TaxTMI 
TaxTMI 
2017 (9) TMI 1459
X X X X Extracts X X X X
X X X X Extracts X X X X
....vt Ltd Rs. 3000. In the alternative, the assessee has taken one more ground that in case the amount is treated to be deemed dividend it should be restricted to the extent of accumulated profit amounting to Rs. 78,50,414/-. 2. The brief facts of the case are that the Assessing Officer during the course of assessment proceedings noted that Flamingo Additives & Colourants Pvt. Ltd had advanced Rs. 48,50,000/- to Flamingo Polycolours Pvt. Ltd., Flamingo Additives & Colourants Pvt. Ltd had advanced Rs. 38,60,000/- to Genesis Nutech Pvt. Ltd., Flamingo Polycolours Pvt. Ltd had advanced Rs. 3000/- to M/s. Genesis Neutech Pvt Ltd. He noted that the assessee had substantial interest in the following companies Name of the Party % of share holding Flamingo Poly Colors Pvt. Ltd 47.3% Genesis Nutech Pvt. Ltd 25% Flamingo Additives and Colourants Pvt Ltd 48% he Assessing Officer was therefore of the view that the amount so advanced is to be treated as deemed dividend u/s. 2(22)(e) of the Act. Accordingly, he asked the assessee why the said amount may not be treated as deemed dividend. The assessee initially contended that under no circumstances the aggregate amou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d dividend u/s. 2(22)(e) of the IT Act or not, in our opinion, it is necessary to look into the provisions of section 2(22)(e), which stipulates as under: "(e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits." 4.1 This section which is equivalent to section 2(6A)(e) of the Income-tax Act, 1922 was for the first time introduced as by the Finance Act, 1955 which states as follows : (a) "Any p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... shares holding 10% voting power. 4.5 Through this sub-clause, deeming fiction is created whereby the scope and ambit of the word dividend has been enlarged to bring within its cover loans granted by closely held companies to their shareholders. In order to have a check on similar transactions, the legislation widens the scope of the term 'dividend' to include loans granted to shareholder by the closely held companies. The word 'deemed' has not been defined anywhere in the Act. Neither has the word been used in section 2(22)(e). Deemed dividend is therefore a legal fiction created wherein certain payments by companies are deemed to be dividends. This is a settled law in view of the decisions of Apex Court in the case of State of Bombay vs. Pandurang Vinayak Chaphalkar (1953) SCR 773 that legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and cannot extend beyond their legitimate field. The legal fiction is of course to be carried to its logical conclusion, but that must be within the framework of the purpose for which it is created. The Courts must assume that such a state of affairs exists as real, and should im....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... relief by providing that any subsequent dividend declared by the company and set-off against the loan or advance, which has been deemed as 'dividend' under sub-clause (e), then to the extent of such set-off, it would not be again treated as dividend. That is to say, if the dividend is not so set off but is paid to the shareholder while the loan remains outstanding, the benefit of sub-cl (iii) cannot be obtained. 4.11 In the Act, the word "shareholder" is followed by the expression "being a person who is the beneficial owner of shares". This expression used in section 2(22)(e) both in the Act, and in the amended provisions with effect from 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. This provision also does not reduce the requirement of being a registered shareholder to a requirement of merely holding a beneficial interest in the shares without being a registered holder of shares. The expression "being a person who is the beneficial owner of shares" is therefore a further requirement before a shareholder can be said to fall within the parameters of section 2(22)(e) of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he must at any time during the previous year, be beneficially entitled to not less than 20% of the income of such concern. 4.15 "Such shareholder" is the shareholder who is a registered and a beneficial holder of shares holding 10% voting power. Therefore, the expanded meaning of 'dividend' as applied to payments to even nonshareholder would be applicable if all of the following conditions are fulfilled- (a) The person is a registered shareholder of the company (b) The person is beneficially entitled to shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power of the company; (c) The person is a member or partner in other concern (d) The person has substantial interest in the concern referred to in clause (c) above. 5. In case of ACIT vs. Bhaumik Colour P. Ltd. 313 ITR 146 (AT). The Special Bench held that the provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non shareholder). It further observed that since the provisions are ambiguous, it....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... repayment. It is in this regard, the judiciaries have consistently taken a view that trade advances made for procuring/ securing goods or services, it would not attract provisions of Section 2(22)(e). 8. This is settled law in view of the decision of Hon'ble Apex Court in CIT vs. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)that apparent is real. Onus is on the party who alleges apparent is not real. In view of the settled position of various decisions, the trade advance cannot be regarded to be the transaction falling within the meaning of section 2(22)(e) of the Act. Hon'ble Allahabad High Court has taken the similar view in the case of CIT vs. Atul Engineering Udyog [2015] 228 Taxman 295 (All). 