DCIT, Circle-17(1), Hyd, Hyderabad V. G.Raghunath Reddy, Hyd, Hyderabad

ITA 53/HYD/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2592 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 11-05-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 14-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: L R AMJI RAO
• Assessee Lawyers: CH G KRISHNAMUR THY
• Keywords: Principle of natural justice; Deemed dividend
• Section: 234B; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 37/HYD/2016 ASSESSMENT YEAR: 2006-07 G. RAGHUNATH REDDY, HYDERABAD. PAN ACVPG 2008F VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 17(1), HYDERABAD. (APPELLANT) (RESPONDENT) ITA NO. 53/HYD/2016 ASSESSMENT YEAR: 2006-07 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 17(1), HYDERABAD. VS. G. RAGHUNATH REDDY, HYDERABAD. PAN ACVPG 2008F (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI CH.G. KRISHNA MURTHY REVENUE BY : SHRI L. RAMJI RAO DATE OF HEARING : 23-08-2017 DATE OF PRONOUNCEMENT : 22-09-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: THESE ARE THE CROSS APPEALS BY THE ASSESSEE AS WEL L AS REVENUE DIRECTED AGAINST THE ORDER OF THE LEARNED C OMMISSIONER OF INCOME-TAX(A) - 5, HYDERABAD, DATED 30-10-2015 FOR AY 2006-07. ITA NO. 37/HYD/16 BY THE ASSESSEE 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE, AN INDIVIDUAL, FILED HIS RETURN OF INCOME FOR THE AY 2 006-07 ON 2 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY 26/07/2016 ADMITTING TOTAL INCOME OF RS. 4,68,367/- . SUMMARY ASSESSMENT U/S 143(1) WAS COMPLETED ON 29/11/06. SU BSEQUENTLY, NOTICE U/S 147 WAS ISSUED ON 27/03/2013. AO OBSERVE D THAT ASSESSEE IS HAVING SHAREHOLDING MORE THAN 10% IN M/S EXEL RU BBER PVT. LTD. AND ALSO HOLDING SHARES IN ACE TYRES P. LTD. 29.3 4%, VILAS POLYMER LTD. 16.22% AND VENUS ELASTOMERS P. LTD. 28.47% . HE NOTED THAT IN THE AY 2006-07, M/S EXEL RUBBER LTD. HAD ADVANCE D UNSECURED LOANS TO THE FOLLOWING COMPANIES: A. VENUS ELASTOMERS RS. 2,00,00,000 B. ACE TYRES (ICD) RS. 42,50,000 ACCORDING TO THE AO, ASSESSEE IS SHAREHOLDER IN M/S EXEL RUBBER LTD. AND BENEFICIAL INTEREST IN OTHER COMPANIES AND, THE REFORE, PROVISIONS OF SECTION 2(22)(E) GET ATTRACTED BY MAKING PAYMENT OF ADVANCES TO THE OTHER CLOSELY HELD COMPANIES. BY RELYING ON VAR IOUS CASE LAWS, HE ADDED DEEMED DIVIDEND IN THE HANDS OF ASSESSEE FOR AN AMOUNT OF RS. 2,42,50,000/- CONSIDERING THAT THE DEEMED DIVID END IS TAXED IN THE HANDS OF SHAREHOLDER. 3. AGGRIEVED WITH THE ABOVE ORDER, ASSESSEE PREFERR ED AN APPEAL BEFORE THE CIT(A). 4. DURING THE APPELLATE PROCEEDINGS, AO BROUGHT SO ME ERRORS TO THE NOTICE OF CIT(A) IN COMPUTATION OF TRANSACTIONS RELATING TO DEEMED DIVIDEND. CORRECT COMPUTATION OF DEEMED DIVIDEND AS EXTRACTED FROM CIT(A)S ORDER IS AS UNDER: A) TOTAL DEBITS (INCLUDING BROUGHT FORWARD BALANCE AS ON 01/04/2005) AS PER LEDGER ACCOUNT OF M/S VENUS IN THE BOOKS OF M/S EXEL LESS: BROUGHT FORWARD BALANCE AS ON 01/04/2005 UNSECURED LOAN DURING THE FY RELEVANT TO AY 2006-07 (DEEMED