TaxTMI 
TaxTMI 
2019 (9) TMI 971
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....r any particular amount, but in the form of an open current account with regular debits and credits during the year; the opening balance (as on 01.4.2013) being in fact at a debit (i.e., receivable) of Rs. 279.48 lacs, which though stood liquidated by 15.4.2013, turning into a credit (payable) balance of Rs. 304.91 lacs on that date. The peak balance for the year was at Rs. 3266.12 lacs on 06.11.2013. GAPL was a company in which public is not substantially interested, i.e., is company other than that defined u/s. 2(18) of the Act. To the extent of it's accumulated profit, therefore, the loan or advance to the assessee was liable to the assessed in it's hands as deemed dividend u/s. 2(22)(e) of the Act. The accumulated profit up to 31.3.2013, i.e., immediately prior to the current year, stood at Rs. 67.36 lacs. The profit for the year, as per the audited accounts, was at Rs. 150.00 lacs, so that, on a pro-rata basis (i.e., up to 06/11/2013), it worked to Rs. 49.81 lacs. The total accumulated profit up to that date, i.e., Rs. 117.17 lacs, was accordingly, after show causing the assessee, brought to tax u/s. 2(22)(e) r/w s. 56 of the Act in assessment. In appeal, the assessee raised....
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....g the relevant year. It was under these circumstances that the Hon'ble jurisdictional High Court in CIT v. Suraj Dev Dada [2014] 367 ITR 78 (P&H), where the credit was for 55 days only, held that the provision of s. 2(22)(e), which was to stop the misuse by taking funds out of the company by way of a loan or advance instead of dividend and, thereby, avoid tax, could be invoked. Similar view, it was submitted, was expressed by the Hon'ble Calcutta High Court in CIT v. Gayatri Chakraborty [2018] 407 ITR 730 (Cal), rendered after considering the decisions by the Apex Court in Sarda (P.) (supra) and CIT v. Mukundray K. Shah [2007] 290 ITR 433 (SC). The decisions in Tarulata Shyam (supra) and Sarda (P.), it was argued, are distinguishable inasmuch as there were no mutual benefits and obligations in the facts of the said cases. In both these cases there were only one-way transactions during the year, i.e., payment by the payer-company to the assessee-shareholder, while in the instant case there are transactions both ways; the assessee-company also making payment/s to the payer-company (GAPL). This is particularly so as the two companies are in the same line of business. On a query by....
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....ares (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; but "dividend" does not include - (i) ............. (ia) ............ (ii) any advance or loan made to a shareholder or the said concern 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 sub- clause (e), to the extent to which it is so set off.' As a mere reading of the provision, language of which is clear and unambiguous, suggests and, in any case, upon a fair look and reading thereo....
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....0.00 271012455.00 Cr 06/11/2013 HDFC BANK Ch. No. 55600000.00 326612455.00 Cr 13/11/2013 to 29/11/2013 HDFC BANK Ch. No. xxx 2121455,00 Cr 29/11/2013 HDFC BANK Ch. No. 10000000.00 7878545.00 Dr 29/11/2013 to 08/01/2014 HDFC BANK Ch. No. xxx xxx 1349481.00 Cr 05/02/2014 to 03/03/2014 HDFC BANK Ch. No. xxx xxx 981313.00 Cr 31/03/2014 INTEREST PAID INTEREST 518665.00 1499978.00 Cr 31/03/2014 TDS INTEREST (PAYABLE) TDS ON INTEREST 51867 1448111.00 Cr The payment of Rs. 6.22 lacs (on October 15 & 17, 2013) is on account of insurance in respect of foreign letter of credit (FLC) by GAPL for an on behalf of the assessee-company, claimed by the latter as an insurance expense. The balance payment of Rs. 3259.90 lacs (on November 5 & 6, 2013) is by way of direct payments, credited to the assessee's bank account with HDFC Bank. The same thus falls under limb (c) and, as the case may be, limb (a), afore-stated (para 4.1). The requirement of the payment being for the benefit of the payeeshareholde....
