TaxTMI 
TaxTMI 
2019 (9) TMI 1229
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....ut appreciating the plethora of evidences filed before the AD & CIT(A) to demonstrate that the transaction was a commercial transaction. 3. That the CIT (A) failed to appreciate that the amount paid by its subsidiary M/s Advantage overseas Pvt Ltd was for a specific commercial purpose and was not in lieu of dividend and by virtue of this investment the profitability of ADPL was to increase due to assured return of 12 and 50 share in profit. 4. That CIT (A) erred in making an addition of Rs. 2,97,74,68,364/- under section 2(22) (e) of the Act without understanding the fact of the case and without appreciating that the amount payable to M/s Advantage overseas Pvt Ltd was taken for strategic investment purpose same was evident from agreement dated 12/10/2012 executed between both holding and its subsidiary company. 5. That CIT (A) erred in not proper interpreting and applying the CBDT Circular No. 19 of 2017 under the facts and circumstances which specially says that contributions given for commercial purpose falls outside preview of Section 2 (22) (e) of the Act. 6. That in the facts and circumstances of the case, the transaction which was to be managed by Appellant as a hold....
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....or vide the said Notice. ABC duly furnished the information called for to the extent possible given the paucity of time on 29th December 2017. The income was assessed at Rs. 297,16,45,750/- after making various additions. 4. During the course of assessment proceedings Ld. A.O. observed that the assessee company had shown huge amounts as unsecured loan from various parties including Rs. 428,50,73,821/- from M/s. Advantage Overseas Pvt. Ltd (In short AOPL) in which its share holding was 85%. The A.O. issued show cause to the appellant. After considering reply, the A.O. concluded that as the assessee company was holding more than 10% of the voting power of AOPL Pvt. Ltd and AOPL has accumulated reserve and surplus, provisions of section 2(22)(e) of the Act are attracted. The A.O. referred to the replies of the assessee that the company did not have any income other than investment in fixed deposit and also that the company was a holding company which invested in its subsidiary and did not have any other income. The Ld. A.O. referred to the submission of the assessee that it had no business other than investment in fixed deposit and concluded that when it had no business then there w....
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....Aggrieved assessee preferred appeal before Ld. CIT(A) and failed to succeed on any of the grounds raised before him, as the observations of the Ld. A.O were duly confirmed by Ld. CIT(A) by further adding few judgments after explaining the ingredients of provisions of section 2(22)(e) of the Act. 7. Aggrieved assessee is in appeal before the Tribunal. During the course of hearing assessee made following submission with the request to admit additional evidence:- 1. The aforesaid Appeal filed by the Appellant! Applicant is fixed for hearing on 20.03.2018 before this Hon'ble Tribunal. 2. That the present Appeal has been filed against the order dated 07/12/2018 passed by CIT (A)-I where in Ld CIT (A) has dismissed the Appeal of the Appellant and sustained the addition made by the Ld. AO on account of deemed dividend under Section 2 (22) (e) of the Act. 3. That during the year under consideration, the Appellant Company has received funds from one of its subsidiary. company i.e. M/s Advantage overseas Private Limited (AOPL) in relation to an MOU entered between the appellant and its subsidiary. 4. The appellant had filed the MOU entered into with its subsidiary Advantage ove....
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.... F.No.DCIT(1)/BPL/ITAT/2019-20 Dated: 09.07.2019 To The Commissioner of Income Tax (DR), Income Tax Appellate Tribunal, CGO Building, 2nd floor, White Church Road, Indore 452001 Madam, Sub: Appellate proceedings in the case of Asian Business Connections Private Limited, Bhopal,ITA No.936/Ind/2018 for the A.Y. 2015-16 - reg.- Kind refer to the above subject and letter F.No.CIT(DR)/ITAT/ IND/ 2018-19/1149 dated 20.03.2019. In this regard, comments are desired in the case of Asian Business Connections Private Limited's application filed under Rule, 29 of Appellate Tribunal Rule, 1963. As additional evidence, the appellant has submitted return of income filed for AY 2018-19 along with audit report of the company and audit report of subsidiary M/s. Advantage Overseas Pvt. Ltd. The appellant has submitted that substantial amount received was invested in shares of a realty company which operated a mall and these shares were subsequently sold in AY 2018-19 ....