9. This view has been taken by Hon'ble Delhi High Court in the case of CIT vs. Raj Kumar, 318 ITR 462 (Delhi). Similar view has been taken by the Mumbai High Court in the case of CIT vs. Nagindas M. Kapadia, 177 ITR 393 (Bom) in which it was held that advance received to purchase the material for the purpose of executing the job work entrusted to the assessee is a trade advance and will not fall within the ambit of section 2(22)(e). In the case of CIT vs. Ambassador Travels P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ubmissions of the appellant. I am of the view that the provisions of S.2(22)(e) of the Act are not applicable at all and therefore the question of deduction of tax at source does not arise and therefore the liability u/s.201(1) and 201(A) of the Act also does not arise. For both the years under consideration, I have perused the copies of the ledger accounts placed on record. It can be seen that there are large number of debit and credit transactions. Meaning thereby, the appellant has given and received funds as and when required to and from its associate concern. It is not an account whereby loans and advances have been given to the associate concerns. It is an account which is in the nature of current adjustment accommodation account wherein there is a movement of fund in both ways, on need basis. Unlike transactions of loans and advances, in this kind of current adjustment accommodation account, the movement of funds is both ways and the same is more in the nature of current account rather than a loan account. Transactions in the nature of loans and advances are usually very few and for a longer duration. In the facts of the present case, the nature of the transaction is in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'ble Punjab & Haryana High Court in the case of CIT vs. Suraj Dev Dada [367 ITR 78], wherein, it has been held as under: "10. From the above, it emerges that the Commissioner of Income-tax (Appeals) and the Tribunal had concurrently recorded that the assessee had running account with the company-M/s. Dada Motors Pvt. Ltd. and had been advancing money to it. It was further observed that the provisions of section 2(22) (e) of the Act were not attracted in the present case; this provision was inserted to stop the misuse by the assessee by taking the funds out of the company by way of loan advances instead of dividend and thereby avoid tax. In the present case, the assessee had in fact advanced money to the company and there was credit for only 55 days for which the provisions of section 2(22)(e) of the Act could not be invoked These findings were not shown to be erroneous or perverse in any manner. 11. In view of the above, no substantial question of law arises in this appeal. Consequently, finding no merit in the appeal, the same is hereby dismissed." 12. Further, we also noted that the 'G' Bench of this Tribunal, vide its order dated 25.08.2010, in ITA Nos. 4869....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of the accounts furnished before us all that can be gathered is that funds have been transferred from and to the sister concerns as and when required and since the managing partner is common to all the sister concerns, the decision to transfer the funds from one concern to another concern or to repay the funds could be said to have been largely influenced by the same individual. In other words, the decision to give and the decision to take rested with either the same group of people or with the same individual. In such circumstances of the case, we hold that the transaction interse between the sister concerns and the assessee can not partake or the nature of either "deposit" or "loan" though interest might have been paid on the same. Excepting for the transfer of funds being witnessed in the books of account of the concerned firms, no material is on record to show issue of receipt or pronote in evidence of accepting deposits or loans as understood in common parlance. It only represents diversion of funds from one concern to another depending upon the exigencies of the business." From the above, it is clear that transaction between sister concerns are just diversion of fu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nature cannot be accepted." On this basis, we reject the plea of the learned DR. No contrary decision was brought to our knowledge. Respectfully, following the decision of Hon'ble Gujarat High Court in the case of Schutz Dishman Bio-tech P Ltd (supra), we hold that the sum of Rs. 48,50,000/- cannot be treated as deemed dividend u/s. 2(22)(e) of the Act. 13. Now coming to the sum of Rs. 36,60,000/-, which was paid by Flamingo Additives & Colourants Pvt. Ltd to Genesis Nutech Pvt. Ltd. The assessee is having 48% share holding in Flamingo Additives & Colourants Pvt. Ltd and 25% share holding in Gnesis Nutech Pvt. Ltd. Again the learned AR before us has taken the same contention as has been taken in respect of the amount paid by Flamingo Additives & Colourants Pvt. Ltd to Flamingo Polycolours Pvt. Ltd., and for this our attention was drawn to pages 4 and 5 of the paperbook. From the copy of the account, we do agree with the learned AR that there are debit and credit transactions between both the companies. The companies has given and received funds as and when required to and from its associate concern. The account here also appeared to be in the nature of current adjustment accommo....