DIVIDEND) 2,00,00,000/- 1,69,00,000/- 31,00,000/- B) TOTAL DEBITS (INCLUDING BROUGHT FORWARD BALANCE AS 4,28,49,999/- 3 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY ON 01/04/2005) AS PER LEDGER ACCOUNT OF M/S ACE IN THE BOOKS OF M/S EXEL LESS: BROUGHT FORWARD BALANCE AS ON 01/04/2005 UNSECURED LOAN DURING THE FY RELEVANT TO AY 2006-07 (DEEMED DIVIDEND) 1,36,99,999/- 2,91,50,000/- TOTAL DEEMED DIVIDEND = RS. 31,00,000 + RS. 2,91,50 ,000/- = RS. 3,22,50,000/- 5. CIT(A), AFTER CONSIDERING THE ORDER OF CIT(A)-II VIDE ITA NO. 794/CIT-II/HYD/2011-12, DT. 26/09/2012, HELD THAT I CDS CANNOT BE CONSIDERED TO BE IN THE NATURE OF LOANS AND ADVANCE S SO AS TO TREAT IT AS DEEMED DIVIDEND. HE ACCORDINGLY, DELETED THE ADD ITIONS MADE IN THE CASE OF ACE TYRES LTD. IN THE CASE OF VENUS EL ASTOMERS PVT. LTD., HE HAD CONFIRMED THE ADDITION BY TREATING THE TRANS ACTION AS DEEMED DIVIDEND BY DECLINING THE CONTENTION OF THE ASSESSE E THAT TRANSACTION IS BUSINESS TRANSACTION AS THE SAME WAS ADVANCED FO R MANUFACTURING TYRE CURING BLADERS ON JOB WORK BASIS, WHICH WILL B E ADJUSTED IN THE NEXT FEW YEARS. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 5 IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE IN SO FAR AS IT RELATES TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 5 OUGHT TO HAVE ACCEPTED THE EXPLANATIONS/SUBMISSIONS MADE AND TREATED THE TRANSACTION AS RELATING TO BUSINESS. 3. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 5 GROSSLY ERRED IN TREATING THE SECURITY DEPOSIT AS LOAN/ADVA NCE AND BRING THE IMPUGNED TRANSACTION WITHIN THE MEANING / DEFIN ITION OF SECTION 2(22)(E) OF THE ACT. 4. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 5 ERRED IN CONFIRMING THE ADDITION OF THE AO BY TREATING THE I MPUGNED TRANSACTION, I.E. SECURITY DEPOSIT AS LOAN / ADVANC E. 4 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY 5. THE APPELLANT RESERVES THE RIGHT TO ADD, ALTER, DELETE, OR MODIFY ANY OF THESE GROUNDS OF APPEAL AT THE TIME O F HEARING. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS FOR- A. DELETION OF ADDITION OF RS.31,00,000 AS INCOME. B. HOLDING THAT AMOUNT RECEIVED AS SECURITY DEPOSIT IS NOT LOAN / ADVANCE WITHIN THE MEANING OF SECTION 2(22)( E), AN D C. DELETION OF INTEREST U/S 234B AND 234C, WHICH AR E CONSEQUENTIAL IN NATURE. 7. LD. AR SUBMITTED THAT ASSESSEE IS A DIRECTOR IN FOUR COMPANIES, WHICH ARE CLOSELY HELD AND HE SUBMITTED THAT M/S EX EL RUBBER PVT. LTD. ENTERED INTO AN AGREEMENT WITH VENUS ELASTOMER S PVT. LTD. TO MANUFACTURE TYRE CURING BLADERS ON JOB WORK BASIS. IN THAT PROCESS, M/S EXEL RUBBER PVT. LTD. HAD PAID 2 CRORES AS ADVA NCE WHICH WILL BE DEDUCTED IN THE CONVERSION CHARGED CLAIMED BY VENUS ELASTOMERS PVT. LTD. OVER A PERIOD OF FIVE YEARS. RELEVANT AGR EEMENT IS PLACED AT PAGES 23 TO 27 OF PAPER BOOK. HE SUBMITTED THAT THI S IS PURELY A BUSINESS TRANSACTION AND NO BENEFIT HAS PASSED ON T O ASSESSEE AND, THEREFORE, THE SAME CANNOT BE TREATED AS DEEMED DIV IDEND. HE FURTHER SUBMITTED THAT AO HAS NOT BROUGHT ON RECORD ANY FIN DING THAT BENEFIT WAS PASSED ON TO ASSESSEE NOR BY CIT(A). THEREFORE, HE SUBMITTED THAT PROVISIONS OF SECTION 2(22)(E) WILL NOT BE ATT RACTED TO THE BUSINESS TRANSACTION. 8. LD. DR, ON THE OTHER HAND, BESIDES RELYING ON TH E ORDERS OF REVENUE AUTHORITIES, SUBMITTED THAT PROVISIONS OF SECTION 2(22)(E) WILL GET ATTRACTED WHEN THE PAYMENT WAS MADE TO OTHER CL OSELY HELD COMPANIES IN WHICH ASSESSEE IS HOLDING SUBSTANTIAL INTEREST. ONCE THE PAYMENT IS MADE TO SUCH CLOSELY HELD COMPANIES, IT IS NOT NECESSARY THAT THE ULTIMATE PAYMENT MAY BE REPAID OR ADJUSTED IN FUTURE WILL NOT ALTER THE FACT THAT IN THE EYE OF LAW. FOR THIS PRO POSITION HE RELIED ON THE FOLLOWING CASES: 5 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY 1. MISS P. SHARDA VS. CIT [1998] 229 ITR 444 (SC) 2. M.D. JINDAL VS. CIT, [1986] 28 TAXMAN 509 (CAL CUTTA) WHEREIN IT WAS HELD THAT EVEN IN THE CASE OF KIND I S TRANSFERRED FOR THE BENEFIT OF BENEFICIAL SHAREHOLDER SECTION 2 (22)(E) WILL GET ATTRACTED. 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. BOTH CIT(A) AND AO HAVE APPLIED PROVISIO NS OF SECTION 2(22)(E) AND MADE THE ADDITION BY OBSERVING THAT AS SESSEE IS SUBSTANTIAL SHAREHOLDER IN ALL THE FOUR COMPANIES I NVOLVED IN THE TRANSACTION OF ICDS AND ADVANCES AND INVOKED SECTIO N 2(22)(E) ON THE FACT THAT ASSESSEE BEING A SUBSTANTIAL SHAREHOLDER IN M/S EXEL RUBBER PVT. LTD., M/S EXEL RUBBER PVT. LTD. HAD PAID ICDS TO ACE TYRES PVT. LTD. AND ADVANCES FOR CONVERSION OF CHARGES TO MANU FACTURE OF TYRE CURING BLADERS TO M/S VENUS ELASTOMERS PVT. LTD. NO DOUBT, THE PROVISIONS OF DEEMED DIVIDEND GET ATTRACTED AS SOON AS CLOSELY HELD COMPANIES MAKE LOANS/ADVANCES TO ANOTHER CLOSELY H ELD COMPANY OR FIRM IN WHICH ASSESSEE IS HOLDING SUBSTANTIAL INTER EST. HOWEVER, AT THE SAME TIME, SECTION 2(22)(E) HAS SUB-CLAUSES, WHICH EXCLUDES THE PAYMENTS, WHICH ARE NOT CONSIDERED AS DEEMED DIVIDE ND, ESPECIALLY SUB-CLAUSE (II), FOR THE CONVENIENCE IT IS REPRODUC ED BELOW: (II) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER [ OR THE SAID CONCERN] BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. THIS SUB-CLAUSE (II) CONSTITUTES EXCEPTION TO DEEME D DIVIDEND AND IT APPLIES ONLY WHERE TWO CUMULATIVE CONDITIONS ARE FU LFILLED, VIZ., I) THE LOAN SHOULD HAVE BEEN MADE BY THE COMPANY IN THE OR DINARY COURSE OF ITS BUSINESS AND II) MONEY LENDING SHOULD BE A S UBSTANTIAL PART OF THE COMPANIES BUSINESS. IN THE GIVEN CASE, VENUS EL ASTOMERS PVT. LTD., IS MANUFACTURING TYRE CURING BLADERS FOR M/S EXEL RUBBER PVT. LTD. AND IN ORDER TO RESERVE MANUFACTURING CAPACITY AND MANUFACTURING AREA, M/S EXCEL RUBBER PVT. LTD. HAS MADE ADVANCES WHICH WILL BE ADJUSTED IN THE CONVERSION CHARGES OV ER A PERIOD OF TIME AS PER THE AGREEMENT SUBMITTED BEFORE US. THIS BEIN G A REGULAR 6 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY BUSINESS TRANSACTION, ADVANCES MADE BY M/S EXEL RUB BER PVT. LTD. IS IN THE ORDINARY COURSE OF BUSINESS. IN THE CASE OF CIT VS. CREATIVE DYING AND PRINTING