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....t and are meant to circumvent the provisions of section 2(22)(e) of the Act. Submitted for kind consideration. Yours faithfully, Sd/- (Rajat Singhai) Deputy Commissioner of Income Tax-1(1), Bhopal 9. From perusal of the above we find that the additional evidence mainly constitutes the Income Tax returns for Assessment Year 2018-19 along with the audit reports of the assessee as well as the subsidiary company i.e. M/s. AOPL, in support of the contention that the strategic investments made jointly during Assessment Year 2015- 16 finally gave profits and the same are equally shared by both the concerns and duly offered to tax. In our considered view since the additional evidence bear a direct nexus with the transaction carried out during the year under appeal, we are inclined to admit the additional evidence for adjudicating the issues raised in this appeal. 10. Ld. Counsel for the assessee submitted that the rational behind the investment is as under; Issue : Whether the amount received by the appellant from its subsidiary is in fact liable to be treated as a Deemed Dividend u/s 2(22)(e) of the Income-tax Ac,1961 or whether it is a purely commercial transaction which does n....
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.... the investment made. * The parties entered into an agreement dated 12Th October 2012 formalizing / recording their understanding. * On basis of the above agreement, AOPL advanced Rs. 428.00 crores to ABC (in AY 2015-16) in parts as and when called for by ABC. It is important to mention here that a) MOU was entered into on 11th Oct 2012 while the amount was received starting from 2/04/2014 i.e. as and when the investment was needed . b) Entire Amount of 423 crores was not given lump sum but was disbursed as an when investment was needed. c) The receipt of funds from subsidiary was immediately followed by investment i.e. no part was kept in the hands of appellant. d) The receipt of funds was entirely invested in strategic investment and nothing was utilized elsewhere. * As can be seen from above, the amount of Rs. 428 crores was made available to ABC for business venture and not as a loan simplicitor or loan / advance in lieu of dividend. In case of a loan or a deposit the entire amount is left to the disposal of the borrower however in the present case the inflow of funds was followed by immediate strategic investment as per the MOU dated 12th Oct, 2012. * It is sub....
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....r may not be interest bearing and may or may not carry an obligation of repayment. However, the word "advance" used in the section has to be associated with the word "loan". It is a well-established fact that associated words take their meaning from another word under the doctrine of noscuntur a sociis. 2. It is a well-established fact that every financial transaction cannot be a loan or advance. Commercial expediency, business necessity and emergency needs result in financial accommodation between sister concerns. These transfer of funds between sister concerns are in line with the object of achieving a common objective. On account of being in one group, there will be large number of debit and credit transactions between group companies. These accounts would be in the nature of current adjustment accommodation account wherein there is a movement of fund in both ways, on need basis. 3. Reliance may be placed on the ITAT judgement in the case of Ravindra Fotedar v. ACIT [2017] 85 taxmann.com 314 (Mum) and Saamag Developers (P.) Ltd v ACIT [2018] 90 taxmann.com 20 (Delhi - Trib.) wherein it was held that "Perusal of the relevant records reveals that they are in the form of curren....