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....ven interest stands charged. The second question that would follow, i.e., where the answer to the first question is in the affirmative, is the length of the period over which the credit obtains, being at 45 days (i.e., from 15.10.2013 to 29.11.2013) in the instant case? The third question in this regard that would need to be addressed, is if the subsequent, or even the prior conduct of the account, relevant? As where, for example, the assessee has, prior or subsequent to the receipt of loan or advance, given loan/advance to the payer-company, which may or may not be in the current year. 4.4 The issue of repayment of the amount received came up before the Tribunal in Tarulata Shyam (supra) in the context of s. 2(6A)(e), the analogous provision under the 1922 Act, introduced, along with s.12(1B), by Finance Act, 1955 w.e.f. 01.4.1955. There arose a difference between the Members of the Tribunal. The AM took the view that the moment a payment as envisaged u/s. 2(6A)(e) is received, it gets clothed with the character of dividend, and is to be regarded as the income of the assessee-shareholder, and that there-fore, the subsequent action or repayment by the share-holder cannot take it ....
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....ory fiction incorporated in s. 2(6A)(e). Thus, s. 108 of the Commonwealth Act appears to be more reasonable and less harsh than its Indian counterpart. The language of the provision was clear and unambiguous, and there was no scope for importing into the statute words that were not there. That would, it stated, be not to construe, but to amend the statute. There was, it explained, no justification to depart from the normal rule of construction according to which the intention of the Legislature is to be primarily gathered from the words used in the statute. Even if there be a casus omissus, it clarified, the defect can be remedied only by legislation and not by judicial interpretation. Referring to Cape Brandy Syndicate v. IRS [1921] 1 KB 64 (KB), it recalled the words of Rowaltt J., that: (at pg. 71) "...... in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." Further, once an assessee comes within the letter of law, he had to be taxed, however great the hardshi....
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....e itself, so that repayment, even after a few days, falls in the following year. A loan or advance carries with it, by definition, an obligation for repayment (return of value), so that the fact of repayment - whether during or subsequent to the relevant year, would be, as clarified, of no moment. The length of the time for which the loan or advance obtains would accordingly be of no significance, i.e., for taxation purposes; the amount having been regarded, on its' receipt, as the income of the payee. The assessee's argument of having retained the credit (sum borrowed), which is on interest, for only 82 days during the year, would therefore be of no assistance thereto, being an irrelevant consideration. Comparison may, for the sake of discussion, as well as for better comprehension, also be made to sec. 68 of the Act deeming a credit as the income of the debtor where the same is not satisfactorily explained as to its nature and source. The subsequent discharge of the credit, as by repayment, where it is described as a loan or advance, is of little consequence, i.e., where it is deemed as an unexplained credit u/s. 68. Temporary loan/advance(s) were, accordingly, even prior ther....
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....ision in Mukundray K. Shah (supra), referred to during hearing by the ld. Sr. DR, as under: (at pg. 447) 'We also quote here-in-below para 19 and para 21 of the judgment of the Bombay High Court in the case of CIT vs. P.K. Badiani [1970] 76 ITR 369 (Bom): "19. Now, the assessee's account for 1st April, 1957, to 31st March, 1958, shows that there are credits as well as debits. What has to be ascertained is whether the debits are 'loans', so that they can be deemed as dividends. The account is a mutual, open, and current account. Every debit, i.e., every payment by the company to the assessee, may not be a loan. To be treated as a loan, every amount paid must make the company a creditor of the assessee for that amount. If, however, at the time when the payment is made by the company is already a debtor of the assessee, the payment would be merely a repayment by the company towards its already existing debt. It would be a loan by the company only if the payment exceeds the amount of its already existing debt and that too only to the extent of the excess. Therefore, the position as regards each debit will have to be individually considered, because it may or may not be a loan. Th....
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....ny moment; the Hon'ble Court clarifying that the nature shall have to be examined with reference to each individual payment, i.e., whether it creates a debt or is in discharge of an earlier one. No wonder, then, that in CIT v. Nagindas M. Kapadia [1989] 177 ITR 393 (Bom), the advances received against purchases by the assessee share-holder were ignored from the running account and only the balance amounts, not relatable to business, representing only financial transactions, so isolated, were regarded as dividend u/s. 2(22)(e), upholding the Tribunal's view. A 'loan', according to Black's Law Dictionary, fifth edition, page 844, means "a lending; delivery by one party to and receipt by another party of sum of money upon agreement, express or implied, to repay it with or without interest [Isaacson v. House, 216, Ga. 698; 119SE 2D 113,116]". A loan is something quite different from a debt. 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. Every sale of goods on credit does not amount to a t....
