Mr. Raja Bagmane, Bangalore V. ACIT, Bangalore

ITA 485/BANG/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 8689 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 25 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: 2002-2003
• Appeal Filed On: 09-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SWATHI S PATIL CITIIDR
• Assessee Lawyers: B P SACHIN KUMAR
• Keywords: Bad and doubtful debts; Deemed dividend; Assessment record; Commercial expediency
• Section: 2(22)(e); 234B; 250; 207; 208; 264; 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. 484 TO 490/BANG/2010 ASSESSMENT YEARS : 2001-02 TO 2007-08 MR. RAJA BAGMANE, NO.497, 14 TH MAIN, 3 RD BLOCK, KORAMANGALA, BANGALORE. : 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 SEVEN APPEALS OF THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS OF THE LD. CIT (A)-VI, BANGALORE, IN ITA NO. 264 / ACIT CC 2(3)/ CIT (A)-VI/ 2008-09 DATED: 2.2.2010 FOR THE ASSESSMENT YEAR 2001-02 AND A CONSOLIDATED ORDER IN ITA NOS: 261, 262, 263, 265, 266 & 267 / ACIT CC 2(3)/ CIT (A)-VI/ 2008-09 DATED: 2.2.2010 FOR THE ASSESSMENT YEARS 2002- 03, 2003-04, 2004-05, 2005-06, 2006-07 & 2007-08 RESPECTIVELY. ITA NOS.484 TO 490/B/10 PAGE 2 OF 40 I. A.Y 2001-02 ITA NO:484/10: 2. THE ASSESSEE HAD RAISED FOUR (SIC) THREE GROUND S IN AN ILLUSTRATIVE AND NARRATIVE MANNER. FOR THE SAKE OF PROPER APPRECIATION OF FACTS, THE ISSUES ARE REFORMULATED, IN A CONCISE MA NNER, AS UNDER: (I) 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 THAT THE TRANS ACTION BETWEEN THE ASSESSEE AND BAGMANE PHARMACEUTICALS (P) LTD [B PPL] IN THE COURSE OF BUSINESS ACTIVITIES AND THAT THE AMOUNT R ECEIVED COULD NOT BE HELD AS DIVIDEND; & (II) THE CIT(A) ERRED IN UPHOLDING THE LEVY OF INTEREST U/S 234B OF THE ACT. II. A.YS 2002-03, 03-04, 05-06, 06-07 & 07-08 ITA NO :485, 486, 488, 489 & 490/10 : 3. FOR THESE ASSESSMENT YEARS, THE ASSESSEE HAD RA ISED THE FOLLOWING IDENTICAL GROUNDS WHICH ARE REFORMULATED, IN A CONCISE MANNER, AS UNDER: (I) 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 [BDPL] WER E IN THE COURSE OF BUSINESS ACTIVITIES AND THAT THE AMOUNTS RECEIVED COULD NOT BE HELD AS DIVIDEND; (II) THE CIT(A) ERRED IN NOT REDUCING THE ACTUAL TAX LI ABILITY OF THE RELEVANT CURRENT YEAR FROM THE PROFITS OF THAT YE AR FOR THE PURPOSES OF COMPUTATION OF ACCUMULATED PROFITS; & ITA NOS.484 TO 490/B/10 PAGE 3 OF 40 (III) THE CIT(A) ERRED IN UPHOLDING THE LEVY OF INTEREST U/S 234B OF THE ACT. III. A.Y 2004-05 ITA NO:487/10: 4. IN THIS ASSESSMENT YEAR, THE ASSESSEE HAD RAISE D THE FOLLOWING GROUNDS WHICH ARE REFORMULATED AS UNDER: (I) 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 [BDPL] WER E IN THE COURSE OF BUSINESS ACTIVITIES AND THAT THE AMOUNT R ECEIVED COULD NOT BE HELD AS DIVIDEND; (II) THE CIT(A) ERRED IN NOT REDUCING THE ACTUAL TAX LIA BILITY OF THE RELEVANT CURRENT YEAR FROM THE PROFITS OF THAT YE AR FOR THE PURPOSES OF COMPUTATION OF ACCUMULATED PROFITS; (III) THE CIT (A) ERRED IN CONFIRMING THE ACTION OF THE A O IN DISALLOWING THE BAD DEBTS WRITTEN OFF; & (IV) THE CIT(A) ERRED IN UPHOLDING THE LEVY OF INTEREST U/S 234B OF THE ACT. 5. AS POINTED OUT EARLIER, THE ISSUES RAISED IN TH ESE APPEALS MORE OR LESS SIMILAR AND RATHER INTER-LINKED; THEY WERE HEARD, CONSIDERED AND DISPOSED OFF IN THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND CLARITY. I. A.Y 2001-02 ITA NO:484/10: 6. THE ASSESSEE, AN INDIVIDUAL, WAS CARRYING ON TH E BUSINESS IN REAL ESTATE. AN ACTION U/S 132 OF THE ACT WAS CARR IED OUT ON 14.9.2006 IN ITA NOS.484 TO 490/B/10 PAGE 4 OF 40 THE CASE OF THE ASSESSEE, HIS GROUP OF COMPANIES AN D CONNECTED OTHER ASSOCIATES. 6.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED IN THE BALANCE SHEET OF THE ASSESSEE THAT A N ADVANCE OF RS.16.64 LAKHS WAS RECEIVED FROM BPPL. ON BEING QUERIED, IT WAS REVEALED THAT DURING THE YEAR THE SAID AMOUNT WAS RECEIVED FROM B PPL BY AN ACCOUNT PAYEE CHEQUE AND THAT NO FURTHER DETAILS COULD BE F URNISHED SINCE THE BOOKS PERTAINING TO THE AY UNDER DISPUTE WERE LOST DURING THE SHIFTING OF THE OFFICE. 6.2. HOWEVER, THE AO WAS OF THE VIEW THAT BPPL WAS A CLOSELY- HELD COMPANY AND THAT THE ASSESSEE WAS THE MANAGING DIRECTOR OF THIS COMPANY. DURING THE PERIOD UNDER CONSIDERATION, HE WAS THE BENEFICIARY, HOLDING MORE THAN 10% OF EQUITY SHARE IN THIS COMPA NY. TAKING CUE FROM THE PROVISIONS OF S. 2 (22)(E) OF THE ACT AND SINCE THE ASSESSEE WAS A BENEFICIARY HOLDING MORE THAN 10% OF EQUITY SHARE C APITAL IN BPPL AND AS PER THE BALANCE SHEET, THE ACCUMULATED PROFIT OF TH E SAID COMPANY WAS RS.19.35 LAKHS AND RS.20 LAKHS AS ON 1.4.2000 AND 31.3.2001 RESPECTIVELY, THE AO HAD REQUIRED THE ASSESSEE TO R ESPOND AS TO WHY THE ADVANCE GIVEN BY BPPL SHOULD NOT BE TREATED AS DEEM ED DIVIDEND IN THE HANDS OF THE ASSESSEE. ON BEING QUERIED, THE ASSES SEES REPLY WAS THAT RS.16.64 LAKHS BEING INTEREST PAID BY BPPL AGAINST THE FUNDS PROVIDED BY HIM EARLIER AND SINCE BPPL WAS STARTED MAKING LOSSE S AND TO PROTECT THE COMPANY FROM BECOMING SICK, HE DECIDED AND TRANSFER RED BACK THE SAME AMOUNT TO THE COMPANY. ITA NOS.484 TO 490/B/10 PAGE 5 OF 40 6.3. BRUSHING ASIDE THE ASSESSEES CLAIM, THE AO S UMMED UP IN HIS IMPUGNED ORDER THAT BPPLS ONLY SOURCE OF INCOM E FOR THE AY UNDER CONSIDERATION WAS FROM LEASING OUT THE BUILDING, PL ANT AND MACHINERY AND THAT THE MONEY LENDING WAS NOT A SUBSTANTIAL PART O F ITS BUSINESS AND, THUS, THE ASSESSEE CANNOT CLAIM THAT THE TRANSACTION DONE BY THIS COMPANY WAS IN ITS NORMAL COURSE OF BUSINESS. FOR THE ELABORAT E REASONS SET OUT IN THE IMPUGNED ORDER, THE AO HAD TERMED THAT THE FUNDS RE CEIVED BY THE ASSESSEE FROM BPPL WAS IN THE NATURE OF LOANS AND A DVANCES WHICH COME UNDER THE PURVIEW OF S. 2 (22) (E) OF THE ACT. DRA WING STRENGTH FROM THE RULING OF THE HONBLE SUPREME COURT IN THE CASE OF P.SARADA V. CIT REPORTED IN 229 ITR 444, THE AO TREATED THE ENTIRE AMOUNT OF ADVANCE OF RS.16.64 LAKHS RECEIVED BY THE ASSESSEE FROM BPPL A S DEEMED DIVIDEND IN HIS HANDS AND TAXED ACCORDINGLY. 6.4. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUE WIT H THE CIT (A) FOR RELIEF. AFTER CONSIDERING THE CONTENTIONS PUT FORTH BY THE ASSESSEE AND ALSO THE PERUSAL OF THE REASONING OF THE AO, THE LD . CIT (A) HAD OBSERVED THUS (I) IN THE BALANCE SHEET OF M/S. BAGMANE PHARMACEUTICAL S PVT. LTD, THE AMOUNT HAS BEEN SHOWED UNDER THE HEAD LOANS AN D ADVANCES. THE APPELLANT ALSO ADMITTED THE FACT BY SHOWING THE ABOVE AMOUNT UNDER THE SCHEDULE OF ADVANCES AND DEP OSITS IN THE ANNEXURE TO THE BALANCE SHEET FILED ALONG WITH THE RETURN OF INCOME FILED IN HIS CASE; (II) THE APPELLANT FAILED TO PROVE THAT THE AMOUNT RECEI VED AS INTEREST WAS RETURNED BACK TO THE COMPANY, IF IT WAS SO, THE N ALSO THE INTEREST INCOME WAS ASSESSABLE IN THE HANDS OF THE APPELLANT; & (III) THE APPELLANTS ARGUMENT THAT THE AO INCLUDED THE I NVESTMENT ALLOWANCE RESERVE OF RS.584742/- AND SUBSIDY FROM D IC OF ITA NOS.484 TO 490/B/10 PAGE 6 OF 40 RS.750000/- IN THE ACCUMULATED PROFITS FOR COMPUTIN G DIVIDENDS IS CONTRARY TO THE FACTS ON RECORD, ACCORDING TO WHICH THE PROFIT OF BPPL AS PER PROFIT AND LOSS ACCOUNT WAS RS.20,00,14 4/- WITHOUT INCLUSION OF THE INVESTMENT ALLOWANCE RESERVE AND S UBSIDY FROM DIC. EVEN OTHERWISE, THE ACCUMULATED PROFIT HAS TO BE TAKEN AS THE COMMERCIAL SENSE WHICH WILL INCLUDE THE INVESTM ENT ALLOWANCE RESERVE AND SUBSIDY ALSO. THIS VIEW IS SUPPORTED B Y THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SRI P.K .BADLANI V. CIT 105 ITR 642 (SC) ACCORDINGLY, HE JUSTIFIED THE AOS ACTION IN BRINGI NG TO TAX RS.16.64 LAKHS U/S 2 (22)(E) OF THE ACT. 7. DISENCHANTED WITH THE FINDING OF THE CIT (A), T HE ASSESSEE HAS COME UP WITH THE PRESENT APPEAL. 