TaxTMI 
TaxTMI 
2010 (11) TMI 662
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....sessee and Bagmane Developers (P) Ltd were in the course of business activities and that the amount received was not in the nature of 'loans and advances'; (iii) the CIT(A) erred in directing the AO to compute the 'current year's profit; and (iv) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act. 3. As pointed out, the issues raised in these appeals were similar and rather inter-linked; they were heard, considered and disposed off in this common order for the sake of convenience and clarity. 4. With regard to the conclusion of assessments u/s 143(3) r.w.s. 153C of the Act for the all the AYs under dispute which was sustained by the Ld. CIT (A), it was contended by the ld. A R that the provisions of s.153C of the Act were not attracted in the assessee's case since nothing incriminating documents relating to the assessee have been found during the course of search, that only the regular books of accounts found were seized during the course of search and, therefore, the AO ought not to have proceeded to invoke the provisions of s.153C of the Act and that the ld. CIT (A) had also grossly erred in out-rightly rejecting the case laws o....
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.... of the Act i.e., Bagmane Developers Pvt. Ltd. and also the other person i.e., the assessee and, as such, there was no need of handing over the books of accounts/documents seized to any other AO. The other argument of the assessee that no incriminating documents were unearthed pertaining to the assessee during the search except regular books of account and, thus, the initiation of the proceedings u/s 153C of the Act illegal etc doesn't hold water since the provisions of s.153C (1) of the Act make it explicitly clear that 'where the assessing officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A'. 5.4. In view of the above, we are of the considered view that the AO was well within his realm to resort to issue of notice u/s 153C of the Act and, accordingly, the assessee's objection is not sustainable for all the AYs under dispute and, accordingly, this ground of the assessee for all the AYs under dispute is dismissed. 6. With regard to the applicability of s.2 (22)(e) of the Act, the AO, after due....
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....nd advances taken by the appellant from BDPL. Accordingly, the assessing officer was right in invoking the provisions of section 2(22)(e) of the Income-tax Act for the above assessment years...." 7. During the course of the hearing before us, the Ld. A R came up with a stout rebuttal of the authorities' stand of invoking the provisions of s.2 (22)(e) of the Act on the grounds that- (i) the amounts paid by BDPL in the normal course of business were neither loans nor advances. BDPL engaged in development of tech. park was looking for prospective tenants in the stature who could comply with STPI formation. Motorola was looking for space with suitable fit-outs at its terms in tech. park. To meet the requirements of the giant tenant - Motorola, BDPL worked out a formula to reduce the fit-out cost by floating a leasing company which would facilitate the BDPL to avail the benefit of customs and excise duty thereby reducing the cost of fit-outs. Due to such business exigencies, BDPL had given money to the assessee to make investment which was treated as security deposit in the hands of the assessee which subsequently enabled BDPL to strike a deal with Motorola. The deposits....
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....ad not proved with any documentary evidence except alleging that the document was not genuine; - an agreement need not to be reduced in writing and it can even be oral. Even if an agreement was reduced in writing, it doesn't require to be registered under s.17 of the Registration Act; - In fact, all the agreements were reduced in writing on stamp papers, just because they were not registered, there can be no reason to reject them; - The other reasoning of the AO that as per Specific Relief Act (SRA), the agreements were time-barred. The limitation starts from the day of default and not earlier and even if no remedy was available under SRA, the aggrieved party can have recourse to normal provisions of the Civil Procedure Code; (iv) The reasoning of the AO that the amounts given by BDPL were profits which the company could have distributed to its shareholders was unfounded as the same was utilized only with a long term policy of securing reputed tenants to occupy the STPI which was evident from its efforts in this direction and not for any non-business purposes as alleged by the AO; - the AO's presumption that the advance taken with no interest....
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....P) Ltd. 120 TTJ 865 (Mum) (vii) the deemed dividends computed for the AY 2005-06 was incorrect. The peak of the amount alleged to have been advanced by BDPL was Rs.22.86 crores as on 13.10.2004 and by excluding the opening balance of Rs.21.51 crores, the difference being Rs.1.34 crores. If the deemed dividend concept were to be applicable Rs.1.34 crores ought to have been treated as 'deemed dividend'. Whatever received by the assessee thereafter was only the amounts paid back to BDPL and received again when occasion arose. The cases relied by the AO have no application to the facts of the present case. In those cases decided by the Hon'ble Supreme Court, the loan or advance was a one time disbursement whereas in the case on hand the ledger account clearly demonstrates otherwise. By fiction, a particular amount was treated as deemed dividend, it got the character of dividend in the hands of the recipient and became his own money. If the same money was given back to the company and received once again in a number of times, it was treated as deemed dividend every time when it was received which would lead to an anomalous position whereby the same amount gets taxed repeatedly; ....