PVT. LTD., [2009] 318 ITR 476 (D ELHI) WHEREIN IT WAS HELD THAT IN THE CASE OF ADVANCE BY THE ASSESSE E ENGAGED IN THE BUSINESS OF DYING AND PRINTING OF CLOTH TO A SISTER COMPANY HAVING ANCILLARY UNIT, BOTH ASSESSEE AND SISTER COMPANY ST RIVING FOR PRODUCTION OF GARMENTS FOR EXPORTS TO MEET INTERNAT IONAL STANDARDS. THIS ADVANCE WAS GIVEN FOR MODERNISATION AND EXPANS ION OF THE RECIPIENT TO BE ADJUSTED AGAINST FUTURE JOB WORK, S O THAT SUCH ADVANCE COULD NOT BE BROUGHT TO TAX AS DEEMED DIVID END. 9.1 RELYING ON THE ABOVE DECISION, IN OUR CONSIDERE D VIEW, IN THE GIVEN CASE, M/S EXCEL RUBBER PVT. LTD. MADE A PAYME NT TO VENUS ELASTOMERS PVT. LTD FOR MANUFACTURING THE TYRE CURI NG BLADERS ON JOB WORK BASIS AND SUPPORTED BY AN AGREEMENT. IT CLEARL Y DEMONSTRATES THAT THE PAYMENT WAS MADE TO RESERVE THE MANUFACTUR ING CAPACITY AND THE CONVERSION CHARGES WILL BE ADJUSTED IN THE NEXT F FINANCIAL YEARS. HENCE, THE PAYMENT IS IN THE REGULAR COURSE OF BUSINESS. ACCORDINGLY, PROVISIONS OF SECTION 2(22)(E) WILL NO T BE ATTRACTED IN THE CASE OF ASSESSEE SINCE IT COMES UNDER EXCEPTIONAL C LAUSE OF SUB- SECTION (II) TO SECTION 2(22)(E). ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ITA NO. 53/HYD/2016 BY REVENUE 11. THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ACTION OF THE CIT(A) IN DELETING THE ADDITION MADE BY THE AO TREA TING THE ADVANCES AS DEEMED DIVIDEND IN THE CASE OF ACE TYRES LTD., H OLDING THAT ICDS CANNOT BE CONSIDERED TO BE IN THE NATURE OF LOANS A ND ADVANCES SO AS TO TREAT IT AS DEEMED DIVIDEND. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: 7 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY 1. THE ORDER OF THE CIT(A) IS ERRONEOUS IN LAW AND ON FACTS OF THE CASE. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE INT ER-CORPORATE DEPOSITS (ICDS) RECEIVED FROM M/S EXCEL RUBBER LTD. BY M/S VENUS ELASTOMERS PVT. LTD. CANNOT BE CONSIDERED TO BE IN THE NATURE OF LOANS AND ADVANCES FOR THE PURPOSE OF APP LICATION OF PROVISIONS OF SECTION 2(22)(E) OF THE INCOME TAX AC T, 1961 WITHOUT APPRECIATING THAT THE ASSESSEE IS HAVING SU BSTANTIAL INTEREST IN BOTH THE COMPANIED, AND, THEREFORE, THE LCD'S ADVANCED PARTAKE THE CHARACTER OF DEEMED DIVIDEND A S PER THE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME TAX AC T, 1961. 3. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME O F HEARING. 12. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF BOMBAY OIL INDU STRIES LTD. VS. DCIT, [2009] 28 SOT 383 (MUM.) WHEREIN THE COORDINA TE BENCH HAS HELD AS UNDER: 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. THE AUTHORITIES BELOW HAVE NOT CONTROVERTED THE CLAIM OF THE ASSESSEE COMPANY THAT THE AMOUNT RECEIVED FROM ABOV E THREE COMPANIES IS ICDS. THE AO HELD AGAINST THE ASSESSEE ONLY ON ACCO UNT THAT IT HAD FAILED TO EXPLAIN, THE INVESTMENT IS NEITHER LOAN OR ADVANCE. IT IS A SETTLED POSITION THAT DEPOSITS CANNOT BE EQUATED WITH LOANS OR ADVAN CES. THE JURISDICTIONAL HIGH COURT IN THE DURGA PRASAD MANDELIAS CASE (SUP RA) HAS NOTICED