7.1. DURING THE COURSE OF HEARING, THE LD. A R RE ITERATED MORE OR LESS WHAT WAS URGED BEFORE THE FIRST APPELLATE AUTH ORITY. IN FURTHERANCE, IT WAS SUBMITTED THAT THE AMOUNT PAID BY THE COMPANY W AS IN RESPECT OF FUNDS TAKEN FROM THE ASSESSEE; THAT THE TRANSACTION BETWEEN THE ASSESSEE AND BPPL WAS IN THE COURSE OF BUSINESS ACTIVITIES A ND AS SUCH THE SAME COULD NOT BE HELD AS DIVIDEND. IT WAS, FURTHER, SU BMITTED THAT THE AUTHORITIES BELOW ERRED IN INCLUSION OF INVESTMENT ALLOWANCE RE SERVE AND SUBSIDY FROM DIC IN THE ACCUMULATED PROFIT FOR THE PURPOSE OF CO MPUTING DIVIDENDS. THE LD. D R PRESENT WAS HEARD. 7.2. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS . THE ASSESSEE ASSERTED THAT THE AMOUNT PAID BY THE COMPA NY WAS IN RESPECT OF FUNDS TAKEN FROM THE ASSESSEE IN THE EARLIER YEARS, WHICH IF THE INTERESTS OFFERED BY THE COMPANY WERE TO BE ACCEPTED BY THE A SSESSEE, THE LOSS OF THE COMPANY WOULD HAVE INCREASED FURTHER. HOWEVER, BEFORE THE AO, IT ITA NOS.484 TO 490/B/10 PAGE 7 OF 40 WAS CONTENDED THAT DURING THE YEAR, RS.16.64 LAKHS RECEIVED FROM BPPL THROUGH AN ACCOUNT PAYEE CHEQUE AND SINCE THE BOOKS PERTAINING TO AY 2001-02 HAD BEEN LOST IN TRANSIT DURING SHIFT OF OF FICE, NO FURTHER DETAILS COULD BE FURNISHED. THE ASSESSEE IN HIS, FURTHER, COMMUNICATION DT: 12.12.2008 SUBMITTED BEFORE THE AO THAT THE COMPANY PAID INTEREST OF RS.16.64 LAKHS FOR EARLIER YEARS DURING THE ASSESSM ENT YEAR 2001-02. HOWEVER, THE COMPANY IS STARTED MAKING LOSSES AND TO PROTECT THE COMPANY FROM BECOMING SICK, IT WAS DECIDED THAT RAJA BAGMAN E WILL NOT CHARGE ANY INTEREST, TRANSFER BACK THE FUNDS RECEIVED BY HIM A ND TO ADVANCE FURTHER FUNDS TO SAFE GUARD THE INTEREST OF THE COMPANY AND SHARE HOLDERS. SINCE THIS FUND RECEIVED WAS RETURNED WHICH WAS ACTUALLY DUE TO HIM (EARLIER TO 2000-01) AS INTEREST AND NO INDIVIDUAL BENEFIT WAS DERIVED FROM SUCH FUNDS, WE KINDLY PRAY TO YOU NOT TO TREAT THE SAID SUM AS DEEMED DIVIDEND AND CHARGE TAX IN THE HANDS OF MR.RAJA BAGMANE. 7.3. HOWEVER, WE FIND THERE WERE CONTRADICTIONS IN THE SUBMISSIONS OF THE ASSESSEE. HE HAD NOT PRODUCED A NY PROOF FOR HAVING RECEIVED THE AMOUNT THROUGH ACCOUNT PAYEE CHEQUE AN D, SUBSEQUENTLY, THE AMOUNT WAS TRANSFERRED BACK TO THE COMPANY TO SAVE FROM BECOMING SICK, THAT THE FUND RECEIVED WAS RETURNED WHICH WAS ACTUA LLY DUE TO HIM ETC., NO DOCUMENTARY EVIDENCES ARE FORTH-COMING TO SUGGEST T HAT THE ASSESSEE HAD ADVANCED THE FUND TO THE COMPANY PRIOR TO THE AY 20 00-01, THE COMPANY WAS IN THE VERGE OF BECOMING SICK AND ALSO NOT ESTA BLISHED THAT NO INDIVIDUAL BENEFIT WAS DERIVED FROM SUCH TRANSACTIO N. IN VIEW OF THE ABOVE, WE ARE OF THE FIRM VIEW THAT THE AO WAS JUSTIFIED I N TREATING THE AMOUNT OF ITA NOS.484 TO 490/B/10 PAGE 8 OF 40 RS.16.64 LAKHS RECEIVED BY THE ASSESSEE FROM BPPL A S DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. IT IS ORDERED ACCORD INGLY. 8. THE OTHER OBJECTION WAS THAT OF THE CIT(A)S ST AND IN CONFIRMING THE ORDER OF THE AO IN INCLUSION OF INV ESTMENT ALLOWANCE RESERVE AND SUBSIDY FROM DIC IN THE ACCUMULATED PRO FITS FOR THE PURPOSE OF COMPUTING DIVIDENDS. ON A GLIMPSE OF THE IMPUGNED ORDERS OF AUTHORITIES BELOW, WE FIND THAT THE ASSESSEES CLAIM WAS CONTRA RY TO THE ACTUAL FACT IN THE SENSE THAT THE AO HAD NOT INCLUDED THE INVESTME NT ALLOWANCE RESERVE OF RS.5.84 LAKHS AND SUBSIDY FROM DIC OF RS.7.5 LAK HS IN THE ACCUMULATED PROFITS FOR COMPUTING THE DIVIDENDS. EVEN OTHERWIS E, THE AOS STAND, AS RIGHTLY HIGHLIGHTED BY THE CIT(A), HAD THE JUDICIAL SUPPORT TO THE EFFECT THAT THE ACCUMULATED PROFITS HAD TO BE TAKEN AT THE COMM ERCIAL SENSE WHICH WILL INCLUDE THE INVESTMENT ALLOWANCE RESERVE AND SUBSID Y TOO [VERDICT ON A SIMILAR ISSUE BY THE HONBLE SUPREME COURT IN THE C ASE OF P.K.BADIANI V. CIT 105 ITR 642 (SC)]. THUS, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 9. THE LAST GROUND OF THE ASSESSEE WAS THAT THE CI T (A) ERRED IN UPHOLDING THE LEVY OF INTEREST U/S 234B OF THE ACT. THIS GROUND OF THE ASSESSEE IS NOT MAINTAINABLE AS CHARGING OF INTERES T U/S 234B OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. THIS GROUND IS, THEREFORE, DISMISSED II. A.YS 2002-03, 03-04, 04-05, 05-06, 06-07 & 07-08 ITA NO:485, 486, 487, 488, 489 & 490/10 : 10. THE COMMON ISSUE RAISED IN RESPECT OF THESE AS SESSMENT YEARS WAS WITH REGARD TO THE APPLICABILITY OF THE P ROVISIONS OF S. 2 (22)(E) OF THE ACT. ITA NOS.484 TO 490/B/10 PAGE 9 OF 40 10.1. BRIEFLY STATED, IT WAS NOTICED BY THE AO DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS FOR THE ASSESSMENT YEARS UND ER CONSIDERATION THAT THE ASSESSEE WAS A BENEFICIAL OWNER OF THE SHA RES HOLDING 99% SHARES IN THE CASE OF BDPL WHICH WAS HAVING ACCUMULATED PR OFITS IN ALL THE ABOVE AYS AND SHOWN UNSECURED LOANS IN THE BOOKS OF ACCOU NTS IN THE NAME OF THE ASSESSEE. ACCORDINGLY, FOR THE ELABORATE REAS ONS RECORDED IN THE RESPECTIVE ASSESSMENT ORDERS UNDER DISPUTE, THE AO TREATED THE UNSECURED LOANS SHOWN BY BDPL TO THE EXTENT OF THE ACCUMULATED PROFITS OF BDPL OF THE RESPECTIVE ASSESSMENT YEARS IN THE HAND S OF THE ASSESSEE AS DEEMED DIVIDEND U/S 2 (22)(E) OF THE ACT. THE FOLL OWING CHART SHOWS THE LOANS AND ADVANCES GIVEN BY BDPL TO THE ASSESSEE AN D THE AMOUNTS TREATED AS DEEMED DIVIDENDS IN THE ASSESSEES HAND FOR THE RESPECTIVE ASSESSMENT YEARS: ASST.YEAR LOAN AND ADVANCES ASSESSED AS DEEMED DIVIDENDS 2002-03 RS.2,45,57,022 RS. 15,74,755 2003-04 RS.3,57,78,308 RS. 3,05,995 2004-05 RS.2,77,81,341 RS.2,77,81,341 2005-06 RS.6,41,59,544 RS.6,41,59,544 2006-07 RS.7,68,47,008 RS.7,68,47,008 2007-08 RS.4,23,16,001 RS.4,23,16,001 11. DISAPPOINTED WITH THE ACTION OF THE AO REFERRE D SUPRA, THE ASSESSEE HAD APPROACHED THE LD. CIT (A) FOR REDRESS AL. AFTER DUE CONSIDERATION OF THE SPIRITED ARGUMENTS OF THE ASSE SSEE AND ALSO REASONING OF THE AO, THE LD. CIT (A) WAS OF THE FIRM VIEW THA T ITA NOS.484 TO 490/B/10 PAGE 10 OF 40 (I) THE ASSESSEE IN HIS SWORN STATEMENT ADMITTED THAT B DPL AND HE HIMSELF CANNOT ACQUIRE THE AGRICULTURAL LANDS WHICH WERE REQUIRED FOR THE BUSINESS OF BDPL, ONCE THE ASSESSEE WAS NOT ENTITLED TO PURCHASE THE AGRICULTURAL LAND, THE ARGUMENT THAT T HE PAYMENTS WERE MADE BY BDPL TO ACQUIRE THE LANDS FOR THE BUSI NESS OF THE COMPANY TO THE ASSESSEE DO NOT HAVE ANY WEIGHT AND, THEREFORE NOT ACCEPTABLE; (II) THE AO HAD ALSO BROUGHT ON RECORD THAT THE ASSESSEE HIMSELF WAS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF LAN DS IN HIS INDIVIDUAL CAPACITY. IT