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....; it having been sufficiently clarified that a reduction or even a ceasure of liability (on account of loan/advance) by the relevant year-end is not relevant. This, then, answers the third question set up by us (refer para 4.3), in that the matter is factual and, accordingly, in the facts and circumstances of the case (also refer para 4.2), the impugned sum of Rs. 3266.12 lacs represents a loan, temporary in nature, having been paid in full by 29/11/2013, i.e., within 45 days, even as the fact of subsequent repayment or the length of period over which it obtains, is of no consequence as regards the attraction of the provision of s. 2(22)(e). Further, as the repayment depends on the availability of surplus funds with the assessee, being deployed in its' business, to sub-serve the interest of which the loan stands contracted, there could be no certainty as to the length of the retention period and, thus, the nature of a loan as a 'temporary' (itself a relative term) loan, is, in the facts and circumstances of the case, suspect. 4.6 We may next consider the decision by Hon'ble jurisdictional High Court in Suraj Dev Dada (supra). The Hon'ble Court, after reproducing the ord....
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....rincipal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner] or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be- (a) filed within one hundred and twenty days from the date on which the order appealed against is received by the assessee or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner; (b) (c) in the form of a memorandum of appeal precisely stating therein the substantial question of law involved. (2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing the same within that period. (3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. (4) The appeal shall be heard only on the question so formulated, and the respondents shall at the hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in thi....
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....its' accounts by the share-holder could imply payment/s, direct or indirect, by it to the said company and, accordingly, receipt back thereof, again, directly or indirectly. Again, it could well be that the debits represent repayment of the sums received, directly or indirectly, in the first instance by the assessee-shareholder and, accordingly, credited to the account of the payer-company. Now, neither the sums paid by the share-holder nor their repayment, attract s. 2(22)(e). Their existence or otherwise, thus, as afore-stated, is of no signification in-so-far as the attraction of the said provision is concerned (refer paras 4.4 & 4.5). These, in fact, ought to be ignored, unless of course the private limited company to which the payments are made by the share-holder, is itself a share-holder (with a holding in excess of the threshold limit) in the share-holder company, being a company in which the public is not substantially interested (which the appellant company apparently is). It is only the opposite set of transactions that hold significance as far as sec. 2(22)(e) is concerned. That it, it is the payment by the payer-company to its' share-holder by way of a loan or advance ....
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....d be on demand or after a fixed period. The two companies in the instant case are not in the business of money lending. As stated, and even otherwise stands to reason, a company would give funds to another only when they are for the time being surplus with it, as otherwise it would, besides facing logistical issues, not be acting in the interest of its' business. Similarly, the payer-company would borrow only when it requires money for it's purposes, and being at a cost, would retain it only for the period as is necessary. That is, in either case, each company, in receiving the loan or advance, is primarily catering to its' own (business) interest. This is similar to any borrowing arrangement that a company may enter into with a bank or financial institution. The lending company is, to the payee-company, only a source of funds. It is this very source, where the payee's interest in the payer-company exceeds a defined limit, and the latter, being a company in which the public is not substantially interested, is not in the business of money lending, that is proscribed or, more correctly, sought to be hit by the legal fiction by regarding it as distribution of profit, i.e., dividend, b....
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....of the time during the relevant year; the transactions being in the nature of a running account, with the credit obtaining for the period of only 55 days during the relevant year. We have also afore-discussed that the lending of money by a shareholder to the payer-company holds, in this context, no particular significance, being outside the ambit of the provision. There is no reference by the Tribunal to judicial precedents, or even the law in the matter, with reference to which we have stated the period of retention, or the length of time for which the credit obtains, as of no consequence, being not a relevant consideration. When the factor of repayment of loan or advance, being in fact inherent thereto, itself is not relevant, how could the retention period, i.e., the period after which the repayment is effected, could possibly be? All these aspects have in fact been deliberated and concluded by the Apex Court per its' constitution bench decision in Navnit Lal C. Jhaveri (supra). The challenge in that case was to the vires of the analogous provision of s. 12(1B) r/w s. 2(6A)(e) of the 1922 Act. Per his dissenting judgment Raghubar Dayal J. held substantially the same what infor....