THE DISTINCTION BETWEEN DEPOSITS AND LOANS IN THE CONTE XT OF S. 370 OF THE COMPANIES ACT. THE COURT HELD AS UNDER : 'THERE CAN BE NO CONTROVERSY THAT IN A TRANSACTION OF A DEPOSIT OF MONEY OR A LOAN, A RELATIONSHIP OF A DEBTOR AND CREDITOR MUS T COME INTO EXISTENCE. THE TERMS DEPOSIT AND LOAN MAY NOT BE MUTUALLY EXCL USIVE, BUT NONETHELESS IN EACH CASE WHAT MUST BE CONSIDERED IS THE INTENTION OF THE PARTIES AND THE CIRCUMSTANCES. IN THE PRESENT CASE, BARRING THE ASS ERTION OF THE RESPONDENT THAT THE MONEYS ADVANCED BY THE COMPANY TO THE ASSO CIATED CEMENT COMPANIES LTD. CONSTITUTE A LOAN AND OFFEND S. 370 OF THE COMPANIES ACT, THERE IS NOTHING ELSE TO SHOW THAT THESE MONEYS HAV E BEEN ADVANCED AS A LOAN. IN THE CONTEXT OF THE STATUTORY PROVISIONS, THE WORD LOAN MAY BE USED IN THE SENSE OF A LOAN NOT AMOUNTING TO A DE POSIT. THE WORD LOAN IN S. 370 MUST NOW BE CONSTRUED AS DEALING WITH LOANS NOT AMOUNTING TO DEPOSITS, BECAUSE, OTHERWISE, IF DEPOSIT OF MONEYS WITH CORPORATE BODIES WERE TO BE TREATED AS LOANS, THEN DEPOSITS WITH SCH EDULED BANKS WOULD ALSO FALL WITHIN THE AMBIT OF S. 370 OF THE COMPANIES AC T. THEREFORE, MONEYS GIVEN BY THE COMPANY TO THE OTHER BODIES CORPORATE IS A LOAN WITHIN THE MEANING OF S. 370 OF THE COMPANIES ACT MUST BE NEGA TIVED. THEREFORE, THE PETITIONERS WOULD WELL BE ENTITLED TO THE RELIEF.' 8 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY SEC. 370 OF THE COMPANIES ACT, 1956 WAS SUBSEQUENTL Y AMENDED TO INCLUDE DEPOSITS INTO ITS AMBIT THEREBY INDICATING THE DI STINCTION BETWEEN DEPOSITS AND LOANS/ADVANCES. THE RECENT DECISION OF THE TRIB UNAL IN THE CASE OF GUJARAT GAS FINANCIAL SERVICES LTD.S CASE (SUPRA) HAS ELABORATELY CONSIDERED THE ISSUE WHETHER THE INTEREST ON ICDS I S INTEREST ON LOANS OR ADVANCES AND WHETHER THE SAME IS EXIGIBLE TO CHARGE ABLE INTEREST UNDER INTEREST-TAX ACT. THE TRIBUNAL AFTER CONSIDERING TH E ENTIRE PRECEDENT ON THE ISSUE THOUGH IN THE CONTEXT OF THE INTEREST-TAX ACT HAD CATEGORICALLY HELD THAT INTEREST ON ICDS IS NOT AKIN TO INTEREST ON LO ANS OR ADVANCES. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL CITED SUPRA WHICH RUNS FROM PARAS 68 TO 74 IS REPRODUCED BELOW : '68. BEFORE THE AO THE ASSESSEE AS REGARDS INCOME F ROM ICD THE ASSESSEE COMPANY ACCEPTED THIS INTEREST OF RS. 1,21 ,54,153 ALONG WITH INTEREST ON BILL DISCOUNTING RS. 1,48,74,208 A ND OTHER INTEREST OF RS. 3,66,184 CAN BE BOUGHT UNDER THE PURVIEW OF THE INTEREST-TAX ACT, 1974. HOWEVER BEFORE CIT(A) IT WAS SUBMITTED T HAT THESE ARE INTEREST ON DEPOSITS AND THE NATURE IS THAT OF THE INVESTMENT AND SO INTEREST-TAX BEING LEVIABLE ON LOANS AND ADVANCES A ND NOT ON FIXED DEPOSITS, THE AMOUNT WAS NOT TO BE INCLUDED. THE CI T(A) HELD : I HAVE CAREFULLY CONSIDERED THE MATTER AND FIND TH AT THE DEFINITION OF INTEREST DOES NOT SPEAK OF EXCLUDING THIS AMOUNT IN ITS DEFINITION. ACCORDINGLY THEREFORE, THE INCLUSION BY THE AO OF T HESE ITEMS IS FOUND JUSTIFIED AND IS UPHELD. 