WAS ALSO EVIDENT FROM THE FACT ON RECORD THAT BETWEEN 1.4.2000 TO 31.3.2007, THE ASSESSEE HA D NOT TRANSFERRED ANY LAND TO BDPL. EVEN IF THE LAND WAS PURCHASED FOR SALE TO BDPL IN FUTURE DOESNT ALTER THE TRUE NATUR E OF TRANSACTION I.E., THE PAYMENT WAS MADE TO THE ASSESSEE AS LOAN AND ADVANCES FOR INDIVIDUAL BENEFIT TO HIM; (III) THE ASSESSEES ARGUMENT THAT THE BOOK ENTRIES CANNO T DECIDE THE AMBIT OF TAXATION WAS NOT ACCEPTABLE IN VIEW OF THE PROVISIONS OF S 2 (22)(E) OF THE ACT, ACCORDING TO WHICH, NOT ONLY THE LOANS AND ADVANCES BUT ANY PAYMENT MADE FOR INDIVIDUAL BENEFI T OF A SHARE- HOLDER WHO WAS THE BENEFICIAL OWNER OF SHARES HOLDI NG NOT LESS THAN 10% OF THE VOTING POWER COMES UNDER THE PURVIE W OF S.2 (22)(E) OF THE ACT; - AS THE AO AFTER EXAMINING THE FACTS OF THE CASE IN DETAIL HAD ARRIVED AT A CONCLUSION THAT THE PAYMENTS WERE MADE TO THE ASSESSEE FOR HIS INDIVIDUAL BENEFIT, THEREFORE, EVEN IF THE SAME WER E NOT TREATED AS LOAN OR ADVANCE, THE SAME COMES UNDER THE PURVIEW OF S. 2 (22)(E) OF THE ACT AS THE PAYMENTS WERE MADE FOR THE INDIVIDUAL BE NEFITS OF THE ASSESSEE; (IV) SHELTERING HIMSELF [THE LD. CIT (A)] IN THE RULINGS OF THE HONBLE SUPREME COURT IN THE CASES OF (A) MISS P.SARADA V. CIT 229 ITR 444 (SC); (B) NAVNIT LALS CASE 56 ITR 198 (SC) AND (III) SMT. TARULATHA SHYAM 108 ITR 357 (SC), IT WAS CLEAR THAT THE PROVISIONS OF S. 2 (22)(E) OF THE ACT WERE CLEARLY APPLICABLE TO THE CASE OF THE ASSESSEE IN RESPECT OF LOANS AND ADVANC ES AND, ACCORDINGLY, THE AO WAS RIGHT IN INVOKING THE PROVI SIONS OF S.2 (22)(E) OF THE ACT. ITA NOS.484 TO 490/B/10 PAGE 11 OF 40 12. DURING THE COURSE OF HEARING BEFORE US, THE SP IRITED ARGUMENTS PUT FORTH BY THE LD. A R TO REBUT THE CON CLUSION OF THE AUTHORITIES BELOW ARE SUMMARIZED AS UNDER: (I) THE AMOUNTS RECEIVED BY THE ASSESSEE WERE NOT ADVAN CES AS ATTRIBUTED BY THE REVENUE, BUT, IT WERE THE FUNDS I N THE COURSE OF BUSINESS TRANSACTIONS THE ASSESSEE TIED UP WITH BDP L AND AS SUCH THEY WERE NEITHER ADVANCES OR LOANS TO THE ASSESSEE AND, THEREFORE, COULD NOT BE CLASSIFIED AS DEEMED DIVIDE NDS; (II) HOWEVER, THE AO HELD WITH A WRONG NOTION THAT - AS PER KARNATAKA LAND REFORMS ACT, NO AGRICULTURAL LAND CAN BE PURCHASED IN THE NAME OF THE ASSESSEE AND, HENCE, W HATEVER PURCHASED WAS ONLY THROUGH VEERAPPA AND, THEREFORE, THE CLAIM OF THE ASSESSEE THAT THE FUNDS WERE GIVEN TO HIM BY BD PL TO PROCURE LAND WAS UNTRUE; - BDPL WAS CARRYING ON REAL ESTATE BUSINESS AND IT HA D ITSELF PURCHASED A PLOT OF LAND IN BYRASANDRA DURING FY 19 96-97 ON WHICH IT HAD DEVELOPED AN STPI AND LET-OUT. BDPL HAD PUR CHASED PROPERTIES FROM HMT LTD AND FROM N.NARAYANA REDDY & SONS DURING THE AYS 2006-07 AND 2007-08 RESPECTIVELY. NO OTHER LAND WAS ACQUIRED BY BDPL FROM THE ASSESSEE; - THE ASSESSEE HIMSELF WAS CARRYING ON REAL ESTATE BU SINESS IN HIS INDIVIDUAL CAPACITY AND WHATEVER PURCHASED BY HIM W AS FOR HIS OWN BUSINESS AND NOT FOR BDPL; - THE PROCUREMENT AGREEMENT OF THE ASSESSEE CANNOT BE ACCEPTED AS GENUINE; - THE ASSESSEE HIMSELF HAD CHANGED THE HEAD OF ACCOUN T TO UNSECURED LOAN WHICH INDICATE THAT THE FUNDS RECEIVED BY THE ASSESSEE WERE IN THE NATURE OF LOANS AND ADVANCES; - THE AMOUNTS GIVEN BY BDPL WERE PROFITS WHICH THE CO MPANY COULD HAVE DISTRIBUTED TO ITS SHAREHOLDERS; - THE ADVANCES TAKEN BY THE ASSESSEE WERE WITHOUT ANY INTEREST; - THE TRANSFER OF FUNDS FROM THE COMPANYS ACCOUNT TO THE ASSESSEES ACCOUNT INCLUDES PAYMENTS MADE BY THE COMPANY ON BE HALF OF THE ASSESSEE ON VARIOUS DATES, E.G., PAYMENTS MADE ON 3 0.2.02 OF RS.1.38 ITA NOS.484 TO 490/B/10 PAGE 12 OF 40 CRORES TO EMBASSY INVESTMENTS AND RS.2.80 CRORES PA ID AS SHARE APPLICATION MONEY; - THE ONLY EXCEPTION WAS IN RESPECT OF MONEY ADVANCED BY A COMPANY CARRYING ON MONEY LENDING BUSINESS WHICH WAS NOT PA RT OF NORMAL COURSE OF BUSINESS OF THE COMPANY; - WITH REGARD TO THE QUANTUM OF DEEMED DIVIDENDS, THE AOS OBSERVATION WAS THAT THOUGH THE OUTSTANDING LIABILI TIES AS AT THE END OF THE YEAR WAS DIFFERENT, THE TOTAL ADVANCE RECEIV ED FROM BDPL DURING THE EACH FY WAS TO BE TAKEN AS DEEMED DIVIDE ND. THE ASSESSEE MAY CLAIM THAT THE AMOUNT REPAID DURING EA CH YEAR WAS NOT WITHIN THE PURVIEW OF S. 2 (22)(E) OF THE ACT. THI S OBSERVATION OF THE AO WAS TOTALLY WRONG; - THE ASSESSEE FURTHER CONTENDED THAT THE DEEMED DIVI DEND WAS CHARGEABLE ONLY TO EXTENT OF ACCUMULATED PROFITS AS ON BEGINNING OF THE YEAR AND THAT THE CURRENT YEAR PROFITS CANNOT B E CONSIDERED FOR THE PURPOSE OF DEEMED DIVIDEND. THIS WAS ALSO UNTENABL E IN THE LIGHT THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CAS E OF CIT V. ROSHANLAL 98 ITR 349 12.1. THE OBSERVATION OF THE AO WAS, FURTHER, CONT ESTED BY THE ASSESSEE THAT (A) THE ASSESSEES STATEMENT WAS RECORDED IN 2006. BY THAT TIME, THE ASSESSEE HAD ALREADY PROCURED CERTAIN LANDS AND THUS EXCEEDED HIS LIMIT AS PER THE KARNATAKA LAND REFORMS ACT. THERE FORE, VEERAPPA WAS INVOLVED IN FURTHER PURCHASE OF LANDS; (B) A PLOT OF LAND IN BYRASANDRA IN FY 1996-97 ON WHICH THE ASSESSEE HAD DEVELOPED AN STPI AND LET OUT WAS ALSO PURCHASED BY THE ASSESSEE DURING 1992 WHICH WAS GOT CONVERTED TO NON -AGRICULTURAL LAND AND TRANSFERRED TO THE COMPANY. THE PROPERTIES PUR CHASED BY THE COMPANY FROM HMT LTD AND N.NARAYANA REDDY AND SONS DURING AY 2006-07 AND 2007-08 RESPECTIVELY WERE CONVERTED NO N-AGRICULTURAL LANDS. NO OTHER LANDS HAD BEEN ACQUIRED BY THE CO MPANY AS IT CANNOT PURCHASE ANY AGRICULTURAL LANDS; (C) THE AOS OTHER OBJECTION THAT THE ASSESSEE WAS CARR YING ON REAL ESTATE BUSINESS IN HIS INDIVIDUAL CAPACITY ETC ., WHICH WAS COUNTERED BY THE ASSESSEE THAT - WHATEVER THE ASSESSEE HAD PURCHASED FOR SELF WERE ONLY SMALL DIMENSIONS OF LANDS WITH LESS CAPITAL WITH A VIEW T O MAKE LAYOUT AND ITA NOS.484 TO 490/B/10 PAGE 13 OF 40 SELLING THEM AS PLOTS. HOWEVER, THE LANDS INDENTED FOR BDPL WERE WITH HIGH COMMERCIAL VALUE AND LARGER PROPOSITION SUITAB LE FOR VERSATILE COMPLEXES. THE PROPERTIES PURCHASED BY THE ASSESSE ES RELATIVES ON BEHALF OF BDPL WERE ULTIMATELY TRANSFERRED TO BDPL [SOURCE: P 199 247 OF PB AR] (D) THE AOS OBJECTION THAT IN THE RETURN OF INCOME FOR THE AY 04- 05, THE ASSESSEE HAD HIMSELF CHANGED THE HEAD OF AC COUNT TO UNSECURED LOAN WHICH INDICATED THAT THE FUNDS RECEIVED BY TH E ASSESSEE WERE IN THE NATURE OF LOANS AND ADVANCES WHICH WAS COUNTERED BY THE ASSESSEE THAT IN BOOK-KEEPING, THE ENTRIES IN THE BOOKS OF ACCOUNTS CANNOT GO TO DECIDE THE AMBIT OF TAXATION; RELIES ON (I) FORT PROPERTIES PVT. LTD. 208 ITR 232 (BOM) (II) KEDARNATH JUTE MANUFACTURING CO. LTD. 82 ITR 363 (S C) (III) G.VENTAKASWAMI NAIDU 35 ITR 594 (SC) (IV) SULTAN BROTHERS 51 ITR 353 (SC) (V) CIT V. EXPRESS NEWSPAPERS 53 ITR 250 (SC) (VI) SITALPUR SUGAR WORKS V. CIT 25 ITR 548 (VII) CIT V. PKN COMPANY LTD. 60 ITR 65 (E) THE AOS REASON FOR REJECTING THE AGREEMEN T WAS 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 WHICH IT LA YS ITS HANDS. THIS AGREEMENT WAS KEPT ALONG WITH THE OTHER ORIGINAL BE LONGINGS OF THE ASSESSEE AND THE SEARCHING PARTYS REASONING IN NO T SEIZING THIS AGREEMENT CANNOT NOW BE SPECULATED; AND