2009 (9) TMI 43 - HC - Income Tax

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

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) - business transactions not falling within deemed dividend - distinction between advance and loan - interpretative rule noscitur a sociis - explanatory nature of clause (ii) of Section 2(22)(e)Deemed dividend under Section 2(22)(e) - business transactions not falling within deemed dividend - distinction between advance and loan - Whether amounts advanced by a sister concern for a commercial expansion project constitute 'deemed dividend' under Section 2(22)(e). - HELD THAT: - The Tribunal found, and this Court accepted, that the payments made by M/s. Pee Empro Exports Pvt. Ltd. to the assessee company were commercial/business advances made in mutual interest to facilitate expansion of capacity, and bore the character of business transactions rather than simple loans or advances made to divert accumulated profits to shareholders. Applying the purposive interpretation of clause (e) (as expounded in prior precedents such as Raj Kumar), the word 'advance' must be read with 'loan' (noscitur a sociis) so as to catch devices where accumulated profits are diverted to shareholders in the guise of loans/advances. Transactions that are bona fide business arrangements serving the operating interests of both companies do not fall within the mischief of Section 2(22)(e). The Tribunal's factual finding that the advance was in the business interest of both parties and would be adjusted against future job-work dues supports its conclusion that the payment was not a deemed dividend. [Paras 10, 12]Amounts advanced for the commercial expansion and mutual business interest of the companies are not deemed dividend under Section 2(22)(e).Explanatory nature of clause (ii) of Section 2(22)(e) - interpretative rule noscitur a sociis - Whether Section 2(22)(e)(ii) (non-inclusion where lending is a substantial part of the lender's business) requires treating all business advances by non-money-lending companies as deemed dividend. - HELD THAT: - The Court held that clause (ii) is illustrative of one situation where an advance would not be treated as dividend (i.e., where the lending company ordinarily carries on lending as its substantial business), but this explanatory clause cannot be read so as to override or expand the core meaning and purpose of the main proviso. The correct approach is to first examine whether the transaction in substance is a business transaction outside the mischief of clause (e); if so, there is no need to invoke clause (ii). The legislative purpose-preventing diversion of accumulated profits by controlled companies-must guide construction, and the interpretative rule noscitur a sociis supports reading 'advance' in the context of 'loan' to avoid capturing bona fide business dealings. [Paras 11]Section 2(22)(e)(ii) is explanatory and does not convert bona fide business advances by a non-money-lending company into deemed dividends; the main provision's scope governs.Final Conclusion: The Tribunal's factual finding that the payments were bona fide business advances serving mutual commercial interests was upheld and, applying the purposive construction of Section 2(22)(e), such advances are not deemed dividends; the revenue's appeal is 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.