DCIT, New Delhi V. Shri Arvind Kumar Jain, New Delhi

ITA 673/DEL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3582 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 15-04-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 12-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAKESH KUMAR KEDIA
• Keywords: Deemed dividend
• Section: 2(22)(e)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA : VICE PRESIDENT AND SHRI H.S. SIDHU : JUDICIAL MEMBER ITA NO. 673/DEL/10 ASSTT. YR: 2006-07 DCIT CIRCLE 33(1), VS. ARVIND KUMAR JAIN, NEW DELHI. 25,B/2, NEW ROHTAK ROAD, KAROL BAGH, NEW DELHI. PAN/ GIR NO. AAFPJ2474G ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI RAKESH KUMAR KEDIA SR. DR RESPONDENT BY : SHRI R.S. SINGHVI FCA O R D E R PER G.E. VEERABHADRAPPA, V.P. : THIS APPEAL, FILED BY THE REVENUE , ARISES OUT O F THE ORDER DATED 26- 11-2009 OF THE CIT(APPEALS)-XXVI, NEW DELHI FOR A. Y. 2006-07. GROUNDS TAKEN BY THE REVENUE ARE AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE LD. CIT(A) HAS ERRED IN HOLDING THAT THE TRANSACTION BETWEEN THE C OMPANY AND THE ASSESSEE ARE IN THE NATURE OF ORDINARY BUSINESS TRA NSACTION, WHICH DO NOT CONSTITUTE DEEMED DIVIDEND U/S 2(22)(E) WITH OUT CONSIDERING THE FACTS THAT THE SAME IS APPEARING UNDER THE HEAD UNSECURED LOANS IN THE ASSESSEES BALANCE SHEET. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E LD. CIT(A) HAS ERRED IN HOLDING THAT THE ASSESSEE DID NOT HAVE AVA ILABLE ACCUMULATED PROFITS FOR THE SAKE OF COMPUTATION OF DEEMED DIVIDEND WITHOUT CONSIDERING THE FACT THAT THE ASSE SSEE HAD ACCUMULATED PROFITS IN ITS BALANCE SHEETS AS ON 31. 3.2005 AND 31.3.2006. 2 2. THE FACTS ARE THAT THE ASSESSEE, AN INDIVIDUAL, IS IN THE BUSINESS OF TRADING IN PURCHASE AND SALE OF BOOKS AND JOURNALS. HE IS ALSO A SHAREHOLDER IN THE COMPANY , NAMED, A & A PERIODICAL SUBSCRIPTI ON AGENCY PVT. LTD. SHRI ARVIND KUMAR JAIN IS A REGISTERED SHARE HOLDER , HAVING 50% SHARES IN THE SAID LIMITED COMPANY. AS ON 31-3-2006, ITS RE SERVES AND SURPLUS STOOD AT RS. 34,38,055/-. BOTH THE LIMITED COMPANY AND TH E ASSESSEE HAD RUNNING BUSINESS TRANSACTIONS AND THERE WAS A RUNNING ACCOU NT BETWEEN THE TWO. THE ASSESSEES ACCOUNT SHOWED A DEBIT BALANCE OF RS. 23 ,14,178/- AT THE BEGINNING OF THE YEAR AND WAS HAVING A CLOSING BALA NCE OF RS. 47,25,318/- AT THE END OF THE YEAR. 2.1. THE ASSESSING OFFICER CONSTRUED THE ABOVE PAYM ENTS TO THE INDIVIDUAL AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT, TO THE EXTENT OF THE ACCUMULATED PROFITS OF RS. 34,38,055/-. ALTHOUGH THE ASSESSING OFFICER DID NOT ACCEPT THAT THE TRANSACTIONS WHICH RESULTED IN THE DEBIT BALANC E WERE A RESULT OF ORDINARY BUSINESS TRANSACTIONS AND THEY DID NOT CONSTITUTE L OANS TO BE COVERED U/S 2(22)(E) OF THE ACT, THE CIT(A) ACCEPTED THE CONTEN TION OF THE ASSESSEE. THE REVENUE IS AGGRIEVED. 