TaxTMI 
TaxTMI 
2016 (8) TMI 651
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....nachem Instruments India P.Ltd. had advanced an amount of Rs. 31,00,000/- on 16.12.2008 to M/s. Advance Scientific Equipment P. Ltd. and M/s. Advance Scientific Equipment had also advanced an amount of Rs. 15,00,000/- on 17.01.2009 and Rs. 20,00,000/- on 19.01.2009 (totaling Rs. 35 lakh) to M/s. Star Earth Minerals P.Ltd. The AO also noticed that the assessee was having more than 50% shareholdings in all these companies. The AO asked the assessee as to why the loan received from M/s. Anachem Instruments India P.Ltd. and M/s. Advance Scientific Equipment P.Ltd. should not be treated as deemed dividend as per provisions of section 2(22)(e) of the Act. The assessee furnished to the AO the balance sheet and P&L account of these two companies and also submitted that the said inter-corporate transactions were in the nature of loan. The AO considered that as per provisions of section 2(22)(e) of the Act, any loan deposit given by a company to another company having a common share holder who is holding not less than 10% of the voting power or to any concern in which such shareholder is a member or a partner and in which he has special interest, such loans deposited is to be deemed to be a ....
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....3,747/- and that of M/s. Anachem Instruments India P.Ltd. at Rs. 19,73,863/- and that of M/s. Star Earth Minerals P.Ltd. at Rs.(-)50,29,833/-. The assessee further explained that M/s M/s. Anachem Instruments India P.Ltd. deposited a sum of Rs. 31 lakhs with M/s. Advance Scientific Equipment P.Ltd. and M/s Advance Scientific Equipment P.Ltd. further deposited a sum of Rs. 35 lakhs with M/s. Star Earth Minerals P.Ltd. as inter-corporate deposits. Ld. AR has further submitted that the said deposits were not gratuitous as the interest was being charged at the market rate. The deposits were in the nature of intercorporate deposits made for business consideration. He has stated that the inter-corporate deposits does not fall within the mischief of section 2(22)(e) of the Act. Ld. AR has further vehemently contended that no benefit had accrued to the assessee out of the above transactions and that there was no evidence that above said transactions were made on behalf of the assessee or for the benefit of the assessee. He has further summited alternatively without prejudice to the above pleas, that even for the sake of arguments, if the deposits were assumed to be dividend, even then, the ....
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....es accumulated profits;" We would also like to reproduce the definition of dividend as it stood under the old Act i.e. Indian Income Tax Act, 1922 (in short the ' Act, 1922'). Section 2(6A)(e) of the said Act provided as under:- " 'Dividend ' includes-... (e) any payment by a company, not being a company, in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or other wise) by way of advance or loan to a shareholder or any payment by any such company on behalf or for the individual benefit of a shareholder, to the extent to which the company in either case, possesses accumulated profits; but dividend does not include-....... (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 clause (e), the extent to which it is so set off." Thus, the inclus....
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....s been added which find place between the words ".....advance or loan to a shareholder.....". and the words "....or for the individual benefit, of any such shareholder...." We find that the words "to any concern in which such shareholder is a member or a partner....." are sandwiched between the first condition of payment to such a shareholder directly and the second condition of payment made to any company on behalf, or for the individual benefit, of any such shareholder. A perusal of the definitions as provided under the Old Act (i.e. the Act of 1922) and the New Act (i.e. the Act of 1961) and even a careful perusal of the definition provided under the new Act alone, would reveal that the phrase " by way of advance or loan appearing in sub-clause (e), must be construed to mean those advances or loans which a shareholder enjoys for simply on account of being a person who is the beneficial owner of shares. The purpose is to bring within the tax net accumulated profits which were distributed by closely held companies to its shareholders in the form of loans to avoid payment of dividend distribution tax u/s.'115 O' of the Act, 1961. Thus, the gratuitous loan or advance given by a comp....
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....it and such attempt must always be made. Though it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing; but statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning. The Hon'ble Karnataka High Court, thus, observed that it is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction. The Hon'ble High Court further observed that the Hon'ble Apex Court again explained the meaning of a deeming provision under the Income Tax Act in the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711, which reads as under:- "The legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be ext....
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.... Constructions (P) Ltd. & Anr." (supra), the Hon'ble Karnataka High Court has held that the purpose of insertion of sub-clause (e) of Section 2(22) of the Act was to bring within the tax net accumulated profits which are distributed by closely held companies to his shareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-O of the Act. Loan or advance given to the shareholders or to a concern, under normal circumstances would not qualify as dividend. If such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Para 24 of the aforesaid decision of the hon'ble Karnataka High Court which is most relevant in the context of the matter for the sake of convenience and completeness is reproduced as under :- "24. Therefore, from the aforesaid judgments, it is clear that the purpose of the insertion of sub-clause (e) of Section 2(22) of the Act was to bring within the tax net accumulated profits which are distributed by closely held companies t....
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..... It can also be applied where the meaning of the words of wider import is doubtful; but, where the object of the legislature in using wider words is clear and free of ambiguity, the rule of construction in question cannot be pressed into service. The Hon'ble High Court in para 27of the order has observed as under :- "27. In this background when we look at the aforesaid provision, it is clear that any payment made by a company by way of advance or loan has to be understood in the context of the object with which the said provision is introduced. Though the legislature has introduced 'advance' as well as 'loan' which are two different words, the meaning of each of those words have to be understood in the context in which they are used. Each word takes its colour from the other. The meaning of the word 'advance' is to be understood by the meaning of the word loan which is used immediately thereafter Associated words take their meaning from one another under the doctrine of noscuntur a sociis the philosophy of which is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it. This rule, according to Maxwe....
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.... not the intention of the legislature in enacting the aforesaid provision. Even if the accumulated profit which ought to have been paid to the shareholders as the dividend paid to a sister concern for the purpose of acquisition of capital assets or as a consideration for the goods received which is required for carrying on the business, it would not fall within the definition of Section 2(22)(e) of the Act as the object was not to pay the said amount to the shareholders after avoiding payment of dividend distribution tax under Section 115-O of the Act. In that view of the matter, it is not possible to accept the interpretation sought to be placed by the revenue. 14. The Hon'ble High Court, thus, relied upon various case laws and vide para 29 of the said decision, has rejected the contention of revenue that the payment by a company by way of any advance or loan made to a shareholder would be out of the purview of Section 2(22)(e) of the Act, only if lending of money is a substantial part of the business of the company. The Hon'ble High Court has observed that the question of looking into the aforesaid provision would arise only when all the conditions prescribed in clause (e) of ....
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....tical instruments supplied by M/s. Advance Scientific Equipment P.Ltd., such as installation of instrument, providing onsite training to the users of instruments, providing annual maintenance services. For these services M/s. Anachem Instruments India P.Ltd. raises its bills on M/s. Advance Scientific Equipment P.Ltd.; It has been further explained in the statement of facts that during the financial year 2008-09, M/s. Anachem Instruments India P.Ltd. received the outstanding amount from, M/s. Advance Scientific Equipment P.Ltd. amounting to Rs. 39,95,907/-. Since the said amount was not immediately required by M/s. Anachem Instruments India P.Ltd., a sum of Rs. 31 lakhs was kept as inter-corporate deposit on 16-12-2008 with M/s. Advance Scientific Equipment P.Ltd. and interest was credited in account amounting to Rs. 96,450/-. So far as transaction of Rs. 35 lakhs as advance by M/s. Advance Scientific Equipment P.Ltd. is concerned, it has been explained that during the year M/s. Star Earth Minerals P.Ltd. raised bills totaling to Rs. 39,70,800/- on M/s. Advance Scientific Equipment P.Ltd. A sum of Rs. 4,08,992/- was deducted by the said Advance Scientific Equipment Pvt. Ltd. toward....
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....at as on 16- 12-2008 M/s. Anachem Instruments India P.Ltd. had to receive Rs. 48,12,600/- from M/s Advance Scientific Equipment P.Ltd.; further that M/s. Advance Scientific Equipment P.Ltd. made certain payments to M/s. Anachem Instruments India P.Ltd. and that as on 1-12-2008 the debit and credit amount was same and thus, on the said date nothing was receivable or payable by M/s. Anachem Instruments India P.Ltd. from M/s. Advance Scientific Equipment P.Ltd. and vica-versa.. The facts itself reveal that these companies were carrying on inter-se transactions and were having running accounts, the amounts were paid and returned also and that no part of the said amount was attributed to the shareholders. The nature of business of the three companies is connected with each other and that are depending upon each other for their business and there are mutual transactions which these companies use to do for the financial help of each other for the purpose of business expediency.. All the more, the most important fact is that the assessee had to receive amounts from M/s. Advance Scientific Equipment P.Ltd. and M/s. Star Earth Minerals P.Ltd. but, in fact, no amount has been received by the ....