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....s was also not established. 2. The relevant para is reproduced below for ready reference. "For the foregoing reasons, it could be said that payment by a company not being a company in which the public were substantially interested within the meaning of section 23A of 1922 Act, of any sum by way of advance or loan to a shareholder, not exceeding the accumulated profits possessed by the company was to be deemed as his dividend under section 2(6A)(e) read with section 12(1B) of the 1922 Act, even if that advance or loan was subsequently repaid in its entirety during the relevant previous year in which it was taken." 3. In the case of the appellant, the transaction does not fall within the ambit of first leg of the definition i.e. "any sum by way of advance or loan" since the payment made by AOPL to ABC was for a business venture and not a loan per se. Therefore, the question whether the repayment of loan or advance would alter the position does not arise. 4. In view of the above, this decision does not apply to the appellant's case. The AO has wrongly relied on the decision of Supreme Court in the case of P. Sarada vs CIT 1. The Hon'ble Supreme Court, in the said case, hel....
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....the director shareholder for the purpose of utilizing the same for the purpose of business. However, in the relevant year, the director had not utilized the funds for the purpose of business and further, no explanation was provided for the huge balance lying with the director and for not withdrawing such funds for the purpose of business. 2. The Income-tax Appellate tribunal, questioning the business expediency of the transaction held that "The argument of the assessee that since the entire amount was utilised in the subsequent year, the purpose of creating imprest account with the director/shareholder would not get frustrated merely because this amount was not utilised in the year under consideration, had no force. In the instant case, admittedly, the entire impugned amount created as a sham imprest account with the director/shareholder, was not utilised during the entire year and there was no explanation as to why the entire amount created was not utilised in the relevant year even though there were huge deposits in this account by the assessee. The amount given to the director/shareholder towards the imprest amount, in real sense was, in fact, not an amount given to the dire....
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....lant. In view of the above, the same cannot be treated as Investments in the books of accounts of the contributor. Further, in view of the fact that the contribution by AOPL was for the purposes of a joint business venture, it is possible to contend that the said transaction can be classified as a Trade Advance as Business includes an adventure in the nature of Trade. In view of the above, it is contended that the AO has not considered the submissions made by the appellant and the terms of the agreement entered into by the appellant and consequently, the observations/conclusions by the AO are baseless and fallacious. It is submitted that the AO has failed to appreciate that the said transaction has been accounted in the balance sheet and adequate disclosure is made in the notes to accounts as required under the provisions of Companies Act, 2013 and the applicable accounting standards. Further, it is submitted that the AO has himself accepted that he has jumped into the shoes of the appellant. In this respect, it is once again submitted that various courts have held that commercial decisions are to be taken by the assessee itself and the tax officer are not authorized to mak....
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.... is that if the contributor is benefitting from the contribution made, provisions of section 2(22)(e) of the Act does not apply. - Bagmane Constructions [2015] 57 taxmann.com 120 (Karnataka) - Sarat Chand Bhavaraju [2017] 81 taxmann.com 323 (Vishakapatnam ITAT) In the instant case, the contributor, AOPL is benefitting from the investment made. Given this, it is contended that the provisions of Section 2(22)(e) of the Act will not be applicable to the appellant. 2.The AO, based on conjectures, guess work and personal opinion, has concluded that transaction between AOPL and ABC is not a business transaction without considering the submissions of the appellant and facts of the case On page no 6 of the Remand Report, while providing his comments on CIT vs Madurai Chettiar Karthikeyan (2014) (45 taxmann.com 274), the AO has summarily concluded that the transaction between ABC and AOPL is not a normal business transaction without assigning any cogent and sound reasons or substantiating his conclusion. In this regard, it may be noted that the AO has not challenged the facts as mentioned by the appellant. As discussed above, he has not examined in detail all the submissions ava....
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....r not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd., the Income-tax Law does not march step by step in the footprints of the accountancy profession." [Emphasis added] The Hon'ble Supreme Court in the case of Taparia Tools Ltd. v. Joint Commissioner of Income-tax [2015] 55 taxmann.com 361 (SC) reiterate that "..because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act" [Emphasis added]. In view of the above, it is submitted that the conclusion made by the AO basis the treatment in the books of accounts / financial statements is based on conjectures and guess work and is aga....
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.... arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or (ii) a reliable estimate of the amount of the obligation cannot be made. It is submitted that the balance contribution to be made under the agreement do not fall under either of the two scenarios. The balance payments to be made by AOPL to ABC is certain and not subject to occurrence or non-occurrence of future uncertain events. Also, the contributions are not a present obligation which are not recognized as it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or a reliable estimate of the amount of the obligation cannot be made. It is a case where contributions are to be made by AOPL as and when called for by ABC. Further, the contingent liability if and when arises gives rise to a permanent outflow of funds which are generally irrecoverable. In the instant case, the contribution made by AOPL to ABC is a business contribution which is to be received back by AOPL. Given the above, it is submitted that the amount of contribution payabl....
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....o be submitted to any statutory authorities. Once again, it is the personal opinion and view of the AO that it has not been clarified that the minutes of the meeting were submitted to MCA. In view of the above, it is submitted that the AO's observation needs to be ignored. The AO has based on conjectures, guess work and personal opinion, wrongly concluded that there exists a repayment obligation of ABC to AOPL and hence the business contribution is loan. The AO has referred to the Hon'ble Delhi High Court in ITA No. 589 of 2011, wherein it was held that the word 'advance' has to be read in conjunction with the word 'loan'. The word 'loan' generally carries an obligation of re-payment. On the other hand, the word 'advance' may or may not include the obligation of re-payment. If it does, it would be considered as 'loan'. Basis the above, the AO has concluded that in the instant case, since there is an element of minimum assured return, it is assumed that the advance is the one which carries with it an obligation of repayment and therefore, it is squarely covered under the definition of term 'loan'. It may be noted here that although the proposal from ABC to AOPL assured min....
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....eceiving advance was purely for business purpose, if in case the issue is decided against it then the addition for the accumulated profits may be made only to the extent of to the opening balance of the accumulated profits. It was further submitted that without prejudice to the above ground, the AO has erred in considering the accumulated profits as on the last day of the assessment year i.e. 31 March 2015 for the purpose of calculating deemed dividend. In this regard, the extract of provisions of section 2(22)(e ) of the Act are reproduced below: 12. In support of its contention Ld. Counsel for the assessee relied on following judgments; 1. CIT v Creative Dyeing & Printing (P.) Ltd. [2009] 184 Taxmann 483 (Delhi) (HC) : 2. Intention of section 2(22)(e) as explained in CIT v. Mukundray Shah[2007] 160 Taxmann 276 (SC) : 3. CIT v Gayatri Chakraborty [2018] 94 taxmann.com 244 (Calcutta) (HC) 4. Chadrasekhar Maruti v ACIT [2016] 71 taxmann.com 239 (Mumbai ITAT) 5. M. Amareswara Rao v DCIT [2016] 67 taxmann.com 15 (Vishakhapatnam ITAT) 6. Commissioner of Income Tax v. Farida Holding (P) Ltdn(2016) (76 Taxmann.com 10) 7. Commissioner of Income Tax, Chennai V Madurai Chetti....
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....oard Resolution for the board meeting held on 11th October 2012. xiii. AOPL's Board Minutes for the board meeting held on 11th October 2012. xiv. Agreement dated 12th October 2012 between ABC and AOPL. xv. Details of date wise receipt of funds by ABC from AOPL and utilization of these funds for business venture by ABC in financial year ('FY') 2014-15. xvi. Summary of funds received from AOPL and deployed for business venture during FY 2014-15. xvii. Calculation of profit on sale of shares of one of the company in which investment was made under the business venture by ABC and share of profit of AOPL thereon. xviii. Computation of advance tax of ABC of FY 2017-18 reflecting its share of profits as income. xix. 26AS of ABC reflecting the advance tax paid and taxes deducted at source by their payers. xx. Income-tax returns and audited final accounts for AY 2018-19 showing the factum of sharing of profits and payment of tax thereon. Following additional details / documents were provided to the Ld. CIT(A): 1. Fund flow from subsidiary and onward investment in target companies as per the business venture. 2. Subsequent gains on sale of investments and distribution o....
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....supported the following findings of Ld. CIUT(A) and judgments referred therein; Issue related to addition u/s 2(22)(e) for deemed dividend: 19.Section 2(22)(e ) which is pari materia with clause (e) of section 2(6A) of the Indian Income-tax Act, 1922, was brought in the statute book to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans/ advances. This clause seeks to suppress this mischief by creating a legal fiction whereby all such loans/advances are deemed to be dividend. It is a wellsettled legal principle as decided by Hon'ble Bombay High Court in CIT vs P.K. Badiani, 76 ITR 369 that a legal fiction has to be carried to its logical conclusion within the framework of the purpose for which it is created. Further, since this clause creates an artificial liability, as held by Hon'ble Apex Court in Tarulata vs CIT (1977) 108 ITR 345 (SC) it must be given a strict interpretation. 20. The relevant extract of the provision is reproduced below: "(22) 'dividend 'includes- ** **** (e )any payment by a company, not being a company in which the public are substantially interested, of ....
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.... and delivery. Payment, however, implies something that is given and it need not have been first apportioned and then disbursed. 24. The five instances of dividend enumerated by this section in clauses (a) to (e ) are cases of distribution or payment out of, or to the extent of accumulated profits of the company (Explanation 2). The 'deemed' dividend under this sub-clause is not restricted to profits proportionate to the shareholding of the assessee in the capital but it extends to the entire accumulated profits. 'Accumulated profits' means profits in a commercial sense. The expression includes tax-free profits like agricultural Income, general reserve, development rebate reserve, credit balance and initial depreciation but not normal depreciation nor provision for taxation and dividends. 25. On a bare perusal of section 2(22)(e), it becomes clear that it brings to tax three types of payments. Firstly, any loans/ advances to shareholders. Secondly, it includes any payment on behalf of a shareholder. Thirdly, it includes any payment for the individual benefit of a shareholder. 26. As held by the Hon'ble Gujarat High Court in Ravindra D. Amin vs CIT 208 ITR ....
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....(iii) The payment was made by way of advance or loan as per the balance sheet of the shareholder ABC (assessee) it is shown as Long term borrowings and in the balance sheet of the company AOPL, it is shown as Short Term Loans and Advances; (iv) The shareholder is beneficial owner of shares holding not less than 10 percent. In fact, ABC holds 85 shares of AOPL. (v) The AOPL possesses accumulated profits to the tune of Rs. 3875,95,992/- on 31.03.2014 and Rs. 29974,68,364 on 31.03.2015. 31. Therefore, from the plain perusal of facts read in the light of the section 2(22)(e), it is clear that all the conditions of deemed dividend as envisaged are satisfied. The payments have been made to beneficial shareholder, which are in the nature of loan as classified in the balance sheet by assessee himself. The company ABCL is not in the business of lending of money. 32. The appellant has relied upon mainly on judgment of CIT vs. Farida Holdings (P) Ltd. [2016] (76 tamann.com 10). It is observed that in that case the main point considered was that the holding company was only an intermediary and no beneficial interest accrued to the assessee company by the advances between the subsidiary....
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....cy, the advance was not covered by section 2(22)(e) of the Act. (CIT vs Amrik Singh, P&H High Court). . iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilised gas available to it from GAlL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22) (e) of the Act. CIT Agra vs Atul Engineering Udyog, Allahabad High Court. 3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in section 2(22)( e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon. 34. It is observed that circular covers only 'trade advances' in the nature of commercial transactions. The ....
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....g accounts and contained both types of entries i.e. giving and taking the amount and the account appeared to be a current account which is not the case here. Therefore, the decisions are not applicable. 37. It is observed that the other case laws relied upon by the appellant are distinguishable on facts and not applicable in the present case. 38. It is observed that the transaction is covered as deemed dividend u/s 2(22){e) of the Income Tax Act, 1961 in view of the judgment of Hon'ble Delhi High Court in CIT vs Arvind Kumar Jain, ITA No. 589 of2011. The facts of the case are as follows: * There was a business transaction between assessee and A&A periodicals and the amount reflected running business relationship and there was a running account maintained by the assessee showing those transactions. * In the books of accounts, the amount was shown as unsecured loan. In the judgment it was held that: «It is clear that Sub-clause (e) of Section 2(22) of the Act, which is parimateria with Clause (e) of Section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in t....
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....i) the term "advance' has undoubtedly more than one meaning depending on the context in which it is used; (ii) both the terms, that is, advance or loan are related to the "accumulated profits' of the company; (iii) and last but not the least the purpose behind insertion of the term advance was to bring within the tax net payments made in guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders; Keeping the aforesaid rule in mind we are of the opinion that the word "advance' which appears in the company of the word "loan' could only mean such advance 'which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not, in our view, fall within the ambit of the provisions of Section 2(22)(e) of the Act. This interpretation would allow the rule of purposive construction with noscitur a sociis, as was done by the Supreme Court in the case of LIC of India v. Retd. LIC Officers Assn. [2008J 3 SCC 321. " 39. The aforesaid judgment clearly establishes the usage of word advance or loan in the c....
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....on board resolutions and MoU between AOPL and ABC by showing filing with any independent third party. 42. The appellant could not rebut the argument of A.O. that the investments that have been made by holding company ABC utilizing funds from AOPL could have been well made by the subsidiary company AOPL itself and that assessee is now trying to rationalize that an investment agreement was undertaken for the said transaction. The persons deciding the strategic investments are also holding the reins of AOPL and could have chosen to invest directly through AOPL. If AOPL was genuinely interested in making some investment it could have easily made direct investment and could have retained the entire profit on the investment. The argument that the assessee company was having expertise in making strategic investments is to no avail as in a normal transaction, the AOPL could have easily obtained professional services of ABC, being both holding and subsidiary company, and if required, for some payment. In this case, it was purely a transaction of giving loan/ advance to ABC which is clearly hit vi] s 2(22)(e) of the Act. 43. The appellant has relied upon the MoU between ABC and AOPL, how....
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.... 6 challenges the finding of Ld. CIT(A) confirming the addition of Rs. 2,97,74,68,364/- made by the Ld. A.O u/s 2(22)(e) of the Act as alleged deemed dividend. Ground No.7 is an alternate ground raised by the assessee without prejudice to Ground No. 1 to 6 and without admitting to have received any dividend has challenged the amount of accumulated profit considered by the Ld. A.O contending that the accumulated profit should have been taken as on the date of receiving the amount from subsidiary company. In Ground No.8 assessee has challenged the finding of Ld. CIT(A) sustaining the addition of disallowance of registry fees of Rs. 85.55 lakhs incurred for increase in share capital. 17. We will first take up Ground No. 1 to 6 challenging the addition made u/s 2(22)(e) of the Act for alleged deemed dividend of Rs. 2,97,74,68,364/-. We observe that the assessee is having substantial interest by way of 85% share holding in AOPL which was further increased to 99.9% during the year under appeal. AOPL is having huge turnover and is a profit making company. In pursuance of the Memorandum of Understanding entered into between the assessee and AOPL for making strategic investment and sharing....
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....and by no canon can be treated as deemed dividend. 20. Before adverting to the detailed adjudication we will first go through section 2(22) of the Act which is reproduced as under; Section 2(22) in The Income- Tax Act, 1995 (22) " dividend" includes- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution to its shareholders by a company of debentures, debenture- stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits w....