3. THE LEARNED DR VEHEMENTLY ARGUED THAT ALL THE CO NDITIONS SPELT OUT IN SECTION 2(22)(E) ARE SATISFIED AND THEREFORE THERE IS NO REASON WHY THE AMOUNT IN QUESTION SHOULD NOT BE TREATED AS DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT. THE LEARNED DR POINTED OUT THAT THE FINDINGS REACHED BY THE CIT(A) ARE NOT SUPPORTED BY THE PROVISIONS OF LAW IN THIS REGARD AND INSISTED THAT WE SHOULD REVERSE THA T ORDER. 3 4. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE POINTED OUT THAT THERE IS NO DISPUTE AS TO THE FACT THAT THE AC COUNT IS THE RUNNING CURRENT ACCOUNT FOR BUSINESS TRANSACTIONS, WHICH THE INDIVI DUAL HAD WITH THE COMPANY. THE BALANCE IN THE ACCOUNT, THEREFORE, DOE S NOT REPRESENT ANY LOAN. RELIANCE WAS PLACED ON THE DECISIONS OF DELHI HIGH COURT IN CIT VS. RAJ KUMAR 318 ITR 462; AND CIT VS. CREATIVE DYING & P RINTING P. LTD. 318 ITR 476. (DEL.). 5. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND GONE TH ROUGH THE RECORDS CAREFULLY. THE PURPOSE OF SECTION 2(22)(E) IS TO BR ING WITHIN THE TAX NET MONIES PAID BY CLOSELY HELD COMPANIES TO THEIR PRIN CIPAL SHAREHOLDERS IN THE GUISE OF LOANS AND ADVANCES TO AVOID PAYMENT OF TAX ON DUE DATES. THE TERM DIVIDEND, AS ORDINARILY UNDERSTOOD, MEANS, SUM PA ID OR RECEIVED BY A SHAREHOLDER, PROPORTIONATE TO HIS HOLDING IN A COMP ANY OUT OF THE TOTAL SUM DISTRIBUTED. UNDER THE PROVISIONS OF THE COMPANIES ACT, DIVIDEND HAS TO BE DECLARED BY THE COMPANY. IN THE CASE OF CLOSELY HEL D COMPANIES, AFFAIRS OF THE COMPANY MAY BE DICTATED IN A MANNER WHERE LEGAL LY SUCH DISTRIBUTION CANNOT BE TREATED AS DIVIDEND. IT IS FOR THIS PURPO SE, THE PROVISION OF SECTION 2(22) DEFINES THE TERM DIVIDEND SO AS TO INCLUDE CERTAIN OTHER DISTRIBUTIONS AND PAYMENTS. THE LEGISLATION ALSO CLARIFIED THAT T HE TERM DIVIDEND DOES NOT INCLUDE CERTAIN OTHER DISTRIBUTIONS AND PAYMENTS AS SPELT OUT IN CLAUSES (I) TO (V) TO THE SAID PROVISION. WITHIN THAT EXCLUSION FA LLS ADVANCE OR LOAN MADE TO SHAREHOLDERS BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSIN ESS OF THE COMPANY. ADMITTEDLY IN THE CASE BEFORE US, THE LENDING OF MO NIES IS NOT A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. THEREFORE, STR ICTLY THE EXCLUSION PROVISION MENTIONED ABOVE DOES NOT APPLY TO THE PAY MENT OF THE SUM IN QUESTION. HAVING REACHED SUCH A CONCLUSION, NOW WE HAVE TO SEE WHETHER IT 4 IS A PAYMENT OR A DISTRIBUTION, WHICH FALLS WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT. THE SAID PROVISION READS AS UN DER: 2. IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQUI RES, __ .. (22) DIVIDEND INCLUDES __ (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY I N WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER A S REPRESENTING A PART O THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE 31 ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, B EING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARERS E NTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WH ICH HE AHS A SUBSTANTIAL INTEREST (HEREINAFTER IN THIS CLAUSE RE FERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHA LF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFIT S. 5.1. THE MAIN CLAUSE OF THE AFORESAID PROVISION IS THAT IT SHOULD BE A PAYMENT BY A COMPANY AND SUCH PAYMENT SHOULD BE BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER BEING A PERSON WHO BENEFICIAL LY IS THE OWNER HOLDING NOT LESS THAN TEN PERCENT OF THE VOTING POWER OF TH E COMPANY; IT SHOULD BE TO THE SUBSTANTIAL SHAREHOLDER MENTIONED IN THE AFORES AID PROVISION; THE COMPANY SHOULD POSSESS ACCUMULATED PROFITS. 5.2. NOW THE CLAIM OF THE ASSESSEE IN THIS CASE IS THAT ALTHOUGH THERE IS A PAYMENT BY A COMPANY, BUT SUCH PAYMENT IS NOT IN T HE NATURE OF LOAN OR ADVANCE. THIS PROVISION HAS COME UP FOR CONSIDERATI ON OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RAJ KUMAR (2009) 318 ITR 462 (DEL.). 5.3. THE CLAIM OF THE ASSESSEE IS THAT THE ASSESSEE , A PARTNERSHIP CONCERN AND THE COMPANY IN QUESTION ARE DOING THE SAME BUSI NESS AND ARE HAVING REGULAR TRANSACTIONS FOR THE PURPOSE OF BUSINESS. ALL THE TRANSACTIONS BETWEEN THE TWO ENTITIES ARE RECORDED IN THE CURREN T ACCOUNT MAINTAINED BY THE PARTIES. ANY OUTSTANDING IN THE SAID ACCOUNT IS MAINLY THE RESULT OF THE TRADE TRANSACTIONS AND DOES NOT REPRESENT ANY ADVAN CE OR LOAN GRANTED TO IT. 5 THEY ARE SIMPLY TRADE BALANCES, WHICH ARE RESULT OF THE ADVERSE TRANSACTIONS, WHICH ARE LIABLE TO BE OFF SET IN THE COURSE OF ITS REGULAR BUSINESS TRANSACTIONS. 5.4. AS POINTED OUT, IDENTICAL FACTS WERE CONSIDERE D BY THE DELHI HIGH COURT IN THE CASE OF CIT VS. RAJ KUMAR (SUPRA). THE ASSESSEE IN THAT CASE WAS IN THE BUSINESS OF MANUFACTURING CUSTOMIZED KIT CHEN EQUIPMENT. HE WAS ALSO THE MANAGING DIRECTOR AND HELD NEARLY 65% OF T HE PAID UP SHARE CAPITAL OF A COMPANY. A SUBSTANTIAL PART OF THE BUSINESS, W HICH WAS NEARLY 90%, WAS OBTAINED THROUGH THAT COMPANY. FOR THAT PURPOSE THE COMPANY WOULD PASS ON THE ADVANCE RECEIVED FROM ITS CUSTOMERS TO THE A SSESSEE TO EXECUTE THE JOB WORK ENTRUSTED TO THE ASSESSEE. THE ASSESSING OFFIC ER WAS OF THE OPINION THAT THE MONEY SO RECEIVED BY THE ASSESSEE WAS IN THE NA TURE OF A LOAN GIVEN BY COMPANY TO THE ASSESSEE WHO HELD MORE THAN 10% OF T HE SHARES IN THE COMPANY. THE ASSESSING OFFICER CONCLUDED THAT THE M ONEY SO RECEIVED BY THE ASSESSEE WAS DEEMED DIVIDEND WITHIN THE MEANING OF THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE CIT(APPEALS) AS WE LL AS THE TRIBUNAL ACCEPTED THE ASSESSEES CONTENTION THAT THE SUMS IN QUESTION WERE NOT LOANS AND ADVANCES. THE DELHI HIGH COURT AFTER ANALYZING THE PROVISIONS OF SECTION 2(22)(E) AND HELD THAT THE SAID PROVISIONS CONTAINED THE FOLLOWING CONDITIONS: (I) THE COMPANY MAKING THE PAYMENT IS ONE IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED. (II) MONEY SHOULD BE PAID BY THE COMPANY TO A SHARE HOLDER HOLDING NOT LESS THAN TEN PER CENT (10%) OF THE VOTING POWE R OF THE SAID COMPANY. IT WOULD MAKE NO DIFFERENCE IF THE PAYMENT WAS OUT OF THE ASSETS OF THE COMPANY OR OTHERWISE. (III) THE MONEY SHOULD BE PAID EITHER BY WAY OF AN ADVANCE OR LOAN OR IT MAY BE ANY PAYMENT WHICH THE COMPANY MAY MAKE ON BEHALF OF, OR FOR THE INDIVIDUAL BENEFIT OF, ANY SHAREHOLDER OR A LSO TO ANY CONCERN IN 6 WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH EH IS SUBSTANTIALLY INTERESTED. (IV) AND, LASTLY, THE LIMITING FACTOR BEING THAT TH ESE PAYMENTS MUST BE, TO THE EXTENT OF ACCUMULATED PROFITS, POSSESSED BY SUCH A COMPANY. 5.5. THEIR LORDSHIPS OF DELHI HIGH COURT WENT INTO THE BACKGROUND OF THE PROVISION RIGHT FROM THE INCEPTION OF SECTION 2(6A) OF THE INCOME-TAX ACT, 1922 AND TILL THE AMENDMENTS WERE MADE. THE HONBLE HIGH COURT, AFTER APPLYING THE RULE OF CONSTRUCTION, NOSCITUR A SOCI IS, OBSERVED AS UNDER: A BARE READING OF THE RECOMMENDATIONS OF THE COMMI SSION AND THE SPEECH OF THE THEN FINANCE MINISTER WOULD SHOW THAT THE PURPOSE OF THE INSERTION OF SUB-CLAUSE (E) TO SECTION 2(6A) IN THE 1922 ACT WAS TO BRING WITHIN THE TAX NET MONIES PAID BY CLOSELY HELD COMP ANIES TO THEIR PRINCIPAL SHAREHOLDERS IN THE GUISE OF LOANS AND ADVANCES TO AVOID PAYMENT OF TAX. THEREFORE, IF THE SAID BACKGROUND IS KEPT IN MIND, IT IS CLEAR THAT SUB-CLAUSE (E) OF SECTION 2(22) OF THE ACT, WHICH I S IN PARIMATERIA WITH SUB-CLAUSE (E) OF SECTION 2(6A) OF THE 1922 ACT, PL AINLY SEEKS TO BRING WITHIN THE TAX NET ACCUMULATED PROFITS WHICH ARE DI STRIBUTED BY CLOSELY HELD COMPANIES TO ITS SHAREHOLDERS IN THE FORM OF L OANS. THE PURPOSE BEING THAT PERSONS WHO MANAGE SUCH CLOSELY HELD COMPANIES SHOULD NOT ARRANGE THEIR AFFAIRS IN A MANNER THAT THEY ASSIST THE SHAR EHOLDERS IN AVOIDING THE PAYMENT OF TAXES BY HAVING THESE COMPANIES PAY OR D ISTRIBUTE, WHAT WOULD LEGITIMATELY BE DIVIDEND IN THE HAND S OF THE SHARE HOLDERS, MONEY IN THE FORM OF AN ADVANCE OR LOAN. 5.6. IN THE LIGHT OF THE DISCUSSIONS, THE JURISDIC TIONAL HIGH COURT HELD THAT TRADE ADVANCES DO NOT FALL WITHIN THE AMBIT OF THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT AND UPHELD THE ORDER OF THE TRI BUNAL. THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE BEFORE US ARE ALM OST SIMILAR TO THE ONE CONSIDERED BY THE JURISDICTIONAL HIGH COURT (CITED SUPRA). HERE ALSO THE ASSESSEE WAS HAVING REGULAR BUSINESS TRANSACTIONS W ITH THE COMPANY WHICH WAS ALSO HAVING THE SAME BUSINESS AND THE BALANCES IN THE RUNNING ACCOUNT MAINTAINED FOR THE PURPOSE OF BUSINESS TRANSACTIONS CANNOT BE CONSTRUED AS LOANS AND ADVANCES WITHIN THE MEANING OF SECTION 2 (22)(E) OF THE ACT AS 7 CONSTRUED BY THE JURISDICTIONAL HIGH COURT IN THE A FORESAID CASE. WE ACCORDINGLY ARE OF THE OPINION THAT THE RUNNING ACC OUNT BALANCES, ARISING DUE TO REGULAR BUSINESS TRANSACTIONS OF THE ASSESSEE WI TH THE COMPANY, CANNOT BE TAKEN TO BE A PART OF LOAN AND ADVANCES TO BE TRE ATED AS DIVIDEND FOR THE PURPOSE OF SECTION 2(22)(E) OF THE ACT. IN THE LIGH T OF THESE DISCUSSIONS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT( A) AND THE SAME IS UPHELD. 6. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 16-7-2010. SD/- SD/- (H.S. SIDHU ) ( G.E. VEERABHADRAPPA ) JUDICIAL MEMBER VICE PRESIDENT DATED: 16-7-2010. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR