TaxTMI 
TaxTMI 
2010 (11) TMI 997
X X X X Extracts X X X X
X X X X Extracts X X X X
....Act for the AYs 2004-05, 05-06, 06-07 and 07-08; (ii) the CIT(A) erred in sustaining the applicability of the provisions of s.2(22)(e) of the Act; - the CIT(A) ought to have appreciated that the transactions between the assessee and Bagmane Developers (P) Ltd [BDPL] 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; & (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 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 AYS 2004-05, 05-06 and 06-07 respectively 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the assessing officer having jurisdiction over such other person and that assessing officer shall proceed against each such other person and issue such other person notice and assess or reassess income of such other person in accordance with the provisions of section 153A." 4.5. As rightly highlighted by the ld. CIT (A), the requirement of handing over the books of account to the AO having jurisdiction over the other person did not arise in the case on hand for a simple reason that the same AO who was having jurisdiction over the person searched u/s 132 of the Act i.e., Bagmane Developers Pvt. Ltd. and 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the assessee took up the issue for all the AYs under challenge before the CIT (A) for redressal. Extensively quoting the reasons adduced by the AO in his impugned orders and also mentioning that the AO had elaborately discussed all the arguments and judicial pronouncements which have been reiterated during the course of appellate proceedings, the CIT (A) opined that the conclusion drawn by the AO were logical, considering the facts and circumstances of the case. He, further, recorded that since the arguments of the appellant have already been considered by the AO, the same did not require further elaboration. However, he went on further to uphold the stand of the AO in invoking the provisions of s.2 (22)(e) of the Act on the grounds that - (i) except the alleged agreement, 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 (sic) agreement 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of business alone which was well outside the ambit of deemed dividend; - The monies taken from BDPL and utilized by the assessee for the intended purpose which has not been disputed by the AO. Based on the ground realities, the assessee was free to adopt his/its own method of carrying on the business; - Relies on - (a) S.A. Builders v. CIT 288 ITR 1 (SC) (b) CIT v. Sassoon David 118 ITR 261 (SC) (iii) the AO's reason for rejecting the agreement was that it was not found at the time of search. It was not as if the search party was expected to record/seize every paper on which it lays its hands. This agreement was kept along with the other original belongings of the assessee and the searching party's reasoning in not seizing this agreement cannot now be speculated; and the worst, the assessee cannot be found fault with either; - just because the said document was 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion with business of the company giving the loan; - case laws relies on (by the assessee) - (a) CIT v. Creative Dyeing and Printing Pvt. Ltd. 318 ITR 476 (Del); (b) NH Securities Ltd. v. DCIT 11 SOT 302 (Mum) - merely because the sum was shown as unsecured loan in the books of accounts cannot be concluded that it was deemed dividend. It was a settled law that in book-keeping, the entries in the books of accounts cannot go to decide the ambit of taxation Relies on - a. Fort Properties Pvt. Limited 208 ITR 232 (Bom) b. Kedarnath Jute Manufacturing co. Ltd. 82 ITR 363 (SC) c. Kasturi Estates (P) Ltd. 62 ITR 578 (Mad) d. G.Venkataswami Naidu 35 ITR 594 (SC) e. Sultan Brothers 51 ITR 353 (SC) f. CIT v. Express Newspapers 53 ITR 250 (SC) - The question of deemed dividend can arise only in the hands of a share holder having substantial interest in the lending company. The assessee was not a shareholder in BDPL from whom the alleged advance had been received. Relies on - ACIT v. Bhaumik Colour (P) Ltd 120 TTJ 865 (Mum) - It is common knowledge that in journal entries t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ends in the hands of the assessee by bringing them 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 action of the authorities below requires to be upheld. 8. We have carefully considered the rival submissions, diligently perused the relevant records, the various judicial pronouncements on which either party had placed their faith and also the voluminous paper books in volumes [I, II, III & IV running into hundreds of pages - in its group of cases] furnished by the Ld. AR during the course of hearing proceedings. 8.1. On a critical examination 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, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....procurement of lands and development of the same into commercial use was to be executed by the assessee for which necessary funds were provided to the assessee until such a time BDPL had arranged finance for its projects from other sources such as banks etc.,. The relevant clauses 10 and 11 of the said agreement are reproduced, for appreciation of facts, as under: "10. The second party shall advance funds to the first party from time to time for acquiring the properties and shall finance the construction till such time the first party is able to secure finance from the banks for the project or find an investor for the project. 11. On completion of the construction on the properties acquired, the first party shall assign the area on the basis of cost + 4% margin to the second party for the amounts paid by the second party to the first party pursuant to the above arrangement entered. The allotment of space is irrevocable. In this connection, the first party shall in close co-ordination with the second party freeze the cost of project per sq. feet and shall allow the representatives of the second party for periodical access to its accounts." As could be seen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ged by the Revenue. While deciding the issue in the case of S.A.Builders cited supra, the Hon'ble Supreme Court had puts its seal of approval to the ratio laid down by the Hon'ble Delhi High Court in the case of CIT v. Dalmia Cement reported in 254 ITR 377 (Del) wherein the Hon'ble Court held that - "The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits." (2) The AO's another contention was that the assessee was unable to substantiate its claim that the funds were given for business exigencies and was in the nature of contractual payments. In this connection, we would like to mention here that the balance-sheets, journal entries in the books of account amply make it clear that the funds were provided during the course of business.. (3) The other reasoning of the AO which was ratified by the learned first appellate authority that the alleged non-registered agreement was produced....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ning of the AO was that BDPL which advanced the alleged loans to the assessee not engaged in the business of money lending and, therefore, the loan given to the assessee comes under the purview of s.2 (22)(e) of the Act. We would like to reiterate that the BDPL was not engaged in the business of money lending, but, the funds so allocated to the assessee during the course of business which purely on business exigency and, thus, the amounts so funded do not fall within the sphere of advance or loan, as the case may be, so as to bring it under the purview of s. 2 (22)(e) of the Act. (5) We are in total disagreement with the Ld. CIT (A)'s perception that the assessee's reliance on the ruling of Hon'ble Supreme Court in the case of S.A. Builders v. CIT cited supra was not applicable. No doubt, the issue was whether interest on borrowed capital allowable or not. However, the Ld. CIT (A) had failed to notice, perhaps by oversight, the concept and the ratio laid down by the Hon'ble Court while deciding the issue. For the sake of ready reference, we reproduce the relevant portion of the ruling of the Hon'ble Court that "It was required to be enquired as to whether the interes....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... issue on hand. Similarly, the case law [ Smt Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC)] relied on the AO has no relevance for the reasons recorded supra. (7) In the case of Ms. P Sarada v. CIT reported in 229 ITR 444 (SC), the issue before the highest judiciary of the land was that Whether, the withdrawals made by the assessee from Universal Radiators Private Limited totaling Rs. 93,027 can be assessed in the hands of the assessee under section 2(22)(e) of the Act for the year 1973-74 ? After due consideration of the facts of the case, the Hon'ble Court was pleased to rule that - "The withdrawals made by the appellant from the company amounted to grant of loan or advance by the company to 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 relevan....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....) Ltd. (2009) 318 ITR 376 and CIT v. Nagin Das M. Kapadia (1989) 177 ITR 393)(Bom). We reproduce the relevant portion of the finding in the case of CIT v. Creative Dyeing and Printing P. Ltd. for reference: "Before us, the learned counsel for the appellant/revenue has contended that the present case is a case of deemed dividend inasmuch as M/s. Pee Empro Exports Pvt. Ltd. has given a loan to the assessee-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] 181 Taxman 155 and CIT v. Ambassador Travels (P.) Ltd. [2008] 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). Befor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 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 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 imp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 318 ITR 462 (Delhi); [2009] 181 Taxman 155. This Court in Raj Kumar's case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under (page 473) : " A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal 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 subclause (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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n interpreting a deeming fiction, the intention of the Legislature has to be given due importance. The fiction should not be extrapolated beyond the purpose for which the legislation is brought in. On interpretation of a legal fiction, it was held in Controller of Estate Duty v. Krishna Kumari Devi (173 ITR 561) that the Court should ascertain the purpose for which the fiction is created and after doing so, assume all facts which are incidental to give in effect to the fiction. In CIT v. Hindustan Petroleum Corporation Ltd. (187 ITR 1) (Bom), it was held that a legal fiction has to be carried to its logical conclusion, but, only within the parameters of the purpose for which a fiction is created. Moreover, as far as possible, the legal fiction should not be given a meaning so as to cause injustice. Thus, it is obvious that the fiction created in section 2(22)(e) only refers to pure advances or loans. Any amount paid on account of genuine business transaction between the entities falls outside the ambit of section 2(22)(e). As a result of globalization during the recent past, various giant infrastructure projects have sprung up and many are in the pipeline. Multivarious activities a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the assessee has not been rebutted with any concrete proof. The onus rather placed at the doorstep of the Revenue has not been duly discharged; (viii) when an agreement in question was between two Limited Companies, though Raja Bagmane and Mrs. Vasundhara Raja represented their respective companies in the capacity of 'Managing Director' and 'Authorized signatory', their personal marital relationship doesn't come into fore. (ix) With regard to the AO's reasoning (for the AY 2006-07) that transfer of shares by Raja Bagmane in favour of Mrs. Vasundhara Raja was not real transfer but a device to reduce the number of shares so that he was not treated as a share holder having substantial interest etc., We find that - - The sales of shares have been disclosed in the Balance Sheets of Raja Bagmane and Smt. Vasundhara Raja as on 31.3.2006. There was a running account of Smt. Vasundhara Raja in 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 Smt. Vasundhara Raja, credit entries were passed; - Raja Bagmane was not having 10% shareholding in the assessee company thr....