TaxTMI 
TaxTMI 
2018 (2) TMI 1085
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.... Both the lower authorities have erred in law and on facts of the case by not appreciating the facts that the appellant shareholder has not received any payment from the company for his individual benefit and therefore provisions of section 2(22)(e) of the Act cannot be invoked at all. 2. On the facts and circumstances of the case the learned CIT (Appeals) was not justified in confirming disallowance of interest expenses of Rs. 46890/- inspite the fact that assessee have interest free loan and his own capital. 2.1 Apropos ground No. 1 of the assessee, the AO observed that the assessee was in receipt of Rs. 14.47 crores from one M/s Dhanvarsha Oil Mills Pvt. Ltd. ("Dhanvarsha/the company" for short) in which he was having a substantial interest of shareholding with voting power of more than 24%. Since, as per the AO, this was a loan taken by the Pvt. Ltd. Co., the AO considered the same as a case of deemed dividend u/s 2(22)(e). The assessee submitted that it was in regular dealing with Dhanvarsha. Dhanvarsha is engaged in the manufacturing of edible oil whereas the assessee is engaged in the trading or oil, oil cakes etc. Therefore, there are continuous transaction of p....
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....ed profit for the purpose of computing dividend u/s 2(22)(e), is not found acceptable, in view of the decision of Supreme Court in the case of CIT vs. V.Damodaran 13 CTR 0191. Hence, the amount of accumulated profit, for the purpose of computing deemed dividend u/s 2(22)(e)is restricted to Rs. 43,45,236/- as against the accumulated profit computed by the AO at the Rs. 49,74,429/-, by excluding the current year's profit of Rs. 6,29,193/-. As far as the amount appearing under the head "capital reserve" (Rs.36,87,000) is concerned, it is very much part of the accumulated profit for the purpose of computing the dividend u/s 2(22)(e). Accordingly, the addition made by the AO is reduced to Rs. 43,45,236/- from Rs. 49,74,429/-. The appellant gets relief of Rs. 6,29,193/-." 2.3 Before us, the ld. AR submitted the detailed submission as under: "1.1. Firstly, the entire case to be seen is whether the subjected amount so received by the assessee, up to the extent of Reserves & Surplus is in the nature of loan or advance in its true legal meaning in the context of Sec.2(22)(e). 1.2.1 Sec.2(22)(e) applies to any payment by a company to a substantial share holder by way of a....
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.... effect to a commercial transaction would not fall within the ambit of section 2(22)(e) (ii) The transaction of loan involves lending delivery by one party & receipt by another party of sum of money upon express or implied agreement to repay it with or without interest. In case of Bombay Steam Navigation Co. (P.) Ltd. 56 ITR 52, 57 (SC), it was held that a loan of money results in debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources & loan is only one of such source. Every creditor who is entitled to receive a debt cannot be regarded as a lender. (iii) In case of Ardee Finvset (P.) Ltd. Vs. DCIT 79 ITD 547/70 TTJ 378 (Del.) (Trib.) it was held that "Loan means "a lending; delivery by one party to and receipt by another party of sum of moneys upon agreement, express or implied, to repay with or without interest. For a loan there must be a lender, a borrower, a thing loaned for use, as well as a contract between the parties for the return of the thing loaned. A loan contracted no doubt creates a debt, but there may be a debt without contracting a loan. In a loan the mind and intention of the two parties, the le....
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....V. M. Enterprises) constituted a group. As and when the assessee needed the fund to pay off the debts because of the purchases made by the assessee to third parties, it obtained funds from the said company. Similarly the said company too, as &when it needed the funds (and naturally with a view to stop the charging of the interest in the OD A/c), got back the funds from the assessee and put them in the bank. This is a common feature that in the group concerns, there are used to be frequent inter transfers of the fund between the parties as and when needed. Since no interest has been paid what comes out is that there was no receipt/repayment of any loan and rather it was in the nature of a running/current A/c being maintained by both the parties for their business convenience and in the irrespective business interest. The fact of there being shortage/requirement of the fund in the case of the assessee, is fully proved from a chart (PB 111- 113). We may show, through a few examples, that there was scarcity of the funds in the bank as also in the cash in hand therefore, the assessee had to obtain the funds. At the same time the company also needed the funds to stop the interest and the....