69. THE SUBMISSION OF THE ASSESSEE IS THAT THESE IC DS BEING NEITHER LOANS OR ADVANCES, INTEREST EARNED ON THESE IS NOT EXIGIBLE TO INTEREST TAX IN VIEW OF THE DECISION OF AHMEDABAD TRIBUNAL I N THE CASE OF UTKARSH FINCAP (P) LTD. VS. ITO (2006) 101 TTJ (AHD ) 210. RELIANCE IS ALSO PLACED ON THE DECISION OF HOUSING & URBAN D EVELOPMENT CORPORATION LTD. VS. JT. CIT (2006) 102 TTJ (DEL)(S B) 936 : (2006) 5 SOT 918 (DEL)(SB), STANROSE HOLDING LTD. (ITA NO. 2 5/MUM/1966) AND PERSEPOLIS INVESTMENT CO. (P) LTD. (ITA NO. 51/ MUM/1997). THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND SUPPORTED THE DECISION OF THE CIT(A) AND SUBMITTED THAT WHEN ASSESSEE ITSELF HAD OFFERED IT TO TAX WHERE THE QUESTION OF ALLOWIN G IT AS NOT TAXABLE. HE ALSO SUBMITTED THAT IT IS TAXABLE AS HELD IN BAJ AJ AUTO HOLDINGS LTD. VS. DY. CIT (2005) 96 TTJ (MUMBAI) 856 : (2005 ) 95 ITD 356 (MUMBAI). 70. WE HAVE HEARD THE PARTIES AND CONSIDERED THE RI VAL SUBMISSIONS. IT MIGHT BE TRUE THAT ASSESSEE HAD OFFERED IT TO TA X INITIALLY BUT HE CLAIMED IT AS NOT TAXABLE AND THEREFORE THE MATTER HAS TO BE EXAMINED ON MERITS AND TO DETERMINE AS TO WHETHER I T IS TAXABLE UNDER THE ACT. WE FIND IT IS NOT TAXABLE IN THE LIG HT OF THE DECISION IN THE CASE OF UTKARSH FINCAP (P) LTD. (SUPRA) WHEREIN AHMEDABAD BENCH OF THE TRIBUNAL AFTER CONSIDERING THE DECISIO N IN THE CASE OF FEDERATION OF ANDHRA PRADESH CHAMBERS OF COMMERCE & INDUSTRY & ORS. VS. STATE OF ANDHRA PRADESH & ORS. (2001) 165 CTR (SC) 672 : (2001) 247 ITR 36 (SC), CIT VS. SAHARA INDIA SAVING S & INVESTMENT CORPORATION LTD. (2003) 185 CTR (ALL) 136 : (2003) 264 ITR 646 (ALL) AND FOLLOWING THE DECISIONS IN THE CASE OF GUJARAT INDUSTRIAL INVESTMENT CORPN. LTD. (SIC), ORIENTAL INSURANCE CO . LTD. VS. DY. CIT (2004) 82 TTJ (DEL) 1084 : (2004) 89 ITD 520 (DEL) HELD THAT 9 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY INTEREST ON ICDS ARE NOT CHARGEABLE TO INTEREST-TAX , AS THE DEPOSITS ARE NOT IN THE NATURE OF LOAN OR ADVANCES. IT HELD AS UNDER : THE TERM LOANS AND ADVANCES SHOULD BE UNDERSTOOD CONJOINTLY AND NOT IN ISOLATION. IF SO READ, THE ADVANCES WHICH AR E IN THE NATURE OF LOAN ALONE SHOULD BE COVERED IN THE TERM. ORDINARIL Y AN ADVANCE IS A PAYMENT BEFOREHAND AND IT DOES NOT CONNOTE, THE IDE A OF REPAYMENT. IT IS ADJUSTED WHEN THE ACTION FOR WHICH THE MONEY IS ADVANCED IS COMPLETED AND IF NOT REPAID ON EXPIRY OF THE LOAN L IKE A DEPOSIT. THE COMPANY IS NOT BOUND TO ACCEPT THE DEPOSIT MADE, IF PROCEEDINGS ON THE BASIS OF THE PROSPECTUS A PERSON INTEREST TO MA KE A DEPOSIT. BY ISSUING PROSPECTUS OF A COMPANY INVITES OFFER FOR M AKING DEPOSIT AND THAT IS NOT OFFER TO RECEIVE DEPOSIT WHEREAS IN CAS E OF LOAN THE ASSESSEE PRAYS FOR A LOAN. IT OFFERS TO BORROW MONE Y AND ONCE THAT OFFER IS ACCEPTED, THE LENDER IS BOUND TO GIVE MONE Y TO THE BORROWER ON TERMS SETTLED. IT IS ALSO TO BE NOTICED THAT A T AXING STATUTE HAS TO BE STRICTLY CONSTRUED AND THE SUBJECT CANNOT BE TAX ED UNLESS COMES WITHIN THE LETTER OF LAW. THE ARGUMENT THAT A PARTI CULAR INCOME FALLS WITHIN THE SPIRIT OF THE LAW CANNOT BE