TaxTMI 
TaxTMI 
TaxTMI 
2010 (11) TMI 982
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....)(e) of the Act; - the CIT(A) ought to have appreciated that the transaction between the assessee and Bagmane Developers (P) Ltd [BDPL] were in the course of business activities and that the amounts received were not in the nature of 'loans and advances'; (iii) the CIT(A) erred in directing the AO to compute the 'current year's profit; & (iv) the CIT(A) erred in upholding the levy of interest u/s 234B of the Act. 3. As pointed out earlier, 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 which were 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 to the assessee since nothing incriminating relating to the assessee have been found at the time of search, that only the regular books of accounts were found and 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 grossly erred in out-rightly reje....
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.... 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'. 5.3. In view of the above, we are of the considered view that the AO was well within his dominion to resort to issue of notices u/s 153C of the Act for all the AYs under challenge and, accordingly, the assessee's objection is not sustainable and the assessee's ground on this count for all the AYs under dispute is dismissed. . 6. With regard to the assessee's grievance in applying the provisions of s.2 (22) (e) of the Act by the AO by treating the amounts received under contractual t....
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....ment, the assessee failed to produce any other evidence to prove that the advances given were for the purpose of the business of BDPL; (ii) MOU was produced only on 15.12.098 and it was neither a registered document nor entered by an independent person because the document was signed by husband and wife and, therefore, self serving document; & (iii) Even if the MOU was in existence, it did not alter the nature of transactions which have been shown by the assessee in the form of unsecured loan 7.1. By distinguishing the case laws on which the assessee had placed its faith, the Ld. CIT (A) sided with the AO who took sanctuary in ruling of the Hon'ble highest judiciary of the land in the case of Miss. P Sarada v. CIT reported in 229 ITR 445 (sic) 444 (SC) and concluded that the assessing officer was right in invoking provisions of section 2(22)(e) of the Income-tax Act for the above assessment years. 8. Disenchanted with the findings of the Ld. CIT (A) cited supra, the assessee has come up with the present appeals. During the course of hearing, the stand of the authorities below was hotly contested by the Ld. AR with his lengthy submission, the focal point of which, is summarized ....
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....s not seized by the search party, doesn't mean to conclude (as the AO did) that the document did not exist at all. The AO had not proved with any documentary evidence except alleging that the document was not genuine; - no agreement needs 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 to make the maximum possible efforts for investments in land and would like to conserve the resources and, thus, distribution of dividends would be its last prior....
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....865 (Mum) - the deemed dividends computed for the AY 2005-06 was incorrect. The peak of the amount alleged to have been advanced by BDPL was ₹ 3.59 crores as on 13.10.2005. Prior to 31.3.2005, the peak credit never exceeded the opening balance. On 31.3.05 certain credit entries of 2.55 crores which according to AO was funds transferred was not actual transfer of funds. They were mere journal entries. It is common knowledge that in journal entries there is neither flow out or flow in of funds. There was no deemed dividends to be taxed at all in the AY 2005-06. The cases relied by the AO have no application to the facts of the present case. relies on - G.R.Govindarajulu Naidu v. CIT 90 ITR 13 (Mad); - For AY 2006-07: With regard to the reasoning of the AO for rejecting the plea of reduction in the share holding of Raja Bagmane in the assessee company was that the transfer was not genuine and the reason given for arriving at such a conclusion was that the assessee had not received the consideration for the transfer of share, but, it was only a journal entry, the contention was that - - The sales of shares have been disclosed in the Balance Sheets of Raja Bagmane and Smt. Vasu....