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.... and advances. The revenue carried the matter in appeal. The Tribunal concurred with the view of the CIT (Appeals) and held that amounts were not in the nature of Inter Corporate Deposits and were therefore, not to be treated as loans or advances as contemplated in section 2(22)(e) of the Act. 5. The issue is substantially one of appreciation of facts. When the CIT(Appeals) as well as Tribunal concurrently held that looking to large number of adjustment entries in the accounts between two entities, the amounts were not in the nature of loan or deposit, but merely adjustments, application ofsection 2(22)(e) of the Act would not arise. Consequently, no question of law arises. Tax appeals are dismissed." 2.6.1The ld. CIT(A) rejected the contention in para 4.3 pg 8 by simply mentioning that neither the provision nor the decisions cited, have held that the recipient of the loans and advances though utilized for its business purpose yet the same shall not be treated as deemed dividend. In fact, the ld. CIT(A) has not at all understood/ purportedly ignored that the very purpose of introducing Sec. 2(22)(e) was to stop avoidance of tax liability u/s 115O by distributing t....
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....that there was intention of the company to give a loan. AO has never doubted the sequence of market service, exhibition at hotel and execution of orders in pursuance of the advance. It would have been a different story if AEPL would have made the payment by way of loan or advance to the partners of the assessee not for the purpose of business, but for their individual benefit. No specific defect has been pointed out in the conclusion of the CIT(A). The same is upheld.- Lakhmichand Muchhal vs. CIT (1961) 43 ITR 315 (MP) and CIT vs. Saurashtra Cement & Chemical Industries Ltd. (1975) 101 ITR 502 (Guj) relied on." (5) Sri Satchindananad S. Pandit v/s ITO 19 SOT 213(Mum Trib) (6) In the case of ACIT v/s Shri Narayan J. Pagrani in ITA No. 7480/Mum/2011 vide order dated 13.08.2014 (DPB 48-51) wherein, it was held that "-------the accumulated profits of company for the purposes of 2(22)(e)by taking the accumulated profits of earlier years as well as current year profits before tax, as reduced by capital investment subsidy of Rs. 30 lacs, Income tax paid of Rs. 3,32,000/-,Dividend distribution tax of Rs. 63,514/- and prior period expenses of Rs. 5,85,474/-and onl....
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....their letter dated 09.09.2008 (A.Y.2009-10)(PB 104) sanction grant-in-aid of Rs. 18,43,500/- to the appellant "for setting up of edible oil plant as mentioned in the enclosed this (annexure I) as grant-in-aid under the scheme of setting up/modernization/explanation/technology up gradation". Further such grantin- aid was subject to various terms & conditions as were mentioned in annexure II. Thereafter, the said Ministry again vide their letter dated 10.05.2012 (A.Y.2013-14) (PB 101-103) has paid the second installment of the grant-in-aid of Rs. 18,43,500/- to the appellant (out of the total grant-in-aid of Rs. 36.87 lakhs) for the said very purpose and the same was also subjected to similar terms & conditions as mentioned in Annexure II. Such grant is continuously being shown by the company in its Balance Sheet. 3.2.2 It is very pertinent to note that in the case of Dhanvarsha the revenue has rather treated such amount as a capital subsidy therefore, no addition has been made in the assessment made for A.Y.2009-10 wherein part of the subsidy was received and again in A.Y.2013-14 where the other part was received. Of course, during the course of the assessment proceedings, ....