THE WORST, THE ASSESSEE CANNOT BE FOUND FAULT WITH EITHER; - 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; - NO AGREEMENT NEEDS TO BE REDUCED IN WRITING AND IT CAN EVEN BE ORAL. EVEN IF AN AGREEMENT WAS REDUCED IN WRITING, IT DOE SNT REQUIRE TO BE REGISTERED UNDER S.17 OF THE REGISTRATION 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 LIMITATION ST ARTS FROM THE DAY OF DEFAULT AND NOT EARLIER AND EVEN IF NO REMEDY WA S AVAILABLE UNDER ITA NOS.484 TO 490/B/10 PAGE 14 OF 40 SRA, THE AGGRIEVED PARTY CAN HAVE RECOURSE TO NORMA L PROVISIONS OF THE CIVIL PROCEDURE CODE; (F) 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 TO MAKE THE MAXIMUM POSSIBLE EFFORTS FOR INVESTMENTS IN LAND AND WOULD LIKE TO C ONSERVE THE RESOURCES AND, THUS, DISTRIBUTION OF DIVIDENDS WOULD BE ITS L AST PRIORITY, PARTICULARLY WHEN THERE WERE HUGE BORROWALS; - THE AOS PRESUMPTION THAT THE FUNDS TAKEN WITH NO INTEREST OR END DATE BY THE ASSESSEE WAS ONE OF THE FACTORS WHICH LED TO PROVE THAT IT BEING AN ADVANCE OR LOAN WAS UNFOUNDED SINCE THE AM OUNT WAS HELD BY THE ASSESSEE FOR PROCUREMENT OF PROPERTIES ON BE HALF OF THE COMPANY AND AS SUCH THERE WAS NO QUESTION OF PAYIN G ANY INTEREST; - ACCORDING TO THE AO, THE ONLY EXCEPTION WAS IN RESP ECT 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 OR OTHERWISE. (G) WITH REGARD TO THE TRANSFER OF FUNDS FROM THE COMPA NYS ACCOUNT TO THE ASSESSEES ACCOUNT INCLUDE PAYMENTS MADE BY THE COMPANY ON BEHALF OF THE ASSESSEE ON VARIOUS DATES; FOR WHI CH, IT WAS EXPLAINED THAT - PAYMENTS MADE ON 30.3.02 OF RS.1.38 CRORES TO E MBASSY INVESTMENTS AND RS.2.80 CRORES PAID AS SHARE APPLICATION MONEY, THE AO HIMSELF HAD ADMITTED THAT ON THE OPENING DAY THE COMPANY OW ED RS.3.18 CRORES AND DURING THE YEAR THE ASSESSEE HAD PAID TH E COMPANY A FURTHER SUM OF RS.1.04 CRORES. THUS, WHAT WAS TRAN SFERRED TO THE ASSESSEES ACCOUNT WAS FAR LESS THAN THE AGGREGATE OF THE AFORESAID AMOUNTS. FURTHER, THOSE TWO ITEMS WERE MERE JOURNAL ENTRIES; - PAYMENTS MADE ON 2.4.2002 OF RS.50 LAKHS TO GAUTHAM MAINI, THIS ITEM WAS MERELY A JOURNAL ENTRY; - THE CREDITS ON 11.4.05, 1.8.05 AND 23.2.06 WERE MER E JOURNAL ENTRIES WHICH NEED TO BE EXCLUDED FROM THE COMPUTATION OF D EEMED DIVIDENDS. EXCLUDING THESE, THE DEEMED DIVIDENDS COULD AT BEST BE RS.2.47 CRORES FOR THE AY 2006-07. THIS SUBMISSION WAS, HOWEVER, WITHOUT PREJUDICE TO THE ASSESSEES MAIN SUBMISSION THAT T HERE WAS NO DEEMED DIVIDEND WHICH COULD BE ASSESSABLE; ITA NOS.484 TO 490/B/10 PAGE 15 OF 40 - IT IS A COMMON KNOWLEDGE THAT IN JOURNAL ENTRIES T HERE IS NEITHER FLOW OUT OR FLOW IN OF FUNDS. THERE WAS NO DEEMED DIVID ENDS TO BE TAXED AT ALL IN THE AY 2005-06. THE CASES RELIED BY THE AO HAVE NO APPLICATION TO THE FACTS OF THE PRESENT CASE. RELI ES ON - G.R.GOVINDARAJULU NAIDU V. CIT 90 ITR 13 (MAD); (H) A.Y. 2004-05 : WITH REGARD DISALLOWANCE OF RS.49.35 LAKHS BEING TH E AMOUNTS WRITTEN OFF AS BAD DEBTS, THE SUBMISSION WA S THAT - KARNATAKA CHEMSYN LTD: RS.42.85 LAKHS : THESE FUNDS WERE ADVANCED TO THE ABOVE COMPANY TO PURCHASE SURPLUS LAND AT JIGANI. THE ASSESSEE BEING THE DIRECTOR, NO AGREEMENT WAS ENTERED INTO. DURING TH E AY 2003-04, THE SAID COMPANY HAD BECOME SICK AND REFERRED TO BIFR. SINC E THE COMPANY HAD BECOME SICK AND WAS NOT IN A POSITION TO TRANSFER T HE LANDS IN QUESTION, THE ADVANCE PAID BY THE ASSESSEE HAD BECOME IRRECOVERAB LE AND, ACCORDINGLY, WRITTEN OFF IN THE ASSESSEES BOOKS OF ACCOUNT; - RELIED IN THE CASE LAW REPORTED IN THE CASE OF CI T V. ASEA LTD. 258 ITR 407 (BOM). DIVYA JAYANTH RS.3.25 LAKHS AND TASMI JAYANTH RS.3. 25 LAKHS : TOKEN ADVANCES PAID TO THE ABOVE PERSONS AGGREGATING TO R S. 6.5 LAKHS FOR A PROPERTY AT GOTTIGERE. WHILE FINALIZING THE PROPER TY, IT WAS FOUND NOT LEGALLY VIABLE TO PROCEED FURTHER TO ACQUIRE THE PROPERTY W HICH WAS SUBSEQUENTLY ABANDONED. AS THE ADVANCES PAID COULD NOT BE RECOV ERED SINCE THE TRANSACTION DID NOT MATERIALIZE, THE SAME WAS WRITT EN OFF IN THE ASSESSEES BOOKS OF ACCOUNT. - RELIED IN THE CASE LAW REPORTED IN THE CASE OF K. RAHEJA DEV. CORPORATION V ACIT 2 SOT 744 (BANGALORE BENCH). 12.2. ON THE OTHER HAND, THE LD. D.R. WAS VERY EMP HATIC IN HER URGE THAT THE ISSUE UNDER DISPUTE HAS BEEN EXTENSIV ELY ANALYZED BY THE AO AND ALSO DRAWING STRENGTH FROM VARIOUS JUDICIAL PRO NOUNCEMENTS ARRIVED AT A CONCLUSION THAT THE ENTIRE AMOUNTS RECEIVED FROM BDPL AS LOANS FOR THE AYS UNDER CHALLENGE WAS RIGHTLY TREATED THEM AS DEEMED DIVIDENDS IN THE HANDS OF THE ASSESSEE BY BRINGING THEM TO TAX NET U NDER THE HEAD INCOME FROM OTHER SOURCES. THE LEARNED FIRST APPELLATE A UTHORITY HAD, AFTER DUE ITA NOS.484 TO 490/B/10 PAGE 16 OF 40 CONSIDERATION OF RIVAL SUBMISSIONS, SUBSTANTIATED T HE AOS ACTION WHICH VINDICATED THE STAND OF THE AO ON THIS POINT. WITH REGARD TO THE DISALLOWANCE OF BAD DEBTS, THE SUBMISSION OF THE LD. D R WAS THAT THE ASSESSEE HAD NOT PRODUC ED ANY EVIDENCE IN SUPPORT OF HIS CLAIM AND, THEREFORE, BAD DEBTS WERE TO BE DISALLOWED. IN CONCLUSION, IT WAS VEHEMENTLY URGED THAT THE A CTION OF THE AUTHORITIES BELOW REQUIRES TO BE UPHELD. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS, METICULOUSLY PERUSED THE RELEVANT RECORDS, THE VAR IOUS JUDICIAL PRONOUNCEMENTS ON WHICH EITHER PARTY HAD PLACED THE IR FAITH AND ALSO THE VOLUMINOUS PAPER BOOKS [IN VOLUMES I, II, III & IV RUNNING INTO HUNDREDS OF PAGES GROUP OF CASES] FURNISHED BY THE LD. AR DU RING THE COURSE OF HEARING PROCEEDINGS. 13.1. ON A DECISIVE EXAMINATION OF THE RELEVANT IM PUGNED ASSESSMENT ORDERS, THE REASONS FOR HAVING ARRIVED AT SUCH A CONCLUSION THAT THOSE AMOUNTS WERE TO BE TREATED AS DEEMED DIV IDENDS U/S 2 (22)(E) OF THE ACT FOR THE AYS UNDER DISPUTE, CAN BE CATEGORIZ ED AS UNDER: (I) THE ASSESSEE IN HIS BALANCE SHEETS UP-TO AY 2003-04 HAD SHOWN THE AMOUNTS PAYABLE TO BDPL UNDER THE HEAD OUTSTAN DING LIABILITY AND AFTERWARDS UNDER THE HEAD UNSECURE D LOANS; - IN THE BALANCE SHEETS OF BDPL FOR THE AYS UNDER DIS PUTE, AMOUNTS RECEIVABLE FROM THE ASSESSEE HAVE BEEN SHOWN UNDER THE HEAD LOANS AND ADVANCES; - THE BALANCE SHEETS OF BDPL SHOW THE ACCUMULATED PRO FITS FOR THE RELEVANT ASSESSMENT YEARS; ITA NOS.484 TO 490/B/10 PAGE 17 OF 40 (II) THE ASSESSEE HAD FAILED TO SUBSTANTIATE ITS CLAIM T HAT THE FUNDS WERE RECEIVED FROM BDPL FOR BUSINESS EXPEDIENCY AN D WERE IN THE NATURE OF CONTRACTUAL PAYMENTS; (III) THE JOURNAL ENTRIES PASSED IN VARIOUS ASSESSMENT YE ARS IN THE CASE OF BDPL RESULTED INTO THE PERSONAL BENEFIT TO THE A SSESSEE; - BDPL WHO ADVANCED THE LOAN TO THE ASSESSEE WAS NOT ENGAGED IN THE BUSINESS OF MONEY LENDING AND, THEREFORE, THE LOAN GIVEN TO THE ASSESSEE COMES UNDER THE PURVIEW OF S.2 (22)(E) OF THE ACT; 13.2. WHILE DEALING WITH THE ISSUE, THE LD. CIT (A ) HAD REASONED THUS (I) THE ASSESSEE IN HIS STATEMENT ON OATH ADMITTED THAT BDPL AND HIMSELF CANNOT ACQUIRE THE AGRICULTURAL LAND WHICH WAS REQUIRED FOR THE BUSINESS OF BDPL, THE PAYMENTS WERE MADE BY BDPL TO ACQUIRE THE LANDS FOR THE BUSINESS OF THE COMPANY T O THE ASSESSEE DO NOT HAVE ANY WEIGHT AND THEREFORE NOT ACCEPTABLE ; (II) THE AO HAD BROUGHT ON RECORD THAT THE ASSESSEE HIMS ELF WAS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF THE LAND IN HIS INDIVIDUAL CAPACITY AND THAT BETWEEN THE PERIOD FRO M 1.4.2000 TO 31.3.2007 THE ASSESSEE HAD NOT TRANSFERRED ANY LAND TO BDPL & (III) THE CASE LAWS RELIED ON BY THE ASSESSEE CANNOT COME TO HIS RESCUE AS THEY WERE DISTINGUISHABLE AND THE ASSESSEES ARG UMENT THAT THE BOOKS ENTRIES CANNOT DECIDE THE AMBIT OF TAXATION W AS NOT ACCEPTABLE IN VIEW OF THE PROVISIONS OF 2. 