TaxTMI 
TaxTMI 
TaxTMI 
2015 (3) TMI 812
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....he opening balance of Rs. 42,55,699/- in 'Sunil Kapoor- Loan' account as the starting point of the transactions carried during the year? 4) Whether in the facts and circumstances of the case, the Tribunal was right in not considering both the accounts of the appellant which were maintained only separately for the purpose of convenience in the books of M/s.Kapoor Imaging Private Ltd., for the purpose of determining the deemed dividend? 5) Whether in the facts and circumstances of the case, the Tribunal was right in not considering the fact that the interest paid to the appellant was on the outstanding balance taking into consideration both the ledgers (Sunil Kapoor and Sunil Kapoor-Loan) in the books of Kapoor Imaging Limited and not on Sunil Kapoor-Loan account alone? 6) Whether in the facts and circumstances of the case, the Tribunal was right in not considering the fact that the salary of Rs. 1,50,000/- per month received by the appellant from the company should be deemed to have been received every month though the ledger shows only two entries - Rs. 6,00,000/- on 31st July, 2008 and Rs. 12,00,000/- on 31st March, 2009?" 2. The facts, in a nutshell, are as hereunder:....
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.... Advance Tax paid : 1,00,000.00 Amount paid to Annees Alikhan : 25,000.00 Cash paid : 3,000.00 EB Board changed : 21,500.00 TOTAL : 76,86,829.00 3. The Assessing Officer, taking note of the fact that the loan outstanding in the books of accounts of the company in favour of the appellant as on 31.3.09 is Rs. 45,44,303/-, held that the amount of Rs. 76,86,829/- received by the assessee from KIPL has not been repaid as on that date and, therefore, all the payments made by KIPL to the assessee upto 31.3.09 by way of loans and advances should be treated as "deemed dividend" in terms of Section 2 (22) (e) of the Income Tax Act because the conditions required to hold the transaction as 'deemed dividend' have been satisfied. The Assessing Officer held that the four basic requirements for construing a transaction as 'deemed dividend' are fulfilled in the present case. For better clarity, the said portion of the order is extracted hereinbelow:- "(i) A shareholder, who is the beneficial owner of shares with not less than 10% voting power. (ii) Any concern in which such shareholder is a member or partner, having beneficial entitlement of not less than 20% of s....
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....holder from the company during the relevant assessment year would fall within the inclusive sub-clause (e) of definition of 'dividend' appearing in Section 2 (22) (e). The Hon'ble Bombay High Court in the case of CIT v. P.K. Badiani, 76 ITR 369 (Bom.) has held that in case of a mutual, open and current account which a shareholder has with a company, every debit, i.e., every payment by the company to the shareholder may not be a loan. To be treated as a loan, every amount paid must make company a creditor of the shareholder for that amount. If, however, at the time when the payment is made, the company is already a debtor of the shareholder, the payment would be merely a repayment by the company towards its existing debt. It would be a loan by the company only if the payment exceeds the amount of its already existing debt and that too only to the extent of the excess. Therefore, the position as regards each debit will have to be individually considered, because it may or may not be a loan. The AO is, therefore, directed to verify each debit entry on the aforesaid line and treat only the excess amount as deemed dividend u/s 2 (22) (e) of the Act. The ground is partly allo....
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....two separate accounts, one as Sunil Kapoor loan account, which is in a sum of Rs. 45,44,303/- for which interest of Rs. 2,12,783/- has been paid and TDS of Rs. 24,108/- has been deducted and paid over to the department and the other account is a running account, which has been reconciled as on 31.3.09 at a sum of Rs. 76,86,829/- and after giving credit to the various amounts, balance due was determined as Rs. 39,32,345/-. This finding of the CIT (Appeals) was upheld by the Tribunal stating that the two accounts are distinct and separate, which, this Court is of the considered opinion, on the facts of the present case, appears to be correct and justified, warranting no interference. 12. However, at the present time, the larger issue before this Court is with regard to the interpretation of Section 2 (22) (e) of the Act on which much reliance has been placed by the Department to hold that the amount pending in the books of accounts of KIPL under the head loans and advances to the assessee is to be construed as 'deemed dividend'. For better clarity, Section 2 (22) (e) of the Income Tax Act is extracted hereinbelow :- "2. Definitions - * *....
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....nally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him, such a fiction created cannot be said to be beyond the scope of legislative competence. The relevant portion of the order, is quoted hereinbelow for better clarity:- The companies to which the impugned section applies are companies in which at least 75 per cent. of the voting power lies in the hands of persons other than the public, and that means that the companies are controlled by a group of persons allied together and having the same interest. In the case of such companies, the controlling group can 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 realised 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 sa....
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....s, to a limited company, specially registered for the purpose, which thereafter received the income from the assets concerned. The individual's total income for tax purposes was then limited to the amount of the dividends distributed to him as practically the only shareholder, which distribution was in his own control. The balance of the income, which was not so distributed, remained with the company to form, in effect, a fund of savings accumulated from income which had not immediately attracted surtax. Should the individual wish to avail himself of the use of any part of these savings he could effect this by borrowing from the company, any interest payable by him going to swell the savings fund; and at any time the individual could acquire the whole balance of the fund in the character of capital by putting the company into liquidation". What Simon says about one-man company can be equally true about the controlled company whose affairs are controlled by a group of persons closely knit and having the same interest." 15. Following the view of the Supreme Court in Navnit Lal Javeri's case (supra), the Calcutta High Court, in the case of Smt. Tarulata Shyam & Ors. - Vs - C....
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.... conditions have been laid down for the purpose of determination of the head on which the amount is to be taxed. For better clarity, the said portion of the order is extracted hereinbelow :- "From the above discussion it emerges clear that the fiction created by section 2(6A)(e) read with section 12(1B) of the Act is inexorably attracted as soon as all the conditions necessary for its application exist in a case. In Navnit Lal's case [1965] 56 ITR 198, 202 (SC) this court, after an analysis of these provisions, listed these conditions, as follows " . . . . . the combined effect of these two provisions is that three kinds of payments made to the shareholder of a company to which the said provisions apply, are treated as taxable dividend to the extent of the accumulated profits held by the company. There three kinds of payments are: (1) payments made to the shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before section 12(1B) can be invoked against a shareholder. The first condition is that the company in question must be one in which the public are not su....
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....e, all the amounts advanced to the assessee/appellant under the head loans and advances fall squarely within the ambit of Section 2 (22) (e) of the Income Tax Act. 18. The object of the Legislature in enacting section 2 (22) (e) is to prevent the escapement of tax by some shareholders. Under section 2 (22) (e) of the Act, by a deeming provision, the Legislature has made payment of any advance or loan to a shareholder a deemed dividend so as to subject such payments to the levy of tax in the hands of the receiver of the said amount. It should be noted that pari materia provision, viz., clause (e) of section 2(6A) of the Act was substituted for the original provision by the Finance Act, 1955, with effect from 1st April, 1955. The object of the provision is to prevent avoidance of tax by the shareholders of a closelyheld company. In such a company, a few shareholders, who effectively control it, can easily exploit its juristic personality, by restraining it from distributing its yearly dividends and thereby accumulating its profits, and thus saving themselves from a higher tax incidence resulting from the distribution of dividend. 19. In such a backdrop, the above provision came to ....