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....having provided specific definition of the expression "accumulated profits" wherein, there is no inclusion of the capital subsidy hence, it cannot be presumed that to make the deeming fiction workable u/s 2(22)(e), the scope of the expression "accumulated profits" should be enlarge even to the extent to include a capital subsidy which, otherwise by its very nature is not a profit much less a revenue profit/and than an accumulated profits. 4.4 The ld. CIT(A) however, rejected such contention summarily in para 4.3 pg 9 at simply saying that "........... as the amount appearing under the head 'capital reserve' (Rs.36,87,000/-) is concerned, it is very much part of the accumulated profit for the purpose of computing the dividend u/s 2(22)(e)..............". This was submitted to AO also vide w/s dated 28-01-16 (PBP 16) who made no adverse comments. 4.5 Covered Issue: This issue is directly covered on similar facts in the case of DCIT v/s Rajasthan Wires (P) Ltd. (003) 81 TTJ 0673 (JP Trib) (DPB 3140)wherein, it was held that "Dividend-Deemed dividend under s. 2(22)(e)-Accumulated profits-Loan from S Ltd., a company in which assessee is holding substantial int....
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.... have gone through the various decisions cited by the ld.AR. We have also gone through the ledger accounts of the assesse and M/s Dhanvarsha Oil Mills Pvt. Ltd. in their respective books of accounts of the relevant year, copies placed at Paper book Pg. No. 4 to 11, and a chart placed at Pg. 111 to 113. We find that the facts of the present case establishes that it was a transaction of loan or advance. Hence, this plea of the assessee has no merit . However, the alternative argument of the ld. AR was that the provisions of Section 2(22)(e), if at all to be applied, could be applied only to extent of the accumulated profits which means only the revenue/operating profit and not a capital subsidy/grant. Whereas, in this case, out of the total subjected receipts of Rs. 43.45 lacs, Rs. 36.87 lacs was an amount, received by the assesse in the preceding year i.e A.Y 2012-13 and in this year, was on account of a capital subsidy. On this aspect, our attention was drawn towards a note in the Audited Balance Sheet as on 31.03.2013 and the breakup of the Reserve & Surplus placed at Pgs 1-2 of the paper book, which reads as under. "RESERVE & SURPLUS 1. Capital Reserve Subsidy Amount ....
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....rofit to be declared as a dividend. When asked the ld. AR denied that a capital subsidy cannot be distributed as dividend. The provision of S. 2(22)(e) along with its Explanations - 2 as stood at the relevant point of time, shall only mean that the expression "accumulated profits" shall only include all the profits of the company up to the date of distribution which are normal revenue profits. The words used are plain, clear and unambiguous that only the profits of the company are to be considered for this purpose. The said provision nowhere indicates that capital subsidy/grant should also be included/ considered within the expression "accumulated profits". We are in full agreement with the decision of the coordinate bench cited by the ld. AR in the case of DCIT v/s Rajasthan Wires (P) Ltd. (003) 81 TTJ 0673 (JP Trib) (copy placed at Pg 31-40 of the decision paper book) wherein, a similar controversy was involved and it was held that "....Further, capital receipts cannot be said to be earned profits available for distribution-Capital reserve on account of state capital investment subsidy, lab equipment subsidy and ISI subsidy provided by the State Government cannot be incl....
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....nt order, statement of facts, grounds of appeal and written submission carefully. The assessee has not furnished any fund flow statement to substantiate his claim that advances of Rs. 7,25,000/- given to Shri Naresh Kumar Jain was out of his own capital or interest free funds available with him. Interest paid is allowable under section 36(1)(3), only if, the interest is paid in respect of capital borrowed for the purpose of business only. The assessee has not furnished any evidence to show that the advance of Rs. 7,32,000/- given to Shri Naresh Kumar Jain was for business purposes, or the advances were given out of the interest free funds available with him. Therefore, the disallowance of interest of Rs. 46,890/- made by the AO is hereby confirmed." 3.3 Now the assessee is in appeal before us. During the course of hearing, the ld.AR of the assessee submitted detailed written submission and relied upon case laws. He submitted that the assessee is having interest free funds much larger than the interest free advances. Hence, a presumption would arise that interest free loans & advances were be only out of interest free funds and not out of interest bearing borrowings. The AO has n....