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....ation of the relevant impugned assessment orders, the reasons for having arrived at such a conclusion that those amounts were to be treated as deemed dividends u/s 2 (22)(e) of the Act for the AYs under dispute, can be categorized as under: (i) the assessee in its Balance Sheets in Schedule 2 had shown those amounts under the head 'unsecured loans'; - in the Balance sheets of BDPL for the AYs under dispute, amounts receivable from the assessee have been shown under the head 'loans and advances'; - the balance sheets of BDPL show the accumulated profits for the relevant assessment years; (ii) the assessee had failed to substantiate its claim that the funds were received from BDPL for business expediency and were in the nature of contractual payments; - the Agreement dated: 11.12.2002 produced to substantiate its claim that the funds were flown from BDPL for business exigencies and were in the nature of contractual payments appears to be an after thought since it was not in existence at the time of search operation; - the evidence produced in the form of an agreement signed by Raja Bagmane and his wife Smt Vasundhara Raja was to be an after thought to go scot-free; (iii) the j....
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....eets, the funds received could have been shown inadvertently as 'unsecured loans' or "advances' by the persons who were at the helm of affairs in the accounting section of the assessee which, in our considered view, doesn't alter the nature and character of the transfer of funds which took place and it cannot be a sole reason to brand them that the funds were unsecured loans and, thus, the provisions of s.2 (22)(e) of the Act have come to play a role. In this connection, it is more appropriate to have a glimpse of the ruling of the Hon'ble Apex Court in the case of S.A. Builders v. CIT reported in 288 ITR 1 (SC) wherein the Hon'ble Court, in its infinite wisdom, had observed thus - "The expression commercial expediency is one 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 business expenditure if it was incurred on grounds of commercial expediency…………………………………..That the borrowed amount is not utilized by the assessee in its own business ....
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....ow have failed to bring on record any credible documentary evidence to prove that the action of the assessee was an after thought and the document itself was 'self serving' etc., Merely making a sweeping remark on the genuineness of the very existence of an agreement without an indisputable evidence, in our view, is lacking conviction. Analyzing the other reasoning of the Ld. CIT (A) that the agreement was neither a registered document nor a document entered by an independent person because the document has been authenticated by husband and wife, it was noticed that the fundamental fact has been lost sight of that the agreement was executed not in the status of a wife and a husband as has been projected, but, representing two Limited companies. No doubt, the wife and husband have represented their respective companies in the capacity of 'Managing Director' and 'Authorized Signatory' respectively and, thus, the question of marital relationship should not have been dragged in to doubt the very bona fide of the agreement itself. The agreement has not been entered into by Raja Bagmane and Mrs. Vasundhara Raja in the status of husband and wife, but, in the capacity of Managing Director....
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.... directly applicable to the facts of the issue on hand. (6) The AO had placed reliance on the ruling of the Hon'ble Apex Court in the case of CIT v. Mysodet (P) Ltd. (1999) 237 ITR 35 (SC) to drive home his point. We have diligently perused the observation of the Hon'ble Court wherein it was ruled that - 'A perusal of section 2(22)(e) shows that for the purpose of the Act, any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend. Since the Act has not provided for any other definition of the word 'dividend' except the ones enumerated in section 2(22), it should be construed that this definition would be applicable to all provisions which contain the term 'dividend' in the Act.' With respects, we would like to mention here that the Hon'ble Court had observed on a perusal of s.2 (22)(e) 'any payment made by a company of any sum of money by way of advance or loan to its shareholders is deemed to be a dividend.' The literally meaning of any sum of money by way of advance or loan to its shareholders, it is deemed to be a 'dividend' whereas in the case on hand, the amounts received were in the normal course of business....
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....PL and the funds so provided for the sole benefit of BDPL and NOT to individual benefits of a shareholder and, therefore, the question of applicability of the provisions of s.2 (22)(e) of the Act doesn't arise. 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. 9.4. The Hon'ble Delhi High Court in its recent judgment in the case of CIT v. Creative Dyeing and Printing Pvt. Limited reported in 318 ITR 476 (Del) ruled that section 2 (22) (e) of the Act can be applied to 'loans' or 'advances' simpliciter and not to those transactions carried out in the course of business as such. In the course of carrying on business transaction between a company and a stockholder, the company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is -what is the purpose of such advance? If the amount is given as advance simpliciter or as such per se without any further obligation behind receiving such advances, may be treated as 'deemed dividend', but, if it is otherwise, the amount given cannot be branded as 'advances' within the meaning of dee....
