2007 (7) TMI 39 - AT - Income Tax

Tribunal rules on loan treatment in tax case, invokes corporate veil doctrine

The Tribunal concluded that the loan advanced by M/s. Sahara India to the assessee could not be treated as a loan by SISICOL. The Judicial Member ... Deemed dividend - Revenue contended that loan received by the assessee from firm is funds of the company and it is consider as 'deemed dividend' - Held that loan can't be treated as dividend and set aside revenue contention Issues Involved:1. Whether the loan of Rs. 1,88,96,202 advanced by the registered firm M/s. Sahara India to the assessee can be treated as a loan advanced by the company SISICOL to the assessee.2. If the answer is affirmative, whether the blending of credit balances can infer that no part of the loan to the assessee came from the credit balance of Rs. 26,24,12,222 in the name of SISICOL, or would it be inferred that 44% of the loan came from the credit balances on a proportionate basis.Detailed Analysis:Issue 1: Loan Advanced by M/s. Sahara India as Loan by SISICOLThe primary question was whether the loan of Rs. 1,88,96,202 advanced by M/s. Sahara India to the assessee could be treated as a loan advanced by SISICOL. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) treated the loan as a deemed dividend under section 2(22)(e) of the Income-tax Act, asserting that SISICOL used M/s. Sahara India as a conduit to advance the loan to the assessee, who is the managing director of SISICOL.The Judicial Member disagreed, stating that the amount to be remitted by the firm to SISICOL was a debt, not a loan or advance. He emphasized that there was no direction from SISICOL to M/s. Sahara India to advance the sum to the assessee. The Judicial Member also noted that the firm had sufficient funds from other sources and had historically advanced loans to the assessee without invoking section 2(22)(e).The Accountant Member concurred with the Judicial Member on certain findings but emphasized that the transactions were interconnected. He invoked the doctrine of piercing the corporate veil, suggesting that M/s. Sahara India acted as a conduit for SISICOL. He concluded that 44% of the loan should be treated as having come from SISICOL.The Third Member found the material on record insufficient to answer the point of difference definitively. He noted that the nature of the account and the capacity in which the assessee requested the loan were unclear. He suggested that the point of difference needed reframing, as the original framing was incorrect.Issue 2: Proportionate Basis of Loan from Credit BalancesIf the loan was deemed to be advanced by SISICOL, the next issue was whether the blending of credit balances aggregating to Rs. 60,61,54,638 could infer that no part of the loan to the assessee came from the credit balance of Rs. 26,24,12,222, or if 44% of the loan came from the credit balances on a proportionate basis.The Judicial Member held that the firm had sufficient funds from other sources and that the loan to the assessee could not be directly linked to the credit balance of SISICOL. He noted that the firm had a total fund of Rs. 60,61,54,638, out of which only Rs. 26,24,12,223 was due to SISICOL. He concluded that there was no nexus between the loan given to the assessee and the amount due to SISICOL.The Accountant Member, however, held that 44% of the loan should be treated as having come from SISICOL, based on the proportion of the total funds available to the firm. He argued that the firm did not have adequate resources of its own to advance the loan, and thus, the loan must have come from SISICOL's funds.The Third Member found that the factual position needed further examination and that the point of difference was not properly formulated. He suggested that the question be reframed and referred back to the Bench for necessary action.Conclusion:The Tribunal concluded that the original framing of the point of difference was incorrect and required reframing. The Third Member suggested that the factual position of the loan/advance policy should be examined further. The matter was referred back to the Bench for necessary action, with the point of difference to be reframed correctly. The Tribunal emphasized the need for a thorough examination of the material on record to establish the nexus between the loan advanced to the assessee and the funds of SISICOL.