 O R D E R PER P.K. BANSAL : 1. SINCE BOTH THESE APPEALS FILED BY THE ASSESSEE ARISE OUT OF A COMMON ISSUE, THEREFORE, BOTH THESE APPEALS ARE BEING DISPOSED OFF BY THIS COMMON 2 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) ORDER. IN BOTH THE APPEALS, THE ASSESSEE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 1. THE LEARNED CIT(A) HAS DISMISSED THE CASE WITHOUT CONSIDERING THE FACT THAT ASSESSMENT DONE BY THE AO WAS BASED ON THE REVISED RETURN WHICH WAS SUBSEQUENTLY RESCINDED BY THE ASSESSEE AND ALSO THE REVISED RETURN FILED WAS BARRED BY TIME U/S 139(5) OF THE IT ACT, 1961. 2. THE LEARNED CIT(A) HAS FAILED TO NOTE THAT THE ADVANCES RECEIVED BY THE ASSESSEE WERE TOWARDS THE BUSINESS TRANSACTIONS CARRIED OUT WITH THE COMPANY AND CANNOT BE TERMED AS DEEMED DIVIDENDS U/S 2(22)(E) OF THE INCOME TAX ACT, 1961. GROUND NO. 1 IN A.Y. 2008 - 09 READS AS UNDER : 1. THE LEARNED CIT(A) HAS DISMISSED THE CASE WITHOUT CONSIDERING THE FACT THAT ASSESSMENT DONE BY THE AO WAS BASED ON THE REVISED RETURN WHICH WAS SUBSEQUENTLY RESCINDED BY THE ASSESSEE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INDIVIDUAL HAVING INCOME FROM EARTH MOVING EQUIPMENT. THE BUSINESS IS BEING CARRIED OUT THROUGH ITS PROPRIETORSHIP CONCERNS VIZ. M/S. S.M. CONSTRUCTION AND M/S. S.M. EARTHMOVERS. THE ASSESSEE FILED RETURN FOR THE A.Y 2007 - 08 ON 1.11.2007 DECLARING AN INCOME OF RS.59,80,490/ - AND FOR A.Y 2008 - 09 ON 30.9.2008 DECLARING AN INCOME OF RS.72,86,648/ - . THE ASSESSEE IS GOVERNED BY SECTION 5A OF THE INCOME TAX ACT. THE TAX AUDIT UNDER SECTION 44AB OF THE AC T WAS CARRIED OUT. A SURVEY WAS CONDUCTED IN THE PREMISES OF M/S. MUKHTAR MINERALS PVT. LTD. ON 24.3.2009 AND AS PER THE ADVICE OF THE SURVEY PARTY, THE ASSESSEE FILED REVISED RETURNS OF INCOME ON 4.6.2009 FOR A.Y. 2007 - 08 AND 2008 - 09 AFTER ADDING INCOME FROM OTHER SOURCES AMOUNTING TO RS. 62,89,434/ - AND RS.2,31,95,360/ - BEING DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME TAX ACT DECLARING INCOME OF RS.1,22,41,750/ - AND RS.3,08,49,010/ - FOR A.Y. 2007 - 08 AND 2008 - 09 RESPECTIVELY. THE ASSESSMENT WAS COMPLETED ACCEPTING THE REVISED RETURNS AND MAKING ADDITION OF RS.8,10,940/ - TOWARDS DISALLOWANCE MADE UNDER 3 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) SECTION 40(A)(IA) OF THE INCOME TAX ACT IN A.Y. 2008 - 09 . DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSEE EXPLAINED THAT THE ADDITIONAL INCOME SURRENDERED IN THE REVISED RETURN WAS FILED BEYOND THE LIMITATION PERIOD IN A.Y. 2007 - 08 WAS OFFERED AS PER THE DIRECTIONS OF THE SURVEY PARTY JUST TO CO - OPERATE WITH THE DEPARTMENT. THE ASSESSEE SUBMITTED THAT T HE PROVISIONS OF SECTION 2(22)(E) WERE NOT APPLICABLE AND THE ASSESSEE HAS RECEIVED THE ADVANCE FROM THE COMPANY DURING THE COURSE OF CARRYING ON THE BUSINESS FOR WHICH BILLS WERE BEING RAISED AT A PARTICULAR INTERVAL. THE ASSESSEE ALSO SUBMITTED THAT THE ORIGINAL RETURN FOR A.Y. 2007 - 08 WAS FIL ED ON 1.11.2007 WHILE THE DUE DATE FOR FILING THE RETURN WAS 30.11.2007. THE REVISED RETURN WAS FILED ON 4.6.2009 WHICH WAS BARRED BY LIMITATION AND IN THE EYES OF LAW WAS AN INVALID RETURN AND THEREFORE IT CANNOT BE ACTED UPON. FOR A.Y. 2008 - 09 IT WAS S UBMITTED THAT THE PROVISIONS OF SEC. 2(22)(E) ARE NOT APPLICABLE AS ADVANCE WAS RECEIVED DURING THE COURSE OF BUSINESS. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A) AND CIT(A) ALSO CONFIRMED THE ADDITION. 3. BEFORE US, THE LEARNED AR VEHEMENTLY CONTENDED THAT U/S 139(5), A REVISED RETURN CAN BE FILED IN CASE THE ASSESSEE DISCOVERS ANY OMISSION OR WRONG STATEMENT BUT BEFORE THE EXPIRY OF ONE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YEAR OR BEFORE THE COMPLETION OF THE ASSESSMENT, WHICHEVER IS EARLIER. IN TH IS CASE, THE REVISED RETURN FOR THE ASSESSMENT YEAR 2007 - 08 COULD HAVE BEEN FILED BY 31.3.2009 BUT THE REVISED RETURN WAS FILED ON 4.6.2009. THEREFORE, THE RETURN FILED BY THE ASSESSEE WAS INVALID AND NON - EST IN THE EYES OF LAW. THE ASSESSMENT SHOULD HAVE BEEN MADE ON THE BASIS OF THE ORIGINAL RETURN AS IT WAS FILED WITHIN TIME. 4. ON MERIT, IT WAS SUBMITTED THAT THERE HAD BEEN A SURVEY IN THE CASE OF M/S. MUK H TAR MINERALS PVT. LTD. IN WHICH THE ASSESSEE WAS HOLDING 40% EQUITY SHARES AND THE PROPRI ETORSHIP CONCERNS OF THE ASSESSEE HAVE DIRECT BUSINESS 4 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) RELATIONSHIP WITH THE COMPANY. BOTH THE PROPRIETORSHIP CONCERNS OF THE ASSESSEE, M/S. S.M. EARTHMOVERS AND M/S. S.M. CONSTRUCTIONS CARRY ON THE BUSINESS ACTIVITIES WITH THE COMPANY. M/S. S.M. EARTHMO VERS SUPPLIES MACHINERY TO M/S. MUK H TAR MINERALS PVT. LTD. ON HIRE AND ALSO UNDERTAKE JOB WORK AND RAISES REGULAR BILLS ON THE COMPANY FOR THE HIRE CHARGES AND JOB WORK BASED ON THE UTILIZATION OF THE MACHINERY. THE COMPANY HAS DEDUCTED TDS AND PAID SAME TO THE GOVERNMENT ON THE HIRE CHARGES AS WELL AS JOB WORK PAID TO M/S. S.M. EARTHMOVERS. COPY OF THE BILLS RAISED BY M/S. S.M. EARTHMOVERS ON M/S. MUK H TAR MINERALS PVT. LTD. AND THE TDS CERTIFICATE WERE DULY FILED BEFORE THE AO AND ATTENTION IN THIS REGAR D WAS DRAWN TO THE C OPIES THEREOF FILED BEFORE US. IT WAS SUBMITTED THAT ANOTHER PROPRIETORSHIP CONCERN, M/S. S.M. CONSTRUCTIONS CARRIES OUT REGULAR BUSINESS ACTIVITIES WITH M/S. MUK H TAR MINERALS PVT. LTD., THE PROPRIETORSHIP CONCERN OF THE ASSESSEE. THIS CONCERN CARRIES OUT WORK OF EXTRACTION FOR THE COMPANY AND RAISES REGULAR BILLS. TDS HAS BEEN DEDUCTED BY THE COMPANY AND PAID TO THE GOVERNMENT. COPIES OF THE BILLS RAISED BY M/S. S.M. CONSTRUCTIONS ON M/S. MUK H TAR MINERALS PVT. LTD. AND TDS CERTIFICAT E WERE FILED BEFORE THE AO. EVEN COPIES THEREOF WERE BROUGHT TO OUR KNOWLEDGE FILED IN THE PAPER BOOK. IT WAS POINTED OUT THAT THE ASSESSEE RECEIVE D THE DEPOSIT AS PER AGREEMENT FOR CARRYING OUT THE JOB WORK IN BOTH THE PROPRIETORSHIP CONCERNS FROM M/S. MUKHTAR MINERALS PVT. LTD. AS THE BILLS ARE RAISED AT QUARTERLY INTERVALS AND THE DELAY IN THE PAYMENT WOULD HAVE HAMPERED THE WORK. IN THIS REGARD, ATTENTION WAS DRAWN TO PG. 76 OF THE PAPER BOOK CONTAINING LETTER DT. 16.8.2005 REQUESTING FOR THE DEPOSIT BY THE ASSESSEES PROPRIETORSHIP CONCERNS FROM M/S. MUKHTAR MINERALS PVT. LTD. ATTENTION WAS ALSO DRAWN TOWARDS THE LETTER DT. 26.8.2005 WRITTEN BY M/S. MUKHTAR MINERALS PVT. LTD. ACCEPTING THE REQUEST OF THE ASSESSEE FOR PAYMENT OF DEPOSIT IN INSTALMENT S SO THAT THE DAY TO DAY WORK CARRIED OUT BY THE PROPRIETORSHIP CONCERNS, M/S. S.M. CONSTRUCTIONS AND M/S. S.M. EARTHMOVERS MAY NOT SUFFER. DURING THE ASSESSMENT YEAR 2007 - 08 DEEMED DIVIDEND WAS SHOWN OF 5 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) RS.1,25, 78, 867/ - . OUR ATTENTION WAS DRAWN TOWARDS PG. 45 AND 46 OF THE PAPER BOOK CONTAINING LETTER DT. 28.12.2009 WRITTEN TO THE ASSESSING OFFICER. IT WAS POINTED THAT THE TRANSACTION ENTERED INTO BETWEEN THE ASSESSEE AND M/S. MUKHTAR MINERALS PVT. LTD. ARE PURELY BUSINESS TRANSACTION S AND CANNOT BE REG ARDED TO BE DEEMED DIVIDEND. RELIANCE WAS PLACED IN THIS REGARD ON THE DECISION OF DELHI HIGH COURT IN CIT VS. CREATIVE DYEING & PRINTING P LTD. 184 TAXMANN 483 (DELHI). OUR ATTENTION WAS ALSO DRAWN TOWARDS THE DECISION OF DCIT, LUDHIANA VS. RADHE SHAM J AIN 28 TAXMANN.COM 255 (CHD.). RELIANCE WAS ALSO PLACED ON THE DECISION OF THE DELHI HIGH COURT IN CIT VS. RAJ KUMAR 318 ITR 462 (DELHI) AND CIT VS. AMBASSADOR TRAVELS PVT. LTD. 318 ITR 376 (DELHI). RELIANCE WAS ALSO PLACED ON DEPARTMENT CIRCULAR NO. 14 DT. 11.4.1955 (COPY PLACED AT PG. 34 - 36 OF P APER B OOK NO. 1 FOR A.Y. 2008 - 09) THAT IT IS THE DUTY OF THE AO TO GUIDE THE ASSESSEE TO FILE ITS CORRECT RETURN OF INCOME. OUR ATTENTION WAS ALSO DRAWN TOWARDS THE COPY OF THE ACCOUNT WHICH THE ASSESSEE HAS WIT H M/S. MUKHTAR MINERALS PVT. LTD. IT WAS VEHEMENTLY CONTENDED THAT SINCE THE ASSESSEE HAS RECEIVED A DEPOSIT DURING THE COURSE OF THE BUSINESS FOR THE PURPOSE OF THE BUSINESS, THEREFORE, THE TRANSACTION CANNOT BE REGARDED TO BE A DEEMED DIVIDEND IN EACH O F THE ASSESSMENT YEAR. REFERRING TO PROVISIONS OF SEC. 2(22)(E) , IT WAS POINTED OUT THAT EVEN IF IT IS TAKEN TO BE DEEMED D IVIDEND, THE DEEMED D IVIDEND CAN BE TAKEN ONLY TO THE EXTENT OF COMPANYS ACCUMULATED PROFIT AS ON 1.4.2007. THE ACCUMULATED PROFIT OF M/S. MUKHTAR MINERALS PVT. LTD. AS ON 1.4.2007 WERE ONLY RS.1,25,78,628/ - . THE ACCUMULATED PROFIT AS ON 1.4.2006 WERE N IL. COPY OF THE BALANCE SHEET OF M/S. MUKHTAR MINERALS PVT. LTD. FOR F.Y . 2006 - 07 AND 2005 - 06 WERE ALSO FILE D . IT WAS POINTED OUT THAT THE LAST BALANCE SHEET OF THE COMPANY AVAILABLE WAS PRIOR TO THE DEPOSIT OF THE MONEY FOR THE YEAR ENDED 31.3.2007 AND 31.3.2008 RESPECTIVELY. RELIANCE WAS PLACED IN THIS REGARD ON THE DECISI ON OF DCIT VS. RADHE SHAM JAIN (SUPRA). THERE CANNOT BE ANY AGREEMENT AGAINST THE STATUTE. TAX HAS TO BE PAID ON THE REAL INCOME EARNED. 6 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) 5. THE LEARNED DR ON THE OTHER HAND, VEHEMENTLY CONTENDED THAT THE A SSESSEE HIMSELF HAS SURRENDERED THE AMOUNT AS DEEMED DIVIDEND. THE A SSESSEE IS HAVING 40% SHAREHOLDING IN M/S. MUKHTAR MINERALS PVT. LTD. AND HAS ALSO RECEIVED DEPOSIT AND THEREFORE COMPLIED WITH THE CONDITIONS STIPULATED UNDER SECTION 2(22)(E) , OF THE INCOME TAX ACT. SO FAR AS THE REVI SED RETURN IS CONCERNED, THE REVISED RETURN, EVEN IF IT HAS BEEN FILED LATE, IT WILL NOT MAKE THE ASSESSMENT TO BE INVALID ALTHOUGH THE REVISED RETURN MAY BE BARRED BY LIMITATION. THE AO CAN ALWAYS CONSIDER THE REVISED RETURN. RELIANCE WAS PLACED ON THE O RDER OF THE AUTHORITIES BELOW. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIALS ON RECORD ALONGWITH THE ORDER OF THE TAX AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE VARIOUS CASE LAWS WHICH WERE BROUGHT TO OUR KNOWLEDGE DURING THE COURSE OF HEARING OF THE APPEAL. IT IS AN UNCONTROVERTED FACT BY BOTH THE SIDES THAT IN THIS CASE THERE HAD BEEN A SURVEY IN THE PREMISES OF M/S. MUKHTAR MINERALS PVT. LTD. ON 24.3.2009, THE COMPANY IN RESPECT OF WHICH THE ASSESSEE IN PROPRIET ORSHIP CONCERNS VIZ. M/S. S.M. CONSTRUCTION AND M/S. S.M. EARTH MOVERS WAS DISCHARGING HIS BUSINESS OBLIGATION S. THE ASSESSEE WAS RECEIVING BUSINESS RECEIPTS IN THE FORM OF HIRE CHARGES AS WELL AS IN OTHER FORMS FROM M/S. MUKHTAR MINERALS PVT. LTD. THE PR OPRIETORSHIP CONCERN OF THE ASSESSEE HAS TAKEN DEPOSIT DURING THE COURSE OF BUSINESS DEALINGS FROM M/S. MUKHTAR MINERALS PVT. LTD. THE ASSESSEE WAS HAVING SHAREHOLDING OF AROUND 40% IN M/S. MUKHTAR MINERALS PVT. LTD. THE ASSESSEE WAS RAISING REGULAR BIL LS TO M/S. MUKHTAR MINERALS PVT. LTD. TDS IS BEING DEDUCTED BY M/S. MUKHTAR MINERALS PVT. LTD. THE ASSESSEE FOR A.Y. 2007 - 08 AND 2008 - 09 HAS FILED THE RETURN ON 1.11.2007 AND 30.9.2008 BUT SUBSEQUENTLY THE ASSESSEE FILED REVISED RETURN ON THE ADVICE OF THE SURVEY PARTY AS CLAIMED BY THE ASSESSEE TREATING THE DEPOSIT TAKEN BY THE ASSESSEE DURING THE COURSE OF THE BUSINESS FROM M/S. MUKHTAR MINERALS PVT. LTD. TO BE DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME 7 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) TAX ACT. DURING THE COURSE OF THE ASSESSMENT, THE ASSESSEE CLAIMED THAT THE DEPOSIT RECEIVED BY THE ASSESSEE WAS NOT IN FACT DEEMED D IVIDEND BUT TO BUY PEACE AND TO CLOSE THE SURVEY AT THE EARLIEST, ASSESSEE FILED REVISED RETURN AS PER THE ADVICE OF THE A O. THE LETTER WRITTEN TO THE AO DT. 28.12.2009 FOR A.Y. 2007 - 08 READS AS UNDER : TO, ADDITIONAL COMMISSIONER OF INCOME TAX MARGAO GOA SUB : DEEMED DIVIDEND OF RS. 1,25,78,867/ - ASSESSMENT YEAR 2007 - 2008 . WITH REFERENCE TO THE ABOVE, WE WOULD LIKE TO STATE THAT SURVEY HAS BEEN CONDUCTED UNDER SECTION 131 OF THE INCOME TAX ACT 1961, ON 26 TH MARCH 2009 AND CONSEQUENT UPON SURVEY, THE QUESTION ARISES REGARDING DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME TAX ACT, IN RESPECT OF THE TRADE ADVANCE S RECEIVED DURING THE YEAR 2006 - 07 BY S.M. EARTHMOVER AND S.M. CONSTRUCTIONS WHICH ARE SISTER CONCERNS OF M/S. MUKHTAR MINERALS PRIVATE LIMI TED. DURING THE TIME OF SURVEY, INSPITE OF OUR VALID EXPLANATIONS, THE ASSESSING OFFICER HAS ASKED US TO TREAT THE ABOVE SAID AMOUNT AS DEEMED DIVIDEND AND ACCORDINGLY ADVISED US TO REVISE THE RETURN OF INCOME FOR THE SAID ASSESSMENT YEAR. DURING THE TIME OF SURVEY WE WERE UNDER TREMENDOUS MEN TAL PRESSURE AND ALSO WE WERE UNABLE TO COPE UP WITH THE SITUATION BECAUSE WE WERE FACING SEVERE MARKET RECESSION AND ALSO AT THE SAME TIME - THIS INCOME TAX SURVEY HAS T A KEN P L A CE. I N ORDER TO C L OSE THE SURVEY AT THE E ARLI EST AND ALSO TO BUY P EACE WE REVI SED OUR RETURN OF INCOME AS PER THE ADVISE OF THE ASSESSING OFFICER. BUT LATER ON CLOSE SCRUTI N Y OF THE SUBJECT, WE CAME TO KNOW THAT THE PROVISION IS NOT APPLICABLE TO US. LATER ON THE CASE HAS BEEN SELECTED FOR SCRUTINY AND DURING THE TIME OF SCRUTINY T HE MATTER HAS CO ME FOR DISCUSSION AND AFTER THOROUGH DISCUSSIONS REQUES T ING FOR JUSTICE, WE HAVE BEEN ASKED TO GIVE P ROPER EXP L ANATION S WHICH SHO U LD S A TIS F Y THE ASSESSING OFFICER . WE ALSO HAVE BEEN ASKED TO ESTABLISH THE NEXUS OF BUSINESS AMONGST THE SIS TER CONCERNS REGARDING THE TRADE ADVANCES PAID DURING THE YEAR 20 06 - 2007 (ASSESSMENT YEAR 2007 - 08 ) W H ICH RAISES THE ISSUE OF DEEMED DIVIDEND U / S 2 ( 22 ) ( E) , IN SUPPORT OF OUR CLAIM. ACCORDINGLY WE SUBMIT AS BELOW : - THE NEXUES OF BUSINESS AMONGST OUR SISTER CONCERNS IS SUCH THAT, THE FIXED ASSETS (MACHINERY & EQUIPMENTS) OF S.M. EARTHMOVERS WHICH IS A PROPRIETARY CONCERN OWNED BY SRI SHAIKH MUKHTAR , HAS BEEN SUPPLIED TO S.M. CONSTRUCTIONS (WHICH IS OWNED BY, SMT. SHAMSHUN SHAIK H) WHICH HAS GOT IRON ORE RAISING CONTRACTS WITH NADEEM MINERALS AT DONIMALAI MINES SANDUR, KARNATAKA AND HEIRS OF LATE DAMU NAYAK (SULCORNA MINES GOA), WITH WHOM M/S. MUKHTAR MINERALS PVT. LTD., HAD CONTRACT TO PURCHASE IRON ORE WITH THE UNDERSTANDING THAT 50% OF THE EXTRACTED IRON 8 