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....logous to section 2(22) of the Act, defines dividend, including deemed dividend (under certain specified conditions) (both per clause (e) thereof), sec.12(1B) provides for bringing the amount outstanding as on 01.4.1955, i.e., even where received or accumulated over the past years, to tax. The Hon'ble Court noted a Circular by the Board providing a window whereby the provision was excepted on genuine repayments of such outstanding by 30.6.1955 (Circular No. 20 (XXI-6/55) dated 10.5.1955). The Hon'ble Court examined several precedents, including challenges to the provision of section 12B, enhancing the scope of 'income' to include 'capital gains'; to section 23A(1), providing an artificial dividend payout at a minimum of 60%, lest the shortfall therein be liable to super-tax, i.e., restraining the company from accumulating its' profit beyond 40% to build up reserves or to provide for capital expenditure; and sec. 16(3)(a) (of the 1922 Act), seeking to tax the income arising to wife and minor son/s of the assessee-individual in his hands. All these provisions were considered by the Apex Court as reasonable steps taken by the Parliament, within it's legislative competence, toward co....
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....ncome in the hands of the citizen or not, it would not be appropriate, it held, to apply the tests traditionally prescribed by the Income Tax Act as such. Further, the provision does not affect the appellant's right to borrow money from any other source, or even from the payee-company where it is in the business of money lending. The restriction imposed by the section could not, in it's view, be regarded as unreasonable (pages 208, 210 of the Reports). The decision by the Hon'ble' High Court (reported at [1963] 48 ITR 451 (Bom)) upholding the constitutionality of the provision, was accordingly affirmed, also noting a similar challenge having been repelled in K.M.S. Lakshmana Aiyer (supra). The appeal was accordingly dismissed with costs. This was followed by another decision by the constitutional bench of the Apex Court in Punjab Distilling Industries Limited v. CIT [1965] 57 ITR 1 (SC), wherein, relying on, among others, the decision in Navnit Lal C. Jhaveri (supra), it upheld the constitutionality of s. 2(6A)(d), under challenge before it. There was no inconsistency, it clarified, between the receipt being a capital one under the company law and by fiction being treated as th....
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....areholder on the basis that he had received the dividend (page 209). That, therefore, there is no 'misuse' of funds of/belonging to such a company, is of no moment in determining if the provision is in the facts and circumstances of the case attracted, and toward which the Apex Court clarified that the provision impinges, subject to five conditions, on three types of payments. These conditions were reiterated by the Apex court in Tarulata Shyam (supra), observing the fifth condition to be applicable for the transitional year (i.e., AY 1955-56) (pg. 355). All that therefore is relevant for the invocation of the section is the satisfaction of these four conditions, being, firstly, that the payer-company should be one in which the public is not substantially interested; secondly, the payee should be a share-holder in the company on the date/s on which the loan is advanced, the extent of his shareholding being immaterial; thirdly, the loan or advance could be deemed as dividend to the extent of the accumulated profit of the payer-company as on the date of the loan; and, fourthly, the loan must not be advanced by the company in the ordinary course of its business, where money lending ....
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....f genuine loans and advances as well, so that such an argument, shown to be factually not valid in the instant case, is not tenable. That is, such an argument, even where the loans by one to another do not carry interest, so that it may factually acquire some force, is not a valid argument, and such an arrangement would, in view of the clear language of the provision, listing four conditions noted supra, the cumulative satisfaction of which alone is relevant, not be a valid argument. In fact, the charge of interest, so that the funds are in the instant case made available by one to another at a cost, preclude the raising of such a contention as being imputed. What a shareholder does with its' funds, on which there is no embargo, is not relevant. It would be a different matter, we may add, where the funds borrowed or advanced, are for business purpose, in which case the same would stand to be adjusted against the business purpose for which the amount stands paid or received, viz. an advance against purchase of goods, while in the instant case the monies received, directly or indirectly, have been met by repayment of monies, i.e., are loans or advances simpliciter, to which, as clari....
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....ent. The provision would in fact apply even if the shareholder does not, as is usually the case for an individual shareholder, maintain books of account, and which is so in the present case only because of it being a corporate entity. On the contrary, it is the assessee who draws on the accounts, stating it to be a running account and, further, a 'low' retention period, and on that basis plead that the provision shall not apply. The provision is applicable qua any payment and, therefore, would (or would not) apply with reference to each specific sum. It is immaterial whether such payment/s is recorded in the books of account or not, and the only thing relevant is if it is in the nature of a loan/s or advance/s. The assessee's argument, which is even otherwise not backed by any material and only in the nature of a bald statement, is therefore without merit. 4.10 The only other issue raised in appeal is the chargeability of the dividend under section 2(22)(e) as 'income from other sources' u/s. 56. No argument was advanced in this respect either before us or, as it appears from their orders, before the Revenue authorities. There is no reference thereto even in the written submissio....
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....his case, as indeed in others cited by it, is that the amount advanced (by the payer-company, GAPL) stands since repaid, so that the provision of s. 2(22)(e) ought not to cover genuine cases of loans/advances, particularly where the shareholder has also given, similarly, loans/advances to the said company. The same accordingly has been discussed with reference to the foundational judgments by the Apex Court, being by its' larger benches, settling the law in the matter, as in Navnit Lal C. Jhaveri (supra); Punjab Distilling Inds. Ltd. (supra) and Tarulata Shyam (supra), which in fact stand followed per it's later decisions, as in Sarda (P.) (supra) and Mukundray K. Shah (supra), to all of which extensive reference stands made. In fact, per these decisions itself the Apex Court has noted with approval several decisions by the Hon'ble High Courts cited before it, even as it, in each case, affirmed the decision by the Hon'ble High Court, under challenge before it. The matter stands discussed at length in this order (refer paras 4.1 thro' 4.10), to which therefore regard is to be had. We may, while concluding our order, extract from the decision in Sarada (P.) (supra) (pg. 448),....
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.... since, which could even be in the relevant year itself, did not find favour with the Apex Court in view of the clear, unambiguous language of the provision; it further noting that the object of the provision had a rational nexus with income, so that the provision, which it agreed was harsh, was within the legislative competence of the Parliament and, therefore, had to be given affect to. A parallel in this context stands drawn by us with section 68 of the Act. The argument of the sum not representing 'real income', though not specifically advanced before us, is implicit in the argument advanced with reference to the genuineness of the loan/ advance, and therefore considered. The same would not carry the assessee's case further, as would even otherwise be apparent from the host of decisions by the Apex Court. As explained in Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC), the concept of 'real income' is subject to the provisions of the Act. The loan or advance being both ways would not carry any special significance in the context of the provision inasmuch as both qualify, independently, to be a loan or advance, which in the present case is with interest, further, est....
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....reference to binding judicial precedents, distinguishable on facts. Further, being not a regular dividend, declared and paid by company, the same does not fall to be covered u/s. 10(34) and, thus, is not excepted u/s. 56. The same has, accordingly, been rightly brought to tax u/s. 2(24)(ii) r/w ss. 2(22)(e) and 56 of the Act by the Revenue, whose action is upheld. The assessee, in this view of the matter, fails. We decide accordingly. 6. In the result, the assessee's appeal is dismissed. Order pronounced in the open court on July 05, 2019 Sd/- Sd/- (N. K. Choudhry) (Sanjay Arora) Judicial Member Accountant Member Date: 05.07.2019 /GP/Sr/ Ps. Copy of the order forwarded to: (1) The Appellant: G. G. Oils & Fats Pvt. Ltd., 2301, Bhupindra Flour Mills, Amrik Singh Road, Bathinda (2) The Respondent: Deputy Commissioner of Income Tax, Circle-1, Bathinda (3) The CIT(Appeals), Bathinda (4) The CIT concerned (5) The Sr. DR, I.T.A.T. This is the true copy of the order pronounced on 05.07.2019, as corrected and modified by the corrigendum order dated 11.07.2019, both on record, and also being uploaded herewith. By Order IN THE INCOME TAX APPELLATE ....