AVAILED OF B Y THE REVENUE. IT IS TRITE LAW THAT NO TAX CAN BE IMPOSED ON THE SUBJECT WITHOUT THE WORDS IN THE ACT. NO TAX CAN BE IMPOSED BY INFERENC E OR ANALOGY. THE CARDINAL PRINCIPLE OF INTERPRETATION OF FISCAL LAW IS THAT IT SHOULD BE CONSIDERED STRICTLY. IN VIEW OF THE ABOVE, THE INTE REST IN ICDS UNLESS THEY CLEARLY FALL WITHIN THE MEANING OF INTEREST O N LOANS AND ADVANCES WOULD NOT BE TAXABLE. ICD CAN NEITHER BE A LOAN NOT AN ADVANCE. THEREFORE, THE AO IS DIRECTED TO EXCLUDE T HE INTEREST ON ICD FROM THE ASSESSMENT OF THE ASSESSEE. CONSEQUENTLY, THE LEVY OF PENALTY MADE WOULD ALSO NOT STAND. THEY ARE, ACCORD INGLY DELETED. 71. IT HAS CONSIDERED THE DECISION OF BAJAJ AUTO HO LDINGS LTD.S CASE (SUPRA) REFERRED TO BY THE CIT(A) AND DISTINGUISHED BY STATING THAT MUMBAI BENCH HAS PROCEEDED ON A FOOTING THAT DEPOSI T WOULD BE AN ADVANCE AND WOULD BE INCLUDIBLE IN THE TERM WITH I NTEREST ON DEPOSIT AND ADVANCE. THE BOMBAY BENCH IS MORE PERSUADED BY THE REASON THAT THE INTEREST ON DEPOSIT WAS NOT EXCLUDED FROM THE DEFINITION OF INTEREST AND THE TERM INTEREST ON LOANS AND ADVANC ES WAS WIDE ENOUGH TO INCLUDE THE SAME. IT HAD NOT CONSIDERED T HAT WHETHER IT WAS NOT A LOAN NOR AN ADVANCE AND AS TO WHETHER THE AMENDED DEFINITION OF INTEREST UNDER THE ACT WAS EXHAUSTI VE OR INCLUSIVE. IN HOLDING THAT THE ICD IS NOT AN ADVANCE THE AHMEDABA D TRIBUNAL ALSO NOTICED THAT THE MEANING OF THE TERM ADVANCE AS U NDERSTOOD IN THE COMMERCIAL WORDS AND AS STATED UNDER THE TITLE WHA T IS ADVANCE IN THE FOLLOWING WORDS : IT WAS HELD IN KM. MOHAMMED ABDUL KADIR ROWTHER VS . S. MUTHIA CHETTIAR (1960) 2 MAD. LJ 13 AT 15 THAT ADVANCE M EANS LITERALLY A PAYMENT BEFOREHAND; IN CERTAIN CASES IT MAY BE A LO AN BUT IT CANNOT BE SAID THAT A SUM PAID BY WAY OF ADVANCE IS NECESS ARILY A LOAN. IN RAJA OF VENKATAGIRI VS. KRISHNAYYA RAO BAHADUR AIR 1948 PC 150 AT P. 155, IT WAS OBSERVED THAT ORDINARILY AND ADVANCE DOES NOT CONNOTE ANY IDEA OF REPAYMENT. IT IS, THEREFORE, CLEAR THAT THE WORD ADVANCED USED IN S. 296 MEANS AN ADVANCE IN THE N ATURE OF A LOAN AND NOT MERELY AN ADVANCE AS IS UNDERSTOOD IN THE C OMMON PARLANCE IN THE SENSE OF PAYMENT OF MONEY BEFOREHAND AND WHI CH IS LIKELY TO BECOME DUE AT SOME FUTURE TIME. 10 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY 72. IT HAS ALSO REFERRED TO S. 296 OF COMPANIES ACT REGULATING LOANS TO DIRECTORS FOR BOOK DEBT WHICH WAS IN THE NATURE OF LOANS OR ADVANCES FROM ITS INCEPTION. 73. IN THE CASE OF HOUSING & URBAN DEVELOPMENT CORP ORATION LTD. (SUPRA), THE SPECIAL BENCH AFTER CONSIDERING VARIOU S DECISIONS AND CIRCULARS OF CBDT HELD THAT DEPOSITS IN THE FORM OF SECURITIES AND BONDS CANNOT BE CONSIDERED AS LOANS AND ADVANCES AN D AS SUCH INTEREST THEREON SHALL BE OUTSIDE THE SCOPE OF INTE REST DEFINED UNDER S. 2(7) OF THE INTEREST-TAX ACT. PARA 22 OF THE ORD ER READS AS UNDER : 22. FROM THE FOREGOING DISCUSSION WE ARE OF THE CO NSIDERED VIEW THAT DESPITE SIMILARITIES, THE TWO EXPRESSIONS LOANS A ND DEPOSITS ARE TO BE TAKEN DIFFERENT AND THE