2 (22)( E) OF THE ACT, ACCORDING TO WHICH, NOT ONLY THE LOAN AND ADVANCE B UT ANY PAYMENT MADE FOR INDIVIDUAL BENEFIT OF A SHAREHOLDE R WHO WAS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THAN 10 % OF THE VOTING POWER COMES UNDER THE PURVIEW OF THE SAID SECTION. . 13.3. ON ANALYZING THE REASONS ATTRIBUTED BY THE A UTHORITIES BELOW, THE FOLLOWING CRUCIAL POINTS WERE EMERGED (A) BOTH THE ENTITIES - BDPL AND THE A SSESSEE - WERE IN THE BUSINESSES OF (I) REAL ESTATE OF ACQUIRING LANDS AN D DEVELOPING THEM INTO ITA NOS.484 TO 490/B/10 PAGE 18 OF 40 BUILDINGS; AND THE OTHER (II) ALSO BEING CARRYING ON REAL ESTATE BUSINESS IN HIS INDIVIDUAL CAPACITY. (B) THE PRIME OBJECTION OF THE AO WAS THAT AS PER THE PROVISIONS OF KARNATAKA LAND REFORMS ACT [KLR ACT], NO AGRICULTUR AL LAND CAN BE PURCHASED IN THE NAME OF THE ASSESSEE AND, HENCE, T HEY WERE PURCHASED THROUGH VEERAPPA. THEREFORE, THE CLAIM OF THE ASSE SSEE THAT THE FUNDS WERE GIVEN TO HIM BY BDPL TO PROCURE LAND WAS NOT T RUE ETC., IN THIS CONNECTION, IT IS RELEVANT TO REPRODUCE THE STATEME NT OF THE ASSESSEE ON OATH RECORDED ON 11.10.2006 WHEREIN HE HAD STATED T HAT 3.6 (I) .. ANS: AS PER THE RULES OF KARNATAKA LAND R EFORMS ACT, NEITHER I NOR THE COMPANIES OF BAGMANE GROUP CAN AC QUIRE AGRICULTURAL LANDS. SINCE LANDS ARE THE BLOODLINE OF OUR TRADE, THERE IS A NECESSITY OF BUYING AGRICULTURAL LANDS. AS SUCH, WE BUY ALL THE AGRICULTURAL LANDS IN THE NAME OF MR. VEERAPPA AS HE IS A PHANI HOLDER AND HIS INCOME IS BELOW RS.2 LAKHS PER ANNUM. SO ONLY THE AGRICULTURAL LAND WILL BE REGISTERED IN THE NAME OF MR.VEERAPPA. PAYMENT TO THE LAND OWNER S WILL BE MADE BY US DIRECTLY AND IF ANY CASH COMPONENT INVOLVED WILL AL SO BE BORNE BY US. ALL THE REGISTRATION AND OTHER INCIDENTAL CHARGES WILL BE BORNE BY US. ONCE THE LAND GETS CONVERTED, THE LAND WILL BE TRANSFERRED T O THE COMPANY WITHOUT ANY CONSIDERATION . CONVERSION CHARGES WILL ALSO BE BORNE BY THE COM PANY. IN SHORT MR.VEERAPPA IS ONLY A CONDUIT. HE IS NOT PAID ANY CONSIDERATION FOR THIS ENTIRE PROCESS. IT IS DONE OUT OF GOODWIL L. (C) THE ASSESSEE HIMSELF HAD ADMITTED THAT THE AGR ICULTURAL LANDS WERE PURCHASED AND REGISTERED IN THE NAME OF VEERAP PA WHO WAS UTILIZED AS A CONDUIT ON BEHALF OF THE ASSESSEE TO OUT-WIT THE PROVISIONS OF KARNATAKA LAND REFORMS ACT. ONCE ALL THE AGRICULTU RAL LANDS HAVE BEEN CONVERTED INTO NON-AGRICULTURAL LANDS, THEY HAVE BE EN TRANSFERRED TO THE COMPANY WHO HAVE FUNDED FOR THE PURCHASE OF AGRICUL TURAL LANDS AND ITA NOS.484 TO 490/B/10 PAGE 19 OF 40 SUBSEQUENTLY CONVERTING THEM INTO NON-AGRICULTURAL PURPOSES. THE RESPECTIVE REGISTERED SALE DEED [PAGES 199 207 O F VOLUME 2 OF PB AR ] WHICH GOES TO PROVE THAT THE MONIES SO FUNDED DUR ING THE COURSE OF BUSINESS AND FOR THE BUSINESS PURPOSES ONLY. (D) HOWEVER, THE AO HAD TAKEN A STAND THAT THE CLAIM OF THE ASSESSEE THAT THE FUNDS ARE GIVEN TO HIM BY THE COM PANY TO PROCURE LAND IS THEREFORE NOT TRUE. THE REASONS FOR ARRIVING AT SUCH A CONCLUSION HAVE NOT BEEN SPELT OUT EXPLICITLY IN THE ASSESSMENT ORDERS WITH DOCUMENTARY EVIDENCE TO BELIE THE ASSESSEES STATEMENT. THE TR ANSACTIONS WHICH TOOK PLACE HAVE NOT BEEN DISPUTED EITHER. (E) ON THE OTHER HAND, THE ASSESSEE HAD PRODUCED A COPY OF MEMORANDUM OF AGREEMENT MADE ON 3.5.2002 [SOURCE: P .167 174 OF PB AR] BETWEEN THE ASSESSEE, VEERAPPA AND SMT. VASUNDH ARA RAJA (AS VENDORS) ON ONE HAND AND BDPL AS PURCHASER FOR THE PROPERTIES SITUATED AT (I) BYRASANDRA, (II) KAGGADASPURA VILLAGE; (III) HU THANHALLI VILLAGE, (IV) JIGANI VILLAGE FOR A TOTAL CONSIDERATION OF RS.40 CRORES. IT WAS MUTUALLY AGREED UPON THAT THE VENDORS SHALL GET CONVERTED THE ABOVE SCHEDULE PROPERTIES FROM AGRICULTURAL PURPOSES TO NON-AGRICULTURAL PURP OSES. - THE ABOVE AGREEMENT GOES TO PROVE THAT THE ASSES SEE ALONG WITH VEERAPPA (AS HIS CONDUIT) AND SMT.VASAUNDHARA RAJA HAVE ENTERED INTO AN AGREEMENT WITH BDPL. (F) ON A PERUSAL OF THE ASSESSMENT ORDER FOR THE A Y 2002-03, IT WAS MENTIONED BY THE AO THAT THE ASSESSEE WAS THE MANAGING DIRECTOR OF ITA NOS.484 TO 490/B/10 PAGE 20 OF 40 BDPL AND ALSO CARRYING ON REAL ESTATE BUSINESS IN H IS INDIVIDUAL CAPACITY AND HIS ASSESSMENT RECORDS REVEAL THAT HE HAD PURC HASED A VAST TRACT OF LAND AT GOTTEGERE, DEVELOPED IT INTO RESIDENTIAL LA YOUTS AND SOLD THEM OUT AND PROFITS IN RANGES OF RS. 2.7 LAKHS TO RS.70 LAK HS FROM THE AYS 2001-02 TO 2006-07, HOWEVER, HE HAD SHOWN A LOSS OF RS.66 L AKHS FROM GOTTIGERE PROJECT FOR THE AY 2007-08. FROM THE ABOVE, THE AO HAD REASONED THAT THE ASSESSEE HAD PURCHASED THE PROPERTIES FOR HIS OWN B USINESS AND NOT FOR THE COMPANY. HE HAD ALSO LISTED OUT THE ALLEGED LO ANS AND ADVANCES RECEIVED BY THE ASSESSEE FROM BDPL OF RS.1.41 CRORE S, RS.4.69 CRORES, RS.6.63 CRORES AND RS.19.68 CRORES FOR THE AYS 2002 -03, 03-04, 04-05 AND 06-07 RESPECTIVELY. - IN THIS CONNECTION, IT IS MORE APPROPRIATE TO HA VE A GLIMPSE OF THE RULING OF THE HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS V. CIT REPORTED IN 288 ITR 1 (SC) WHEREIN THE HONBLE COUR T, IN ITS INFINITE WISDOM, HAD OBSERVED THUS THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BU SINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY..THAT THE BORROWED AMOUNT I S NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS BU T HAD BEEN ADVANCED AS INTEREST FREE LOAN TO ITS SISTER CONCERN IS NOT REL EVANT. WHAT IS RELEVANT IS WHETHER THE AMOUNT WAS ADVANCED AS A MEASURE OF COM MERCIAL EXPEDIENCY AND NOT FROM THE POINT OF WHETHER THE AM OUNT WAS ADVANCED FOR EARNING PROFITS. WITH HIGHEST REGARDS, WE WOULD LIKE TO POINT T HAT THE ASSESSEE HAD RECEIVED FUNDS AS A MEASURE OF COMMERCIAL EXPED IENCY OF THIS VENTURE ITA NOS.484 TO 490/B/10 PAGE 21 OF 40 WHICH, IN ANY STRETCH OF IMAGINATION, CAN BE TERMED AS EITHER ADVANCE OR LOAN AS ALLEGED BY THE REVENUE. WHILE DECIDING THE ISS UE IN THE CASE OF S.A.BUILDERS CITED SUPRA, THE HONBLE SUPREME COURT HAD PUTS ITS SEAL OF APPROVAL TO THE RATIO LAID DOWN BY THE HONBLE DELH I HIGH COURT IN THE CASE OF CIT V. DALMIA CEMENT REPORTED IN 254 ITR 377 (DE L) WHEREIN THE HONBLE COURT HELD THAT THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM T HEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STAT ED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SIST ER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS . (G) THE AOS ANOTHER CONTENTION WAS THAT THE ASSES SEE WAS UNABLE TO SUBSTANTIATE ITS CLAIM THAT THE FUNDS WER E GIVEN FOR BUSINESS EXIGENCIES AND WAS IN THE NATURE OF CONTRACTUAL PAY MENTS. IN THIS CONNECTION, WE WOULD LIKE TO MENTION HERE THAT THE BALANCE-SHEETS, JOURNAL ENTRIES IN THE BOOKS OF ACCOUNT AMPLY MAKE IT CLEAR THAT THE FUNDS WERE PROVIDED DURING THE COURSE OF BUSINESS.. (H) THE OTHER REASONING OF THE AO THAT THE ASSESS EE HAD PRODUCED ALLEGED NON-REGISTERED PROCUREMENT AGREEME NT DATED: 11.2.2002 PURPORTEDLY ENTERED INTO BETWEEN THE ASSESSEE AND B DPL REPRESENTED BY HIS WIFE SMT. VASUNDHARA RAJA AS A DIRECTOR OF BDPL . AS PER THE SAID AGREEMENT, THE ASSESSEE HAD AGREED TO ACT AS PROCUR EMENT AGENT OF AGRICULTURAL LANDS FOR AND ON BEHALF OF BDPL. THIS CLAIM, ACCORDING TO AO, BELIED THE ASSESSEES STATEMENT ON OATH WHEREIN HE HAD STATED THAT IT WAS NOT POSSIBLE FOR HIM OR THE COMPANY TO ACQUIRE AGRI CULTURAL LANDS AS PER ITA NOS.484 TO 490/B/10 PAGE 22 OF 40 KLR ACT AND AS SUCH, ALL AGRICULTURAL LANDS WERE AC QUIRED IN THE NAME OF VEERAPPA WHO WAS A PHANI HOLDER ETC., - IT WAS ALSO AN UNDISPUTED FACT THAT THE ASSESSEE HIMSELF WAS ENGAGED IN A SMALL SCALE IN PURCHASE AND SALE OF LA NDS IN HIS INDIVIDUAL CAPACITY, BUT, AT THE SAME TIME HE WAS NOT FORBIDDE N UNDER ANY LAW TO USE HIS ACUMEN-SHIP IN THE FIELD OF REAL ESTATE BUSINES S TO PROCURE VAST AGRICULTURAL LANDS ON BEHALF OF BDPL BY USING THE N AME AND SERVICES OF VEERAPPA AS A CONDUIT THEREBY MANEUVERING TO OUT-WIT THE PROVISIONS OF KLR ACT - STUCK TWO MANGOES IN ONE STONE . (I) WITH REGARD TO THE AOS ASSERTION THAT THE CLA IM OF THE ASSESSEE THAT HE HAD ENTERED INTO A PROCUREMENT AGR EEMENT DT.11.2.2002 ETC., WAS CONTRARY TO HIS STATEMENT ON OATH WHEREIN HE HAD STATED THAT IT WAS NOT POSSIBLE FOR HIM OR THE COMPANY TO ACQUIRE AGRICULTURAL LAND AS PER KLR ACT ETC., THERE ARE TO ASPECTS WHICH REQUIRE CA REFUL STUDY, NAMELY: (A) THE PROCUREMENT AGREEMENT DT : 11.2.2002 WAS ENTERED INTO BETWEEN THE ASSESSEE AND BDPL AND AS PER THIS AGREE MENT THE ASSESSEE HAD AGREED TO ACT AS PROCUREMENT AGENT OF AGRICULTU RAL LAND FOR AND ON BEHALF OF BDPL. WHEN THE AGREEMENT WAS ENTERED INT O IN THE YEAR 2002 THE ASSESSEE HAD AGREED TO ACT AS PROCUREMENT AGENT OF AGRICULTURAL LAND. (B) WHEN HIS STATEMENT WAS RECORDED AT THE END OF THE YEAR 2006, HE HAD STATED THAT AS PER THE RULES OF KLR ACT, NEITHER I NOR THE COMPANIES OF BAGMANE GROUP CAN ACQUIRE AGRICULTURAL LANDS. AS SUCH, WE BUY ALL THE AGRICULTURAL LANDS IN THE NAME OF MR .VEERAPPA AS HE IS A PHANI HOLDER AND HIS INCOME IS BELOW RS.2 LAKHS PER ANNUM. SO ONLY THE AGRICULTURAL LAND WILL BE REGISTERED IN THE NAME OF MR.VEERAPPA ITA NOS.484 TO 490/B/10 PAGE 23 OF 40 - THE SIMPLE LOGIC BEHIND THIS WAS THAT WHEN THE A SSESSEE HAD ENTERED INTO A PROCUREMENT AGREEMENT WAY BACK IN 20 02, HE WAS ELIGIBLE TO ACQUIRE AGRICULTURAL LANDS AS PER THE PROVISIONS OF KLR ACT WHEREAS THE STATEMENT WHICH WAS RECORDED AT THE FAG END OF YEAR 2006, ACCORDING TO THE ASSESSEES CONTENTION BEFORE US, BY THAT TIME, HE H AD ALREADY MADE PURCHASE OF CERTAIN AGRICULTURAL LANDS AND THUS REA CHED THE MAXIMUM LIMIT AS PER KLR ACT AND, THEREFORE, HE AVERRED THAT IT W AS NOT POSSIBLE FOR HIM TO ACQUIRE AGRICULTURAL LANDS AND, THUS, THE LANDS WERE ACQUIRED IN THE NAME OF VEERAPPA. FROM THE SEQUENCE OF ABOVE EVENTS, WE FIND THAT THERE WAS NO CONTRADICTION IN THE STATEMENT OF THE ASSESSEE A S ALLEGED BY THE AO. (J) ON A PERUSAL OF EITHER THE IMPUGNED ASSESSMENT ORDERS OR THE ORDER OF THE LD. CIT (A), IT COULD NOT BE GAUGE D AS TO WHETHER VEERAPPA WAS EXAMINED BY THE AUTHORITIES CONCERNED TO FIND O UT THE VERACITY OF THE ASSESSEES CLAIM THAT VEERAPPA WAS UTILIZED AS A CO NDUIT BY THE ASSESSEE TO BUY AGRICULTURAL LANDS IN HIS BEHALF ETC., AS TH INGS STAND NOW, THE REVENUE HAD NOT DISPUTED THE VERY FACT THAT VEERAPP A HAD PURCHASED THE AGRICULTURAL LANDS. (K) ANOTHER QUESTION BEING POSED WAS HOW DID THE AO FORESEE THAT WHATEVER THE LANDS PURCHASED BY THE ASSESSEE W AS FOR HIS OWN BUSINESS AND NOT FOR BDPL? - THE AO HAD FAILED TO SEE THE REASON T HAT THE LANDS PURCHASED BY THE ASSESSEE WAS FOR HIS OWN BUSINESS WITH ULTIMATE LY INCLUDED FOR BDPL TOO. WE FAIL TO UNDERSTAND THE PHILOSOPHY OF THE A O TO ATTRIBUTE THAT THE LANDS PURCHASED BY THE ASSESSEE WERE FOR HIS OWN BU SINESS ONLY. HOW DID ITA NOS.484 TO 490/B/10 PAGE 24 OF 40 THE AO DEMARCATE THE LANDS DEALT BY THE ASSESSEE WA S ONLY FOR HIS OWN BUSINESS IS ANYBODYS GUESS? (L) WE ARE ALSO NOT IN AGREEMENT WITH THE CIT(A)S PRESUMPTION THAT WHEN THE ASSESSEE WAS NOT ENTITLED TO PURCHAS E ANY AGRICULTURAL LANDS, THE ARGUMENT THAT THE PAYMENTS WERE MADE BY BDPL TO ACQUIRE THE LANDS FOR THE BUSINESS OF THE COMPANY TO THE ASSESS EE DO NOT HAVE ANY WEIGHT AND, THEREFORE, NOT ACCEPTABLE. - WHEN THE ASSESSEE WAS NOT ENTITLED TO INDULGE IN PURCHASE OF AGRICULTURAL LANDS HIMSELF AS HE HAD EXCEEDED THE L IMIT OF BUYING THE AGRICULTURAL LANDS UNDER K.L.R. ACT, HE HAD EXPLORE D OR DEVISED THE OTHER AVENUE OF BUYING THE LANDS FOR THE COMPANY BY USING VEERAPPA AS A CONDUIT. NO PRUDENT BUSINESSMAN BEING AN INDIVIDUAL OR A R EGISTERED FIRM OR A COMPANY, AS THE CASE MAY BE - LIE DOWN AT HOME AS HE WAS NOT ENTITLED TO GO FOR A BUYING SPREE OF AGRICULTURAL L ANDS IN HIS NAME DUE TO CEILING OF K.L.R ACT. HE SHALL EXPLORE THE OTHER P OSSIBLE AVENUES BY USING HIS EXPERTISE IN THE FIELD TO FURTHERANCE HIS FORTU NE. THE ASSESSEE BEING A PRUDENT PERSON IN THE REAL ESTATE FIELD FOR DECAD E AS CONCEDED BY THE REVENUE, HE MUST HAVE UTILIZED THE NAME AND SERVICE S OF VEERAPPA IN PROCURING THE AGRICULTURAL LANDS FOR THE COMPANY. - UNWITTINGLY, THE AO HIMSELF HAD ADMITTED THAT TH E ASSESSEE WAS INDULGED IN THE BUSINESS OF PURCHASE AND SALE O F LAND IN HIS INDIVIDUAL CAPACITY AND, THUS, THE REVENUE HAD DULY RECOGNIZED THAT THE ASSESSEE WAS IN THE REAL ESTATE BUSINESS. SINCE THE PROVISI ONS OF K.L.R. ACT CAME IN THE WAY OF THE ASSESSEE TO PURCHASE OF ANY AGRICULT URAL LANDS IN A VAST ITA NOS.484 TO 490/B/10 PAGE 25 OF 40 SCALE ON BEHALF OF BDPL, THIS MUST HAVE PROMPTED TH E ASSESSEE TO BRING VEERAPPA INTO PICTURE AS HIS CONDUIT. IT IS NOT U NCOMMON IN THIS LINE OF REAL ESTATE BUSINESS THAT THE INCUMBENTS PUT INTO MOTION THEIR ACUMEN-SHIP IN THE TRADE TO OVERCOME THE OBSTACLES COMING IN THEIR WAY. (M) THE PROCLAMATION OF THE AO WHICH WAS DULY RATI FIED BY THE CIT (A) THAT BDPL HAD MADE THE PAYMENTS TO THE ASSESSEE FOR HIS INDIVIDUAL BENEFITS ONLY WAS WITHOUT ANY CLINCHING DOCUMENTARY EVIDENCE TO SUBSTANTIATE THEIR CLAIM. (N) THE AOS ANOTHER REASONING WAS THAT THE SEIZED /IMPOUNDED MATERIALS IN THIS GROUP OF CASES DO NOT INDICATE TH E EXISTENCE OF ANY SUCH AGREEMENT AND AS SUCH IT APPEARS THAT THE PROCUREMENT AGREEMENT WAS ONLY AN AFTER THOUGHT AND A CAMOUFLAGE FOR THE FACT UAL NATURE OF TRANSACTION WITH THE COMPANY AND GIVE IT A DIFFERENT COLOUR. IN A NUT-SHELL, THE AUTHORITIES BELOW HAVE FAILE D TO BRING ON RECORD ANY DOCUMENTARY EVIDENCE TO PROVE THAT THE A CTION OF THE ASSESSEE WAS NOTHING BUT AN AFTER THOUGHT AND THE DOCUMENT I TSELF WAS SELF SERVING ETC., MERELY MAKING A SWEEPING REMARK ON THE GENU INENESS OF THE VERY EXISTENCE OF AN AGREEMENT WITHOUT AN INDISPUTABLE E VIDENCE, IN OUR VIEW, IS LACKING CONVICTION. THE AO WAS NOT FIRM IN HIS CON VICTION THAT THE ALLEGED PROCUREMENT AGREEMENT WAS