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) ORE BELONGING TO NADEEM MINERALS AND ENTIRE EXTRACTED IRON ORE OF SULCORNA MINES HAS TO BE SOLD TO M/S. MUKHTAR MINERALS PVT LTD ONLY, BUT WITH AGREED RATES PER TON. THEREFORE, M/S S.M. EART H MOVES, M/S. S. M. CONSTRUCTIONS A ND M/ S MUKHTAR MINERALS P V T . LTD,, HAS INTER R E LATED BUSIN E SSES AND WHATEVER THE ADVANCES PAID BY M/S MUKHTAR MINERALS PVT LTD . TO THESE S I STER CONCERNS IS ONLY FOR BUSINESS PURPOSE AND THESE ADVANCES AR E PURELY IN THE NATURE OF TRADE ADVANCES WHICH DOES N OT ATTRACT THE PROVISIONS OF SECTION 2(22 ) (E) OF THE INCOME TAX ACT. IN SUPPORT OF OUR CLAIM WE RELIED ON FOLLOWING CASE LAWS : - 1. CIT VS AMBASSADOR TRAVELS (P ) LTD (2009) 318 I T R 376 ( DELHI HIGH COURT ) 2. C I T V S CREATIVE DYING & PRINTING (P) LTD., (2009) 318 ITR 476 (DELHI HIGH COURT) 3. CIT VS RAJ K UMAR (2009) 318 ITR 462 - (DELHI HIGH COU R T) COPIES OF THE J UDG EM ENTS ARE ENCLOSED HEREWITH FOR YOUR KIND PERUSAL. WE HOPE THE ABOVE SUBMISSIONS WILL SATISFY YOU AND WE REQUEST YOUR GOODSELVES TO CONSI DER OUR REQUEST FAVOUR ABLY. 7. THE AO, WE NOTED, JUST COMPLETED THE ASSESSMENT ON THE BASIS OF THE REVISED RETURN. NOW, THE FIRST QUESTION BEFORE US ARISES WHETHER THE AO IS BOUND TO MAKE ASSESSMENT ON THE BASIS OF THE REVISED RETURN EVEN THOUGH THE INC OME RETURNED BY THE ASSESSEE IN THE REVISED RETURN IS IN FACT NOT THE INCOME OF THE ASSESSEE CHARGEABLE TO TAX WITHIN THE FOUR CORNERS OF THE INCOME TAX ACT. IT IS ALSO A FACT IN THIS CASE, ESPECIALLY IN A.Y. 2007 - 08 , WE NOTED THAT THE REVISED RETURN WAS FILED BY THE ASSESSEE BEYOND THE TIME AS IS PERMISSIBLE U/S 139(5) OF THE INCOME TAX ACT AND WAS NOT A VALID RETURN. ONCE THE REVISED RETURN IS NOT A VALID RETURN, THE ORIGINAL RETURN IS BOUND TO BE TAKEN TO BE THE BA SIS FOR MAKING THE ASSESSMENT EVEN THOUGH THE REVISED RETURN MAY BE TAKEN TO BE EVIDENCE FOR THE PURPOSE OF ASSESSING THE INCOME OF THE ASSESSEE. THE A . O , WE NOTED, IN THIS CASE JUST COMPLETED THE ASSESSMENT ON THE BASIS OF THE REVISED STATEMENT IGNORING THE FACT THAT THE REVISED RETURN WAS NOT VALID. EVEN HE REJECTED THE EXPLANATION OF THE A SSESSEE THAT THE DEPOSIT RECEIVED BY THE ASSESSEE FROM THE COMPANY ARE ADVANCE RECEIVED DURING THE COURSE OF REGULAR BUSINESS 9 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) TRANSACTIONS IN THE BUSINESS OF TRADE AN D EXPORT OF IRON ORE M ERELY STATING THAT THE CLAIM MADE BY THE A SSESSEE IS ONLY AN AFTERTHOUGHT AND THEREFORE A.O IGNORED THE SAME. THE AO DID NOT EXAMINE WHETHER THE ADVANCE RECEIVED BY THE A SSESSEE FROM M/S. MUKHTAR MINERALS PVT. LTD. IS ADVANCE ARISING OUT OF THE BUSINESS TRANSACTIONS. THE AO EVEN THOUGH NOTED THAT THE ASSESSEE HAS RELIED IN THIS REGARD ON THE VARIOUS DECISIONS OF THE DELHI HIGH COURT DID NOT UTTER OR WHISPER A SINGLE WORD HOW DEPOSIT HAS NOT BEEN RECEIVED BY THE ASSESSEE DURING THE CO URSE OF THE BUSINESS TRANSACTION. SECTION 4 WHICH IS THE CHARGING SECTION IMPOSES INCOME TAX ON THE TOTAL INCOME OF THE PREVIOUS YEAR OF ANY PERSON IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX ACT. THEREFORE, IN OUR OPINION, BEFORE CHARGING ANY RE CEIPT TO BE THE INCOME OF THE ASSESSE, IT IS ESSENTIAL THAT THE REVENUE MUST PROVE THAT THE RECEIPT RECEIVED BY THE ASSESSEE DURING THE YEAR REPRESENTS THE INCOME OF THE ASSESSEE. INCOME TAX IS CHARGEABLE ON THE REAL INCOME AS MAY BE COMPUTED IN ACCORDANC E WITH THE INCOME TAX ACT. THEREFORE, THE AO BEFORE MAKING THE ASSESSMENT OF DEPOSIT RECEIVED BY THE ASSESSEE FROM M/S. MUKHTAR MINERALS PVT. LTD. TO BE THE INCOME OF THE ASSESSEE MUST HAVE EXAMINED WHETHER THE DEPOSIT REPRESENTS DEEMED DIVIDEND WITHIN TH E PROVISIONS OF SEC. 2(22)(E) OF THE INCOME TAX ACT OR NOT. THE RECEIPT CANNOT BE REGARDED TO BE THE INCOME MERELY BECAUSE THE ASSESSEE AGREES TO TREAT IT TO BE ITS INCOME. IF SOME RECEIPT IS INCOME WITHIN THE FOUR CORNERS OF THE INCOME TAX ACT , IT WILL BE CHARGEABLE TO TAX , OTHERWISE IT CANNOT BE CHARGED TO INCOME TAX. THE SUBJECT IS NOT TO BE TAXED UNLESS THE CHARGING PROVISION CLEARLY IMPOSES THE OBLIGATION ON THE SUBJECT. THIS VIEW HAS BEEN TAKEN BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. AJAX PRODUCTS LTD. 55 ITR 741 (SC). EVEN OTHERWISE, THERE CANNOT BE ANY ESTOPPEL AGAINST THE STATUTE. THE REVENUE OR THE ASSESSEE CANNOT AGREE TO TREAT A RECEIPT TO BE THE INCOME OR NOT TO BE INCOME WHEN IT IS AN INCOME WITHIN THE PROVISION OF THE INCOME TAX ACT. AN AGREEMENT BETWEEN THE PARTIES CONTRARY TO THE PROVISIONS OF THE INCOME TAX ACT, IN OUR OPINION, IS INVALID AND VOID AB INITIO . IF A PARTICULAR RECEIPT IS NOT 10 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) TAXABLE UNDER THE INCOME TAX ACT, IT CANNOT BE TAXED ON THE BASIS OF ESTOPPEL OR AN Y OTHER EQUITABLE DOCTRINE. EQUITY IS OUT OF PLACE IN THE TAX LAWS. A PARTICULAR INCOME IS EITHER LIABLE TO TAX UNDER THE TAXATION STATUTE OR IT IS NOT. IF IT IS NOT, THE INCOME TAX OFFICER HAS NO POWER TO IMPOSE TAX ON THE SAID INCOME. SIMILAR VIEW HA S BEEN TAKEN BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. V. MR. P. FIRM, 56 ITR 67 (SC). THE TAX CAN BE COLLECTED BY THE TAX COLLECTOR ONLY AS PROVIDED UNDER THE ACT. IF THE ASSESSEE UNDER A MISTAKE, MISCONCEPTION OR ON NOT BEING PROPERLY INSTRUC TED IS OVER - ASSESSED, THE AUTHORITIES UNDER THE ACT ARE REQUIRED TO ASSIST HIM AND ENSURE THAT ONLY LEGITIMATE TAXES DUE ARE COLLECTED . IF A PARTICULAR LEVY IS NOT PERMITTED UNDER THE ACT, THE TAX CANNOT BE LEVIED BY APPLYING DOCTRINE OF ESTOPPEL. ON THI S BASIS, WE NOTED THAT THE BOARD HAS ISSUED CIRCULAR NO. 14 (XL - 35) DT. 11.4.1955. THIS CIRCULAR READS AS UNDER : 1. THE BOARD HAVE ISSUED INSTRUCTIONS FROM TIME TO TIME IN REGARD TO THE ATTITUDE WHICH THE OFFICERS OF THE DEPARTMENT SHOULD ADOPT IN DEALI NG WITH ASSESSES IN MATTERS AFFECTING THEIR INTERESTS AND CONVENIENCE. IT APPEARS THAT THESE INSTRUCTIONS ARE NOT BEING UNIFORMLY FOLLOWED. 2. COMPLAINTS ARE STILL BEING RECEIVED THAT WHILE INCOME - TAX OFFICERS ARE PROMPT IN MAKING ASSESSMENTS LIKELY TO RE SULT INTO DEMANDS AND IN EFFECTING THEIR RECOVERY, THEY ARE LETHARGIC AND INDIFFERENT IN GRANTING REFUNDS AND GIVING RELIEFS DUE TO ASSESSEES UNDER THE ACT. DILATORINESS OR INDIFFERENCE IN DEALING WITH REFUND CLAIMS (EITHER UNDER SECTION 48 OR DUE TO APPEL LATE, REVISIONAL, ETC . , ORDERS) MUST BE COMPLETELY AVOIDED SO THAT THE PUBLIC MAY FEEL THAT THE GOVERNMENT ARE ACTUALLY PROMPT AND CAREFUL IN THE MATTER OF COLLECTING TAXES AND GRANTING REFUNDS AND GIVING RELIEFS. (3) OFFICERS OF THE DEPARTMENT MUST NOT TAKE ADVANTAGE OF IGNORANCE OF AN ASSESSEE AS TO HIS RIGHTS. IT IS ONE OF THEIR DUTIES TO ASSIST A TAXPAYER IN EVERY REASONABLE WAY, PARTICULARLY IN THE MATTER OF CLAIMING AND SECURING RELIEFS AND IN THIS REGARD THE OFFICERS SHOULD TAKE THE INITIATIVE IN G UIDING A TAXPAYER WHERE PROCEEDINGS OR OTHER PARTICULARS BEFORE THEM INDICATE THAT SOME REFUND OR RELIEF IS DUE TO HIM. THIS ATTITUDE WOULD, IN THE LONG RUN, BENEFIT THE DEPARTMENT FOR IT WOULD INSPIRE CONFIDENCE IN HIM THAT HE MAY BE SURE OF GETTING A SQU ARE DEAL FROM THE DEPARTMENT. ALTHOUGH, THEREFORE, THE RESPONSIBILITY FOR CLAIMING REFUNDS AND RELIEFS RESTS WITH ASSESSEE ON WHOM IT IS IMPOSED BY LAW, OFFICERS SHOULD 11 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) (A) DRAW THEIR ATTENTION TO ANY REFUNDS OR RELIEFS TO WHICH THEY APPEAR TO BE CLEARLY ENT ITLED BUT WHICH THEY HAVE OMITTED TO CLAIM FOR SOME REASON OR OTHER; (B) FREELY ADVISE THEM WHEN APPROACHED BY THEM AS TO THEIR RIGHTS AND LIABILITIES AND AS TO THE PROCEDURE TO BE ADOPTED FOR CLAIMING REFUNDS AND RELIEFS. 4. PUBLIC RELATION OFFICERS HAVE BEEN APPOINTED AT IMPORTANT CENTRES, BUT BY THE VERY NATURE OF THEIR DUTIES, THEIR FIELD OF ACTIVITY IS BOUND TO BE LIMITED. THE FOLLOWING EXAMPLES (WHICH ARE BY NO MEANS EXHAUSTIVE) INDICATE THE ATTITUDE WHICH OFFICERS SHOULD ADOPT: (1) SECTION 17 ( 1 ) OF THE 1922 ACT [SECTION 113 OF THE 1961 ACT] - WHILE DEALING WITH THE ASSESSMENT OF A NON - RESIDENT ASSESSEE THE OFFICER SHOULD BRING TO HIS NOTICE THAT HE MAY EXERCISE THE OPTION TO PAY TAX ON HIS INDIAN INCOME WITH REFERENCE TO HIS TOTAL WORLD INCOME IF IT IS TO HIS ADVANTAGE. (2) SECTION 18(3), (3A), (3B) AND (3D) OF THE 1922 ACT [SECTIONS 193, 197(1), 195(1), 195(2) AND 194 OF THE 196] ACT] - THE OFFICER SHOULD IN EVERY APPROPRIATE CASE BRING TO THE ASSESSEES NOTICE THE POSSIBILITY OF OBTAINING A C ERTIFICATE AUTHORISING DEDUCTION OF INCOME - TAX AT A RATE LESS THAN THE MAXIMUM OR DEDUCTION OF SUPER TAX AT A RATE LOWER THAN THE FLAT RATE, AS THE CASE MAYBE. (3) SECTION 25(3) AND 25(4) OF THE 1922 ACT - THE MANDATORY RELIEF ABOUT EXEMPTION FROM TAX MUS T BE GRANTED WHETHER CLAIMED OR NOT; THE OTHER RELIEF ABOUT SUBSTITUTION, IF NOT TIME BARRED, MUST HE BROUGHT TO THE NOTICE OF A TAXPAYER. (4) SECTION 26A OF THE 1922 ACT SECTIONS 184 TO 186 OF THE 1961 ACT] - THE BENEFIT TO BE OBTAINED BY REGISTRATION SH OULD BE EXPLAINED IN APPROPRIATE CASES. WHERE AN APPLICATION FOR REGISTRATION PRESENTED BY A FIRM IS FOUND DEFECTIVE, THE OFFICER SHOULD POINT OUT THE DEFECT TO IT AND GIVE IT AN OPPORTUNITY TO PRESENT A PROPER APPLICATION. (5) SECTION 33A OF THE 1922 ACT [SECTION 264 OF THE 196 1 ACT] - CASES IN WHICH THE INCOME - TAX OFFICER OR THE ASSISTANT COMMISSIONER THINKS THAT AN ASSESSMENT SHOULD BE REVISED, MUST BE BROUGHT TO THE NOTICE OF THE COMMISSIONER OF INCOME - TAX. (6) SECTION 35 OF THE 1922 ACT [SECTIONS 154 AND 155 OF THE 1961 ACT] - MISTAKES SHOULD BE RECTIFIED AS SOON AS THEY ARE DISCOVERED WITHOUT WAITING FOR AN ASSESSEE TO POINT THEM OUT. (7) SECTION 60(2) OF THE 1922 ACT [SECTIONS 89(1) AND 103 OF THE 1961 ACT] - CASES WHERE RELIEF CAN PROPERLY BE GIVE N UNDER THIS SUB - SECTION SHOULD BE REPORTED TO THE BOARD. 12 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) 5. WHILE OFFICERS SHOULD WHEN REQUESTED, FREELY ADVICE ASSESSEES THE WAY IN WHICH ENTRIES SHOULD BE MADE IN VARIOUS FORMS, THEY SHOULD NOT THEMSELVES MAKE ANY IN T HEM ON THEIR BEHALF. WHERE SUCH ADVICE IS GIVEN, IT SHOULD BE CLEARLY EXPLAINED TO THEM THAT THEY ARE RESPONSIBLE FOR THE ENTRIES MADE IN ANY FORM AND THAT THEY CANNOT BE ALLOWED TO PLEAD THAT THEY WERE MADE UNDER OFFICIAL INSTRUCTIONS. THIS EQUALLY APPLIES TO THE PUBLIC RELATION OFFICER S. 6. THE INTEN T ION OF THIS CIRCULAR IS NOT THAT TAX DUE SHOULD NOT BE CHARGED OR THAT ANY FAVOUR SHOULD BE SHOWN TO ANYBODY IN THE MATTER OF ASSESSMENT, OR THAT WHERE INVESTIGATIONS ARE CALLED FOR, THEY SHOULD NOT BE MADE. WHATEVER THE LEGITIMATE TAX IT MUST BE ASSESSED AND MUST BE COLLECTED. THE PURPOSE OF THIS CIRCULAR IS MERELY TO EMPHASISE THAT WE SHOULD NOT TAKE ADVANTAGE OF AN ASSESSEES IGNORANCE TO COLLECT MORE TAX OUT OF HIM THAN IS LEGITIMATELY DUE FROM HIM. 8. FROM THE CIRCULAR IT IS APPARENT THAT THE CBDT IS FULLY CONSCIOUS THAT THE LEGITIMATE TAX MUST BE ASSESSED AND MUST BE COLLECTED AN D REVENUE SHOULD NOT TAKE ADVANTAGE OF THE IGNORANCE OF THE ASSESSEE IN RESPECT OF ANY PROVISION FOR COLLECTING MORE TAX THAN WHAT IS LEGITIMATELY DUE FROM HIM. WE NOTED THAT THE JURISDICTIONAL HIGH COURT HAD ALSO TAKEN SIMILAR VIEW IN THE CASE OF BALMUKU ND ACHARYA VS. DCIT, 310 ITR 310 WHEREIN THE HIGH COURT HAS HELD AS UNDER : 31. HAVING SAID SO, WE MUST OBSERVE THAT THE APEX COURT AND THE VARIOUS HIGH COURTS HAVE RULED THAT THE AUTHORITIES UNDER THE ACT ARE UNDER AN OBLIGATION TO ACT IN ACCORDANCE WIT H LAW. TAX CAN BE COLLECTED ONLY AS PROVIDED UNDER THE ACT. IF ANY ASSESSEE, UNDER A MISTAKE, MISCONCEPTION OR ON NOT BEING PROPERLY INSTRUCTED IS OVERASSESSED, THE AUTHORITIES UNDER THE ACT ARE REQUIRED TO ASSIST HIM AND ENSURE THAT ONLY LEGITIMATE TAXES DUE ARE COLLECTED [SEE S.R. KOSHTI VS. CIT (2005) 193 CTR (GUJ) 518 : (2005) 276 ITR 165 (GUJ), C.P.A. YOOSUF VS. ITO (1970) 77 ITR 237 (KER), CIT VS. BHARAT GENERAL REINSURANCE CO. LTD. (1971) 81 ITR 303 (DEL), CIT VS. ARCHANA R. DHANWATEY (1981) 24 CTR ( BOM) 142 : (1982) 136 ITR 355 (BOM)]. 32. IF PARTICULAR LEVY IS NOT PERMITTED UNDER THE ACT, TAX CANNOT BE LEVIED APPLYING THE DOCTRINE OF ESTOPPEL [SEE DY. CST VS. SREENI PRINTERS (1987) 67 SCC 279]. 33. THIS COURT IN THE CASE OF NIRMALA L. MEHTA VS. A. BALASUBRAMANIAM, CIT (2004) 191 CTR (BOM) 8 : (2004) 269 ITR 1 (BOM) HAS HELD THAT THERE CANNOT BE ANY ESTOPPEL AGAINST THE STATUTE. ARTICLE 265 OF THE CONSTITUTION OF INDIA IN UNMISTAKABLE TERMS PROVIDES THAT NO TAX SHALL BE LEVIED OR COLLECTED EXCEPT BY 13 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) AUTHORITY OF LAW. ACQUIESCENCE CANNOT TAKE AWAY FROM A PARTY THE RELIEF THAT HE IS ENTITLED TO WHERE THE TAX IS LEVIED OR COLLECTED WITHOUT AUTHORITY OF LAW. IN THE CASE ON HAND, IT WAS OBLIGATORY ON THE PART OF THE AO TO APPLY HIS MIND TO THE FACTS DIS CLOSED IN THE RETURN AND ASSESS THE ASSESSEE KEEPING IN MIND THE LAW HOLDING THE FIELD. 9. THE DECISION OF THE JURISDICTIONAL H IGH COURT IS BINDING ON US. WE THEREFORE, HOLD THAT THE AO WAS NOT CORRECT IN ASSESSING THE ADVANCE RECEIVED BY THE ASSESSEE FROM M/S. MUKHTAR MINERALS PVT. LTD. TO BE THE INCOME OF THE ASSESSEE MERELY ON THE BASIS OF THE REVISED COMPUTATION WITHOUT EXAMINING WHETHER THE ADVANCE SO REC EIVED IS DEEMED D IVIDEN D U/S 2(22)(E) OF THE INCOME TAX ACT IN EACH OF THE ASSESSMENT YEAR. 10. NOW, THE QUESTION ARISES WHETHER THE ADVANCE RECEIVED BY THE ASSESSEE IS DEEMED DIVIDEND WITHIN THE PROVISIONS OF SEC. 2(22)(E) OF THE INCOME TAX ACT OR NOT. IN THIS REGARD, WE HAVE TO EXAMINE THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT. SEC. 2(22)(E) OF THE INCOME TAX ACT AS AMENDED WITH EFFECT FROM 1 ST APRIL, 1988 READS AS UNDER: - '(E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEIN G 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 SUBS TANTIAL 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 PROFIT S.' THIS SECTION WHICH IS EQUIVALENT TO SECTION 2(6A)(E) OF THE INCOME - TAX ACT, 1922 WAS FOR THE FIRST TIME INTRODUCED AS BY THE FINANCE ACT, 1955 WHICH STATES AS FOLLOWS : - 14 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) (A) 'ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED WITHIN THE MEANING OF SECTION 23A, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) BY WAY OF ADVANCE OR LOAN TO A SHAREHOL DER, OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF A SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' PRIOR TO 1 ST APRIL 1988, SECTION 2(22) OF THE INCOME - TAX ACT, 1961 DEFIN ES DIVIDEND AS FOLLOWS : 'SECTION 2(22) 'DIVIDEND' INCLUDES (A) TO (D) .. (E) ANY PAYMENT MADE 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 COMP ANY OR OTHERWISE) BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY, OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COM PANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' UNDER THE INCOME - TAX ACT, 1922, TWO CATEGORIES OF PAYMENT WERE CONSIDERED AS DIVIDEND VIZ. (A) ANY PAYMENT BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER , OR (B) ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. 11 . IN THE 1961 ACT, FOR THESE VERY SAME PAYMENTS, AN ADDITIONAL CONDITION WAS INTRODUCED THAT THE PAYMENT SHOULD BE TO A SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES AND WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY I.E. A SHAREHOLDING WHI CH CARRIES NOT LESS THAN 20% OF THE VOTING POWER. THIS PERCENTAGE OF VOTING POWER WAS REDUCED FROM 20% TO 10% WITH EFFECT FROM 1ST APRIL, 1988 BY THE 1987 AMENDMENT. BY THE VERY SAME AMENDMENT, PAYMENT TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST WAS ALSO CONSIDERED AS DIVIDEND. AS PER SECTION 2(32) THE EXPRESSION 'PERSON WHO HAS A SUBSTANTIAL INTEREST IN THE COMPANY', IN RELATION TO A COMPANY, MEANS A PERSON WHO IS THE BENEFICIAL OWNER OF S HARES, NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND 15 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN 20% OF THE VOTING POWER. 'SUCH SHAREHOLDER' IS THE SHAREHOLDER WHO IS A REGISTERED AND A BENEFICIAL HOLDER OF SHA RES HOLDING 10% VOTING POWER (WHICH IN THIS CASE ARE MR. MUKHTAR SHAMSHUDDIN SHAIKH AND MRS. SHAMSHUN MUKHTAR SHAIKH) AS EACH OF THEM ARE HOLDING MORE THAN 20% SHAREHOLDING IN M/S. MUKHTAR MINERALS PVT. LTD. THE ASSESSEE IS NEITHER A REGISTERED NOR BENEFI CIAL HOLDER OF THE SHARES. 12 . THROUGH THIS SUB - CLAUSE, DEEMING FICTION IS CREATED WHEREBY THE SCOPE AND AMBIT OF THE WORD DIVIDEND HAS BEEN ENLARGED TO BRING WITHIN ITS COVER, LOANS GRANTED BY CLOSELY HELD COMPANIES TO THEIR SHAREHOLDERS. IN ORDER TO H AVE A CHECK ON SIMILAR TRANSACTIONS, THE LEGISLATION WIDENS THE SCOPE OF THE TERM DIVIDEND TO INCLUDE LOANS GRANTED TO SHAREHOLDER BY THE CLOSELY HELD COMPANIES. THE WORD DEEMED HAS NOT BEEN DEFINED ANYWHERE IN THE ACT. NEITHER HAS THE WORD BEEN USED I N SECTION 2(22)(E). DEEMED DIVIDEND IS THEREFORE A LEGAL FICTION CREATED WHEREIN CERTAIN PAYMENTS BY COMPANIES ARE DEEMED TO BE DIVIDENDS. THIS IS A SETTLED LAW IN VIEW OF THE DECISIONS OF APEX COURT IN THE CASE OF STATE OF BOMBAY VS. PANDURANG VINAYAK C HAPHALKAR (1953) SCR 773 THAT LEGAL FICTIONS ARE CREATED ONLY FOR A DEFINITE PURPOSE AND THEY ARE LIMITED TO THE PURPOSE FOR WHICH THEY ARE CREATED AND CANNOT EXTEND BEYOND THEIR LEGITIMATE FIELD. THE LEGAL FICTION IS OF COURSE TO BE CARRIED TO ITS LOGICAL CONCLUSION, BUT THAT MUST BE WITHIN THE FRAMEWORK OF THE PURPOSE FOR WHICH IT IS CREATED. THE COURTS MUST ASSUME THAT SUCH A STATE OF AFFAIRS EXISTS AS REAL, AND SHOULD IMAGINE AS REAL THE CONSEQUENCES AND INCIDENTS WHICH INVARIABLY FLOW THEREFROM, AND GI VE EFFECT TO THEM. FURTHER, A DEEMING PROVISION MAY BE INTENDED TO ENLARGE THE MEANING OF A PARTICULAR WORD OR TO INCLUDE MATTERS WHICH OTHERWISE MAY OR MAY NOT FALL WITHIN THE MAIN PROVISION [G. VISWANATHAN VS. HONBLE SPEAKER, TAMIL NADU LEGISLATIVE ASSE MBLY (1996) 2 SCC 353 (SC)]. THIS PROVISION, THUS, WOULD NECESSARILY BE ACCORDED STRICT INTERPRETATION AND THE 16 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) AMBIT OF THE FICTION WOULD NOT BE PRESSED BEYOND ITS TRUE LIMITS. IT IS NOW A WELL SETTLED LAW THAT THE FICTION IS TO BE CARRIED TO ITS LOGICAL E ND HOWEVER, AT THE SAME TIME, IT CAN ALSO NOT BE EXPANDED SO AS TO INCLUDE THE FACTS WHICH REQUIRE SUBSTANTIAL MODIFICATION AS COMPARED TO THE FACTS TO BE CAPTURED AS PRESCRIBED BY THE LEGISLATURE. 13 . FROM THE READING OF SECTION 2(22)(E), IT IS APPARENT THAT IT HAS THE EFFECT OF BRINGING TO TAX AS DIVIDEND BELOW REFERRED TYPES OF PAYMENTS MADE BY A COMPANY: ANY PAYMENT OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE ) BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER (EXTENDED TO PAYMENT TO CONCERNS IN WHICH SHAREHOLDER HOLDS SUBSTANTIAL INTEREST); ANY PAYMENT ON BEHALF OF A SHAREHOLDER; ANY PAYMENT FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. 1 4 . ANY OF THE ABOVE REFERRED PAYMENTS WOULD BE TAXED UNDER THIS SUB - CLAUSE IF FOLLOWING THREE CONDITIONS ARE FULFILLED: THE COMPANY NOT TO BE THE ONE IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED WITHIN THE MEANING OF SECTION 2(18); IF THE ADVANCE OR LOAN IS MADE AFTER 31 MAY, 19 87 TO A SHAREHOLDER WHO BENEFICIALLY OWNS AT LEAST 10 PER CENT OF THE EQUITY CAPITAL, OR TO A CONCERN IN WHICH HE IS MEMBER / PARTNER AND IS BENEFICIALLY ENTITLED TO NOT LESS THAN 20% OF INCOME OF THE CONCERN. THE COMPANY SHOULD POSSESS ACCUMULATED PROFIT S AT THE TIME IT MAKES THE PAYMENT, THE PAYMENT BEING DEEMED TO BE DIVIDEND ONLY TO THE EXTENT OF SUCH PROFITS. 1 5 . A LOAN OR ADVANCE TO A SHAREHOLDER IS DEEMED AS DIVIDEND, IRRESPECTIVE OF THE PURPOSE OF THE LOAN OR ADVANCE OR PERIOD OF THE LOAN/ADVANCE. UNDER THIS 17 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) SUB - CLAUSE THE DEEMED DIVIDEND IS TO THE EXTENT OF THE ENTIRE ACCUMULATED PROFITS AND NOT MERELY A PORTION OF SUCH PROFITS PROPORTIONATE TO THE ASSESSEES SHAREHOLDING IN THE CAPITAL OF THE COMPANY. IF THE ACCUMULATED PROFITS ARE CAPITALIZED, THEY CANNOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS SUB - CLAUSE. SIMILARLY, WHEN AN AMOUNT LENT HAS ALREADY BEEN CONSIDERED FICTIONALLY TO BE DIVIDEND, THE SAME AMOUNT WHEN REPAID AND RELENT CANNOT AGAIN ATTRACT THE FICTION AND BE ONCE AGAIN DEEMED TO BE DIVIDEND. THEREFORE, IN CONSIDERING THE TAXABILITY OF SUBSEQUENT TRANSACTIONS, THE ACCUMULATED PROFITS SHOULD BE NOTIONALLY REDUCED BY THE AMOUNT OF ALL LOANS AND OTHER BENEFITS WHICH WERE ONCE DEEMED TO BE DIVIDEND. 1 6 . FURTHER, IN ORDER TO ATTRAC T THE APPLICATION OF THIS CLAUSE, THE PERSON SHOULD BE A SHAREHOLDER AND HE SHOULD BENEFICIALLY OWN AT LEAST TEN PER CENT OF THE EQUITY CAPITAL. A SHAREHOLDER MEANS A PERSON IN WHOSE NAME THE SHARES STAND IN THE SHARE REGISTER OF THE COMPANY; THEREFORE, IF A PERSON IS MERELY THE BENEFICIAL OWNER OF SHARES, WITHOUT BEING THE REGISTERED SHAREHOLDER, THIS CLAUSE WOULD NOT APPLY TO HIM. 1 7 . SECTION ALSO PRESCRIBES AN EXCEPTION TO THE ABOVE RULE. SUCH EXCEPTION APPLIES WHERE TWO CUMULATIVE CONDITIONS ARE SATISF IED FIRSTLY, THE LOAN SHOULD HAVE BEEN MADE BY THE COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, AND SECONDLY, MONEY LENDING SHOULD BE A SUBSTANTIAL PART OF THE COMPANYS BUSINESS. 1 8 . FURTHER, THE SECTION ALSO GIVES RELIEF BY PROVIDING THAT ANY SUBSEQUENT DIVIDEND DECLARED BY THE COMPANY AND SET - OFF AGAINST THE LOAN OR ADVANCE, WHICH HAS BEEN DEEMED AS DIVIDEND UNDER SUB - CLAUSE (E), THEN TO THE EXTENT OF 18 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) SUCH SET - OFF, IT WOULD NOT BE AGAIN TREATED AS DIVIDEND. THAT IS TO SAY, IF THE DIVIDEND IS NOT SO SET OFF BUT IS PAID TO THE SHAREHOLDER WHILE THE LOAN REMAINS OUTSTANDING, THE BENEFIT OF SUB - CL (III) CANNOT BE OBTAINED. 19. WE NOTED FROM THE LAST AUDITED BALANCE SHEET OF M/S. MUKHT AR MINERALS PVT. LTD. PRIOR TO A.Y. 2007 - 08 AVAILABLE WAS THE BALANCE SHEET FOR THE YEAR ENDED 31.3.2006 AND AS ON 31.3.2006 THERE WAS NO ACCUMULATED PROFIT IN THE BALANCE SHEET OF THE ASSESSEE COMPANY. RATHER THERE WAS ACCUMULATED LOSS AMOUNTING TO RS.1,52,103/ - . IN VIEW OF THIS, IF ANY ADVANCE HAS BEEN RECEIVED BY THE ASSESSEE FROM M/S. MUKHTAR MINERALS PVT. LTD. DURING THE YEAR A.Y. 2007 - 08, SUCH ADVANCE CANNOT BE REGARDED TO BE THE DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME TAX ACT E VEN WITHOUT CONSIDERING THE SUBMISSION OF THE ASSESSEE THAT THIS ADVANCE WAS MADE DURING THE COURSE OF BUSINESS BETWEEN THE ASSESSEE AND M/S. MUKHTAR MINERALS PVT. LTD. ON THIS BASIS ITSELF, SINCE THERE WAS NO ACCUMULATED PROFIT AS ON 1.4.2006 I.E. P RIOR TO THE ADVANCE / DEPOSIT BEING GIVEN BY M/S. MUKHTAR MINERALS PVT. LTD., ACCORDINGLY THE AMOUNT ADDED IN THE REVISED STATEMENT AS DEEMED DIVIDEND STANDS DELETED. SIMILARLY, DURING THE A.Y. 2008 - 09 ALSO SINCE THE ACCUMULATED PROFIT AS ON 1.4.2007 AS P ER THE LAST AUDITED BALANCE SHEET WERE ONLY RS.1,25,78,627/ - , THIS AMOUNT CAN BE TREATED TO BE DEEMED DIVIDEND IN THE HANDS OF BOTH THE ASSESSEE AND THE ADDITION OVER AND ABOVE THIS AMOUNT GETS DELETED MERELY ON THIS BASIS FOR THE A.Y. 2008 - 09. 20. NOW, COMING TO THE CONTENTION OF THE LD. AR THAT THE ADVANCE WAS GIVEN IN THE NORMAL COURSE OF THE BUSINESS, WE NOTED THAT VIDE LETTER DT. 16.8.2005 THE ASSESSEE BEING THE PROPRIETOR OF M/S. S.M. CONSTRUCTION AND M/S. S.M. EARTH MOVER WHO WERE CARRYING OUT JOB WORK CONTRACT AT DIFFERENT SITES OF M/S. MUKHTAR MINERALS PVT. LTD. BY EMPLOYING SPECIALIZED LABOUR, PLANT AND MACHINERY ON THE BASIS OF WORK ORDER ISSUED BY THE COMPANY HAS SPECIFICALLY 19 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) ASKED FOR A DEPOSIT OF RS. 10 CRORES FOR CARRYING OUT THE WORK ON BE HALF OF THE COMPANY. THE LETTER STATES AS UNDER : TO, THE FINANCE MANAGER, M/S. MUKHTAR MINERALS PRIVATE LIMITED, G - 28, PHOENIX ESTATE, GOGOL, MARGAO, GOA. DEAR SIR, SUB: DEPOSITS. WE THE PROPRIETORS OF M/S. S M CONSTRUCTIONS AND M/S. S M EARTHMOVERS, HAVE BEEN CARRYING OUT JOB WORKS CONTRACTS AT YOUR DIFFERENT SITES BY EMPLOYING SPECIALIZED LABOUR, OUR PLANT AND MACHINERY ON THE BASIS OF WORK ORDERS ISSUED TO US. YOU WILL APPRECIATE, WE HAVE TO INCUR DAY TO DAY EXPENDITURE WHILE OUR BILLS ARE RAISED AT QUARTERLY INTERVALS A ND DELAY IN PAYMENTS HAMPERS THE WORK FOR CARRYING OUT JOBS. YOU ARE ALSO AWARE OF THE FACT THAT THE SPECIALIZED LABOUR IN THIS FIELD ARE SCARCELY AVAILABLE AND NOW THEY ASK FOR ADVANCE PAYMENTS, HENCE WE CAN CARRY OUT T HE WORK ONLY INCASE A SUM OF RS. 10 . 00 CRORE EACH REMAINS AS DEPOSIT WITH US. WE HOPE YOU WILL CONSIDER OUR REQUEST POSITIVELY. 21. IN RESPONSE TO THE SAID LETTER, WE NOTED THAT THE COMPANY AGREED TO GIVE A DEPOSIT OF RS. 8 CRORES TO THE PROPRIETORSHIP C ONCERN OF THE ASSESSEE TO MEET THEIR DAY TO DAY EXPENSES VIDE ITS LETTER DT. 26.8.2005 COPY OF WHICH IS AVAILABLE AT PG. 61. IT IS NOT DENIED THAT THE ASSESSEES PROPRIETORSHIP CONCERNS WERE CARRYING OUT THE JOB WORK ON BEHALF OF M/S. MUKHTAR MINERALS PVT . LTD. RATHER IT IS A CASE WHERE THE ASSESSEE HAS SHOWN INCOME BY WAY OF JOB WORKS FROM M/S. MUKHTAR MINERALS PVT. LTD. AND HAS RAISED THE BILLS. WE NOTED DURING THE A.Y. 2008 - 09 TO THE EXTENT OF RS.2,96,22,602/ - AND FOR THE A.Y. 2007 - 08 TO THE EXTENT OF RS.4,48,55,641/ - EVEN TDS HAS ALSO BEEN DEDUCTED ON THESE RECEIPTS AND THE ASSESSEE HAS BEEN GIVEN CREDIT IN RESPE CT OF THE TDS WHILE MAKING HIS 20 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) ASSESSMENT. THE DEPOSIT SO RECEIVED, IN OUR OPINION, IS IN THE NORMAL COURSE OF BUSINESS AND THE TRANSACTION SO ENTERED INTO BENEFITS BOTH THE ASSESSEE AS WELL AS THE ASSESSEE COMPANY. 22. WE HAVE GONE THROUGH THE VARIOUS CASE LAW AS RELIED BY THE LEARNED AR AND THE ONE PLACED BEFORE US. THE VARIOUS CASE LAWS IN THIS REGARD ARE DISCUSSED AS UNDER : - A. PRADIP KUMAR MALHOTRA V. COMMISSIONER OF INCOME - TAX 338 ITR 538 (CAL). THE PHRASE 'BY WAY OF ADVANCE OR LOAN' APPEARING IN S UB - CLAUSE (E) OF SECTION 2(22) OF THE INCOME - TAX ACT, 1961, MUST BE CONSTRUED TO MEAN THOSE ADVANCES OR LOANS WHICH A SHAREHOLDER ENJOYS SIMPLY ON ACCOUNT OF BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT. OF THE VOTING POWER ; BUT IF SUCH LOAN OR ADVANCE IS GIVEN TO SUCH SHAREHOLDER AS A CONSEQUENCE OF ANY FURTHER CONSIDERATION WHICH IS BENEFICIAL TO THE COMPANY RECEIVED FROM SUCH A SHARE - HOLDER, IN SUCH CASE, SUCH ADVANCE OR LOAN CANNOT BE SAID TO BE DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. THUS, GRATUITOUS LOAN OR ADVANCE GIVEN BY A COMPANY TO THOSE CLASSES OF SHAREHOLDERS WOULD COME WITHIN THE PU RVIEW OF SECTION 2(22) BUT NOT CASES WHERE THE LOAN OR ADVANCE IS GIVEN IN RETURN TO AN ADVANTAGE CONFERRED UPON THE COMPANY BY SUCH SHAREHOLDER. B. SHYAMA CHARAN GUPTA V. COMMISSIONER OF INCOME - TAX 337 ITR 511 (ALL) THE ASSESSEE, THE MANAGING DIRECTOR OF A COMPANY, RECEIVED ADVANCES OF SALARY AND COMMISSION ON PROFITS. THE ASSESSING OFFICER TREATED THEM AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961. THE 21 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) TRIBUNAL HELD THAT THE ASSESSEE WAS NOT ENTITLED TO CLAIM RECEIPT OF ADVANCE AGAIN ST COMMISSION AND DIRECTED THE ASSESSING AUTHORITY TO REDETERMINE THE DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE AFTER ADJUSTING THE SALARY. ON APPEAL TO THE HIGH COURT, IT WAS HELD DISMISSING THE APPEAL, THAT THE ADVANCE TOWARDS SALARY, WHICH WAS DUE TO THE ASSESSEE AND WAS CREDITED TO HIS ACCOUNT EVERY MONTH COULD NOT BE TREATED AS DEEMED DIVIDEND, BUT THE ADVANCE OF COMMISSION ON PROFITS OVER AND ABOVE THAT AMOUNT DRAWN DURING THE COURSE OF THE YEARS RELEVANT TO THE ASSESSMENT YEARS 1992 - 93 AND 1993 - 94 BEFORE THE PROFITS WERE DETERMINED AND ACCRUED TO HIM WOULD BE TREATED AS DEEMED DIVIDEND. THE AMOUNT WAS NOT TREATED AS A SEPARATE ADDITION IN THE HANDS OF THE ASSESSEE. C. COMMISSIONER OF INCOME - TAX V. CREATIVE DYEING AND PRINTING P. LTD. 318 ITR 476 (D EL) THE ASSESSEE - COMPANY WAS ENGAGED IN THE BUSINESS OF DYEING AND PRINTING OF CLOTH AND WAS AN ANCILLARY UNIT OF P. BOTH THE ASSESSEE - COMPANY AND P HAD COMMON SHAREHOLDERS AND DIRECTORS, TWO OF WHOM HELD MORE THAN 20 PER CENT. OF THE SHARES IN BOTH COMPAN IES AND P HELD 50 PER CENT. OF THE SHARES IN THE ASSESSEE - COMPANY. P, IN ORDER TO INCREASE ITS EXPORT BUSINESS AND TO COMPETE WITH THE INTERNATIONAL STANDARDS IN GARMENTS EXPORTS PROPOSED MODERNIZATION AND EXPANSION OF THE PLANT AND MACHINERY OF THE ASSESS EE - COMPANY. THE ASSESSEE - COMPANY BEING UNABLE TO INVEST SUCH A LARGE AMOUNT, P AGREED TO INVEST 50 PER CENT OF THE PROJECT COST, THE REST OF THE 50 PER CENT TO BE ARRANGED BY THE SHAREHOLDERS/DIRECTORS OF THE COMPANY. THE FUNDS ADVANCED WERE TO BE ADJUSTE D AGAINST THE DUES PAYABLE BY P TO THE ASSESSEE - COMPANY IN SUBSEQUENT YEARS FOR THE JOB WORK OF PRINTING AND DYEING TO BE DONE BY THE ASSESSEE FOR P. THE ASSESSING OFFICER HELD THAT THE AMOUNT PAID TO THE ASSESSEE - COMPANY WAS A DEEMED DIVIDEND UNDER SECTIO N 2(22)(E) OF THE INCOME - TAX ACT, 1961. THE TRIBUNAL HELD THAT IT WAS AN ADVANCE FOR A 22 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) COMMERCIAL PURPOSE TO THE ASSESSEE - COMPANY BY ITS SISTER CONCERN P AND NOT A DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. ON APPEAL IT WAS HELD DISMISSING THE AP PEAL, THAT THE AMOUNTS ADVANCED FOR BUSINESS TRANSACTION BETWEEN THE ASSESSEE - COMPANY AND P DID NOT FALL WITHIN THE DEFINITION OF DEEMED DIVIDEND UNDER SECTION 2(22)(E). D. COMMISSIONER OF INCOME - TAX V. RAJ KUMAR 318 ITR 462 (DEL) SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961, SHOWS THAT A PAYMENT WOULD ACQUIRE THE ATTRIBUTES OF A DIVIDEND WITHIN THE MEANING OF THE PROVISION IF THE FOLLOWING CONDITIONS ARE FULFILLED: (I) THE COMPANY MAKING THE PAYMENT IS ONE IN WHICH THE PUBLIC ARE N OT SUBSTANTIALLY INTERESTED ; (II) MONEY SHOULD BE PAID BY THE COMPANY TO A SHAREHOLDER HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER OF THE COMPANY. IT WOULD MAKE NO DIFFERENCE IF THE PAYMENT WAS OUT OF THE ASSETS OF THE COMPANY OR OTHERWISE; (I II) 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 A ND IN WHICH HE IS SUBSTANTIALLY INTERESTED; AND (IV) THE LIMITING FACTOR BEING THAT THESE PAYMENTS MUST BE TO THE EXTENT OF ACCUMULATED PROFITS, POSSESSED BY SUCH A COMPANY. THE IMMEDIATE PRECURSOR TO SECTION 2(22)(E) IS FOUND IN SECTION 2(6A) OF THE INDIA N INCOME - TAX ACT, 1922. THE PURPOSE OF INSERTION OF SUB - 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. THEREFORE, SUB - CLAUSE (E) OF SECTION 2(22) OF THE 1961 ACT, WHICH IS IN PARI MATERIA WITH SUB - 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 23 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) 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. THE WORD 'ADVANCE' HAS TO BE READ IN CONJUNCTION WITH THE WORD 'LOAN'. USUALLY ATTRIBUTES OF A LOAN ARE THAT IT INVOLVES THE POSITIV E ACT OF LENDING COUPLED WITH ACCEPTANCE BY THE OTHER SIDE OF THE MONEY AS LOAN : IT GENERALLY CARRIES 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 'A DVANCE' 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'. TH E RULE OF CONSTRUCTION WHICH ANSWERS THIS CONUNDRUM IS NOSCITUR A SOCIIS. THE RULE HAS BEEN EXPLAINED BOTH BY THE PRIVY COUNCIL IN THE CASE OF ANGUS ROBERTSON V. GEORGE DAY [1879] 5 AC 63 BY OBSERVING 'IT IS LEGITIMATE RULE OF CONSTRUCTION TO CONSTRUE WOR DS IN AN ACT OF PARLIAMENT WITH REFERENCE TO WORDS FOUND IN IMMEDIATE CONNECTION WITH THEM' AND THE SUPREME COURT IN THE CASE OF ROHIT PULP AND PAPER MILLS LTD. V. COLLECTOR OF CENTRAL EXCISE, AIR 1991 SC 754 AND STATE OF BOMBAY V. HOSPITAL MAZDOOR SABHA , AIR 1960 SC 610. THE PRINCIPLES WITH REGARD TO THE APPLICABILITY OF THE RULE OF CONSTRUCTION ARE BRIEFLY 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 NA RROWER OR WIDER MEANING ; (II) ARE THE WORDS OR TERMS USED FOUND IN A GROUP TOTALLY 'DISSIMILAR' OR IS THERE A 'COMMON THREAD' RUNNING THROUGH THEM ; (III) THE PURPOSE BEHIND INSERTING OF THE TERM. IN THE INSTANT CASE (I) THE TERM 'ADVANCE' HAS UNDOUBTEDLY MORE THAN ONE MEANING DEPENDING ON THE CONTEXT IN WHICH IT IS USED; (II) BOTH THE TERMS, THAT IS, 'ADVANCE' OR 'LOAN' ARE RELATED TO THE ACCUMULATED PROFITS OF THE COMPANY; AND (III) THE PURPOSE BEHIND THE 24 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) INSERTION OF THE TERM 'ADVANCE' WAS TO BRING WITH IN THE TAX NET PAYMENTS MADE IN THE GUISE OF LOAN TO SHAREHOLDERS BY COMPANIES IN WHICH THEY HAVE A SUBSTANTIAL INTEREST SO AS TO AVOID PAYMENT OF TAX BY THE SHAREHOLDERS. THE WORD 'ADVANCE' WHICH APPEARS IN THE COMPANY OF THE WORD 'LOAN' COULD ONLY MEAN S UCH ADVANCE WHICH CARRIES WITH IT AN OBLIGATION OF REPAYMENT. TRADE ADVANCES WHICH ARE 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) OF THE ACT. E. COMMISSION ER OF INCOME - TAX V. AMBASSADOR TRAVELS P. LTD. 318 ITR 376 (DEL) THE ASSESSEE WAS ENGAGED IN THE TRAVEL AGENCY BUSINESS. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1998 - 99, THE ASSESSEE ENTERED INTO BUSINESS TRANSACTIONS WITH TWO COMPANIES AND H AD FINANCIAL TRANSACTIONS WITH THEM. THE ASSESSING OFFICER ON THE BASIS OF THE SHAREHOLDING PATTERN CONCLUDED THAT THE FINANCIAL TRANSACTIONS WOULD FALL IN THE CATEGORY OF DEEMED DIVIDEND. THE COMMISSIONER OF INCOME - TAX (APPEALS) CONFIRMED THE ORDER PASSED BY THE ASSESSING OFFICER. THE TRIBUNAL HELD THAT THE TRANSACTIONS DID NOT REPRESENT LOANS OR ADVANCES WITHIN THE MEANING OF THE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961. ON APPEAL , IT WAS HELD DISMISSING THE APPEAL, THAT THE ASSESSEE WA S INVOLVED IN THE BOOKING OF RESORTS FOR THE CUSTOMERS OF THESE COMPANIES AND ENTERED INTO NORMAL BUSINESS TRANSACTIONS AS A PART OF ITS DAY - TO - DAY BUSINESS ACTIVITIES. THE FINANCIAL TRANSACTIONS IN ANY CIRCUMSTANCES COULD NOT BE TREATED AS LOANS OR ADVANC ES. HENCE, SECTION 2(22)(E) WAS NOT APPLICABLE. F) CIT VS. ANKITECH PVT. LTD. IN THIS CASE, THE ASSESSEE RECEIVED ADVANCE OF CERTAIN AMOUNT BY WAY OF BOOK ENTRY FROM JGPL AND THE SHAREHOLDERS WERE HAVING SUBSTANTIAL INTEREST 25 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) IN THE ASSESSEE COMPANY HAVING MORE THAN 10% OF THE VOTING POWER IN JGPL. THE AO HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE FROM JGPL CONSTITUTED ADVANCE AND LOANS AND THEREFORE ARE DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME TAX ACT. CIT(A) TOOK THE VIEW THAT SEC. 2(22)(E) OF THE INCOME TAX ACT WOULD NOT BE ATTRACTED AS THE ASSESSEE WAS NOT SHAREHOLDER IN JGPL. THE TRIBUNAL CONFIRMED THE VIEW OF CIT(A) AND ALSO HELD THAT SUCH DIVIDEND WOULD HAVE TO BE TAXED, IF AT ALL, IN THE HANDS OF THE SHAREHOLDE RS WHO HAD SUBSTANTIAL INTEREST IN THE ASSESSEE COMPANY. WHEN THE MATTER WENT BEFORE THE HON'BLE HIGH COURT, THE HON'BLE HIGH COURT TOOK THE VIEW THAT THE MONEY WHICH WAS PAID WAS NOT IN THE NATURE OF LOANS AND ADVANCES SIMPLICITOR BUT THE AMOUNTS WERE ADVANCES FOR BUSINESS TRANSACTION. WE ALSO NOTED THAT THE BOMBAY HIGH COURT IN THE CASE OF SAT PRAKASH GOYAL VS ITO, MUMBAI 2010 - TIOL - 633 - ITAT - MUM TOOK THE VIEW THAT THE PAYMENT MADE BY A COMPANY THROUGH A RUNNING ACCOUNT IN DISCHARGE OF ITS EXISTING DEBT S OR AGAINST PURCHASES OR FOR AVAILING SERVICES, SUCH PAYMENTS MADE IN THE ORDINARY COURSE OF BUSINESS CARRIED ON BY BOTH THE PARTIES COULD NOT BE TREATED AS DEEMED DIVIDEND FOR THE PURPOSE OF SECTION 2(22)(E) OF THE ACT. IT FURTHER OBSERVED THAT DEEMING PROVISIONS OF LAW CONTAINED IN SECTION 2(22)(E) APPLY ONLY IN SUCH CASES WHERE THE COMPANY PAYS TO A RELATED PERSON AN AMOUNT AS ADVANCE OR A LOAN AS SUCH AND NOT IN ANY OTHER CONTEXT. THE LAW DOES NOT PROHIBIT BUSINESS TRANSACTIONS BETWEEN RELATED CONCER NS AND THEREFORE PAYMENT MADE IN THE ORDINARY COURSE OF BUSINESS CANNOT BE TREATED AS LOANS AND ADVANCES. WE ALSO NOTED THAT THE COCHIN BENCH OF THIS TRIBUNAL IN ACIT VS. SMT. LAKSHMIKUTTY NARAYANAN 105 ITD 558 ( COCHIN ) HELD THAT ADVANCE TO ASSESSEE SHA REHOLDER DIRECTOR HAVING BEEN MADE IN THE NORMAL COURSE OF BUSINESS TRANSACTION BETWEEN ASSESSEE AND COMPANY, SAME COULD NOT BE TREATED AS DEEMED DIVIDEND UNDER S. 2(22)(E). IN THE CASE OF DCIT VS. LAKRA BROTHERS 106 TTJ (CHD) 250, IT WAS HELD THAT ADVANCE S MADE DURING THE ORDINARY COURSE OF 26 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) BUSINESS FOR BUSINESS EXPEDIENCIES DO NOT CONSTITUTE LOAN FOR PURPOSES OF S. 2(22)(E) AND CANNOT BE TAXED AS DEEMED DIVIDEND. WE ALSO NOTED THAT IN THE CASE OF SUNIL CHOPRA VS. DCIT, 26 SOT 95 (DEL), IT WAS HELD THAT IN VIEW OF EXPLANATION OF ASSESSEE, THE DIRECTOR OF COMPANY, THAT THE AMOUNT OF RS.30 LAKHS WAS HANDED OVER TO HIM UNDER BOARD RESOLUTION AS AN IMPREST AMOUNT TO ENTER INTO A TRANSACTION FOR BENEFIT OF COMPANY WHICH WAS RETURNED WITHIN A WEEK WHEN THE TRAN SACTION WAS NOT MATERIALISED, THE SAME COULD NOT BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. 23. THE ASSESSEE HAS TAKEN THE CONTENTION BEFORE THE AUTHORITIES BELOW THAT THE AMOUNT WAS TAKEN AS A DEPOSIT FROM M/S. MUKHTAR MINERALS PVT. LTD. IN THE ORDINARY COURSE OF BUSINESS. THIS FACT HAS NOT BEEN DENIED BY THE AUTHORITIES BELOW. EVEN THE LD. DR WHO APPEARED BEFORE US ALSO DID NOT DENY THIS FACT. EVEN THE EVIDENCE FILED BEFORE US CLEARLY PROVES THAT M/S. MUKHTAR MINERALS PVT. LTD. H AS GIVEN A DEPOSIT TO THE ASSESSEE DURING THE COURSE OF BUSINESS. ON THE BASIS OF THE AFORESAID DECISIONS, THE BUSINESS TRANSACTION CANNOT BE REGARDED, IN OUR OPINION, TO BE A DEEMED DIVIDEND. 24. WE ALSO NOTED ANOTHER ANGLE THAT IN THIS CASE THE AMOUN T WAS GIVEN AS DEPOSIT. THE DEPOSIT, IN OUR OPINION, IS REGARDED TO BE DIFFERENT FROM LOANS AND ADVANCES. THE LEGISLATURE SEEMS TO HAVE MADE A CONSCIOUS DISTINCTION BETWEEN THE EXPRESSION LOAN AND DEPOSIT. THE GENERAL LAW ALSO MAKES CLEAR DISTINCT ION BETWEEN THE TWO E.G. UNDER THE LIMITATION ACT, DIFFERENT LIMITS HAVE BEEN SET OUT FOR INSTITUTING SUIT FOR RECOVERY OF LOANS AND DEPOSITS. THE CHAMBERS 20 TH CENTURY DICTIONARY , NEW EDITION 1983 , DEFINES A DEPOSIT AS THAT WHICH IS DEPOSITED OR PUT D OWN; A SUM OF MONEY PAID TO SECURE AN ARTICLE, SERVICE, ETC., WHILE IT DEFINES LOAN AS ANYTHING LENT, ESPECIALLY MONEY AT INTEREST; THE ACT OF LENDING; THE CONDITION OF BEING LENT; AN ARRANGEMENT FOR LENDING. THUS, THERE IS A MARKED DISTINCTION BETWEE N A LOAN AND A DEPOSIT. THIS 27 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) DISTINCTION BETWEEN THE TWO EXPRESSIONS HAS BEEN BROUGHT OUT IN A COMMENTARY BY CHATURVEDI & PITHISARIA ON PAGE 5735 (VOL. V, 4TH EDN.) IN FOLLOWING WORDS: DEPOSIT AND LOAN THESE TWO ARE NOT IDENTICAL IN MEANING IT IS TRUE THAT BOTH IN THE CASE OF A LOAN AND IN THE CASE OF A DEPOSIT THERE IS A RELATIONSHIP OF A DEBTOR AND A CREDITOR BETWEEN THE PARTY GIVING MONEY AND THE PARTY RECEIVING MONEY. BUT IN THE CASE OF A DEPOSIT, THE DELIVERY OF MONEY IS USUALLY AT THE INSTAN CE OF THE GIVER AND IT IS FOR THE BENEFIT OF THE PERSON WHO DEPOSITS THE MONEY THE BENEFIT NORMALLY BEING EARNING OF INTEREST FROM A PARTY WHO CUSTOMARILY ACCEPTS DEPOSITS. DEPOSITS COULD ALSO BE FOR SAFE - KEEPING OR AS A SECURITY FOR THE PERFORMANCE OF AN OBLIGATION UNDERTAKEN BY THE DEPOSITOR. IN THE CASE OF A LOAN, HOWEVER, IT IS THE BORROWER AT WHOSE INSTANCE AND FOR WHOSE NEEDS THE MONEY IS ADVANCED. THE BORROWING IS PRIMARILY FOR THE BENEFIT OF THE BORROWER ALTHOUGH THE PERSON WHO LENDS THE MONEY M AY ALSO STAND TO GAIN THEREBY BY EARNING INTEREST ON THE AMOUNT LENT. ORDINARILY, THOUGH NOT ALWAYS, IN THE CASE OF A DEPOSIT, IT IS THE DEPOSITOR WHO IS THE PRIME MOVER. WHILE IN THE CASE OF A LOAN, IT IS THE BORROWER WHO IS THE PRIME MOVER. THE OTHER AN D MORE IMPORTANT DISTINCTION IS IN RELATION TO THE OBLIGATION TO RETURN THE MONEY SO RECEIVED. IN THE CASE OF A DEPOSIT WHICH IS PAYABLE ON DEMAND, THE DEPOSIT WOULD BECOME PAYABLE WHEN A DEMAND IS MADE. IN THE CASE OF A LOAN, HOWEVER, THE OBLIGATION TO REPAY THE AMOUNT ARISES IMMEDIATELY ON RECEIPT OF THE LOAN. IT IS POSSIBLE THAT IN CASE OF DEPOSITS WHICH ARE FOR A FIXED PERIOD OR LOANS WHICH ARE FOR A FIXED PERIOD, THE POINT OF REPAYMENT MAY ARISE IN A DIFFERENT MANNER. BUT BY AND LARGE, THE TRANSACTIO N OF A LOAN AND THE TRANSACTION OF MAKING A DEPOSIT ARE NOT ALWAYS CONSIDERED IDENTICAL. LOAN AND DEPOSIT ARE NOT IDENTICAL IN MEANING AND CANNOT ALWAYS BE INTERCHANGED. SOME LOANS MAY BE DEPOSITS AND SOME DEPOSITS MAY BE LOANS. BUT ALL LOANS ARE NOT DEPOSITS OR VICE VERSA. THE DIVIDING LINE BETWEEN A LOAN OR DEPOSIT IS UNDOUBTEDLY THIN: THE TWO, HOWEVER, ARE NOT SYNONYMOUS PENNWALT INDIA LTD. V. REGISTRAR OF COMPANIES [1987] 62 COMP, CAS. 112 (BOM); ALSO SEE, DURGA PRASAD MANDLIA V. REGISTRAR OF COMPANIES [1987] 61 COMP. CAS. 479 (BOM.). 25. IN VIEW OF THE AFORESAID DISCUSSION AND THE DICTUM OF LAW LAID DOWN IN VARIOUS JUDICIAL PRONOUNCEMENTS AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE AMOUNT RECEIVED BY THE ASSESSEE FROM M/S. MUKHTAR MINERALS PVT. LTD. AS DEPOSIT COUPLED WITH CERTAIN OBLI GATIONS TO BE COMPLIED WITH CANNOT BE REGARDED TO BE PAYMENT BY THE ASSESSEE COMPANY AS DEEMED DIVIDEND U/S. 2(22)(E) OF 28 ITA NO.18 TO 21/PNJ/2013 (A.Y:2007 - 08 & 2008 - 09) THE INCOME TAX ACT. WE, ACCORDINGLY, SET ASIDE THE ORDER OF CIT(A) AND DIRECT THE AO TO DELETE THE AMOUNT OF DEEMED D IVIDEND ADDED BY THE ASSESSEE MISTAKENLY IN THE REVISED COMPUTATION. 26. IN THE RESULT, ALL THE FOUR APPEALS FILED BY THE ASSESSE ARE ALLOWED. 27. ORDER PRONOU NCED IN THE OPEN COURT ON 14 /06/2013. SD/ - (D.T.GARASIA) JUDICIAL MEMBER SD/ - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI / GOA DATED : 14 / 0 6/ 2013 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT CONCERNED (4) CIT (A) (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER , SR. PRIVATE SECRETARY, ITAT, PANAJI, GOA