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.... also 'at any time during the previous year'. Wherever the Legislature wanted to rope in concerns which at any time held substantial interest, the Legislature has done so. 7.1. On the other hand, the Ld. D.R. was very unambiguous in her submission that the issue in dispute has been extensively analyzed by the AO and also drawing strength from judicial pronouncements arrived at a conclusion that the entire amounts received from BDPL as loans for the AYs under challenge and was rightly treated as deemed dividends in the hands of the assessee and bringing to tax net under the head 'income from Other Sources'. The learned first appellate authority had, after due consideration of rival submissions, substantiated the AO's action which vindicated the stand of the AO on this point. It was, therefore, vehemently urged that the stand of the authorities below requires to be upheld. 8. We have carefully considered the rival submissions, attentively perused the relevant records, various judicial pronouncements on which the either party had placed their faith and also the voluminous paper books in volumes [I, II, III and IV running into hundreds of pages] furnished by the Ld. AR ....
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.... shall place funds with the assessee from time to time; (ii) the assessee provide fittings and office equipments as required by Motorola at the schedule premises and receive lease rentals from Motorola for the fittings and office equipments so provided by the assessee; (iii) the assessee shall execute a standard lease agreement for the fittings and equipments with the lessee; and (iv) at the end of 7 years term or the premises falling vacant whichever is earlier, the assessee shall sell the leased fittings and office equipments to BDPL at ed with mutually agreed consideration arrived with help of approved valuator. The funds so provided by BDPL, according to the assessee, were utilized for acquiring the fit-outs at aggregate cost of Rs.23.97 crores which has been mentioned in its balance sheet as on 31.3.2004 as 'value of leased assets at Rs.23.97 crores and lease rental of Rs.13.16 lakhs for the AY.2004.05. In this transaction, as rightly urged by the Ld. A.R, the ultimate beneficiary was none other than BDPL which got tenants for its Tech Park and NOT the assessee by receiving the amounts from BDPL for furnishing the fit-outs in BDPL's Tech Park. T....
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.... had shown in its respective Balance Sheets, the lease rentals of Rs.13.16 lakhs, Rs.1.77 crores, Rs.2.03 crores for the AYs 2004-05, 2005-06 and 2006-07 respectively. (4). Let us have a quick perusal of judicial pronouncements as to whether the AO was within his realm to invoke the provisions of s.2 (22)(e) of the Act to term the amounts received from BDPL was a deemed dividend. (i) The Hon'ble highest judiciary of the land in S.A. Builders v. CIT 288 ITR 1(SC) in its wisdom had ruled that- "The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. The Hon'ble Court went further to put its seal on the view of the Hon'ble Delhi Court, thus- We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not nec....
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....sessee-company but the lending company, namely, M/s. Pee Empro Exports Pvt. Ltd. is not into the business of money lending as required by section 2(22)(e)(ii). The counsel for the respondent, on the other hand, has referred to two recent Division Bench judgments of this Court reported as CIT v. Raj Kumar [2009] 318 ITR 462 (Delhi); [200]) 181 Taxman 155 and CIT v. Ambassador Travels (P.) Ltd. [2009] 318 ITR 376 (Delhi); [2009] 173 Taxman 407 to contend that merely because a loan is given by M/s. Pee Empro Exports Pvt. Ltd. to the assessee-company would not mean that the same would become a deemed dividend inasmuch as moneys are paid for transactions which are business transactions/commercial transactions and, therefore, such transactions cannot fall under the expression "deemed dividend" within the provision of section 2(22)(e). Before we refer to the rival contentions of the parties, we would like to reproduce the following finding of facts arrived at by the Tribunal: "7.5 In the present case the amount paid by M/s. Pee Empro Exports to the appellant-company does not bear the characteristic of loans and advances. The amount has been paid by M/s. Pee Empro Exports i....
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....an do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. When the Legislature realized that though money was reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescri....
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.... may be treated is 'deemed dividend', but if it is otherwise, the amount given cannot be branded as 'advances' within the meaning of deemed dividend under section 2(22)(e). Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by a company in the ordinary course of business where the lending of money is a substantial part of the business of the company, advance in the ordinary course of carrying on business cannot be considered as 'dividend' within the meaning of section 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such 'advance' as deemed dividend" We agree with the aforesaid observations. 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 am....
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....rincipal 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 is parimateria with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. If this purpose is kept in mind then, in our view, 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....
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....eholder but not a registered shareholder then also the provisions of s. 2(22)(e) will not apply." (vi) In the case of CIT v. C.P Sarathy Mudaliar 83 ITR 170 (SC), the Hon'ble Apex Court was emphatic in its wisdom that the burden was squarely placed on the shoulders of the Revenue to prove that the case falls within the deeming provision. Concurring with the ruling of the Hon'ble Court, we are of the firm view that the Revenue had failed to bring on record with any conclusive evidence to prove that the amounts so received from BDPL by the assessee was advance or loan so as to bring it under the ambit of s.2 (22) (e) of the Act. (vii) With regard to the accumulated profits of BDPL as computed by the AO, the assessee had placed strong reliance on the finding of the Hon'ble Madras High Court in the case of G.R.Govindarajulu Naidu v. CIT reported in 90 ITR 13 (Mad). With due respects we have perused the ruling of the Hon'ble Court wherein it had posed questions that- Whether accumulated profits for the purpose of paying deemed dividends includes initial depreciation? Whether payment by way of loan or advance includes notional payment by book entries? When....
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.... (viii) Yet another case, the Hon'ble ITAT, Ahmedabad 'B' Bench in its finding in the case of M.B.Stock Holdings Private Limited v. ACIT reported in 75I TTJ 898 (Ahd) dated: 27.12.2001 had observed thus- "30. On analysis of the aforementioned discussion, in our view, the following principles emerge:- (i) That for purposes of section 2(22)(e), the accumulated profits are to be worked out up to the date of each payment/advancement of the loan. (ii) That there is a distinction between the "accumulated profits" of business and the current year's profits of business. (iii) That the profits of business accrue at the end of the previous year. (iv) That loan or advance treated as deemed income up-to the date of fresh loan is to be reduced from accumulated profits. (v) That the repayment of loan during the same year is not to be deducted from the accumulated profits. 31. When one keeps all the above four principles of law in mind, it will not be difficult to appreciate that the Explanation 2 to section 2(22)(e) does not have the effect of inclusion of current year's business profits. These are certain examples to show that Expl....
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....s held that even if Raja Bagmane had transferred his shares during this year and reduced it to 9%, he was still having substantial interest in M/s.Bagmane Leasing and Finance Pvt. Ltd. and the provisions of section 2(22)(e) is applicable in the case of the assessee for this assessment year also...." To belie the AO's reasoning, it was contended by the assessee that the sale of shares had been disclosed in the Balance sheets of Raja Bagmane and Mrs. Vasundhara Raja as on 31.3.06. Even an immovable property can be transferred for a consideration paid, part paid and part promised as per s.54 of the Transfer of Property Act. It was further contended that there was a running account of Mrs. Vasundhara Raja in the books of Raja Bagmane and, therefore, the consideration due was debited to her account. Similarly, in the account of Raja Bagmane in the books of Mrs. Vasundhara Raja credit entries were passed. Copy of Annual return for the year 2005-06 furnished before the Registrar of Companies, detailing the transfer of shares by Raja Bagmane to Mrs. Vasundhara Raja was produced [source: P 103 - 110 of PB AR]. A copy of such annual return furnished was authenticated by the A....
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....o the shareholder. The legal fiction came into play as soon as the monies were paid by the company to the appellant. The assessee must be deemed to have received dividends on the dates on which she withdrew the aforesaid amounts of money from the company. The loan or advance taken from the company may have been ultimately repaid or adjusted, but that will not alter the fact that the assessee, in the eye of law, had received dividend from the company during the relevant accounting period." With highest regards, we would like to point out that the issue before the Hon'ble Apex Court was on the different footing which has no relevance to the issue on hand on the very ground that the assessee had not received any loan or advance for its own benefit, but, the funds were provided for the execution of fit-outs in the Tech. Park on behalf of BDPL. Thus, in our considered view, the case law cited by the authorities below is distinguishable. (ii) Yet another case law on which the authorities below have placed reliance to drive home their point was in the case of Smt Tarulata Shysam and Other v. CIT, West Bengal reported in 108 ITR 357 (sic) 345 (SC) wherein the issue before t....
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.... conditions prescribed by the Hon'ble Court are applicable to the case on hand, namely, (1) no payments were made to the assessee by way of advance or loan by BDPL, but, funds were allocated for execution of fit-outs on its behalf; (2) no payments were made on its behalf; and (3) payments made were not for anybody's individual benefit. The payments in question were provided due to business exigencies of BDPL and the funds so provided for the sole benefit of BDPL and NOT to individual benefits of a shareholder, the question of applicability of the provisions of s.2 (22)(e) of the Act doesn't arise. 8.4. We are, therefore, of the considered view that the case laws relied on by the authorities below has no relevance to the issue on hand. 8.5 Section 2(22)(e) brings in a deeming fiction. It provides in certain circumstances an advance or loan is treated as dividend in the hands of the shareholder. Advances and loans have to be interpreted in its true sense. Any payment made out of business expediency does not fall within the ambit of advances and loans, though the accounting entries are passed as such. The true nature of the transaction has to be seen as to whether the ....