ONLY AN AFTER THOUGHT W HICH PROMPTED HIM TO CHOOSE THE WORD APPEARS IN COMING TO SUCH A CONCLUSION. (O) THE OTHER REASONING OF THE AO WAS THAT BDPL W HICH ADVANCED THE ALLEGED LOANS TO THE ASSESSEE NOT ENG AGED IN THE BUSINESS OF MONEY LENDING AND, THEREFORE, THE LOAN GIVEN TO THE ASSESSEE COMES ITA NOS.484 TO 490/B/10 PAGE 26 OF 40 UNDER THE PURVIEW OF S.2 (22)(E) OF THE ACT. WE WO ULD LIKE TO REITERATE THAT THE BDPL WAS NOT ENGAGED IN THE BUSINESS OF MONEY L ENDING, BUT, THE FUNDS SO ALLOCATED TO THE ASSESSEE DURING THE COURS E OF BUSINESS WHICH PURELY ON BUSINESS EXIGENCY AND, THUS, THE AMOUNTS SO FUNDED DO NOT FALL WITHIN THE SPHERE OF ADVANCE OR LOAN , AS THE CASE MAY BE, SO AS TO BRING IT UNDER THE PURVIEW OF S. 2 (22)(E) OF THE ACT. (P) LET US HAVE A GLIMPSE OF THE ASSESSEES RELI ANCE ON THE RULING OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS V. CIT CITED SUPRA. NO DOUBT, THE ISSUE WAS WHETHER INTEREST ON BORROWED CAPITAL ALLOWABLE OR NOT. HOWEVER, ONE SHOULD ACCEPT THE CONCEPT AND THE RATIO LAID DOWN BY THE HONBLE COURT WHILE DECIDING THE ISSUE. FOR THE SAKE OF READY REFERENCE, WE REPRODUCE THE RELEVANT PORTION OF THE RULING OF THE HONBLE COURT THAT IT WAS REQUIRED TO BE ENQUIRED AS TO WHETHER THE INTEREST-FREE LOAN WAS GIVEN TO THE SISTER CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENCY. IF IT IS SO, INTEREST ON BO RROWED FUNDS IS TO BE ALLOWED IT, FURTHER, WENT ON TO OBSERVE THAT THE AUTHORITIES SHOULD EXAMINE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY TO ITS SISTER CONCERN AND WHAT THE SISTER CONCERN DID WITH THIS M ONEY IN ORDER TO DECIDE WHETHER IT WAS FOR COMMERCIAL EXPEDIENCY. THUS, THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE CITED SUPRA I S FIT IN TO THE ISSUE ON HAND. ONE SHOULD ANALYZE THE ISSUE, KEEPING IN VI EW THE PROCEDURE LAID DOWN BY THE HONBLE SUPREME COURT, WHETHER THE FUND S RECEIVED WAS DURING THE COURSE OF BUSINESS OR OTHERWISE. AS THE TRANSACTION TOOK PLACE DURING THE COURSE OF BUSINESS AND IN THE BUSINESS E XIGENCY, WE ARE OF THE ITA NOS.484 TO 490/B/10 PAGE 27 OF 40 FIRM VIEW THAT THE RATIO LAID DOWN BY THE HONBLE S UPREME COURT IN THE CASE OF S.A. BUILDERS CITED SUPRA IS ABSOLUTELY APPLICAB LE TO THE FACTS OF THE ISSUE ON HAND. (Q) IN THE CASE OF MS. P SARADA V. CIT REPORTED IN 229 ITR 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 FOR 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 THAT THE ISSUE BEFORE THE HONBLE APEX COURT WAS ON THE DIFFERENT FOOTING WHICH HAS NO RELEVANCE TO THE ISSUE ON HAND ON THE VERY GROUND T HAT THE ASSESSEE HAD NOT RECEIVED ANY LOAN OR ADVANCE FOR ITS OWN BENEFIT, BUT, THE FUNDS WERE PROVIDED FOR SPECIFIC PURPOSE. THUS, IN OUR CONSID ERED VIEW, THE CASE LAW CITED BY THE AUTHORITIES BELOW IS DISTINGUISHABLE. WITH DUE RESPECTS, WE WOULD LIKE TO MAKE IT C LEAR THAT NONE OF THE THREE CONDITIONS PRESCRIBED BY THE HONBLE COUR T ARE APPLICABLE TO ITA NOS.484 TO 490/B/10 PAGE 28 OF 40 THE CASE ON HAND, NAMELY, (1) NO PAYMENTS WERE MADE TO THE ASSESSEE BY WAY OF ADVANCE OR LOAN BY BDPL, BUT, FUNDS WERE ALL OCATED FOR PROCUREMENT OF LANDS ON ITS BEHALF; (2) NO PAYMENTS WERE MADE ON ITS BEHALF; AND (3) PAYMENTS MADE WERE NOT FOR ANYBODY S INDIVIDUAL BENEFIT. THE PAYMENTS IN QUESTION WERE PROVIDED DUE TO BUSIN ESS EXIGENCIES OF BDPL AND THE FUNDS SO PROVIDED FOR THE SOLE BENEFIT OF BDPL AND NOT TO INDIVIDUAL BENEFIT OF A SHAREHOLDER AND, THEREFO RE, THE QUESTION OF APPLICABILITY OF THE PROVISIONS OF S.2 (22)(E) OF T HE ACT DOESNT ARISE. WE ARE, THEREFORE, OF THE CONSIDERED VIEW THAT TH E CASE LAWS RELIED ON BY THE AUTHORITIES HAVE NO RELEVANCE TO THE PRESENT ISSUE. 13.4. THE HONBLE DELHI HIGH COURT IN ITS RECENT JUDGMENT IN THE CASE OF CIT V. CREATIVE DYEING AND PRINTING PVT. LIMITED REPORTED IN 318 ITR 476 (DEL) RULED THAT SECTION 2 (22) (E) OF THE ACT CAN BE APPLIED TO LOANS OR ADVANCES SIMPLIC ITER AND NOT TO THOSE TRANSACTIONS CARRIED OUT IN THE COURSE OF BUS INESS AS SUCH. IN THE COURSE OF CARRYING ON BUSINESS TRANSACTION B ETWEEN A COMPANY AND A STOCKHOLDER, THE COMPANY MAY BE REQUI RED 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 SIMPLICITER OR AS SUCH PER SE WITHOUT ANY FURTHER O BLIGATION BEHIND RECEIVING 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 ITA NOS.484 TO 490/B/10 PAGE 29 OF 40 SECTION 2 (22) (E). IN RENDERING THIS DECISION, TH E HONBLE HIGH COURT HAD PLACED RELIANCE IN THE DECISION OF THE CA SE OF CIT V. RAJ KUMAR (2009) 318 ITR 462 (DEL), CIT V. AMBASSAD OR TRAVELS (P.) LTD. (2009) 318 ITR 376 AND CIT V. NAGIN DAS M. KAPADIA (1989) 177 ITR 393)(BOM). WE HEREBELOW REPRODUCE THE RELEVANT PORTION OF THE CASE 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 ). 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 ITA NOS.484 TO 490/B/10 PAGE 30 OF 40 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 : 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 ITA NOS.484 TO 490/B/10 PAGE 31 OF 40 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 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 : ITA NOS.484 TO 490/B/10 PAGE 32 OF 40 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 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 ITA NOS.484 TO 490/B/10 PAGE 33 OF 40 [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) : 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 ITA NOS.484 TO 490/B/10 PAGE 34 OF 40 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. 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. 13.5. FURTHER, WE WOULD LIKE TO POINT OUT THAT SE CTION 2(22)(E) BRINGS IN A DEEMING FICTION. IT PROVIDES IN CERTAI N CIRCUMSTANCES AN ADVANCE OR LOAN IS TREATED AS DIVIDEND IN THE HANDS OF THE SHAREHOLDER. ADVANCES AND LOANS HAVE TO BE INTERPRETED IN ITS TR UE SENSE. ANY PAYMENT MADE OUT OF BUSINESS EXPEDIENCY DOES NOT F ALL WITHIN THE AMBIT ITA NOS.484 TO 490/B/10 PAGE 35 OF 40 OF ADVANCES AND LOANS, THOUGH THE ACCOUNTING ENTRIE S 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 NOT TO BE EXTENDED BEYOND THE PURPOSE FOR WHICH THE DEEMING FICTION IS CREATED OR BEYOND THE LANGUA GE OF THE SECTION. IN INTERPRETING A DEEMING FICTION, THE INTENTION OF TH E LEGISLATURE HAS TO BE GIVEN DUE IMPORTANCE. THE FICTION SHOULD NOT BE EXT RAPOLATED BEYOND THE PURPOSE FOR WHICH THE LEGISLATION IS BROUGHT IN. O N INTERPRETATION OF A LEGAL FICTION, IT WAS HELD IN CONTROLLER OF ESTATE DUTY V. KRISHNA KUMARI DEVI (173 ITR 561) THAT THE COURT SHOULD ASCERTAIN THE PURPOSE FOR WHI CH THE FICTION IS CREATED AND AFTER DOING SO, ASSUME A LL FACTS WHICH ARE INCIDENTAL TO GIVE IN EFFECT TO THE FICTION. IN CIT V. HINDUSTAN PETROLEUM CORPORATION LTD. (187 ITR 1) (BOM) , IT WAS HELD THAT A LEGAL FICTION HAS TO BE CARRIED TO ITS LOGICAL CONCLUSION, BUT, ONLY WIT HIN 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 T O CAUSE INJUSTICE. THUS, IT IS OBVIOUS THAT THE FICTION CREATED IN SEC TION 2(22)(E) ONLY REFERS TO PURE ADVANCES OR LOANS. ANY AMOUNT PAID ON ACCO UNT OF GENUINE BUSINESS TRANSACTION BETWEEN THE ENTITIES FALLS OUT SIDE THE AMBIT OF SECTION 2(22)(E). AS A RESULT OF GLOBALIZATION DUR ING THE RECENT PAST, VARIOUS GIANT INFRASTRUCTURE PROJECTS HAVE SPRUNG U P AND MANY ARE IN THE PIPELINE. MULTI-VARIOUS ACTIVITIES ARE INVOLVED IN PROMOTING THESE GIANT PROJECTS. ALL THESE ACTIVITIES COLLECTIVELY STRIVE TO COMPLETE THE PROJECTS. EACH ACTIVITY IS DISTINCT IN CHARACTER. FOR EACH AC TIVITY, DIFFERENT KINDS OF COMMERCIAL AGREEMENTS AND TECHNICAL AGREEMENTS ARE REQUIRED. THE ITA NOS.484 TO 490/B/10 PAGE 36 OF 40 FINANCIAL STRUCTURE OF EVERY ACTIVITY DIFFERS. THE RISK AND REWARD INVOLVED IN EVERY ACTIVITY ALSO DIFFERS. IN ORDER TO MEET S UCH COMPLEX CONSTRAINTS, THE FLAGSHIP COMPANY/THE PROMOTER MAY CREATE VARIOU S DISTINCT ENTITIES BEING SPECIAL UTILITY VEHICLES (SUV) TO DEAL IN EAC H OF THESE ACTIVITIES INDEPENDENTLY. THE PROMOTERS ALONG WITH THESE SUV JOINTLY WORK TO COMPLETE THE OVER-ALL PROJECT. IN SUCH SITUATION, FUNDS BEING THE BLOODLINE FOR ALL THESE ENTITIES FLOW FROM ONE ENTI TY 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. 