TaxTMI 
TaxTMI 
2015 (3) TMI 767
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...., had to remit Rs. 26,24,12,222/- on 31-03-1992, which it had collected and was payable to SISICOL. Between 01-04-1991, and 31-03-1992, the firm advanced Rs. 1,88,96,202/- to the assessee. The Assessing Officer (AO) held that the amount was a loan from SISICOL to the assessee through the use of the company's agent, the firm, which was a "conduit" and a device adopted to bypass application of Section 2(22)(e) of the Income-tax Act, 1961 (hereinafter, referred to as "the Act"). The amount of Rs. 1,88,96,202/- being a loan out of SISICOL's accumulated profits to the assessee-shareholder was treated as "deemed dividend" under section 2(22)(e) of the Income-tax Act ("the Act") and added to the assessee's income. 3. On appeal, the learned Commissioner of Income-tax (Appeals) - hereafter "CIT (A)" held that SISICOL had advanced sums to a concern (the firm) in which the assessee had a substantial interest. Taking note that Section 2(22)(e) as applicable after its amendment w.e.f. from 31-05-1987, for AY year 1988-89, included concerns in which shareholder is a member or partner, the CIT (A) upheld the addition made. 4. The assessee carried the matter in appeal to the ITAT. There was ....
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....the firm be said to debit the company's account and not that of individual partner. It was therefore held that the firm was indebted to the company (in respect of what it collected and which was payable to SISICOL), but by no stretch of imagination could it be said such amounts in the hands of the firm were given as loan or advance by SISICOL. The amounts payable in the large running account was unremitted collection, and the relationship was that of a debtor and a creditor in respect of the trade debt but not one of a borrower and a lender. Reference was made to Schedule IX appended to the profit and loss account of SISICOL for the relevant period. He noted that the sums shown as due from the firm to the company was reflected in Schedule VII to the balance-sheet with the heading "Cash, bank and other balances". Thus, the description for the amount due from the firm was entirely different from normal loan and advance appearing in the relevant accounts. 7. The Judicial Member found that in the facts and circumstances of the case, the Rs. 1.88 crores loan to the assessee by the firm was not an advance out of the amounts payable by the firm to SISICOL. The firm had sufficient funds f....
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....h loan advanced by the firm to the assessee. The Judicial Member accordingly held that there was no receipt of "deemed dividend" in the hands of the assessee. 9. The Accountant Member, on the other hand, noticed that as managing director of SISICOL, the assesses controlled the activities of all companies and firms of the Sahara group and was also the main person behind the activities of all concerns. He held that a "payment" is not the same thing as payment in fact and relied on G. R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13 (Mad). He also observed that the transaction in question could not be treated as being carried out at arm's length. He observed that there was no dispute that the firm had advanced amounts to the assessee. The Accountant Member held that two transactions, one from company, SISICOL, to the firm, and from the firm to the assessee should be treated as a combined one, amounting to payment of loan from SISICOL, to the assessee. He held that the firm was only a conduit for the loan and that the firm's loan to the assessee had its roots in the credit balance of SISICOL. Reliance was placed in this regard upon T. Sundaram Chettiar v. CIT [1963] 49 ITR 287 (Mad)....
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.... became a convenient device to funnel SISICOL's amounts, advanced to it. Counsel said that once it was proved that a substantial amount i.e., Rs. 26,24,12,223/- stood to the credit of SISICOL, that some amounts were paid by the firm to the assessee reinforced the inference that they were out of that company's funds. Counsel submitted that Section 2 (22) (e) enacts a deeming fiction and that in such cases, it is open to the revenue to follow that fiction and not allow the mind to boggle at some intervening facts. Consequently, in reality, the firm being a device or mechanism to avoid the provision, should be ignored and the fact that the amounts were flowing from SISICOL to the assessee, should be given due weight. 13. Learned counsel relied on the judgment of the Supreme Court in Commissioner of Income Tax v. Mukundray K. Shah [2007] 290 ITR 433 where it was held that: "11... The companies having accumulated profits and the companies in which substantial voting power lies in the hands of the person other than the public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it li....
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....e. Moreover, in MKSEPL the assessee is not only a shareholder having more than 10 per cent. of total voting power, he is also a director of that company. The said company is also a partner in MKF and MKI which explains why the amount of Rs. 5.99 crores was routed by splitting the said amount into two parts of Rs. 2.79 crores and Rs. 3.20 crores. In the present case, the most important aspect, which has not been considered by the High Court, was that withdrawal of money by the assessee from his capital account, in the books of MKI, during the financial year 1999-2000 led to a debit balance of Rs. 8.18 crores as on March 31, 2000. To this extent, the finding given by the Assessing Officer and by the Tribunal remains unchallenged.... The five payments had direct co-relation with Rs. 5.99 crores paid by MKSEPL to MKF and MKI and payments by the said two firms to the assessee who used the said money to buy 9 per cent. RBI Relief Bonds. Therefore, the said payment by the company through the two firms was for the benefit of the assessee. Therefore, the said funds were not repayment of loans, they were for purchase of 9 per cent. RBI Relief Bonds by the respondent." The revenue's counsel ....
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....s; but " dividend" does not include-- (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ii) any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (3), to the extent to which it is so set off. Explanation 1.-The expression 'accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956. Explanation 2.-The expression 'accumulated profits' in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub- clauses, and in sub clause (c) shall....
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.... or partner and in which he has substantial interest), by the company in the ordinary course of his business where the lending of money is a substantial part of the business of the company or any dividend paid by a company which is set off by the company against the whole or any part of sum previously paid by it and treated as a dividend under Section 2 (22) (e) to the extent of set off, is not "dividend" and therefore excluded. 18. In Commissioner of Income Tax v. C. P. Sarathy Mudaliar 1972 (83) ITR 170 (SC), Section 2(6A)(e) of the Income Tax Act, 1922, (which was identical to Section 2(22)(e)) was considered. There, members of a Hindu undivided family (HUF) acquired shares in a company with family's funds. Loans were given to the HUF and the question was whether those loans could be treated as the family's dividend income in terms of Section 2(6A)(e). The Supreme Court held that only loans advanced to shareholders could be deemed to be dividends under Section 2(6A)(e) of the Act, and that the HUF could not be considered to be a " shareholder" . Therefore, amounts loaned to the HUF were not loans of the company to its shareholders and could not, therefore, be deemed to be its i....
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.... the company- or otherwise) by way of advance or loan to a shareholder..." and such shareholder being one who has a substantial interest in the company. It is undisputed that the payments were not made to the assessee "by the company" (SISICOL); nor in his capacity as its "shareholder". They were paid by the firm (of which he is undoubtedly a partner). 20. The AO and the CIT (A) were of the opinion that the firm - which gave the amounts as loan to the assessee - a partner, was a ruse a facade and a smokescreen to shield the real payment by SISICOL to him. Whilst there is no gainsaying that the assessee is managing director of SISICOL - equally he is partner of the firm, which advanced the amount to him. However, the question of payment to the concern (in this case, the firm) is a matter that requires to be established. Here the factual findings are important. A sum may be a debt but not loan from company to firm or to the assessee. The assessee had relied on Bombay Steam Navigation Co. (1953) P. Ltd. (supra) and other decisions to say that there had to be outflow of funds. The third member who agreed with the Judicial member (and therefore spoke for the majority view), correctly s....
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....d by the firm to advance loan to the assessee. The firm had advanced Rs. 1,88,96,202/- out of total available funds of more than Rs. 60 crores: which belonged to different parties though available with it i.e., the firm. This factual finding does not disclose any error or infirmity. 21. So far as the contention that the two transactions -one from SISICOL to the firm and the second from the firm to the assessee should be treated as one, is not based on any valid justification. The firm has a legal existence separate and independent of SISICOL. It carried on significant commercial activity and collected substantial amounts (crores of rupees). Therefore, the finding that the two transactions, i.e., one of advancing loan (by the firm to the assessee) and the other of the use of funds of SISICOL by the firm being in reality one transaction is without basis. The presumption was drawn without any material to support the case of the Revenue that funds of the company were utilized to advance the loan. Speaking about this, the third member, who spoke for the majority view of the ITAT since he concurred with the Judicial Member, said: "There is no nexus between funds of the company wi....
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....he assessee as well, for the purpose of section 2(22)(e). The amount received by the assessee from JGPL, therefore, was held to constitute "advances and loans" and treated as deemed dividend under Section 2(22)(e) of the Act, and added that amount to the assessee's income despite their plea to the contrary. Highlighting the limits to which a fiction can be carried, this Court ruled that: "25. ....under the normal circumstances, such a loan or advance given to the shareholders or to a concern, would not qualify as dividend. It has been made so by a legal fiction created under section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to "dividend". Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to "shareholder". When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to be extended further for broadening the concept of shareholders by way of legal fiction. It is a common case that any company is supposed to distrib....
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....s "beneficial owner" is the partnership firm. This would mean that the loan or advance given by the company would never be treated as deemed dividend either in the hands of the partners or in the hands of partnership firm. In this way the very purpose for which this provision was enacted would get defeated... ..22. No doubt, when section 2(22)(e) of the Act enacts a deeming provision, it has to be strictly construed. At the same time, it is also trite that such a deeming provision has to be taken to its logical conclusion. If the partnership firm which has purchased the shares is not treated as shareholder merely because the shares were purchased in the name of the partners, that too because of the legal compulsion that shares could not be allotted to the said partnership firm which is a non-legal entity, it would be impossible for such a condition to be fulfilled. That is not the purpose of law. The partnership firm is synonym of the partners. As per the Circular issued by the SEBI dated March 31, 1975, interpreting section 187C of the Companies Act, relied on by the learned counsel for the assessee himself, a partnership firm is not a person capable of being a "member" within th....
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....in the Circular. The judicial Member held that it was not a case of benefit to "concern" as in that situation 'deemed dividend' under Section 2(22)(e) had to be added in the hands of the concerns and not of the assessee. The Revenue objected to the observations in the ultimate para of the third Member that the source of funds utilized for advancing loan to the assessee was not examined and no material was on record to prove that SISICOL's funds were used to advance loan to the assessee. Therefore, conditions of Section 2(22)(e) were not satisfied. Dealing with these submissions, the ITAT held that: "8. It is contended in the application that Third Member was expected to evaluate himself the factual position and material which had been brought by both the parties. He should have called for detailed information before deciding the issue in favour of the assessee as I.T.A.T is a final fact finding body . 9. The contention advanced is without any substance. Evidence on record has been evaluated and finding of fact recorded by the Third Member as noted above. Further the Third Member has a very limited jurisdiction to agree with one of the differing Members of the Bench. As a ....