2009 (9) TMI 43 - HC - Income Tax

Appeal dismissed: sister concern payments treated as commercial advances, not deemed dividends under Section 2(22)(e)

COMMISSIONER OF INCOME TAX Versus M/s CREATIVE DYEING & PRINTING PVT. LTD.

HC dismissed the appeal, upholding the Tribunal's finding that payments made by a sister concern to the assessee company were commercial advances, not ... Deemed Dividend under Section 2(22)(e) - Nature of advance payment for a commercial purpose to the assessee company by its sister concern - word ‘advance’ - Held that - The finding of facts, arrived at by the Tribunal in the present case 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 amount is in fact not a loan but only an advance because the amount paid to the assessee company would be adjusted against the entitlement of moneys of the assessee company payable by M/s. Pee Empro Exports Pvt. Ltd. in the subsequent years. The word ‘advance’ has to be read in conjunction with the word ‘loan’ - Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally 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 include the obligation of repayment - that the amounts advanced for business transaction between the parties was not such to fall within the definition of deemed dividend under Section 2(22)(e). 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 definition of deemed dividend under Section 2(22)(e). The present appeal is therefore dismissed. Issues Involved:1. Whether the payment made by M/s Pee Empro Exports Pvt. Ltd. to the assessee company constitutes 'deemed dividend' under Section 2(22)(e) of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Whether the payment made by M/s Pee Empro Exports Pvt. Ltd. to the assessee company constitutes 'deemed dividend' under Section 2(22)(e) of the Income Tax Act, 1961:The facts of the case reveal that the respondent is engaged in the business of dyeing and printing cloth and has been an ancillary unit of M/s. Pee Empro Exports Pvt. Ltd. Both companies share common shareholders/directors, and M/s Pee Empro Exports Pvt. Ltd. holds a 50% share in the assessee company. To enhance its export business, M/s Pee Empro Exports Pvt. Ltd. proposed the modernization and expansion of the assessee company's plant and machinery, agreeing to fund 50% of the project cost. The remaining 50% was to be provided by the directors Mr. P.S. Uppal and Mr. P.M.S. Uppal.The Assessing Officer added Rs. 3,60,18,885/- to the assessee company's income as deemed dividend under Section 2(22)(e) of the Act, arguing that the directors held significant shares in both companies.Section 2(22)(e) defines deemed dividend as any payment by a company, not substantially interested by the public, to a shareholder holding not less than 10% voting power or to any concern in which such a shareholder has a substantial interest, to the extent of the company's accumulated profits. However, it excludes advances or loans made in the ordinary course of business where money lending is a substantial part of the company's business.The appellant/revenue contended that the payment to the assessee company was a loan and not a business transaction, as M/s Pee Empro Exports Pvt. Ltd. is not in the money lending business. The respondent, however, cited judgments in C.I.T. Vs. Raj Kumar and CIT Vs. Ambassador Travels (Pvt.) Ltd., arguing that business transactions are not deemed dividends.The Tribunal found that the payment by M/s Pee Empro Exports Pvt. Ltd. was in its own business interest and not for the individual benefit of the directors. The amount was to be adjusted against dues payable for job work done by the assessee company. Thus, the payment did not bear the characteristics of loans and advances but was a business transaction benefiting both companies.The Tribunal referred to the legislative intent behind Section 2(22)(e), as explained in the Supreme Court judgment in Navneet Lal C. Jhaveri Vs. K.K. Sea, emphasizing that the provision aims to prevent tax evasion through loans or advances disguised as dividends. The Tribunal also cited the Bombay High Court judgment in C.I.T. Vs. Nagin Das M. Kapadia, which held that business transactions are outside the purview of Section 2(22)(e).The Tribunal concluded that Section 2(22)(e) applies to loans or advances simpliciter and not to business transactions carried out in mutual interest. Advances made in the ordinary course of business cannot be deemed dividends.The Tribunal's findings were upheld, stating that the payments were business transactions benefiting both companies and not loans or advances. The provision of Section 2(22)(e)(ii) was deemed an explanation and not applicable to business transactions. The legislative intent was to tax accumulated profits distributed as loans or advances to avoid tax, not genuine business transactions.Ultimately, the Tribunal's decision was affirmed, holding that the amounts advanced were not deemed dividends under Section 2(22)(e) of the Act. The appeal was dismissed.