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....ld have been made to it or that Pee Empro Exports would not have distributed as dividend to its shareholders. Thus, but for the advances, the amount of advances could not have reached assessee at all. We therefore, delete the additions as made by the Assessing Officer as the amount received by assessee is not deemed dividend within the meaning of section 2(22)(e) of the Act." The counsel for the revenue has also further stated that it is not in dispute that the monies which have been advanced to the assessee-company by M/s. Pee Empro Exports Pvt. Ltd. have not to be repaid but have to be adjusted against the dues payable by M/s. Pee Empro Exports Pvt. Ltd. to the assessee-company in the subsequent years for the job work of printing and dyeing which is done by the assessee-company for M/s. Pee Empro Exports Pvt. Ltd. We find that the Tribunal in the present case has very extensively dealt with legislative intention of introducing section 2(22)(e) and has referred to such legislative intention by reference to Supreme Court judgment in the case of Navnit Lal C. Javeri v. K.K. Sen [1965] 56 ITR 198 where a similar provision of the Income-tax Act, 1922 i.e., section 2(6A)(e) was in is....
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....ting of shareholders have deliberately, decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company; but the main object underlying the loan is to avoid payment of tax....." . The Tribunal has also referred to the judgment of the Bombay High Court in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 3931 in which it was held that business transactions are outside the purview of section 2(22)(e) of the Act. In the said case, the company in which Kapadia was having substantial interest had paid various amount to Kapadia. The Tribunal had found that Kapadia had business transactions with the company and on verification of the accounts, the Tribunal deleted the amounts which were relating to the business transactions and which finding was upheld by the High Court. In the present case the Tribunal on considering decisions in various cases held as under : "From the ratio laid down in above cases and on the basis of judicial interpretation of words, 'loans' or 'advances', it can be held that section 2(22)(e) can be applied to 'loans'....
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....emed dividend only if the lending of moneys is by a company which is engaged in the business of money-lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would, therefore, be covered by section 2(22)(e)(ii) and consequently payments even for the business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot, however, have bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions does not fall within section 2(22)(e), we need not to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that is all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). We feel that this interpretation of ours is in acc....
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....5 AC 63 by observing 'it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them' and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610." Therefore, we hold that the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assesseecompany 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." 9.5. Further, s. 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 transaction is attributable to be a loan or an advance. In construing a de....
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....ils have been culled out and for the appreciation of facts, the relevant facts of which are as under: AY 2004-05: ₹ 79.80 lakhs were received from BDPL to make advances to the land owners for the purposes of development of Tech. Park. AY 2005-06 & 06-07: The manner of utilization of funds of ₹ 2.76 crores received from BDPL were furnished as under: Purpose of utilization Amount(in Crores) Status Annexure 1. Paid to N.K. Developers for purchase of concord property Rs.1.00 Land is under dispute and in the process of settlement MOU/3.12.04- Annx.V Addl. Advance paid for purchase of said property Rs.0.25 - do - -do- Annex.VII 2. Paid to Subramanya Naga Enterprises for Chalmukunte property Rs.1.60 - do - Annex.VI Addl. Advance paid Rs.0.12 - do - 3.Adv. paid to Sampangi - on behalf of Veerappa and transferred to BDPL in AY 2010-11 after conversion Rs.0.10 Regd. In the name of Veerappa -do- Annex.X 4. Settlement made to Byanna property - Sy.No.151 Rs.0.55 Regd. In the name of Veerappa - in the process of conversion -do- Annex.XI Addl. Consideration Rs.0.30 - do - -do- Annex.XIV 5. Purchase of land from Raman Nair, Usha Shivkumar & regn. Expen....