13.6. TAKING INTO ACCOUNT THE FACTS AND THE CIRCUM STANCES OF THE ISSUE WHICH HAS BEEN ELABORATELY ANALYZED IN THE FO RE-GOING PARAGRAPHS, WE ARE OF THE FIRM VIEW THAT (I ) THE ASSESSEE HAD FURNISHED THE DOCUMENTARY EVID ENCE BY MEANS OF AN AGREEMENT ENTERED INTO AND THAT THE AMO UNTS RECEIVED DURING THE COURSE OF BUSINESS AND DUE TO BUSINESS EXIGENCY; (II) THE NOMENCLATURE UNSECURED LOAN AND ADVANCE , PERHAPS INADVERTENTLY, IN THE BALANCE SHEETS SHALL NOT ALTE R THE CHARACTER OF THE PURPOSE FOR WHICH THE AMOUNTS RECE IVED; (III) THE SWEEPING REMARK OF THE AUTHORITIES BELO W THAT THE AGREEMENT ENTERED INTO BY THE PARTIES CONCERNED WAS AN AFTER-THOUGHT ETC., WILL NOT STAND THE TESTIMONY OF LAW UNLESS IT HAS BEEN BACKED WITH CLINCHING DOCUMENTAR Y EVIDENCE; (IV) THE AUTHORITIES ALLEGATION THAT THE JOURNAL E NTRIES PASSED IN VARIOUS ASSESSMENT YEARS IN THE CASE OF BDPL RESULT ED INTO THE PERSONAL BENEFIT TO THE ASSESSEE ETC., WILL NOT HOLD WATER UNLESS IT HAS BEEN PROVED SO WITH DOCUMENTARY EVIDE NCE; (IV) NO DOUBT, BDPL WAS NOT ENGAGED IN THE BUSINE SS OF MONEY LENDING AND, THUS, IT COULD BE TERMED THAT THE AMO UNTS SO RECEIVED COME UNDER THE AMBIT OF S. 2(22)(E) OF THE ACT PROVIDED THE AMOUNTS WERE IN THE NATURE OF ADVANCE OR ITA NOS.484 TO 490/B/10 PAGE 37 OF 40 LOAN. INCIDENTALLY, THIS HAS NOT BEEN IMPLICITLY PROVED B Y THE REVENUE; (V) THE CLINCHING EVIDENCE IN THE FORM OF AN AGRE EMENT ENTERED INTO WITH BDPL AS PRODUCED BY THE ASSESSEE HAS NOT BEEN REBUTTED WITH ANY CONCRETE PROOF. THE ONUS RATHER PLACED AT THE DOORSTEP OF THE REVENUE HAS NOT BEEN DULY DISCH ARGED; 13.5. TO SUM UP, 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 2002- 03 TO 2007-08 UNDER DISPUTE. THE LD. CIT (A)S STAND IN UPHOLDING THE FINDINGS O F THE AO WAS ALSO NOT JUSTIFIABLE FOR THE REASONS REC ORDED SUPRA . IT IS ORDERED ACCORDINGLY. 14. THE ISSUE OF APPLICABILITY OF S.2 (22)(E) OF T HE ACT IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE FOR THE REA SONS RECORDED IN THE 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. A.Y. 2004-05 : 15. WITH REGARD DISALLOWANCE OF RS.49.35 LAKHS BEING TH E AMOUNTS WRITTEN OFF AS BAD DEBTS, FOR THE DETAILED REASONS SET-OUT IN THE IMPUGNED ORDER, THE AO HAD CONCLUDED THUS 4.1. IT MAY ALSO BE STATED HERE THAT WRITING OFF OF BAD DEBTS, WITHOUT CHARGING THE SAME IN THE PROFIT AND LOSS ACCOUNT, I S NOT A WRITE OFF AT ALL, BECAUSE ASSESSMENT IS MADE BASED ON THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET FILED ALONG WITH THE RETURNS. IT IS NOT ENOUGH IF THE ASSESSEE WRITES OFF THE DEBT IN SOME OF THE BOOKS MAINTAINED BY IT (LIKE PERSONAL ITA NOS.484 TO 490/B/10 PAGE 38 OF 40 ACCOUNT OF DEBTORS), WHICH DO NOT FORM PART OF HIS ACCOUNTS INCLUDING THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET BASED ON WHICH ASSESSMENT IS MADE. 4.2. TO SUM UP, THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE IN SUPPORT OF HIS CLAIM THAT THERE IS DEBT OWING TO HIM, THAT IT HAS BEEN TAXED IN THE EARLIER YEARS, THAT THE DEBT AROSE IN THE COURSE OF BUSINES S OF THE ASSESSEE AND, FINALLY, THAT IT HAD BECOME BAD IN THE YEAR OF ACCO UNT. HE HAS ALSO NOT FURNISHED ANY EVIDENCE TO PROVE THAT THE DEBIT HAS BECOME IRRECOVERABLE. THE CLAIM OF THE ASSESSEE FOR ADVANCE WRITTEN OFF O F RS.49,35,110/- IS DISALLOWED. 15.1. AT THE OUT-SET, WE WOULD LIKE TO POINT OUT T HAT ONCE THE ASSESSEE HAD WRITTEN OFF DEBTS AS IRRECOVERABLE IN HIS ACCOUNTS, THE ASSESSEE NEED NOT REQUIRED TO PROVE THAT THEY HAD B ECOME BAD ETC., OUR VIEW IS IN CONSONANCE WITH THE VARIOUS JUDICIAL PR ONOUNCEMENTS ON THE ISSUE, CHIEFLY - (I) IN THE CASE OF LAWLYS ENTERPRISES P. LT D. V. CIT REPORTED IN (2009) 314 ITR 297 (PATNA) THE HONBLE PATNA HIGH C OURT WAS PLEASED TO OBSERVE THAT -, THE LAWS AS AMENDED WITH EFFECT FROM APRIL 1, 1989 , PERMITTED DEDUCTION OF THE AMOUNT OF ANY BAD DEBT OR PART THEREOF, WHICH W AS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR T HE PREVIOUS YEAR. THE ASSESSEE HAVING WRITTEN OFF THE AMOUNT AS IRRECOVER ABLE IN ITS ACCOUNTS FOR THE PREVIOUS YEAR WAS ENTITLED TO DEDUCTION OF THE AMOUNT OF THE BAD DEBT. . (II) THE HONBLE HIGH COURT OF HIMACHAL PRADESH I N THE CASE OF SURESH GAGGAL V. ITO REPORTED IN (2009) 222 CTR (HP) 96 HA D HELD THAT - ONCE THE ASSESSEE WRITES OFF THE DEBT AS IRRECOVERA BLE, HIS CLAIM FOR DEDUCTION CANNOT BE REJECTED ON THE GROUND THAT THE DEBT HAS NOT BEEN ESTABLISHED TO HAVE BECOME IRRECOVERABLE. THE AFOR ESAID POSITION IS ALSO SUPPORTED BY THE AMENDMENT MADE TO S.36(2) W.E.F. 1 ST APRIL, 1989 AND ITA NOS.484 TO 490/B/10 PAGE 39 OF 40 ANY DOUBT, IF REMAINING, HAS BEEN CLARIFIED BY CIRC ULAR NO.551 DATED: 23 RD JANUARY, 1990. (III) THE HONBLE BOMBAY HIGH COURT, IN THE CASE OF CIT V. STAR CHEMICALS (BOMBAY) P. LTD. REPORTED IN (2009) 313 I TR 126 (BOM), IN ITS WISDOM HAD HELD THAT UNDER SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961 AND CIRCULAR NO.551 DATED JANUARY, 23, 1990 IF THE ASSESSEE HAD WRITTEN OFF THE DEBT AS A BAD DEBT THAT WOULD SATIS FY THE PURPOSE OF THE SECTION. (IV) THE HONBLE SUPREME COURT OF INDIA, IN THE CA SE OF T.R.F. LTD. V. COMMISSIONER OF INCOME TAX HELD THAT AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBT S, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, H AS BECOME IRRECOVERABLE: IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRE COVERABLE IN THE ACCOUNTS OF THE ASSESSEE. ACCORDINGLY, WE HOLD THAT THE BAD DEBTS WRITTEN OFF BY THE ASSESSEE IN HIS BOOKS OF ACCOUNT SHALL BE ALLOWED AS A DEDUC TION. 16. 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 FOR ALL THE ASSESSMENT YEARS UNDER APPEAL. ITA NOS.484 TO 490/B/10 PAGE 40 OF 40 17. IN THE RESULT , (I) THE ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2001-02 IS DISMISSED; & (II) THE ASSESSEES APPEALS FOR THE ASSESSMENT YEAR S 2002-03, 2003-04, 2004-05, 2005-06, 2006-07 & 2007- 08 ARE PARTLY ALLOWED. 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: BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE. 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE