TaxTMI 
TaxTMI 
2019 (9) TMI 971
X X X X Extracts X X X X
X X X X Extracts X X X X
....an, which was interest-bearing, was not for 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 as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....account. The credit obtained only for a period of 82 days during 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....87, 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; 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 readi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2013 HDFC BANK Ch. No. 54400000.00 55022455.00 Cr 05/11/2013 HDFC BANK Ch. No. 54045000.00 109067455.00 Cr 05/11/2013 HDFC BANK Ch. No. 54000000.00 163067455.00 Cr 05/11/2013 HDFC BANK Ch. No. 53945000.00 217012455.00 Cr 06/11/2013 HDFC BANK Ch. No. 54000000.00 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 & 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce is if the fact of the subsequent repayment (of loan/advance) relevant, i.e., in determining if the amount received from the payer-company is to be, or is not to be, considered as dividend u/s. 2(22)(e)? This is as de hors the amounts paid by the assessee to GAPL, which are again, as we shall presently see, only in the nature of loans/ advances, either prior to 15/10/2013, or subsequent to 28/11/2013, the sums received by it from GAPL are only in the nature of loans/advances, on which in fact even 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 (supr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The Apex Court agreed that the provision was harsher than sec. 108 of the Commonwealth Income-tax Act, which was its' inspiration. However, the Parliament had itself exercised its' legislative judgment, raising a conclusive presumption that in all cases where loans are advanced to a shareholder in a private limited company having accumulated profits, the advance should be deemed to be the dividend income of such shareholder. It is this presumption, it explained, which is the foundation of the statutory 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. R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntial for the purpose of application of the fiction of the provision of deemed divided, introduced on the statute book from AY 1955-56 onwards. Why, in a given case, the repayment may be after the close of the relevant year, and which would therefore have little bearing in the matter, while ought to be given regard to if the fact of the repayment is relevant? How should, one may ask, it matter that the repayment is after x days or y days or any other? In a given case the payment may be received at the fag-end of the year, or on the last date 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 there....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as regards the relevance of the retention period, does not consequently arise. 4.5 Continuing further, clearly, there is two-way traffic, i.e., receipt of loan or advance, as well as its' repayment, in the instant case. That the repayment was in excess, constituting a loan/advance by the share-holder to the payeecompany, would, in the context of the provision, carry no special significance. The plea of a mutual, open and current account was adopted in P.K. Badiani (supra). The Apex Court considered it relevant to reproduce the relevant part of the said decision 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Mr. Rajgopal ignore the basic fact that s. 2(6A)(e) uses the words 'any payment' which means, every payment, and s. 2(6A)(e) requires the determination of two factors, viz., whether the payment is a loan and whether at the date when the payment is made there were 'accumulated profits' and that these two factors are to be correlated and the result must be ascertained at the date of each such payment." (emphasis, italicised in print, supplied)' Neither, therefore, the fact of subsequent repayment, nor of the payment finding reflection in a current account, was considered as of any 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 D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me. This variability, though, would not alter the nature of the amounts as loan (or advance - signifying, here, a temporary loan). The charge of interest, confirms, if any was required, the nature of the amount paid and received as loan/s, adjusting the amount received firstly against the loan/s already advanced, and vice versa. Why, if the interest charged is at 10 % p.a., as for the preceding year (being not mentioned in the narration to relevant entry in accounts), the same, at Rs. 5,18,665, implies an average loan of Rs. 51.87 lacs during the year. This though would be of no consequence; 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 regard....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The jurisdiction of the High Court under the Act, which is the third appellate authority there-under, arises only on a positive finding on a substantial question of law arising out of the order by the Tribunal, i.e., the second appellate authority under the Act. This is patent from a mere browse of sec. 260A where an appeal is preferred before the High Court; it reading as under: Appeal to High Court. 260A. (1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal if the High Court is satisfied that the case involves a substantial question of law. (2) The Principal 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a 'running account' would take the transactions entered into out of the purview of s. 2(22)(e) (or s. 2(6A)(e) of the 1922 Act), we may, for the sake of clarity, advert, once again, to the decisions by the Apex Court referred hereinabove, extracting from the decisions in Tarulata Shyam (supra) (at para 4.4); Mukundray K. Shah (supra) (para 4.5). On facts, we have already clarified that the nature of the financial transactions in the instant case is in the nature of loan/s, also adverting to the decisions wherein, similarly, open, current accounts were maintained. A running account is nothing but an account with transactions both ways. The debits and credits (to the account of the payer-company) in 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ance in the context of the provision, i.e., apart from legally, even factually; the repayment being a function of the business need/s. A repayment in disregard thereof may hurt the borrowers' business interest. How could, then, even factually speaking, the 'early' return, be of any import? It is for this and such other reasons that we stated hereinbefore the assessee's case as untenable even on facts. The extension of a loan/advance carries with it an obligation to repay, with or without interest. This extension, which could be both ways, thus, does not create any mutual obligation i.e., apart from, and only understandably, that concomitant to the borrowing. As, for instance, of repayment, which could 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....81 lacs (the balance outstanding representing interest, which though would assume the character of the principal, as the past conduct of the account shows), i.e., before the year-end, itself proves it to be nothing but financial transactions. It is for this reason that loan transactions, where the lender-company is in the business of money lending, are excepted u/s. 2(22)(e). The other aspect that prevailed with the Tribunal in Suraj Dev Dada (supra), the operative part of whose order stands reproduced by the Hon'ble Court in its' order, is that no 'misuse' of funds belonging to payer-company was shown, coupled with the fact of the assessee-appellant having lent the money to the payer-company most 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 h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it and, further, could not ascribe such distribution as dividend in excess of the proportionate share of the payee in the accumulated profits. The same, however, did not find favor with the other four judges constituting the Bench, who delivered the majority opinion upholding the constitutionality of the provision of section 12(1B) r/w s. 2(6A)(e) of the Indian Income Tax Act, 1922, also finding the same as not violating fundamental rights guaranteed under Article 19(1)(f) and (g) of the Constitution. The scope of the relevant entry (in the Legislative lists), it explained, are not powers but fields of legislation and the widest import and significance should be attached to them. While section 2(6A), analogous 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... interest may be received by the company; but the main object underlying the loan is to avoid payment of tax. It may ultimately be repaid to the company and when it is so repaid, it may or may not be treated as part of accumulated profits. It is this kind of a well-planned device which s. 12(1B) intends to reach for the purpose of taxation.' (pg. 208) The Hon'ble Court agreed that the doctrine does not mean that the Parliament can choose to tax as income an item which can in no rational sense be regarded as the citizen's income. The item taxed should be rationally capable of being considered as the income of the citizen. But in considering the question as to whether a particular item can be regarded as income 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'....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... loans/advances as well, which consideration also prevailed with the dissenting judge (in Navnit Lal C. Jhaveri (supra)) in holding otherwise, was not found a valid ground for striking down the provision which, in it's view, laid a reasonable restriction on the source of borrowing by a substantial shareholder in a private company. It must be remembered, it observed therein, that the loan/advance is made in full knowledge of the provision contained in the impugned section (page 207). If the Legislatures thinks, it explained, that loan/advance(s) in almost every case is a result of a device, it is competent to prescribe a fiction and hold that in cases of such loans/advances tax shall be recovered from the shareholder 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 con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....transaction, i.e., of the loan and advance by such a company thereto. This is in fact admittedly so in the instant case, being dependent on the availability of surplus funds with the assessee and, further, on the same being required at the relevant time by the company. It is the source of borrowing to a shareholder that the law places restriction on. Considering the said restriction on it, it is not permissible for a shareholder to contend - though to be fair it has not been before us, that the loan or advance to it by the payer-company is in consideration of it, similarly, advancing monies thereto. That would tantamount to defeating the clear and strict provision of law which, as afore-noted, covers cases of 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 argu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le of ejusdem generis, should only include payments in the nature of loans, excluding business transactions, which have, as a matter of course, if not necessarily, to be settled by remitting funds; the provision in no manner seeking to impinge on genuine business transactions. 4.9 Finally, it is stated that the entries in the books of account are not determinative. The same seeks to perhaps meet the reflection of the outstanding sum (as at the year-end) as a loan or advance in the balance-sheet of the lender or the borrower company. It is nobody's case that the provision stands invoked on account of such reflection, which has not been shown to be incorrect, so that there is no factual basis to the argument. 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,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re not stand to be assessed u/s. 2(24)(ii) r/w s. 56 of the Act. The said dividend would only be that envisaged u/s. 2(22)(a), i.e., as declared observing the required procedure in its respect under the Companies Act, 1956 (or, as the case may be, Companies Act, 2013), to all the shareholders, i.e., in proportion to their shareholding. This would certainly not cover dividend which gets included within its definition under the Act in view of the extended meaning of the term 'dividend' by virtue of a legal fiction. The dividend deemed as such u/s. 2(22)(e) would, therefore, stand to be assessed and, accordingly, has been rightly brought to tax, u/s. 56 of the Act. The assesse fails on its' Gd. 3 as well. In sum 5. The principal objection of the assessee in this 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' la....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yment of advance or loan to a shareholder by the company. The legislature had deliberately not made the subsistence of the loan or advance, or its remaining outstanding, on the last date of the previous year relevant to the assessment year a pre-requisite for raising the statutory fiction.' (emphasis, supplied) The nature of transactions, purely financial in nature, has been found to be receipt and payment of money, i.e., a 'loan' by definition, a term judicially well expounded. This aspect, denoting a primary fact, is in fact admitted. The genuineness of a loan or advance, i.e., creates an actual liability - an absence of which would attract s. 68, is not in issue. However, that the loan/advance represents an actual liability of the shareholder, which may have been repaid 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 con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ceipt by) the shareholder (company) would stand to be regarded as 'dividend'. In fact, a plea as to only the peak credit being regarded as dividend was raised, though not accepted, in P.K. Badiani (supra) (refer pg. 380), a decision which subsequently found approval in Mukundray K. Shah (supra). That is, the Revenue has, in regarding only the peak amount advanced as the qualifying amount, acted as reasonable as it could under the circumstances, i.e., given the settled law in the matter, the payment being regarded as dividend only under its artificial definition, as explained, per an irrebuttable presumption, statutorily provided. The question of the genuineness of the loan or advance, is, for the same reason, of no significance. The decisions cited are, besides being without 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ot in dispute.' 3. In para 4.6, after the reproduction of section 260A, the following be subscribed:(emphasis,supplied)' 4. In para 4.7 (in sub-para 3, beginning with the words 'The extension of a loan/advance carries with it.......'), the following sentence at page 23: 'When the factor of repayment of loan and advance itself is not relevant, how could the retention period, i.e., the period after which the repayment is effected, could possibly be?', being the last sentence of the said sub-para, be read as: '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?'; 5. In para 4.7 (in sub-para 4, beginning with the words 'All these aspects have in fact been deliberated and concluded by the Apex Court......') in the sentence (at pgs. 24-25) beginning with the words: 'The definition of dividend must have.....), the word 'the' be read between the words 'context of' and 'profit of a company'; 6. In para 4.7 (in sub-para 4, beginning with the words 'All these aspects have in fact been deliberated and concluded by t....