DISTINCTION CAN BE SUMME D UP BY STATING THAT IN THE CASE OF LOAN, THE NEEDY PERSON APPROACH ES THE LENDER FOR OBTAINING THE LOAN THEREFROM. THE LOAN IS CLEARLY L ENT AT THE TERMS STATED BY THE LENDER. IN THE CASE OF DEPOSIT, HOWEV ER, THE DEPOSITOR GOES TO THE DEPOSITEE FOR INVESTING HIS MONEY PRIMA RILY WITH THE INTENTION OF EARNING INTEREST. IN VIEW OF THIS LEGA L POSITION, IT HAS TO BE HELD THAT INTEREST ON DEPOSITS REPRESENTING INVE STMENT OF SURPLUS FUNDS WOULD ALSO NOT FALL UNDER THE DEFINITION OF I NTEREST AS GIVEN IN S. 2(7) OF THE ACT AND AS SUCH WOULD NOT BE LIABLE TO INTEREST-TAX. THE ANSWER TO THE QUESTION UNDER REFERENCE IN OUR HUMBL E OPINION IS THAT INVESTMENTS MADE BY WAY OF SHORT-TERM DEPOSITS AND ALSO IN THE FORM OF SECURITIES AND BONDS CANNOT BE CONSIDERED A S LOANS AND ADVANCES AND AS SUCH INTEREST THEREON SHALL BE OUTS IDE THE SCOPE OF INTEREST DEFINED UNDER S. 2(7) OF THE ACT. 74. IN THESE CIRCUMSTANCES WE HOLD THAT INTEREST ON ICDS IS NOT AN INTEREST ON LOAN OR ADVANCE AND THEREFORE WOULD NOT BE INCLUDIBLE IN THE CHARGEABLE INTEREST UNDER THE INTEREST-TAX ACT. ' FROM THE ABOVE IT IS CLEAR THERE IS DISTINCTION BET WEEN DEPOSITS VIS-A-VIS LOANS/ADVANCES. S. 2(22)(E) ENACTS A DEEMING FICTIO N WHEREBY THE SCOPE AND AMBIT OF THE WORD DIVIDEND HAS BEEN ENLARGED TO BRI NG WITHIN ITS SWEEP CERTAIN PAYMENTS MADE BY A COMPANY AS PER THE SITUA TIONS ENUMERATED IN THE SECTION. SUCH A DEEMING FICTION WOULD NOT BE GI VEN A WIDER MEANING THAN WHAT IT PURPORTS TO DO. THE PROVISIONS WOULD N ECESSARILY BE ACCORDED STRICT INTERPRETATION AND THE AMBIT OF THE FICTION WOULD NOT BE PRESSED BEYOND ITS TRUE LIMITS. THE REQUISITE CONDITION FOR INVOKING S. 2(22)(E) OF THE ACT IS THAT PAYMENT MUST BE BY WAY OF LOAN OR ADVAN CES. SINCE THERE IS A CLEAR DISTINCTION BETWEEN THE ICDS VIS-A-VIS LOANS/ ADVANCES, ACCORDING TO US THE AUTHORITIES BELOW WERE NOT RIGHT IN TREATING TH E SAME AS DEEMED DIVIDEND UNDER S. 2(22)(E) OF THE ACT. SINCE WE HOL D THAT ICDS DO NOT COME WITHIN THE PURVIEW OF DEEMED DIVIDEND UNDER S. 2(22 )(E) OF THE ACT, THE ALTERNATIVE CONTENTION OF THE ASSESSEE NAMELY BY VI RTUE OF S. 2(22)(E)(II) OF THE ACT, THE UNSECURED LOANS RECEIVED BY THE ASSESS EE IS NOT DIVIDEND IS NOT ADJUDICATED. FOLLOWING THE DECISION OF THE COORDINATE BENCH OF I TAT, MUMBAI, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED B Y THE REVENUE IN THIS REGARD. 11 ITA NOS. 37 & 53/H/16 G. RAGHUNATH REDDY 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 12. TO SUM UP, APPEAL OF THE ASSESSEE IS ALLOWED AN D THE APPEAL OF THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 22 ND SEPTEMBER, 2017. SD/- SD/- (D. MANMOHAN) (S. RIFAUR RAHMAN ) VICE PRESIDENT AC COUNTANT MEMBER HYDERABAD, DATED: 22 ND SEPTEMBER, 2017. KV COPY TO:- 1) SHRI G. RAGHUNATH REDDY, C/O M/S CH. G. KRISHNA MURTHY & CO., CA 133/1, PRENDERGHAST ROAD, SECUNDERABAD 500 00 3. 2) DCIT, CIRCLE 17(1), HYDERABAD. 3) CIT(A) - 5, HYDERABAD 4 PR. CIT - 5, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE