M/s Bagmane Leasing and Financing Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 443/BANG/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 8699 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-08-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 05-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SWATHI S PATIL CITIIDR
• Assessee Lawyers: B P SACHIN KUMAR
• Keywords: Depreciation; Search and seizure; Document seized; Deemed to accrue or arise in india; Avoidance of tax; Deemed dividend; Block assessment; Commercial expediency; Documents seized
• Section: 143(3); 153A; 234B; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NOS. 442 TO 444/BANG/2010 ASSESSMENT YEARS : 2004-05 TO 2006-07 M/S. BAGMANE LEASING & FINANCE PVT. LTD., A BLOCK, 8 TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE 560 093. : APPELLANT VS. THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(3), BANGALORE. : RESPONDENT APPELLANT BY : SHRI B.P. SACHIN KUMAR, C.A. RESPONDENT BY : SMT. SWATHI S. PATIL, CIT-II(DR) O R D E R PER BENCH THESE APPEALS OF THE ASSESSEE COMPANY ARE DIRECTED AGAINST THE CONSOLIDATED ORDER OF THE LD. CIT (A)-VI, BANGALORE , IN ITA NOS: 269, 270 & 253 / ACIT CC 2(3)/ CIT (A)-VI/ 2008-09 DATED: 2.2.2010 FOR THE ASSESSMENT YEARS 2004-05, 2005-06 AND 2006-07 RESPECTIVELY. 2. THE ASSESSEE COMPANY [THE ASSESSEE IN SHORT] HAS RAISED IDENTICAL FIVE GROUNDS IN A NARRATIVE MANNER FOR AL L THE AYS UNDER CHALLENGE. ITA NOS.442 TO 444/B/10 PAGE 2 OF 33 FOR THE SAKE OF PROPER APPRECIATION OF FACTS AND CL ARITY, THEY ARE REFORMULATED IN A CONCISE MANNER AS UNDER: (I) THE CIT(A) ERRED IN UPHOLDING THE STAND OF THE AO I N INITIATING THE PROCEEDING U/S 153C OF THE ACT; (II) THE CIT(A) ERRED IN SUSTAINING THE APPLICABILITY OF THE PROVISIONS OF S.2(22)(E) OF THE ACT; - THE CIT(A) OUGHT TO HAVE APPRECIATED THE TRANSACTIO N BETWEEN THE ASSESSEE AND BAGMANE DEVELOPERS (P) LTD WERE IN THE COURSE OF BUSINESS ACTIVITIES AND THAT THE AMOUNT RECEIVED WA S NOT IN THE NATURE OF LOANS AND ADVANCES; (III) THE CIT(A) ERRED IN DIRECTING THE AO TO COMPUTE THE CURRENT YEARS PROFIT; & (IV) THE CIT(A) ERRED IN UPHOLDING THE LEVY OF INTEREST U/S 234B OF THE ACT. 3. AS POINTED OUT, THE ISSUES RAISED IN THESE APPE ALS WERE SIMILAR AND RATHER INTER-LINKED; THEY WERE HEARD, C ONSIDERED AND DISPOSED OFF IN THIS COMMON ORDER FOR THE SAKE OF CONVENIENC E AND CLARITY. 4. WITH REGARD TO THE CONCLUSION OF ASSESSMENTS U/ S 143(3) R.W.S. 153C OF THE ACT FOR THE ALL THE AYS UNDER DI SPUTE WHICH WAS SUSTAINED BY THE LD. CIT (A), IT WAS CONTENDED BY T HE LD. A R THAT THE PROVISIONS OF S.153C OF THE ACT WERE NOT ATTRACTED IN THE ASSESSEES CASE SINCE NOTHING INCRIMINATING DOCUMENTS RELATING TO T HE ASSESSEE HAVE BEEN FOUND DURING THE COURSE OF SEARCH, THAT ONLY THE RE GULAR BOOKS OF ACCOUNTS FOUND WERE SEIZED DURING THE COURSE OF SEARCH AND, THEREFORE, THE AO OUGHT NOT TO HAVE PROCEEDED TO INVOKE THE PROVISION S OF S.153C OF THE ACT AND THAT THE LD. CIT (A) HAD ALSO GROSSLY ERRED IN OUT-RIGHTLY REJECTING THE CASE LAWS ON WHICH THE ASSESSEE HAD PLACED STRONG R ELIANCE. IT WAS, ITA NOS.442 TO 444/B/10 PAGE 3 OF 33 THEREFORE, PLEADED THAT THE ORDERS OF THE AO WERE O PPOSED TO LAW WHICH REQUIRE TO BE SUMMARILY ANNULLED. 4.1. THE LD. D R PRESENT DURING THE COURSE OF HEARI NG WAS VEHEMENT IN HER URGE THAT THE AO WAS WITHIN HIS DOMAIN TO INVOK E THE PROVISIONS OF S.153C OF THE ACT WHICH HAS BEEN JUDICIOUSLY RATIFI ED BY THE LD. CIT (A) AND, THUS, IT WAS SUBMITTED, THE ASSESSEE SHOULD HA VE NO GRIEVANCE ON THIS POINT. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND ALSO CRITICALLY PERUSED THE RELEVANT RECORDS. WITH DUE RESPECTS, WE HAVE PERUSED THE RULING OF THE HONBLE APEX COURT IN THE CASE OF MANISH MAHESHWARI V. ACIT & ANR REPORTED IN (2007) 289 ITR 341 (SC) WHEREIN THE ISSUE BEFORE THE HONBLE COURT WAS THAT OF THE BLOCK ASSESSMENT (SEARCH AND SEIZURE) PROCEEDINGS U/S 158BD OF THE A CT. 5.1. IN THE INSTANT CASE, THE ISSUE, IN BRIEF, WAS THAT THERE WAS AN ACTION U/S 132 OF THE ACT IN THE CASE OF BAGMANE DEVELOPER S PVT. LTD. [BDPL] ON 14.9.2006 WHEREIN CERTAIN DOCUMENTS BELONGING TO IT S GROUPS WERE UNEARTHED. CONSEQUENTLY, A NOTICE U/S 153A R.W.S.1 53C OF THE ACT WAS ISSUED BY INVOKING THE PROVISIONS OF S.153C OF THE ACT. THIS ACTION OF THE AO HAS BEEN HOTLY CONTESTED BY THE ASSESSEE. 5.2. WE SHALL HAVE A GLANCE OF WHAT SECTION 153C OF THE ACT PRECISELY SAYS: 153C (1) NOTWITHSTANDING ANYTHING CONTAINED IN SEC TION 139, SECTION 147, SECTION 148, SECTION 149, SECTION 151 AND SECTION 1 53, WHERE THE ASSESSING OFFICER IS SATISFIED THAT ANY MONEY, BULLION, JEWEL LERY OR OTHER VALUABLE ARTICLE OR THING OR BOOKS OF ACCOUNT OR DOCUMENTS S EIZED OR REQUISITIONED ITA NOS.442 TO 444/B/10 PAGE 4 OF 33 BELONGS OR BELONG TO A PERSON OTHER THAN THE PERSON REFERRED TO IN SECTION 153A, THEN THE BOOKS OF ACCOUNT OR DOCUMENTS OR ASS ETS SEIZED OR REQUISITIONED SHALL BE HANDED OVER TO THE ASSESSING OFFICER HAVING JURISDICTION OVER SUCH OTHER PERSON AND THAT ASSESS ING OFFICER SHALL PROCEED AGAINST EACH SUCH OTHER PERSON AND ISSUE SUCH OTHER PERSON NOTICE AND ASSESS OR REASSESS INCOME OF SUCH OTHER PERSON IN A CCORDANCE WITH THE PROVISIONS OF SECTION 153A. 5.3. AS RIGHTLY HIGHLIGHTED BY THE LD. CIT (A), TH E REQUIREMENT OF HANDING OVER THE BOOKS OF ACCOUNT TO THE AO HAVING JURISDICTION OVER THE OTHER PERSON DID NOT ARISE IN THE CASE ON HAND FOR A SIMPLE REASON THAT THE SAME AO WHO WAS HAVING JURISDICTION OVER THE PERSON SEARCHED U/S 132 OF THE ACT I.E., BAGMANE DEVELOPERS PVT. LTD. AND ALSO THE OTHER PERSON I.E., THE ASSESSEE AND, AS SUCH, THERE WAS NO NEED OF HA NDING OVER THE BOOKS OF ACCOUNTS/DOCUMENTS SEIZED TO ANY OTHER AO. THE OTHER ARGUMENT OF THE ASSESSEE THAT NO INCRIMINATING DOCUMENTS WERE UNEAR THED PERTAINING TO THE ASSESSEE DURING THE SEARCH EXCEPT REGULAR BOOKS OF ACCOUNT AND, THUS, THE INITIATION OF THE PROCEEDINGS U/S 153C OF THE ACT I LLEGAL ETC DOESNT HOLD WATER SINCE THE PROVISIONS OF S.153C (1) OF THE ACT MAKE IT EXPLICITLY CLEAR THAT WHERE THE ASSESSING OFFICER IS SATISFIED THAT ANY M ONEY, BULLION, JEWELLERY OR OTHER VALUABLE ARTICLE OR THING OR BOOKS OF ACCOUNT OR DOCUMENTS SEIZED OR REQUISITIONED BELONGS OR BELONG TO A PERSON OTHER THAN THE PERSON REFERRED TO IN SECTION 153A. 5.4. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERE D VIEW THAT THE AO WAS WELL WITHIN HIS REALM TO RESORT TO ISSUE OF NOTICE U/S 153C OF THE ACT AND, ACCORDINGLY, THE ASSESSEES OBJECTION IS NOT S USTAINABLE FOR ALL THE AYS UNDER DISPUTE AND, ACCORDINGLY, THIS GROUND OF THE ASSESSEE FOR ALL THE AYS UNDER DISPUTE IS DISMISSED. ITA NOS.442 TO 444/B/10 PAGE 5 OF 33 6. WITH REGARD TO THE APPLICABILITY OF S.2 (22)(E) OF THE ACT, THE AO, AFTER DUE CONSIDERATION OF VARIOUS CONTENTIONS PUT-FORTH BY THE ASSESSEE AND FOR THE REASONS SET-OUT IN HIS IMPUGNED ORDERS COUPLED WITH A NUMBER OF JUDICIAL PRONOUNCEMENTS, HAD OBSERVED THUS 3.10. THE PROVISIONS OF SEC.2 (22)(E) ARE SQUARELY APPLICABLE TO ANY LOANS AND ADVANCES. THE ONLY EXCEPTION BEING ADVANCES M ADE IN COURSE OF BUSINESS BY A COMPANY SUBSTANTIALLY ENGAGED IN MONE Y LENDING. THIS NOT BEING THE CASE THE PAYMENTS MADE WOULD FALL IN THE DEEMING PROVISIONS OF S.2(22)(E). THE PROVISIONS OF S.2 (22)(E) ARE FOR THE PURPOSE OF COUNTERING AVOIDANCE OF TAX BY CLOSELY HELD COMPANIES EVEN WHE N THE AMOUNTS ARE EITHER GIVEN AS AN ADVANCE OR LOANS TO THE SHAREHOL DERS. THERE IS NO EXCEPTIONAL CLAUSE STATING THAT THE TRADE ADVANCE O R LOANS WILL NOT SUFFER DEEMED DIVIDEND. THE PROVISIONS COVER ALL KINDS OF LOANS AND ADVANCES. WHAT HAS BEEN GIVEN TO THE ASSESSEE IS ONLY COVERED BY WAY OF AN ADVANCE OR LOAN AND FOR WHICH THE BENEFIT HAS ALSO BEEN ENJOYE D BY THE ASSESSEE. SECTION 2 (22) (E) DOES NOT DISTINGUISH FINANCIAL L OANS AND ADVANCES AND NON-FINANCIAL LOANS AND ADVANCES MADE TO SHAREHOLDE RS. 3.11. FROM THE DISCUSSIONS ABOVE, IT IS CLEAR THAT THE LOANS RECEIVED BY THE ASSESSEE COMPANY FROM M/S. BAGMANE DEVELOPERS PVT. LTD COMES UNDER THE PURVIEW OF SECTION 2(22)(E) OF THE INCOME-TAX ACT. THEREFORE, THE LOANS RECEIVED BY THE ASSESSEE DURING THE RELEVANT PERIOD FROM M/S. BAGMANE DEVELOPERS PVT. LTD. IS TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961 AND TAXED ACCORDINGLY. 6.1. THE AO, FOR SIMILAR REASONS, ASSESSED THE UNS ECURED LOANS GIVEN BY [BDPL] TO THE ASSESSEE TO THE EXTENT OF RS .5,55,48,334/-, RS.2,07,10,359/- AND RS.1,75,81,391/- RESPECTIVELY FOR THE AYS UNDER CHALLENGE. 6.2. TAKING INTO ACCOUNT THE REASONING OF THE AO I N HIS IMPUGNED ORDERS, THE FORCEFUL CONTENTIONS PUT FORTH BY THE L D. A R DURING THE COURSE OF APPELLATE PROCEEDINGS AND ALSO VARIOUS JUDICIAL PRO NOUNCEMENTS ON THE ISSUE, THE LD. CIT (A) WAS OF THE VIEW THAT 2.2.3.(IV)(ON PAGE 12).. ITA NOS.442 TO 444/B/10 PAGE 6 OF 33 FROM THE FACTS BROUGHT ON RECORD BY THE ASSESSING O FFICER AND THE JUDICIAL PRONOUNCEMENTS ON WHICH THE RELIANCE HAS BEEN PLACE D BY THE ASSESSING OFFICER, IT IS CLEAR THAT THE PROVISIONS UNDER SECT ION 2 (22)(E) ARE CLEARLY APPLICABLE TO THE CASE OF THE APPELLANT IN RESPECT OF THE LOAN AND ADVANCES TAKEN BY THE APPELLANT FROM BDPL. ACCORDINGLY, THE ASSESSING OFFICER WAS RIGHT IN INVOKING THE PROVISIONS OF SECTION 2(22)(E ) OF THE INCOME-TAX ACT FOR THE ABOVE ASSESSMENT YEARS. 7. DURING THE COURSE OF THE HEARING BEFORE US, THE LD. A R CAME UP WITH A STOUT REBUTTAL OF THE AUTHORITIES STAND OF INVOKING THE PROVISIONS OF S.2 (22)(E) OF THE ACT ON THE GROUNDS THAT - (I) THE AMOUNTS PAID BY BDPL IN THE NORMAL COURSE OF BU SINESS WERE NEITHER LOANS NOR ADVANCES. BDPL ENGAGED IN DE VELOPMENT OF TECH. PARK WAS LOOKING FOR PROSPECTIVE TENANTS IN THE STATURE WHO COULD COMPLY WITH STPI FORMATION. MOTOROLA WAS LOOKING FOR SPACE WITH SUITABLE FIT-OUTS AT ITS TERMS IN T ECH. PARK. TO MEET THE REQUIREMENTS OF THE GIANT TENANT - MOTOROL A, BDPL WORKED OUT A FORMULA TO REDUCE THE FIT-OUT COST B Y FLOATING A LEASING COMPANY WHICH WOULD FACILITATE THE BDPL TO AVAIL THE BENEFIT OF CUSTOMS AND EXCISE DUTY THEREBY REDUCING THE COST OF FIT-OUTS. DUE TO SUCH BUSINESS EXIGENCIES, BDPL HA D GIVEN MONEY TO THE ASSESSEE TO MAKE INVESTMENT WHICH WAS TREATED AS SECURITY DEPOSIT IN THE HANDS OF THE ASSESSEE WHICH SUBSEQUENTLY ENABLED BDPL TO STRIKE A DEAL WITH MOTOROLA. THE DE POSITS PAID BY BDPL FOR ITS BENEFIT AND BUSINESS EXIGENCY ONLY FUND NOT TO INDIVIDUAL BENEFITS OF SHARE-HOLDER AND, THUS, THE QUESTION OF DEEMED DIVIDEND PHILOSOPHY HAS NO APPLICATION; (II) THE AMOUNTS SO FUNDED BY BDPL WERE UTILIZED FOR ACQ UIRING THE FIT-OUTS AS PRESCRIBED BY MOTOROLA SUCH AS (I) PLAN T AND MACHINERY RS.12.78 CRORES; (II) FURNITURE AND FIXTU RES RS.11.09 CRORES AND (III) OFFICE EQUIPMENT RS.9.52 LAKHS, AG GREGATING TO RS.23.97 CRORES; - IN THE BALANCE SHEET O THE ASSESSEE AS AT 31.3.04, THE VALUE OF LEASED ASSETS HAS BEEN RECORDED AT RS.23.97 CRORES AND THE ASSESSEE WAS IN RECEIPT OF LEASE RENTALS OF RS.13.16 LAKHS, RS.1.77 CRORES AND RS.2.03 CRORES FOR THE AYS 04.05, 05.06 AND 06.07 R ESPECTIVELY; - BDPL HAD RECEIVED A WHOPPING SUM OF RS.45.03 CRORES UPTO THE AY 07-08 FROM MOTOROLA FOR THE OCCUPATION OF A PORTION OF PROPERTY AT STPI DEVELOPED BY BDPL, BUT, THE ASSESSEE WAS NOT B ENEFITED IN ANY WAY BY THE RECEIPT OF AMOUNTS BY BDPL. HOWEVER, BD PL WAS THE ITA NOS.442 TO 444/B/10 PAGE 7 OF 33 BENEFICIARY BY THE TRANSFER AS MORE TENANTS VENTURE D TO OCCUPY THE BDPLS PROPERTY AFTER MOTOROLA. THIS CLEARLY EXHIB ITS THAT THE TRANSACTION ENTERED INTO BETWEEN THE ASSESSEE AND B DPL WAS AT ARMS LENGTH BASIS WITH A SOLE INTENTION OF EARNING PROFITS FROM THIS VENTURE ON A COMMERCIAL EXPEDIENCY. THE TRANSACTIO N HAD TAKEN PLACE DURING THE COURSE OF BUSINESS AND FOR THE PUR POSES OF BUSINESS ONLY AND THIS WAS WELL OUTSIDE THE AMBIT O F DEEMED DIVIDENDS; - IT WAS NOT FOR THE AO TO DIKTAT AS TO HOW A BUSINES SMAN TO CONDUCT HIS BUSINESS AS IT WAS RATHER A PREROGATIVE OF THE ASSESSEE AS TO HOW TO RUN HIS/ITS BUSINESS BASED ON THE GROUND REALITI ES; - RELY ON THE CASE LAWS: (A) S.A. BUILDERS V. CIT 288 ITR 1 (SC); (B) CIT V. SASSOON DAVID 118 ITR 261 (SC); (III) THE AOS NOVEL REASON FOR REJECTING THE AGREEMENT W AS THAT IT WAS NOT FOUND AT THE TIME OF SEARCH. IT WAS NOT AS IF THE SEARCH PARTY WAS EXPECTED TO RECORD/SEIZE EVERY PAPER ON W HICH IT LAYS ITS HANDS. THIS AGREEMENT WAS KEPT ALONG WITH THE OTHER ORIGINAL BELONGINGS OF THE ASSESSEE AND THE SEARCHI NG PARTYS REASONING IN NOT SEIZING THIS AGREEMENT CANNOT NOW BE SPECULATED; AND THE WORST CANNOT BE FOUND FAULT WIT H THE ASSESSEE; - JUST BECAUSE THE SAID DOCUMENT WAS NOT SEIZED BY TH E SEARCH PARTY, DOESNT MEAN TO CONCLUDE (AS THE AO DID) THAT THE D OCUMENT DID NOT EXIST AT ALL. THE AO HAD NOT PROVED WITH ANY DOCUM ENTARY EVIDENCE EXCEPT ALLEGING THAT THE DOCUMENT WAS NOT GENUINE; - AN AGREEMENT NEED NOT TO BE REDUCED IN WRITING AND IT CAN EVEN BE ORAL. EVEN IF AN AGREEMENT WAS REDUCED IN WRITING, IT DOESNT REQUIRE TO BE REGISTERED UNDER S.17 OF THE REGISTRA TION ACT; - IN FACT, ALL THE AGREEMENTS WERE REDUCED IN WRITING ON STAMP PAPERS, JUST BECAUSE THEY WERE NOT REGISTERED, THERE CAN BE NO REASON TO REJECT THEM; - THE OTHER REASONING OF THE AO THAT AS PER SPECIFIC RELIEF ACT (SRA), THE AGREEMENTS WERE TIME-BARRED. THE LIMITA TION STARTS FROM THE DAY OF DEFAULT AND NOT EARLIER AND EVEN IF NO R EMEDY WAS AVAILABLE UNDER SRA, THE AGGRIEVED PARTY CAN HAVE R ECOURSE TO NORMAL PROVISIONS OF THE CIVIL PROCEDURE CODE; (IV) THE REASONING OF THE AO THAT THE AMOUNTS GIVEN BY B DPL WERE PROFITS WHICH THE COMPANY COULD HAVE DISTRIBUTED TO ITS SHAREHOLDERS WAS UNFOUNDED AS THE SAME WAS UTILIZED ONLY WITH A LONG TERM POLICY OF SECURING REPUTED TENANTS TO O CCUPY THE ITA NOS.442 TO 444/B/10 PAGE 8 OF 33 STPI WHICH WAS EVIDENT FROM ITS EFFORTS IN THIS DIR ECTION AND NOT FOR ANY NON-BUSINESS PURPOSES AS ALLEGED BY THE AO; - THE AOS PRESUMPTION THAT THE ADVANCE TAKEN WITH NO INTEREST OR END DATE BY THE ASSESSEE WAS ONE OF THE FACTORS WH ICH LED TO PROVE THAT IT BEING AN ADVANCE OR LOAN WAS UNFOUNDED SINC E THE AMOUNT WAS HELD BY THE ASSESSEE FOR PROCUREMENT OF FIT OUT S ON BEHALF OF BDPL AND AS SUCH THERE WAS NO QUESTION OF PAYING AN Y INTEREST; - ACCORDING TO THE AO THE ONLY EXCEPTION WAS IN RESPE CT OF MONEY ADVANCED BY A COMPANY CARRYING ON MONEY LENDING B USINESS. THE QUESTION OF EXCEPTION WILL CROP UP ONLY AFTER CONSI DERING THE VITAL QUESTION AS TO WHETHER THE AMOUNT WAS AN ADVANCE OR A LOAN. - A NUMBER OF CASE LAWS RELIED ON BY THE AO WERE NOT APPLICABLE FOR THE REASONS THAT (A) ACIT V. SMT.LAKSHMI KUTTI NARAYANAN 112 TTJ 396 (IT AT KOCHI) THE MAIN ISSUE IN THAT CASE WAS THAT BO OK ENTRIES WERE RELATING TO EARLIER YEARS. BUT THE PRINCIPLE LAID DOWN THER EIN HAD BEEN LOST SIGHT OF BY THE AO. (B)NAGINDAS KAPADIA 177 ITR 393 (BOM) (C)AMBASSADOR TRAVELS 173 TAXMAN 407 (DEL ) (D) ARDEE FINVEST (P) LTD. 79 ITD 547 (ITA T, DELHI BENCH) & (E) SEASMIST PROPERTIES PVT. LTD. 1 SOT 14 2 (MUM) WERE HELD TO BE NOT APPLICABLE BECAUSE TH E SCHEDULE TO THE BALANCE SHEETS REFLECT THOSE AMOUNTS AS UNSECURED LOANS AND, THEREFORE, IT WAS NOT IN THE NATURE OF ANY TRADE AD VANCE OR ANY PAYMENT MADE IN CONNECTION WITH BUSINESS OF THE COMPANY GIV ING THE LOAN; - CASE LAWS RELIES ON (A) CIT V. CREATIVE DYEING AND PRINTING PVT. LTD. 318 I TR 476 (DEL); (B) NH SECURITIES LTD. V. DCIT 11 SOT 302 (MUM) (V) MERELY BECAUSE THE SUM WAS SHOWN AS UNSECURED LOAN IN THE BOOKS OF ACCOUNTS CANNOT BE CONCLUDED THAT IT WAS D EEMED DIVIDEND. IT WAS A SETTLED LAW THAT IN BOOK-KEEPI NG, THE ENTRIES IN THE BOOKS OF ACCOUNTS CANNOT GO TO DECIDE THE AM BIT OF TAXATION RELIES ON (A) FORT PROPERTIES PVT. LIMITED 208 ITR 232 (BOM) (B) KEDARNATH JUTE MANUFACTURING CO. LTD. 82 ITR 363 (S C) ITA NOS.442 TO 444/B/10 PAGE 9 OF 33 (C) KASTURI ESTATES (P) LTD. 62 ITR 578 (MAD) (D) G.VENKATASWAMI NAIDU 35 ITR 594 (SC) (E) SULTAN BROTHERS 51 ITR 353 (SC) (F) CIT V. EXPRESS NEWSPAPERS 53 ITR 250 (SC) (VI) THE QUESTION OF DEEMED DIVIDEND CAN ARISE ONLY IN T HE HANDS OF A SHARE HOLDER HAVING SUBSTANTIAL INTEREST IN THE L ENDING COMPANY. THE ASSESSEE WAS NOT A SHAREHOLDER IN BDP L FROM WHOM THE ALLEGED ADVANCE HAD BEEN RECEIVED. RELIES ON ACIT V. BHAUMIK COLOUR (P) LTD 120 TTJ 865 (MUM) (VII) THE DEEMED DIVIDENDS COMPUTED FOR THE AY 2005-06 WA S INCORRECT. THE PEAK OF THE AMOUNT ALLEGED TO HAVE B EEN ADVANCED BY BDPL WAS RS.22.86 CRORES AS ON 13.10.20 04 AND BY EXCLUDING THE OPENING BALANCE OF RS.21.51 CRORES, T HE DIFFERENCE BEING RS.1.34 CRORES. IF THE DEEMED DIVIDEND CONCE PT WERE TO BE APPLICABLE RS.1.34 CRORES OUGHT TO HAVE BEEN TREATE D AS DEEMED DIVIDEND. WHATEVER RECEIVED BY THE ASSESSEE THERE AFTER WAS ONLY THE AMOUNTS PAID BACK TO BDPL AND RECEIVED AGAIN WH EN OCCASION AROSE. THE CASES RELIED BY THE AO HAVE NO APPLICATION TO THE FACTS OF THE PRESENT CASE. IN THOSE CASES D ECIDED BY THE HONBLE SUPREME COURT, THE LOAN OR ADVANCE WAS A ON E TIME DISBURSEMENT WHEREAS IN THE CASE ON HAND THE LEDGER ACCOUNT CLEARLY DEMONSTRATES OTHERWISE. BY FICTION, A PART ICULAR AMOUNT WAS TREATED AS DEEMED DIVIDEND, IT GOT THE CHARACTE R OF DIVIDEND IN THE HANDS OF THE RECIPIENT AND BECAME HIS OWN MO NEY. IF THE SAME MONEY WAS GIVEN BACK TO THE COMPANY AND RECEIV ED ONCE AGAIN IN A NUMBER OF TIMES, IT WAS TREATED AS DEEME D DIVIDEND EVERY TIME WHEN IT WAS RECEIVED WHICH WOULD LEAD TO AN ANOMALOUS POSITION WHEREBY THE SAME AMOUNT GETS TAX ED REPEATEDLY; RELIES ON CIT V. C.P.SARATHY MUDALOIAR 83 ITR 170 (VIII) THE AO APPEARS TO HAVE TAKEN INTO CONSIDERATION THE AMOUNTS RECEIVED BY THE ASSESSEE DURING THE WHOLE FINANCIAL YEAR FROM BDPL AS DEEMED DIVIDEND. IT WAS EVIDENT FROM THE L EDGER ACCOUNT THAT THERE WERE MANY JOURNAL ENTRIES IN BDP L A/C IN THE BOOKS OF THE ASSESSEE. IT WAS A COMMON KNOWLEDGE T HAT IN JOURNAL ENTRIES THERE WOULD BE NEITHER FLOW OUT OR FLOW IN OF FUNDS; RELIES ON - G.R.GOVINDARAJULU NAIDU V. CIT 90 ITR 1 3 (MAD); ITA NOS.442 TO 444/B/10 PAGE 10 OF 33 (IX) FOR AY 2006-07: WITH REGARD TO THE REASONING OF THE AO FOR REJECTING THE PLEA OF REDUCTION IN THE SHARE HOLDIN G OF RAJA BAGMANE IN THE ASSESSEE COMPANY WAS THAT THE TRANSF ER WAS NOT GENUINE AND THE REASON GIVEN FOR ARRIVING AT SUCH A CONCLUSION WAS THAT THE ASSESSEE HAD NOT RECEIVED THE CONSIDER ATION FOR THE TRANSFER OF SHARE, BUT, IT WAS ONLY A JOURNAL ENTRY , THE CONTENTION WAS THAT THE SALES OF SHARES HAVE BEEN DISCLOSED IN THE BALA NCE SHEETS OF RAJA BAGMANE AND SMT. VASUNDHARA RAJA AS ON 31.3.20 06. EVEN AN IMMOVABLE PROPERTY CAN BE TRANSFERRED FOR A CONSIDERATION PAID, PROMISED, PARTLY PAID AND PARTL Y PROMISED AS PER S.54 OF THE TRANSFER OF PROPERTY ACT. FURTHER, THERE WAS A RUNNING ACCOUNT OF SMT. VASUNDHARA RAJA IN BOOKS OF RAJA BAGMANE AND, THEREFORE, THE CONSIDERATION DUE WAS D EBITED TO HER ACCOUNT. SIMILARLY, IN THE ACCOUNT OF RAJA BAG MANE IN THE BOOKS OF SMT. VASUNDHARA RAJA, CREDIT ENTRIES WERE PASSED AND THUS, THERE WAS NOTHING AMISS ABOUT IT; (X) RAJA BAGMANE WAS NOT HAVING 10% SHAREHOLDING IN THE ASSESSEE COMPANY THROUGHOUT THE YEAR. FOR THE APPLICABILITY OF S.2 (22)(E), IT WAS NECESSARY THAT THE SHARE-HOLDER SHO ULD HAVE 10% EQUITY SHARE CAPITAL IN BOTH THE CONCERNS THE CON CERN WHICH LENT THE MONEY AND THE CONCERN TO WHOM MONEY HAD BE EN LENT. THOUGH RAJA BAGMANE DID HOLD MORE THAN 10% SHARE IN BDPL THROUGHOUT THE YEAR, HE DID NOT HOLD 10% SHARE IN T HE ASSESSEE COMPANY THROUGHOUT THE YEAR. IT IS SETTLED LAW THA T THE RELEVANT SHARE HOLDER SHOULD NOT ONLY BE A REGISTERED SHARE HOLDER BUT A PERSON HAVING BENEFICIAL INTEREST. THUS, THE PROV ISIONS OF S.2 (22)(E) WILL GET ATTRACTED ONLY IF THE CONCERNED PE RSON WAS NOT ONLY A REGISTERED SHAREHOLDER BUT ALSO A BENEFICIAL SHAREHOLDER HOLDING NOT LESS THAN 10% OF THE SHARE; - IN EXPLANATION 3(B) TO S.2 (22)(E) OF THE ACT, THE WORD CONCERN OTHER THAN A COMPANY AND ALSO AT ANY TIME DURING THE PREVIOUS YEAR. WHEREVER THE LEGISLATURE WANTED TO ROPE IN CONCERNS WHICH AT ANY TIME HELD SUBSTANTIAL INTEREST, THE LEGISLAT URE HAS DONE SO. 7.1. ON THE OTHER HAND, THE LD. D.R. WAS VERY UNAM BIGUOUS IN HER SUBMISSION THAT THE ISSUE IN DISPUTE HAS BEEN EXTEN SIVELY ANALYZED BY THE AO AND ALSO DRAWING STRENGTH FROM JUDICIAL PRONOUN CEMENTS ARRIVED AT A CONCLUSION THAT THE ENTIRE AMOUNTS RECEIVED FROM BD PL AS LOANS FOR THE ITA NOS.442 TO 444/B/10 PAGE 11 OF 33 AYS UNDER CHALLENGE AND WAS RIGHTLY TREATED AS DEE MED DIVIDENDS IN THE HANDS OF THE ASSESSEE AND BRINGING TO TAX NET UNDER THE HEAD INCOME FROM OTHER SOURCES. THE LEARNED FIRST APPELLATE AUTHOR ITY HAD, AFTER DUE CONSIDERATION OF RIVAL SUBMISSIONS, SUBSTANTIATED T HE AOS ACTION WHICH VINDICATED THE STAND OF THE AO ON THIS POINT. IT W AS, THEREFORE, VEHEMENTLY URGED THAT THE STAND OF THE AUTHORITIES BELOW REQUI RES TO BE UPHELD. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS, ATTENTIVELY PERUSED THE RELEVANT RECORDS, VARIOUS JUDICIAL PRON OUNCEMENTS ON WHICH THE EITHER PARTY HAD PLACED THEIR FAITH AND ALSO TH E VOLUMINOUS PAPER BOOKS IN VOLUMES [I, II, III & IV RUNNING INTO HUNDREDS OF PAGES] FURNISHED BY THE LD. AR DURING THE COURSE OF HEARING PROCEEDINGS. 8.1. THE REASONING OF THE AO, IN BRIEF, WAS THAT TH E PROVISIONS OF SEC.2 (22)(E) ARE SQUARELY APPLICABLE TO ANY LOANS AND A DVANCES. THE ONLY EXCEPTION BEING ADVANCES MADE IN COURSE OF BUSINESS BY A COMPANY SUBSTANTIALLY ENGAGED IN MONEY LENDING. THIS NOT B EING THE CASE, THE PAYMENTS MADE WOULD FALL IN THE DEEMING PROVISIONS OF S. 2(22)(E). THE PROVISIONS OF S.2 (22)(E) ARE FOR THE PURPOSE OF CO UNTERING AVOIDANCE OF TAX BY CLOSELY HELD COMPANIES EVEN WHEN THE AMOUNTS ARE EITHER GIVEN AS ADVANCE OR LOANS TO THE SHAREHOLDERS. THERE IS NO EXCEPTIONAL CLAUSE STATING THAT THE TRADE ADVANCE OR LOANS WILL NOT SU FFER DEEMED DIVIDEND. THE PROVISIONS COVER ALL KINDS OF LOANS AND ADVANCE S. WHAT HAS BEEN GIVEN TO THE ASSESSEE WAS ONLY COVERED BY WAY OF AN ADVANCE OR LOAN AND FOR WHICH THE BENEFIT HAS ALSO BEEN ENJOYED BY THE ASSESSEE. SECTION 2 (22) (E) DOES NOT DISTINGUISH FINANCIAL LOANS AND A DVANCES AND NON-FINANCIAL ITA NOS.442 TO 444/B/10 PAGE 12 OF 33 LOANS AND ADVANCES MADE TO SHAREHOLDERS. THUS, THE LOANS RECEIVED BY THE ASSESSEE COMPANY FROM BDPL COME UNDER THE PURVI EW OF SECTION 2(22)(E) OF THE ACT AND, ACCORDINGLY TREATED AS DE EMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 8.2. THE LD. CIT (A) HAD, MORE OR LESS REITERATED W HAT WAS NARRATED IN THE IMPUGNED ASSESSMENT ORDERS AND SHELTERING HIMSE LF IN THE FINDING OF THE HONBLE SUPREME COURT IN THE CASE OF MS. P. SHA RADA V. CIT REPORTED IN 229 ITR 445, UPHELD THE ACTION OF THE AO IN INVOKIN G THE PROVISIONS OF S.2(22) (E) OF THE ACT FOR THE AYS UNDER DISPUTE. 8.3. IN TAKING INTO CONSIDERATION OF THE REASONING OF THE AO AS WELL AS THE FIRST APPELLATE AUTHORITY IN INVOKING THE PROVISION S OF S.2 (22) (E) OF THE ACT WHICH HAS BEEN HOTLY CONTESTED BY THE ASSESSEE THRO UGH ITS LD. A R REFERRED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT (1). THE ASSESSEE CAME INTO EXISTENCE AT THE BEHES T OF BDPL TO PROVIDE FIT-OUTS IN TECH. PARK OF BDPL AS PER THE REQUIREM ENTS OF MOTOROLA, A PRIME PROSPECTIVE TENANT OF BDPL, ACCORDING TO WHICH; DUE TO BUSINESS EXIGENCIES AND CONTINGENCY, BDPL HAD AGREED TO PRO VIDE THE REQUIRED FUNDS TO THE ASSESSEE TO GO AHEAD WITH THE FURNISHI NG OF TECH PARK WITH FIT- OUTS. A MEMORANDUM OF UNDERSTANDING WAS REDUCED IN WRITING AND EXECUTED ON 16.4.2003 ON A STAMP PAPER BETWEEN BDPL AND THE ASSESSEE [SOURCE: P179 OF PB AR] CONSIST OF SOME IMPORTANT CLAUSES (I) BDPL SHALL PLACE FUNDS WITH THE ASSESSEE FROM TIME TO TIME; (II) THE ASSESSEE PROVIDE FITTINGS AND OFFICE EQU IPMENTS AS REQUIRED BY MOTOROLA AT THE SCHEDULE PREMISES AND RECEIVE LEASE RENTALS FROM MOTOROLA FOR THE FITTINGS AND OFFICE EQUIPMENTS SO PROVIDED BY THE ASSESSEE; ITA NOS.442 TO 444/B/10 PAGE 13 OF 33 (III) THE ASSESSEE SHALL EXECUTE A STANDARD LEASE A GREEMENT FOR THE FITTINGS & EQUIPMENTS WITH THE LESSEE; & (IV) AT THE END OF 7 YEARS TERM OR THE PREMISES FAL LING VACANT WHICHEVER IS EARLIER, THE ASSESSEE SHALL SELL THE LEASED FITTING S AND OFFICE EQUIPMENTS TO BDPL AT ED WITH MUTUALLY AGREED CONSIDERATION ARRIV ED WITH HELP OF APPROVED VALUATOR. THE FUNDS SO PROVIDED BY BDPL, ACCORDING TO THE ASS ESSEE, WERE UTILIZED FOR ACQUIRING THE FIT-OUTS AT AGGREGATE COST OF RS. 23.97 CRORES WHICH HAS BEEN MENTIONED IN ITS BALANCE SHEET AS ON 31.3.2004 AS VALUE OF LEASED ASSETS AT RS.23.97 CRORES AND LEASE RENTAL OF RS.13 .16 LAKHS FOR THE AY.2004.05. IN THIS TRANSACTION, AS RIGHTLY URGED BY THE LD. A.R, THE ULTIMATE BENEFICIARY WAS NONE OTHER THAN BDPL WHICH GOT TENANTS FOR ITS TECH PARK AND NOT THE ASSESSEE BY RECEIVING THE AMO UNTS FROM BDPL FOR FURNISHING THE FIT-OUTS IN BDPLS TECH PARK. THE E NTIRE EVENTS, TO PUT IT IN A NUT-SHELL, MAKE EXPLICITLY CLEAR THAT THE INTENTION OF THE ASSESSEE WAS TO EARN PROFITS FROM THE ABOVE VENTURE AND BASICALLY O N A COMMERCIAL EXIGENCY. (2). WITH REGARD TO THE BONA FIDE AND AUTHENTICI TY OF THE MOU, IT WAS REASONED BY THE AO THAT THE SEIZED/IMPOUNDED MATERI ALS OF THE GROUP OF CASES DID NOT INDICATE THE EXISTENCE OF ANY SUCH AG REEMENT BETWEEN BDPL AND THE ASSESSEE AND SO ON SO FORTH, IT APPEARS, AC CORDING TO THE AO, THAT THE AGREEMENT WAS AN AFTERTHOUGHT AND A CAMOUFLAG E FOR THE ACTUAL NATURE OF TRANSACTION WITH THE ASSESSEE. IN THIS CONNECTIO N, WE WOULD LIKE TO EMPHASIS THAT THE SWEEPING ALLEGATION OF THE AO THA T THE DOCUMENT NEVER EXISTED [JUST BECAUSE THE AGREEMENT WAS NOT ONE OF THE SEIZED DOCUMENTS] AND IT WAS AN AFTERTHOUGHT ETC DOESNT HOLD WATER, AS RIGHTLY HIGHLIGHTED BY ITA NOS.442 TO 444/B/10 PAGE 14 OF 33 THE ASSESSEE, EITHER THE SEARCHING PARTY WOULD HAVE THOUGHT IT OTHERWISE OR AT WORST IT WOULD HAVE LOST SIGHT OF THEM. UNLESS T HE REVENUE HAD BROUGHT ANY CREDIBLE DOCUMENTARY EVIDENCE ON RECORD TO SUGG EST THAT THE SAID MOU WAS AN AFTERTHOUGHT OR PLANTED ETC., IT CANNO T BE SUBJECTED TO SCANNING. THERE WOULD BE NO TAKERS OF THE ASSESSIN G OFFICERS ANOTHER THEORY THAT THE AGREEMENT PRODUCED HAD NO EVIDENTIA RY VALUE UNLESS IT WAS REGISTERED. IN THIS CONNECTION, WE WOULD LIKE TO P OINT OUT THAT NO AGREEMENT NEEDS TO BE REGISTERED TO PROVE ITS SANCTITY UNLESS IT IS PROVED OTHERWISE WITH DOCUMENTARY EVIDENCE. . EVEN A VERBAL AGREEME NT BETWEEN THE PARTIES (NOT EVEN REDUCED IN WRITING ON A PLAIN PAP ER) HAS ITS HOLINESS AS VOUCHED BY JUDICIARY. SIMPLY BECAUSE THE MOU EXE CUTED ON A STAMP PAPER NOT REGISTERED WITH THE AUTHORITIES CONCERNED CANNOT, IN OUR CONSIDERED VIEW, BE A SOLE REASON TO SUSPECT ITS V ERY BONA FIDE OR ITS LEGITIMACY. (3). THE ADVANCE RECEIVED FROM BDPL BY THE ASSES SEE WITHOUT ANY INTEREST OR END DATE WAS ONE OF THE REASONS FOR THE AO TO ARRIVE AT A CONCLUSION THAT IT WAS NOTHING BUT AN ADVANCE OR LO AN. THIS PERCEPTION OF THE AO WAS TOTALLY MISCONCEIVED AND WITHOUT ANY BAS IS AS THE MOU HAD MADE IT AMPLY CLEARS THAT BDPL SHALL PLACE FUNDS WITH BLFPL FROM TIME TO TIME AND THAT THESE FUNDS HAVE BEEN EARMARKED FOR SPECIF IC PURPOSE OF EXECUTING/FURNISHING FIT-OUTS IN THE TECH. PARK OF BDPL ON ITS BEHALF WHICH, IN OUR CONSIDERED VIEW, CANNOT BE ATTRIBUTED AS AD VANCE OR LOAN. TO SUBSTANTIATE ITS CLAIM, THE ASSESSEE HAD SHOWN IN I TS RESPECTIVE BALANCE SHEETS, THE LEASE RENTALS OF RS.13.16 LAKHS, RS.1.7 7 CRORES, RS.2.03 CRORES FOR THE AYS 2004-05, 2005-06 AND 2006-07 RESPECTIVE LY. ITA NOS.442 TO 444/B/10 PAGE 15 OF 33 (4). LET US HAVE A QUICK PERUSAL OF JUDICIAL PRON OUNCEMENTS AS TO WHETHER THE AO WAS WITHIN HIS REALM TO INVOKE THE PROVISION S OF S.2 (22)(E) OF THE ACT TO TERM THE AMOUNTS RECEIVED FROM BDPL WAS A DE EMED DIVIDEND. (I) THE HONBLE HIGHEST JUDICIARY OF THE LAND IN S. A. BUILDERS V. CIT REPORTED IN 288 ITR 1(SC) IN ITS WISDOM HAD RULED THAT THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRE SSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS MAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE B EEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSI NESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. THE HONBLE COURT WENT FURTHER TO PUT ITS SEAL ON T HE VIEW OF THE HONBLE DELHI COURT, THUS - WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COUR T IN CIT V. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE O F THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSE E ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-C HAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUM E THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE H IS PROFIT. THE INCOME- TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MU ST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUD ENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER O F THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED F OR EARNING PROFITS. WITH HIGHEST REGARDS, WE CONCUR WITH THE RATIO LAID DOWN BY THE HONBLE COURT WHICH DIRECTLY APPLICABLE TO THE ISSUE ON HAN D. (II) THE HONBLE DELHI HIGH COURT IN ITS RECENT JU DGMENT IN THE CASE OF CIT V. CREATIVE DYEING AND PRINTING PVT. LIMITED REPORT ED IN 318 ITR 476 (DEL) RULED THAT SECTION 2 (22) (E) OF THE ACT CAN BE APP LIED TO LOANS OR ADVANCES SIMPLICITER AND NOT TO THOSE TRANSACTION S CARRIED OUT IN THE ITA NOS.442 TO 444/B/10 PAGE 16 OF 33 COURSE OF BUSINESS AS SUCH. IN THE COURSE OF CARRY ING ON BUSINESS TRANSACTION BETWEEN A COMPANY AND A STOCKHOLDER, TH E COMPANY MAY BE REQUIRED TO GIVE ADVANCE IN MUTUAL INTEREST. THERE IS NO LEGAL BAR IN HAVING SUCH TRANSACTION. WHAT IS TO BE ASCERTAINED IS -W HAT IS THE PURPOSE OF SUCH ADVANCE? IF THE AMOUNT IS GIVEN AS ADVANCE SI MPLICITER OR AS SUCH PER SE WITHOUT ANY FURTHER OBLIGATION BEHIND RECEIV ING SUCH ADVANCES, MAY BE TREATED AS DEEMED DIVIDEND, BUT, IF IT IS OTHERWISE , THE AMOUNT GIVEN CANNOT BE BRANDED AS ADVANCES WITHIN THE MEANING OF DEEMED DIVIDEND UNDER SECTION 2 (22) (E). IN RENDERING THIS DECISI ON, THE HONBLE HIGH COURT HAD PLACED RELIANCE IN THE DECISION OF THE CASE OF CIT V. RAJ KUMAR (2009) 318 ITR 462 (DEL), CIT V. AMBASSADOR TRAVELS (P.) L TD. (2009) 318 ITR 376 AND CIT V. NAGIN DAS M. KAPADIA (1989) 177 ITR 393)(BOM ). WE HEREBELOW REPRODUCE THE RELEVANT PORTION OF THE CAS E CIT V. CREATIVE DYEING AND PRINTING P. LTD. FOR REFERENCE: BEFORE US, THE LEARNED COUNSEL FOR THE APPELLANT/R EVENUE HAS CONTENDED THAT THE PRESENT CASE IS A CASE OF DE EMED DIVIDEND INASMUCH AS M/S. PEE EMPRO EXPORTS PVT. LTD. HAS GI VEN A LOAN TO THE ASSESSEE-COMPANY BUT THE LENDING COMPANY, NA MELY, M/S. PEE EMPRO EXPORTS PVT. LTD. IS NOT INTO THE BUSINES S OF MONEY LENDING AS REQUIRED BY SECTION 2(22)( E )( II ). THE COUNSEL FOR THE RESPONDENT, ON THE OTHER HAND, HAS REFERRED TO TWO RECENT DIVISION BENCH JUDGMENTS OF THIS COURT REPORTED AS CIT V. RAJ KUMAR [2009] 318 ITR 462 (DELHI); [200]) 181 TAXMAN 155 AND CIT V. AMBASSADOR TRAVELS (P.) LTD. [2009] 318 ITR 376 (DE LHI); [2009] 173 TAXMAN 407 TO CONTEND THAT MERELY BECAUS E A LOAN IS GIVEN BY M/S. PEE EMPRO EXPORTS PVT. LTD. TO THE AS SESSEE- COMPANY WOULD NOT MEAN THAT THE SAME WOULD BECOME A DEEMED DIVIDEND INASMUCH AS MONEYS ARE PAID FOR TRANSACTIO NS WHICH ARE BUSINESS TRANSACTIONS/COMMERCIAL TRANSACTIONS AND, THEREFORE, SUCH TRANSACTIONS CANNOT FALL UNDER THE EXPRESSION DEEMED DIVIDEND WITHIN THE PROVISION OF SECTION 2(22)( E ). ITA NOS.442 TO 444/B/10 PAGE 17 OF 33 BEFORE WE REFER TO THE RIVAL CONTENTIONS OF THE PAR TIES, WE WOULD LIKE TO REPRODUCE THE FOLLOWING FINDING OF FA CTS ARRIVED AT BY THE TRIBUNAL : 7.5 IN THE PRESENT CASE THE AMOUNT PAID BY M/S. PEE EMPRO EXPORTS TO THE APPELLANT-COMPANY DOES NOT BEA R THE CHARACTERISTIC OF LOANS AND ADVANCES. THE AMOUN T HAS BEEN PAID BY M/S. PEE EMPRO EXPORTS IN ITS OWN INTE REST AND THAT TOO FOR THE PURPOSE OF BUSINESS BECAUSE TH E ULTIMATE BENEFICIARY OF THE PROPOSED EXPANSION OF P LANT AND MACHINERY IS M/S. PEE EMPRO EXPORTS ITSELF. M/S . PEE EMPRO EXPORTS HAS NOT MADE THE PAYMENT TO THE APPEL LANT- COMPANY FOR THE INDIVIDUAL BENEFIT OF MR. R.S. UPPA L AND MR. P.M.S. UPPAL AND ON THE CONTRARY THESE TWO DIRE CTORS HAVE ALSO PROVIDED FUNDS TO THE APPELLANT-COMPANY A S OWNERS OF THE COMPANY AS ALSO MADE BY M/S. PEE EMPR O EXPORTS. THE ASSESSEE UNDERTOOK EXPANSION OF ITS CAPACITY, WHICH WAS IN MUTUAL INTEREST OF ASSESSEE AS WELL PE E EMPRO EXPORTS. IF THE ASSESSEE HAS NOT UNDERTAKEN S UCH EXPANSION, NO ADVANCE COULD HAVE BEEN MADE TO IT OR THAT PEE EMPRO EXPORTS WOULD NOT HAVE DISTRIBUTED AS DIVIDEND TO ITS SHAREHOLDERS. THUS, BUT FOR THE ADV ANCES, THE AMOUNT OF ADVANCES COULD NOT HAVE REACHED ASSES SEE AT ALL. WE THEREFORE, DELETE THE ADDITIONS AS MADE BY THE ASSESSING OFFICER AS THE AMOUNT RECEIVED BY ASSESSE E IS NOT DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)( E ) OF THE ACT. THE COUNSEL FOR THE REVENUE HAS ALSO FURTHER STATED THAT IT IS NOT IN DISPUTE THAT THE MONIES WHICH HAVE BEEN ADVA NCED TO THE ASSESSEE-COMPANY BY M/S. PEE EMPRO EXPORTS PVT. LTD . HAVE NOT TO BE REPAID BUT HAVE TO BE ADJUSTED AGAINST THE DU ES PAYABLE BY M/S. PEE EMPRO EXPORTS PVT. LTD. TO THE ASSESSEE-CO MPANY IN THE SUBSEQUENT YEARS FOR THE JOB WORK OF PRINTING AND D YEING WHICH IS DONE BY THE ASSESSEE-COMPANY FOR M/S. PEE EMPRO EXP ORTS PVT. LTD. WE FIND THAT THE TRIBUNAL IN THE PRESENT CASE HAS V ERY EXTENSIVELY DEALT WITH LEGISLATIVE INTENTION OF INT RODUCING SECTION 2(22)( E ) AND HAS REFERRED TO SUCH LEGISLATIVE INTENTION BY REFERENCE TO SUPREME COURT JUDGMENT IN THE CASE OF NAVNIT LAL C. JAVERI V. K.K. SEN AAC [1965] 56 ITR 198 WHERE A SIMILAR PROVISION OF THE INCOME-TAX ACT, 1922, I.E., SECTION 2(6A)( E ) WAS IN ISSUE BY REPRODUCING THE RELEVANT PARA IN NAVNIT LAL C. JAVERIS CASE ( SUPRA ) AS UNDER : ITA NOS.442 TO 444/B/10 PAGE 18 OF 33 IN DEALING WITH MR. PATHAKS ARGUMENT IN THE PRESE NT CASE, LET AS RECALL THE RELEVANT FACTS. THE COMPANI ES TO WHICH THE IMPUGNED SECTION APPLIES ARE COMPANIES IN WHICH AT LEAST 75 PER CENT OF THE VOTING POWER LIES IN THE HANDS OF OTHER THAN THE PUBLIC, AND THAT MEANS THAT THE COMPANIES ARE CONTROLLED BY A GROUP OF PERSONS ALLI ED TOGETHER AND HAVING THE SAME INTEREST. IN THE CASE OF SUCH COMPANIES, THE CONTROLLING GROUP CAN DO WHAT IT LIK ES WITH THE MANAGEMENT OF THE COMPANY, ITS AFFAIRS AND ITS PROFITS WITHIN THE LIMITS OF THE COMPANIES ACT. IT IS FOR T HIS GROUP TO DETERMINE WHETHER THE PROFITS MADE BY THE COMPAN Y SHOULD BE DISTRIBUTED AS DIVIDENDS OR NOT. THE DECL ARATION OF DIVIDEND IS ENTIRELY WITHIN THE DISCRETION OF TH IS GROUP. WHEN THE LEGISLATURE REALIZED THAT THOUGH MONEY WAS REASONABLY AVAILABLE WITH THE COMPANY IN THE FORM O F PROFITS, THOSE IN CHARGE OF THE COMPANY DELIBERATEL Y REFUSED TO DISTRIBUTE IT AS DIVIDENDS TO THE SHAREH OLDERS, BUT ADOPTED THE DEVICE OF ADVANCING THE SAID ACCUMULATE D PROFITS BY WAY OF LOAN OR ADVANCE TO ONE OF ITS SHAREHOLDERS, IT WAS PLAIN THAT THE OBJECT OF SUCH A LOAN OR ADVANCE WAS TO EVADE THE PAYMENT OF TAX ON ACCUMULA TED PROFITS UNDER SECTION 23A. IT WILL BE REMEMBERED TH AT AN ADVANCE OR LOAN WHICH FALLS WITHIN THE MISCHIEF OF THE IMPUGNED SECTION IS ADVANCE OR LOAN MADE BY A COMPA NY WHICH DOES NOT NORMALLY DEAL IN MONEY-LENDING, AND IT IS MADE WITH THE FULL KNOWLEDGE OF THE PROVISIONS CONT AINED IN THE IMPUGNED SECTION. THE OBJECT OF KEEPING ACCUMULATED PROFITS WITHOUT DISTRIBUTING THEM OBVIO USLY IS TO TAKE THE BENEFIT OF THE LOWER RATE OF SUPER-TAX PRESCRIBED FOR COMPANIES. THIS OBJECT WAS DEFEATED BY SECTION 23A WHICH PROVIDES THAT IN THE CASE OF UNDISTRIBUTED PR OFITS, TAX WOULD BE LEVIED ON THE SHAREHOLDERS ON THE BASIS TH AT THE ACCUMULATED PROFITS WILL BE DEEMED TO HAVE BEEN DISTRIBUTED AMONGST THEM. SIMILARLY, SECTION 12(1B) PROVIDES THAT IF A CONTROLLED COMPANY ADOPTS THE DE VICE OF MAKING A LOAN OR ADVANCE TO ONE OF ITS SHAREHOLDERS , SUCH SHAREHOLDERS WILL BE DEEMED TO HAVE RECEIVED THE SA ID AMOUNT OUT OF THE ACCUMULATED PROFITS AND WOULD BE LIABLE TO PAY TAX ON THE BASIS THAT HE HAS RECEIVED THE SA ID LOAN BY WAY OF DIVIDEND. IT IS CLEAR THAT, WHEN SUCH A DEVI CE IS ADOPTED BY A CONTROLLED COMPANY, THE CONTROLLING GR OUP CONSISTING OF SHAREHOLDERS HAVE DELIBERATELY, DECID ED TO ADOPT THE DEVICE OF MAKING A LOAN OR ADVANCE. SUCH AN ARRANGEMENT IS INTENDED TO EVADE THE APPLICATION OF SECTION 23A. THE LOAN MAY CARRY INTEREST AND THE SAID INTER EST MAY ITA NOS.442 TO 444/B/10 PAGE 19 OF 33 BE RECEIVED BY THE COMPANY; BUT THE MAIN OBJECT UNDERLYING THE LOAN IS TO AVOID PAYMENT OF TAX. THE TRIBUNAL HAS ALSO REFERRED TO THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. NAGINDAS M. KAPADIA [1989] 177 ITR 393 (BOM) IN WHICH IT WAS HELD THAT BUSINESS TRANSACTIONS ARE OUTSIDE THE PURVIEW OF SECTION 2(2 2)( E ) OF THE ACT. IN THE SAID CASE, THE COMPANY IN WHICH KAPADI A WAS HAVING SUBSTANTIAL INTEREST HAD PAID VARIOUS AMOUNT TO KAP ADIA. THE TRIBUNAL HAD FOUND THAT KAPADIA HAD BUSINESS TRANSA CTIONS WITH THE COMPANY AND ON VERIFICATION OF THE ACCOUNTS, TH E TRIBUNAL DELETED THE AMOUNTS WHICH WERE RELATING TO THE BUSI NESS TRANSACTIONS AND WHICH FINDING WAS UPHELD BY THE HI GH COURT. IN THE PRESENT CASE THE TRIBUNAL ON CONSIDERING DEC ISIONS IN VARIOUS CASES HELD AS UNDER : FROM THE RATIO LAID DOWN IN ABOVE CASES AND ON THE BASIS OF JUDICIAL INTERPRETATION OF WORDS, LOANS OR AD VANCES, IT CAN BE HELD THAT SECTION 2(22)( E ) CAN BE APPLIED TO LOANS OR ADVANCES SIMPLICITER AND NOT TO THOSE TRANSACTIONS CARRIED OUT IN COURSE OF BUSINESS AS S UCH. IN THE COURSE OF CARRYING ON BUSINESS TRANSACTION BETW EEN A COMPANY AND A STOCKHOLDER, THE COMPANY MAY BE REQUIRED TO GIVE ADVANCE IN MUTUAL INTEREST. THERE IS NO LEGAL BAR IN HAVING SUCH TRANSACTION. WHAT IS TO BE ASCERTAINED IS WHAT IS THE PURPOSE OF SUCH ADVANCE. IF THE AMOUNT IS GIVEN AS ADVANCE SIMPLICITER OR AS SUCH PER SE WITHOUT ANY FURTHER OBLIGATION BEHIND RECEIVING SUC H ADVANCES, MAY BE TREATED IS DEEMED DIVIDEND, BUT IF IT IS OTHERWISE, THE AMOUNT GIVEN CANNOT BE BRANDED AS ADVANCES WITHIN THE MEANING OF DEEMED DIVIDEND UN DER SECTION 2(22)( E ). JUST AS PER CLAUSE ( II ) OF SECTION 2(22)( E ), DIVIDEND IS NOT TO INCLUDE ADVANCE OR LOAN MADE BY A COMPANY IN THE ORDINARY COURSE OF BUSINESS WHE RE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE B USINESS OF THE COMPANY, ADVANCE IN THE ORDINARY COURSE OF CARRYING ON BUSINESS CANNOT BE CONSIDERED AS DIVID END WITHIN THE MEANING OF SECTION 2(22)( E ). BY GRANTING ADVANCE IF THE BUSINESS PURPOSE OF THE COMPANY IS S ERVED AND WHICH IS NOT THE SUM, WHICH IT OTHERWISE WOULD HAVE DISTRIBUTED AS DIVIDEND, CANNOT BE BROUGHT WITHIN T HE DEEMING PROVISION OF TREATING SUCH ADVANCE AS DEE MED DIVIDEND WE AGREE WITH THE AFORESAID OBSERVATIONS. THE FIN DING OF FACTS, ARRIVED AT BY THE TRIBUNAL, IN THE PRESENT C ASE, IS THAT THE ITA NOS.442 TO 444/B/10 PAGE 20 OF 33 TRANSACTION IN QUESTION WAS A BUSINESS TRANSACTION AND WHICH TRANSACTION WOULD HAVE BENEFITED BOTH THE ASSESSEE- COMPANY AND M/S. PEE EMPRO EXPORTS PVT. LTD. IN FACT, AS STATED ABOVE, THE COUNSEL FOR THE APPELLANT HAS CONCEDED THAT THE AMO UNT IS IN FACT NOT A LOAN BUT ONLY AN ADVANCE BECAUSE THE AMOUNT P AID TO THE ASSESSEE-COMPANY WOULD BE ADJUSTED AGAINST THE ENTI TLEMENT OF MONEYS OF THE ASSESSEE-COMPANY PAYABLE BY M/S. PEE EMPRO EXPORTS PVT. LTD. IN THE SUBSEQUENT YEARS. THE COUNSEL FOR THE APPELLANT HAS VERY STRENUOUSLY URGED THAT NEITHER THE TRIBUNAL NOR THE JUDGMENT OF THIS COURT IN RAJ KUMARS CASE [2009] 318 ITR 462 (DELHI); [2009] 181 TAXMAN 155 DEALS WITH THAT PART OF THE DEFINITION OF DEEME D DIVIDEND UNDER SECTION 2(22)( E ) WHICH STATES THAT DEEMED DIVIDEND DOES NOT INCLUDE AN ADVANCE OR LOAN MADE TO A SHAREHOLDE R BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS WHER E THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF T HE COMPANY [SECTION 2(22)( E )( II )], I.E., THERE IS NO DEEMED DIVIDEND ONLY IF THE LENDING OF MONEYS IS BY A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MONEY-LENDING. DILATING FURTHER THE COU NSEL FOR THE APPELLANT CONTENDED THAT SINCE M/S. PEE EMPRO EXPOR TS PVT. LTD. IS NOT INTO THE BUSINESS OF LENDING OF MONEY, THE P AYMENTS MADE BY IT TO THE ASSESSEE-COMPANY WOULD, THEREFORE, BE COVERED BY SECTION 2(22)( E )( II ) AND CONSEQUENTLY PAYMENTS EVEN FOR THE BUSINESS TRANSACTIONS WOULD BE A DEEMED DIVIDEND. W E DO NOT AGREE. THE TRIBUNAL HAS DEALT WITH THIS ASPECT AS R EPRODUCED IN PARA (9) ABOVE. THE PROVISION OF SECTION 2(22)( E )( II ) IS BASICALLY IN THE NATURE OF AN EXPLANATION. THAT CANNOT, HOWEV ER, HAVE A BEARING ON INTERPRETATION OF THE MAIN PROVISION OF SECTION 2(22)( E ) AND ONCE IT IS HELD THAT THE BUSINESS TRANSACTIONS DO NOT FALL WITHIN SECTION 2(22)( E ), WE NEED NOT TO GO FURTHER TO SECTION 2(22)( E )( II ). THE PROVISION OF SECTION 2(22)( E )( II ) GIVES AN EXAMPLE ONLY OF ONE OF THE SITUATIONS WHERE THE LOAN/ADVANCE WILL N OT BE TREATED AS A DEEMED DIVIDEND, BUT THAT IS ALL. THE SAME CANNOT BE EXPANDED FURTHER TO TAKE AWAY THE BASIC MEANING, INTENT AND PURPORT OF THE MAIN PART OF SECTION 2(22)( E ). WE FEEL THAT THIS INTERPRETATION OF OURS IS IN ACCORDANCE WITH THE LEGISLATIVE INTENTIO N OF INTRODUCING SECTION 2(22)( E ) AND WHICH HAS BEEN EXTENSIVELY DEALT WITH BY THIS COURT IN THE JUDGMENT IN RAJ KUMARS CASE [ 2009] 318 ITR 462 (DELHI); [2009] 181 TAXMAN 155. THIS COURT IN RAJ KUMARS CASE ( SUPRA ) EXTENSIVELY REFERRED TO THE REPORT OF THE TAXATION ENQUIRY COMMISSION AND THE SPEECH OF THE F INANCE MINISTER IN THE BUDGET WHILE INTRODUCING THE FINANC E BILL. ULTIMATELY, THIS COURT IN THE SAID JUDGMENT HELD AS UNDER (PAGE 473) : ITA NOS.442 TO 444/B/10 PAGE 21 OF 33 A BARE READING OF THE RECOMMENDATIONS OF THE COMMISSION AND THE SPEECH OF THE THEN FINANCE MINIS TER WOULD SHOW THAT THE PURPOSE OF INSERTION OF CLAUSE ( E ) TO SECTION 2(6A) IN THE 1922 ACT WAS TO BRING WITHIN T HE TAX NET MONIES PAID BY CLOSELY HELD COMPANIES TO THEIR PRINCIPAL SHAREHOLDERS IN THE GUISE OF LOANS AND AD VANCES TO AVOID PAYMENT OF TAX. THEREFORE, IF THE SAID BACKGROUND IS KEPT IN MIN D, IT IS CLEAR THAT SUB-CLAUSE ( E ) OF SECTION 2(22) OF THE ACT, WHICH IS PARIMATERIA WITH CLAUSE ( E ) OF SECTION 2(6A) OF THE 1922 ACT, PLAINLY SEEKS TO BRING WITHIN THE TAX NET ACCUMULATED PROFITS WHICH ARE DISTRIBUTED BY CLOSEL Y 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 AVOIDIN G 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. IF THIS PURPOSE IS KEPT IN MIND THEN, IN OUR VIEW, THE WORD ADVANCE HAS TO BE READ IN CONJUNCTION WITH T HE WORD LOAN. USUALLY ATTRIBUTES OF A LOAN ARE THAT IT INVOLVES POSITIVE ACT OF LENDING COUPLED WITH ACCEP TANCE BY THE OTHER SIDE OF THE MONEY AS LOAN: IT GENERALL Y 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 INCLU DE THE OBLIGATION OF REPAYMENT. IF IT DOES THEN IT WOU LD BE A LOAN. THUS, ARISES THE CONUNDRUM AS TO WHAT MEANING ONE WOULD ATTRIBUTE TO THE TERM ADVANCE. THE RULE OF CONSTRUCTION TO OUR MINDS WHICH ANSWERS THIS CONUND RUM IS NOSCITUR A SOCIIS. THE SALE RULE HAS BEEN EXPLA INED BOTH BY THE PRIVY COUNCIL IN THE CASE OF ANGUS ROBERTSON V. GEORGE DAY [1879] 5 AC 63 BY OBSERVING IT IS A LEGITIMATE RULE OF CONSTRUCTION TO CONSTRUE WORDS I N AN ACT OF PARLIAMENT WITH REFERENCE TO WORDS FOUND IN IMMEDIATE CONNECTION WITH THEM AND OUR SUPREME COU RT 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. ITA NOS.442 TO 444/B/10 PAGE 22 OF 33 THEREFORE, WE HOLD THAT THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE AMOUNTS ADVANCED FOR BUSINESS TRANSACTION BETWEEN THE PARTIES, NAMELY, THE ASSESSEE-COMPANY AND M/S. PEE EMPRO EXPORTS PVT. LTD. WAS NOT SUCH TO FALL WITHIN THE D EFINITION OF DEEMED DIVIDEND UNDER SECTION 2(22)( E ). THE PRESENT APPEAL IS, THEREFORE, DISMISSED. (III) A SIMILAR VIEW HAS BEEN REITERATED IN THE CA SE OF NH SECURITIES LIMITED V. DCIT 11 SOT 302 (MUM). (IV) THE ENTRIES MADE IN THE BOOKS OF ACCOUNT CANNO T GO TO DECIDE THE AMBIT OF TAXATION. IN THIS REGARD, THE HONBLE APEX COUR T IN THE CASE OF KEDARNATH JUTE MANUFACTURING CO., LTD V. CIT (CENTRAL) CALCUT TA REPORTED IN 82 ITR 363 (SC) HAD RULED THAT WHETHER THE ASSESSEE IS ENTITLED TO THE DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING TO IT AND NOT IN THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS; NOR CAN THE EXISTENCE OR ABSENC E OF ENTRIES IN THE ACCOUNT BOOKS BE DECISIVE OR CONCLUSIVE IN THIS MATTER. THE ASSESSEE WAS ENTITLED TO CLAIM THE DEDUCTION TOWARDS THE SALES TAX LIABILITY WHICH IT WAS LIABLE UNDER LAW TO PAY DURING THE RELEVANT ACCOUNTING YEAR. THA T LIABILITY DID NOT CEASE TO BE A LIABILITY BECAUSE THE ASSESSEE HAD TAKEN PR OCEEDINGS BEFORE HIGHER AUTHORITIES FOR GETTING IT REDUCED OR WIPED OUT SO LONG AS THE ASSESSEE'S COMPLETION DID NOT PREVAIL. (V) THE HONBLE ITAT (SB) IN THE CASE OF ACIT V. B HAUMIK COLOUR (P) LTD. REPORTED IN 120 TTJ 865 (MUM), AFTER DUE CONSIDERAT ION OF THE RIVAL SUBMISSIONS AND ALSO THE FINDING OF THE EARLIER BEN CH, THE HONBLE SPECIAL BENCH WAS PLEASED TO OBSERVE THUS - 41. IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUES TIONS REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS: ITA NOS.442 TO 444/B/10 PAGE 23 OF 33 ON THE FIRST QUESTION: DEEMED DIVIDEND CAN BE ASSES SED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION: THE EXPRESSION 'SHAREHOLDER ' REFERRED TO IN S. 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AN D BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLDER THEN THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY . SIMILARLY , IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHO LDER THEN ALSO THE PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. (VI) IN THE CASE OF CIT V. C.P SARATHY MUDALIAR REPORT ED IN 83 ITR 170 (SC), THE HONBLE APEX COURT WAS EMPHATIC IN ITS WI SDOM THAT THE BURDEN WAS SQUARELY PLACED ON THE SHOULDERS OF THE REVENUE TO PROVE THAT THE CASE FALLS WITHIN THE DEEMING PROVISION. CONCURRING WITH THE RULING OF THE HONBLE COURT, WE ARE OF THE FIRM VIEW THAT THE REVENUE HAD FAILED TO BRING ON RECORD WITH ANY CONCLUSIVE EVIDENCE TO PROVE THAT THE AMOUNTS SO RECEIVED FROM BDPL BY THE ASSESSEE WAS ADVANCE OR LOAN SO AS TO BRING IT UNDER THE AMBIT O F S.2 (22) (E) OF THE ACT. (VII) WITH REGARD TO THE ACCUMULATED PROFITS OF BD PL AS COMPUTED BY THE AO, THE ASSESSEE HAD PLACED STRONG RELIANCE ON THE FINDING OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF G.R.GOVINDARAJULU NAIDU V. CIT REPORTED IN 90 ITR 13 (MAD). WITH DUE RESPECTS WE HAVE PERU SED THE RULING OF THE HONBLE COURT WHEREIN IT HAD POSED QUESTIONS THAT - WHETHER ACCUMULATED PROFITS FOR THE PURPOSE OF PAYI NG DEEMED DIVIDENDS INCLUDES INITIAL DEPRECIATION? WHETHER PAYMENT BY W AY OF LOAN OR ADVANCE INCLUDES NOTIONAL PAYMENT BY BOOK ENTRIES? WHEN CAL L MONIES DUE FROM THE SHAREHOLDERS WERE ADJUSTED BY BOOK ENTRIES AND SHAR ES WERE FULLY PAID UP, WHETHER IT AMOUNTS TO PAYMENT OF DIVIDEND? HINDU UN DIVIDED FAMILY WAS THE BENEFICIAL OWNER OF SHARES. THE KARTA WAS REGISTERE D HOLDER. WHETHER THE ITA NOS.442 TO 444/B/10 PAGE 24 OF 33 LOAN TO THE FAMILY AND NOT TO THE SHAREHOLDER CAN B E TREATED AS DIVIDEND PAID TO THE FAMILY? AFTER ANALYZING THE ISSUE IN VARIOUS ANGLES, THE HO NBLE COURT HELD THAT - THE AMOUNTS DUE BY THE ASSESSEE TO THE COMPANY TOW ARDS CALL MONEY ON SHARES WHICH WERE TREATED AS HAVING BEEN SPEED UP B Y MAKING BOOK ENTRIES CANNOT BE TREATED AS A PAYMENT OF LOAN BY THE COMPA NY FOR THE PURPOSE OF S. 2(6A)(E). FURTHER, TO APPLY THE PROVISIONS OF S. 2( 6A), THE LOAN MUST HAVE BEEN TO ITS REGISTERED SHAREHOLDER. THIS SECTION DO ES NOT EMPOWER THE COMPANY TO PAY DIVIDENDS TO ANY ONE OTHER THAN ITS REGISTERED SHAREHOLDERS. THE FACT THAT THE FAMILY WAS THE BENEFICIAL OWNER W OULD NOT MAKE IT A REGISTERED SHAREHOLDER. S. 133 OF COMPANIES ACT PRO HIBITS RECOGNITION OF TRUSTS AS A SHAREHOLDER AND THERE IS A SPECIFIC PRO VISION FOR HUF BEING A SHAREHOLDER. THEREFORE, S. 2(6A)(E) CANNOT BE APPLI ED UNLESS THE LEGISLATURE INTRODUCES A FURTHER DEEMING PROVISION TO THE EFFEC T THAT THE JOINT FAMILY WHICH IS THE BENEFICIAL OWNER OF THE SHARES SHALL B E DEEMED TO BE THE REGISTERED SHAREHOLDER OF THE COMPANY. HAVING REGARD TO THE WORDS 'PAYMENT BY WAY OF LOAN OR ADVANCE' EMPLOYED IN SECTION 2(6A)(E), WE ARE OF THE VIEW THAT THERE SHOULD BE AN OUTGOING OR FLOW OF MONEY FROM THE COMPANY TO THE SHAREHOLDER S O AS TO ATTRACT THE SAID PROVISION. SOME LIGHT IS THROWN BY THE PROVISION IN SECTION 205(5) OF THE COMPANIES ACT, 1956, WHICH PROVIDES THAT NO DIVIDEN D SHALL BE PAYABLE EXCEPT IN CASH, THE ONLY EXCEPTION BEING THE ISSUE OF FULLY PAID UP BONUS SHARES OR THE PAYMENT TOWARDS UNPAID CALL MONIES ON ANY SHARES HELD BY THE MEMBERS. IN THIS CASE, THERE CANNOT BE ANY DISPUTE THAT THE SUM OF RS. 1,65,000 CANNOT BE TREATED AS AN ADVANCE, FOR IT IS NOT AN AMOUNT PAID TOWARDS ANY OTHER AMOUNT DUE BY THE COMPANY TO THE ASSESSEE-FAMILY. THE ONLY QUESTION THEN IS WHETHER THE SAID SUM REPRESEN TS THE PAYMENT BY WAY OF LOAN BY THE COMPANY TO THE ASSESSEE-FAMILY. HAVING REGARD LO THE SETTING IN WHICH THE SAID CLAUSE (E) OF SECTION 2(6A) OCCURS, IT IS NOT POSSIBLE TO SAY THAT THE PAYMENT CONTEMPLATED WILL INCLUDE A NOTION AL PAYMENT BY WAY OF BOOK ENTRIES. (VIII) YET ANOTHER CASE, THE HONBLE ITAT, AHMEDABA D B BENCH IN ITS FINDING IN THE CASE OF M.B.STOCK HOLDINGS PRIVATE L IMITED V. ACIT REPORTED IN 75I TTJ 898 (AHD) DATED: 27.12.2001 HAD OBSERVED THUS 30. ON ANALYSIS OF THE AFOREMENTIONED DISCUSSION, IN OUR VIEW, THE FOLLOWING PRINCIPLES EMERGE:-- (I) THAT FOR PURPOSES OF SECTION 2(22)(E), THE ACCU MULATED PROFITS ARE TO BE WORKED OUT UP TO THE DATE OF EACH PAYMENT/ADVANCEME NT OF THE LOAN. ITA NOS.442 TO 444/B/10 PAGE 25 OF 33 (II) THAT THERE IS A DISTINCTION BETWEEN THE 'ACCUM ULATED PROFITS' OF BUSINESS AND THE CURRENT YEAR'S PROFITS OF BUSINESS . (III) THAT THE PROFITS OF BUSINESS ACCRUE AT THE EN D OF THE PREVIOUS YEAR. (IV) THAT LOAN OR ADVANCE TREATED AS DEEMED INCOME UP-TO THE DATE OF FRESH LOAN IS TO BE REDUCED FROM ACCUMULATED PROFITS. (V) THAT THE REPAYMENT OF LOAN DURING THE SAME YE AR IS NOT TO BE DEDUCTED FROM THE ACCUMULATED PROFITS. 31. WHEN ONE KEEPS ALL THE ABOVE FOUR PRINCIPLES OF LAW IN MIND, IT WILL NOT BE DIFFICULT TO APPRECIATE THAT THE EXPLANATION 2 T O SECTION 2(22)(E) DOES NOT HAVE THE EFFECT OF INCLUSION OF CURRENT YEAR'S BUSI NESS PROFITS. THESE ARE CERTAIN EXAMPLES TO SHOW THAT EXPLANATION 2 TO SECT ION 2(22)(E) DOES NOT BECOME REDUNDANT IN THE LIGHT OF THE DECISION OF HO N'BLE SUPREME COURT IN THE CASE OF V. DAMODARAN. 32. THEREFORE, WHEREAS THE AFOREMENTIONED ADJUSTMEN TS AND OTHER ADJUSTMENTS AS MAY BE PERMISSIBLE IN LAW ARE TO BE MADE AND, ACCORDINGLY, ACCUMULATED PROFITS WORKED OUT ON EACH DAY OF LOAN OR ADVANCE IS MADE TO THE SHAREHOLDER, WE ARE OF THE FIRM VIEW THAT ALL T HE PROFITS THAT HAVE NOT ACCRUED TO THE COMPANY ADVANCING THE LOAN UP-TO THE EACH DAY OF ADVANCE/LOAN HAVE TO BE TAKEN INTO ACCOUNT IN WORKI NG THE ACCUMULATED PROFITS WITHIN THE MEANING OF SECTION 2(22)(E). BUT SINCE THE BUSINESS PROFITS OF THE COMPANY ACCRUE ONLY AT THE END OF THE YEAR, THE CURRENT YEAR'S BUSINESS PROFITS ARE NOT TO BE INCLUDED. WE WOULD, THEREFORE, IN THE INTEREST OF JUSTICE, RESTORE THIS ISSUE TO THE FILE OF THE A SSESSING OFFICER FOR THE PURPOSE OF WORKING OUT THE ACCUMULATED PROFITS ON E ACH DAY OF ADVANCING THE LOAN TO THE APPELLANT AND APPLY SECTION 2(22)(E ) TO SUCH LOANS SUBJECT TO THE MAXIMUM OF ACCUMULATED PROFITS UP TO THE DATE O F ADVANCEMENT OF THE LOAN. (5) IN RESPECT OF THE ASSESSEES PLEA THAT THERE WA S REDUCTION IN THE SHARE-HOLDING OF RAJA BAGMANE IN THE ASSESSEES COM PANY, THE AO, AFTER ANALYZING THE ASSESSEES CONTENTIONS, HAD OBSERVED IN HIS IMPUGNED ORDER FOR THE ASSESSMENT YEAR 2006-07 THUS - 3.18. ON CAREFUL CONSIDERATION OF THE ABOVE, IT A PPEARS THAT SMT VASUNDHARA RAJA IS NOT IN A POSITION TO PAY OFF RS. 4,91,94,263/- FOR THE SHARES TRANSFERRED BY HER HUSBAND. AS ALREADY DISC USSED ABOVE, THERE WAS ITA NOS.442 TO 444/B/10 PAGE 26 OF 33 NO TRANSFER OF FUNDS EITHER BY WAY OF CASH OR CHEQU E FOR TRANSFER OF THE SHARES AND IT WAS MADE BY BOOK ENTRIES ONLY. IT TH EREFORE APPEARS THAT THE INTENTION OF SHRI RAJA BAGMANE OF TRANSFERRING THE SHARES TO HIS WIFE IS NOT REAL AND IS ONLY ARRANGEMENT OR A COLOURABLE DEVICE TO CIRCUMVENT THE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME-TAX AC T, 1961. A CAREFUL EXAMINATION OF THE FACTS OF THE CASE INDICATES THAT THERE WAS NOT A REAL TRANSFER OF SHARE AND IT WAS ONLY A COLOURABLE DEVI CE TO REDUCE THE NUMBER OF SHARES BY RAJA BAGMANE SO THAT HE IS NOT TREATED AS A SHAREHOLDER HAVING A SUBSTANTIAL INTEREST IN THE COMPANY AND, THEREBY, AVOID THE TAXABILITY OF DEEMED DIVIDEND. BUT IN REALITY, HE WAS STILL HAVI NG SUBSTANTIAL INTEREST IN THE COMPANY AND HAD TOTAL CONTROL OVER THE COMPANY. IN VIEW OF THE ABOVE, IT IS HELD THAT EVEN IF RAJA BAGMANE HAD TRANSFERRE D HIS SHARES DURING THIS YEAR AND REDUCED IT TO 9%, HE WAS STILL HAVING SUBS TANTIAL INTEREST IN M/S.BAGMANE LEASING & FINANCE PVT. LTD. AND THE PRO VISIONS OF SECTION 2(22)(E) IS APPLICABLE IN THE CASE OF THE ASSESSEE FOR THIS ASSESSMENT YEAR ALSO. TO BELIE THE AOS REASONING, IT WAS CONTENDED BY TH E ASSESSEE THAT THE SALE OF SHARES HAD BEEN DISCLOSED IN THE BALANCE SH EETS OF RAJA BAGMANE AND MRS. VASUNDHARA RAJA AS ON 31.3.06. EVEN AN IM MOVABLE PROPERTY CAN BE TRANSFERRED FOR A CONSIDERATION PAID, PART P AID AND PART PROMISED AS PER S.54 OF THE TRANSFER OF PROPERTY ACT. IT WAS F URTHER CONTENDED THAT THERE WAS A RUNNING ACCOUNT OF MRS. VASUNDHARA RAJA IN T HE BOOKS OF RAJA BAGMANE AND, THEREFORE, THE CONSIDERATION DUE WAS D EBITED TO HER ACCOUNT. SIMILARLY, IN THE ACCOUNT OF RAJA BAGMANE IN THE BO OKS OF MRS. VASUNDHARA RAJA CREDIT ENTRIES WERE PASSED. COPY OF ANNUAL RETURN FOR THE YEAR 2005-06 FURNISHE D BEFORE THE REGISTRAR OF COMPANIES, DETAILING THE TRANSFER OF SHARES BY R AJA BAGMANE TO MRS. VASUNDHARA RAJA WAS PRODUCED [SOURCE: P 103 110 O F PB AR]. A COPY OF SUCH ANNUAL RETURN FURNISHED WAS AUTHENTICATED BY T HE ASST. REGISTRAR OF COMPANIES CONFIRMING THE DETAILS OF SHARES TRANSFER RED [P 103 OF PB AR]. ITA NOS.442 TO 444/B/10 PAGE 27 OF 33 (6) A CLINCHING EVIDENCE WAS THAT RAJA BAGMANE WAS NOT HAVING 10% SHARE-HOLDING IN THE ASSESSEE COMPANY THROUGH OUT T HE YEAR. EVEN FOR INVOKING OR THE APPLICABILITY OF THE PROVISIONS OF S.2 (22)(E) OF THE ACT, IT WAS ESSENTIAL THAT THE SHAREHOLDER SHOULD HAVE 10% EQUI TY SHARE CAPITAL IN BOTH THE COMPANIES THE CONCERN WHICH LENT THE MONEY AN D THE CONCERN TO WHOM MONEY HAD BEEN LENT. ACCORDING TO THE ASSESSE E, THOUGH RAJA BAGMANE WAS HOLDING MORE THAN 10% SHARE IN BDPL THR OUGHOUT THE YEAR, HE DID NOT PERHAPS HOLD 10% SHARE IN THE ASSESSEE COMPANY THROUGHOUT THE YEAR. THUS, THE PROVISIONS OF S.2 (22)(E) OF T HE ACT CAN BE INVOKED IF THE CONCERNED PERSON WAS NOT ONLY A REGISTERED SHAREHO LDER BUT ALSO A BENEFICIAL SHAREHOLDER HOLDING NOT LESS THAN 10% OF THE SHARE. TO ILLUSTRATE FURTHER LET US HAVE GLANCE AT EXPLANA TION 3(B) TO S. 2(22)(E) OF THE ACT: S.2 (22)(E): EXPLANATION 3 FOR THE PURPOSES OF TH IS CLAUSE,- (A) CONCERN MEANS . (B) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIM E DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS TH AN TWENTY PER CENT OF THE INCOME OF SUCH CONCERN; FROM THE ABOVE WORDINGS, TWO IMPORTANT ASPECTS ARE TO BE NOTICED, NAMELY, (I) CONCERN OTHER THAN COMPANY ; AND (II) AT ANY TIME DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LES S THAN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN. THUS, IN THE PRESENT CASE, NONE OF THESE TWO ASPECTS ARE ATTRACTED. ITA NOS.442 TO 444/B/10 PAGE 28 OF 33 (7) TURNING OUR ATTENTION TO THE CASE LAWS ON WHICH THE AO HAD PLACED STRONG RELIANCE WHICH HAS BEEN RATIFIED BY T HE LD. CIT (A) IN HIS IMPUGNED ORDER. (I) IN THE CASE OF MS.P SARADA V. CIT REPORTED IN 2 29 ITR 445 (SIC) 444 (SC), THE ISSUE BEFORE THE HIGHEST JUDICIARY OF THE LAND WAS THAT WHETHER, THE WITHDRAWALS MADE BY THE ASSESSEE FROM UNIVERSAL RADIATORS PRIVATE LIMITED TOTALING RS. 93,027 CAN BE ASSESSED IN THE HANDS OF THE ASSESSEE UNDER SECTION 2(22)(E) OF THE ACT THE YEAR 1973-74 ? AFTER DUE CONSIDERATION OF THE FACTS OF THE CASE, THE HONBLE COURT WAS PLEASED TO RULE THAT - THE WITHDRAWALS MADE BY THE APPELLANT FROM THE COM PANY AMOUNTED TO GRANT OF LOAN OR ADVANCE BY THE COMPANY TO THE SHAR EHOLDER. THE LEGAL FICTION CAME INTO PLAY AS SOON AS THE MONIES WERE P AID BY THE COMPANY TO THE APPELLANT. THE ASSESSEE MUST BE DEEMED TO HAVE RECEIVED DIVIDENDS ON THE DATES ON WHICH SHE WITHDREW THE AFORESAID AMOUN TS OF MONEY FROM THE COMPANY. THE LOAN OR ADVANCE TAKEN FROM THE COMPANY MAY HAVE BEEN ULTIMATELY REPAID OR ADJUSTED, BUT THAT WILL NOT AL TER THE FACT THAT THE ASSESSEE, IN THE EYE OF LAW, HAD RECEIVED DIVIDEND FROM THE COMPANY DURING THE RELEVANT ACCOUNTING PERIOD. WITH HIGHEST REGARDS, WE WOULD LIKE TO POINT OUT TH AT THE ISSUE BEFORE THE HONBLE APEX COURT WAS ON THE DIFFERENT FOOTING WHI CH HAS NO RELEVANCE TO THE ISSUE ON HAND ON THE VERY GROUND THAT THE ASSES SEE HAD NOT RECEIVED ANY LOAN OR ADVANCE FOR ITS OWN BENEFIT, BUT, THE FUNDS WERE PROVIDED F OR THE EXECUTION OF FIT-OUTS IN THE TECH. PARK ON BEHALF O F BDPL. THUS, IN OUR CONSIDERED VIEW, THE CASE LAW CITED BY THE AUTHORIT IES BELOW IS DISTINGUISHABLE. (II) YET ANOTHER CASE LAW ON WHICH THE AUTHORITIES BELOW HAVE PLACED RELIANCE TO DRIVE HOME THEIR POINT WAS IN THE CASE OF SMT TARULATA SHYSAM ITA NOS.442 TO 444/B/10 PAGE 29 OF 33 AND OTHER V. CIT, WEST BENGAL REPORTED IN 108 ITR 3 57 (SIC) 345 (SC) WHEREIN THE ISSUE BEFORE THE HONBLE APEX COURT WAS - WHEN LOAN OR ADVANCE MADE TO SHAREHOLDER ARE REPAID BEFORE THE E ND OF THE ACCOUNTING YEAR, WHETHER THE LOAN OR ADVANCE COULD BE TREATED AS BEING DIVIDEND? THE PROVISIONS OF S. 2(6A)(E) OF 1922 ACT, WOULD BE ATT RACTED AT THE TIME OF ADVANCE OF LOAN BEING MADE TO THE SHAREHOLDER EXCEP T FOR THE SPECIFIC PROVISIONS IN S. 12(1B) FOR THE ASSESSMENT YEAR 195 5-56, THE LEGISLATURE HAS DELIBERATELY NOT MADE THE SUBSISTENCE OF THE LOAN O N THE DATE OF THE PREVIOUS YEAR A PREREQUISITE FOR RAISING OR APPLYING THE STA TUTORY PROVISIONS. AFTER MUCH DELIBERATION OF THE ISSUE, EXTENSIVELY Q UOTING VARIOUS JUDICIAL FINDINGS, THE HONBLE COURT RULED THAT '... THE COMBINED EFFECT OF THESE TWO PROVISIONS IS THAT THREE KINDS OF PAYMENTS MADE TO THE SHAREHOLDER OF A COMPANY TO WHICH THE SAID PROVISIONS APPLY, ARE TRE ATED AS TAXABLE DIVIDEND TO THE EXTENT OF THE ACCUMULATED PROFITS HELD BY TH E COMPANY. THERE THREE KINDS OF PAYMENTS ARE (1) PAYMENTS MADE TO THE SHAREHOLDER BY WAY OF ADVANCE OR LOAN; (2) PAYMENTS MADE ON HIS BEHALF; A ND (3) PAYMENTS MADE FOR HIS INDIVIDUAL BENEFIT. THERE ARE FIVE CONDITIONS WHICH MUST BE SATISFIED BEFORE SECTION 12(1B) CAN BE INVOKED AGAINST A SHAR EHOLDER. THE FIRST CONDITION IS THAT THE COMPANY IN QUESTION MUST BE O NE IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED WITHIN THE MEANING OF SECTION 23A AS IT STOOD IN THE YEAR IN WHICH THE LOAN WAS ADVANCED. THE SEC OND CONDITION IS THAT THE BORROWER MUST BE A SHAREHOLDER AT THE DATE WHEN THE LOAN WAS ADVANCED; IT IS IMMATERIAL WHAT THE EXTENT OF HIS SHAREHOLDING I S. THE THIRD CONDITION IS ITA NOS.442 TO 444/B/10 PAGE 30 OF 33 THAT THE LOAN ADVANCED TO A SHAREHOLDER BY SUCH A C OMPANY CAN BE DEEMED TO BE DIVIDEND ONLY TO THE EXTENT TO WHICH IT IS SH OWN THAT THE COMPANY POSSESSED ACCUMULATED PROFIT AT THE DATE OF THE LOA N. THIS IS AN IMPORTANT LIMIT PRESCRIBED BY THE RELEVANT SECTION. THE FOURT H CONDITION IS THAT THE LOAN MUST NOT HAVE BEEN ADVANCED BY THE COMPANY IN THE O RDINARY COURSE OF ITS BUSINESS. IN OTHER WORDS, THIS PROVISION WOULD NOT APPLY TO CASES WHERE THE COMPANY WHICH ADVANCES A LOAN TO ITS SHAREHOLDER CA RRIES ON THE BUSINESS OF MONEY-LENDING ITSELF; AND THE LAST CONDITION IS THA T THE LOAN MUST HAVE REMAINED OUTSTANDING AT THE COMMENCEMENT OF THE SHA REHOLDER'S PREVIOUS YEAR IN RELATION TO THE ASSESSMENT YEAR 1955-56. WITH DUE RESPECTS, WE WOULD LIKE TO POINT OUT THAT NONE OF THE THREE CONDITIONS PRESCRIBED BY THE HONBLE COURT ARE APPL ICABLE TO THE CASE ON HAND, NAMELY, (1) NO PAYMENTS WERE MADE TO THE ASSESSEE BY WAY OF ADVANCE OR LOAN BY BDPL, BUT, FUNDS WERE ALLOCATED FOR EXECUTION OF FIT- OUTS ON ITS BEHALF; (2) NO PAYMENTS WERE MADE ON ITS BEHALF; AND (3) PAYMENTS MADE WERE NOT FOR ANYBODYS INDIVIDUAL BE NEFIT. THE PAYMENTS IN QUESTION WERE PROVIDED DUE TO BUSINESS EXIGENCIES OF BDPL AND THE FUNDS SO PROVIDED FOR THE SOLE BENEFIT OF BDPL AND NOT TO INDIVIDUAL BENEFITS OF A SHAREHOLDER, THE QUESTI ON OF APPLICABILITY OF THE PROVISIONS OF S.2 (22)(E) OF THE ACT DOESNT ARISE. 8.4. WE ARE, THEREFORE, OF THE CONSIDERED VIEW THAT THE CASE LAWS RELIED ON BY THE AUTHORITIES BELOW HAS NO RELEVANCE TO THE ISSUE ON HAND. ITA NOS.442 TO 444/B/10 PAGE 31 OF 33 8.5 SECTION 2(22)(E) BRINGS IN A DEEMING FICTIO N. IT PROVIDES IN CERTAIN CIRCUMSTANCES AN ADVANCE OR LOAN IS TREATED AS DIVIDEND IN THE HANDS OF THE SHAREHOLDER. ADVANCES AND LOANS HAVE TO BE INTERPRETED IN ITS TRUE SENSE. ANY PAYMENT MADE OUT OF BUSINESS EXPEDIENCY DOES NOT FALL WITHIN THE AMBIT OF ADVANCES AND LOANS, THOUGH THE ACCOUNTING ENTRIES ARE PASSED AS SUCH. THE TRUE NATURE OF THE TRANSACTION HAS TO BE SEEN AS TO WHETHER THE TRANSACTION IS ATTRIBUTABLE TO BE A LOAN OR AN ADVANCE. IN CONSTRUING A DEEMING FICTION, IT IS NO T TO BE EXTENDED BEYOND THE PURPOSE FOR WHICH THE DEEMING FICTION IS CREATED OR BEYOND THE LANGUAGE OF THE SECTION. IN INTERPRETING A DEE MING FICTION, THE INTENTION OF THE LEGISLATURE HAS TO BE GIVEN DUE IM PORTANCE. THE FICTION SHOULD NOT BE EXTRAPOLATED BEYOND THE PURPOSE FOR W HICH THE LEGISLATION IS BROUGHT IN. ON INTERPRETATION OF A LEGAL FICTIO N, IT WAS HELD IN CONTROLLER OF ESTATE DUTY V. KRISHNA KUMARI DEVI (173 ITR 561) THAT THE COURT SHOULD ASCERTAIN THE PURPOSE FOR WHICH THE FICTION IS CREATED AND AFTER DOING SO, ASSUME ALL FACTS WHICH ARE INCIDENTAL TO GIVE IN EFFECT TO THE FICTION. IN CIT V. HINDUSTAN PETROLEUM CORPORATION LTD. (187 IT R 1) (BOM) , IT WAS HELD THAT A LEGAL FICTION HAS TO BE CARRIE D TO ITS LOGICAL CONCLUSION, BUT, ONLY WITHIN THE PARAMETERS OF THE PURPOSE FOR WHICH A FICTION IS CREATED. MOREOVER, AS FAR AS POSSIBLE, THE LEGAL FICTION SHOULD NOT BE GIVEN A MEANING SO AS TO CAUSE INJUSTICE. TH US, IT IS OBVIOUS THAT THE FICTION CREATED IN SECTION 2(22)(E) ONLY REFERS TO PURE ADVANCES OR LOANS. ANY AMOUNT PAID ON ACCOUNT OF GENUINE BUSIN ESS TRANSACTION BETWEEN THE ENTITIES FALLS OUTSIDE THE AMBIT OF SEC TION 2(22)(E). AS A RESULT OF GLOBALIZATION DURING THE RECENT PAST, VAR IOUS GIANT INFRASTRUCTURE ITA NOS.442 TO 444/B/10 PAGE 32 OF 33 PROJECTS HAVE SPRUNG UP AND MANY ARE IN THE PIPELIN E. MULTI-VARIOUS ACTIVITIES ARE INVOLVED IN PROMOTING THESE GIANT PR OJECTS. ALL THESE ACTIVITIES COLLECTIVELY STRIVE TO COMPLETE THE PROJ ECTS. EACH ACTIVITY IS DISTINCT IN CHARACTER. FOR EACH ACTIVITY, DIFFERENT KINDS OF COMMERCIAL AGREEMENTS AND TECHNICAL AGREEMENTS ARE REQUIRED. THE FINANCIAL STRUCTURE OF EVERY ACTIVITY DIFFERS. THE RISK AND REWARD INVOLVED IN EVERY ACTIVITY ALSO DIFFERS. IN ORDER TO MEET SUCH COMP LEX CONSTRAINTS, THE FLAGSHIP COMPANY/THE PROMOTER MAY CREATE VARIOUS DI STINCT ENTITIES BEING SPECIAL UTILITY VEHICLES (SUV) TO DEAL IN EACH OF T HESE ACTIVITIES INDEPENDENTLY. THE PROMOTER ALONG WITH THESE SUV JOINTLY WORKS TO COMPLETE THE OVER-ALL PROJECT. IN SUCH SITUATION, FUNDS BEING THE BLOODLINE FOR ALL THESE ENTITIES, FLOW FROM ONE ENT ITY TO THE OTHER. SUCH TRANSFER OF FUNDS ARISING OUT OF COMMERCIAL EXPEDIE NCY MAY NOT BE IN THE NATURE OF ADVANCES OR LOAN IN ALL CIRCUMSTANCES. 8.6. TAKING INTO ACCOUNT THE RIVAL SUBMISSIONS, TH E FACTS AND CIRCUMSTANCES OF THE ISSUE AS DELIBERATED UPON IN T HE FORE-GOING PARAGRAPHS AND ALSO THE VARIOUS JUDICIAL PRONOUNCEM ENTS CITED SUPRA, WE ARE OF THE UNANIMOUS VIEW THAT THE AO WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF S.2 (22)(E) OF THE ACT IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEARS UNDER DISPUTE. THE LD. CIT(A)S STAND IN UPHOLDING THE FINDINGS OF THE AO IS ALSO NOT JUSTIFIABLE FOR THE REASONS RECORDED SUPRA . IT IS ORDERED ACCORDINGLY. 9. THE ISSUE OF APPLICABILITY OF S.2 (22)(E) OF TH E ACT IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE FOR THE REA SONS RECORDED IN THE ITA NOS.442 TO 444/B/10 PAGE 33 OF 33 FORE-GOING PARAGRAPHS, THE ASSESSEES OTHER GRIEVA NCE THAT THE CIT(A) ERRED IN NOT REDUCING THE ACTUAL TAX LIABILITY OF T HE RELEVANT CURRENT YEAR FROM THE PROFITS OF THAT YEAR FOR THE PURPOSES OF C OMPUTATION OF ACCUMULATED PROFITS HAS NOT BEEN ADDRESSED TO. 10. THE LAST GROUND OF THE ASSESSEE THAT THE CIT(A ) ERRED IN UPHOLDING THE LEVY OF INTEREST U/S 234B OF THE ACT IS NOT MAINTAINABLE AS CHARGING OF INTEREST U/S 234B OF THE ACT IS MANDATO RY AND CONSEQUENTIAL IN NATURE. THIS GROUND IS, THEREFORE, DISMISSED. 11. IN THE RESULT, THE ASSESSEES APPEAL FOR THE ASSESSMENT YEARS 2004-05, 2005-06, AND 2006-07 ARE PARTLY ALLO WED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF NOVEMBER, 2010. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 4 TH NOVEMBER, 2010. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.