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....lude all profits of the company up to the date of distribution or payment referred to in those sub- clauses, and in subclause (c) shall include all profits of the company up to the. date of liquidation, 4 but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. Explanation 3.- For the purposes of this clause,- (a) " concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;] 21. The above provisions deals with dividend and includes various types of payments in cash or otherwise to the share holders of the company. In the instant appeal revenue authorities have invoked provisions of Se....
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....exception list, as the advance/loan given by AOPL to its shareholder i.e. ABCPL is in the ordinary course of business. 23. Now our adjudication will be centered on the point that "whether the amount given by AOPL to ABCPL is an advance or loan given in the ordinary course of business". 24. As far as the contention of Ld. Departmental Representative the alleged amount has been shown as unsecured loan by the assessee company, we observe that the Hon'ble Apex court in the case of Tapadia Tools Ltd V/s JCIT (2015) 55 taxmann.com 361 (SC) held that "because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by the courts that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touch stone of the provisions contained in the Act [emphasis added].Therefore mere depicting the amount received under a particular head will not be conclusive to hold that the amount is an unsecured loan only. It has to be examined in the light of the facts of a particular case. In the financial statements the alleged ....
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.... risen to 297.75 crores (approximate). So AOPL has accumulated reserve and surplus which is the profit after tax available with the company which can distributed as dividend to the shareholders or can be reinvested for the business purpose to earn more profits. * As per the Memorandum of Association placed at page 191 to page 206 of the paper book, AOPL is authorised to carry out the business to achieve its main objects and the objects incidental or ancillary to the attainment of main object of the company. As per the other objects No.2, AOPL is authorised to invest money of the company not immediately required in such manner as may from time to time determined by the company in assets, properties, shares, bullion and sell or vary such investments and to execute all transfers, agreements, receipts that may be necessary in that behalf. * On 25.5.2012 in the meeting of Board of Directors of AOPL placed at page 208 of the paper book, it was resolved that company can find investment opportunities for investing its idle fund and utilise it in accordance with the provisions of companies Act 1956 and other rules made therein to maximise returns for the shareholders. It also resolved....
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....the Memorandum of Understanding dated 2.10.2012. * Against the agreed amount of investment of Rs. 850 crores, only amount of Rs. 428 crores was advanced and that too not in lumpsum rather as and when investment was needed. In the ledger account of AOPL in the books of ABCPL, amount was received from AOPL on around 51 occasions during the year. The receipt of funds from subsidiary was immediately followed by investments so that no fund is kept idle in the hands of ABCPL. The amount received by ABCPL was not at its disposal but it was applied for the agreed strategic investment as per the memorandum of understanding dated 12.10.2012. * As regards the application of fund received for strategic investment is concerned in the audited financial statement of ABCPL for financial year 2014-15 in Schedule-VIII under the head investment placed at page 139, following major new investments were made; (a) Equity share in AOPL Rs. 0.50 crores (b) Equity share in AUSIN Software Pvt. Ltd Rs. 5.00 crores (c) Equity share in Carnival Finance Pvt. Ltd Rs. 31.00 Crores (d) Equity share in Leela Software Pvt. Ltd Rs. 206.70 crores. (e) Equity share in L&T Realty Ltd Rs. 180.36 crores. In....
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....r it can distribute the profit as dividend to the shareholders. The dividend is allocated as a focused amount per share. Shareholders receives the dividend in proportion to the shareholdings. In some cases where there are large number of shareholders and the company is not interested to distribute the dividend to all the shareholders but want to part away with the retained earnings by way of giving loan or advances to the shareholders having substantial interest in the company who are normally at the helm of affairs of the company. Such diversion of the accumulated reserves/ earnings to few of the substantial interested shareholders which are actually in the nature of dividend but this action restricts the other shareholders from getting their share of dividend. In our understanding of law in such type of situation when the retained earnings/accumulated surplus funds are diverted to the substantial interested shareholders as loans or advance and not as dividend at a fixed rate per equity share to avoid paying dividend distribution tax, then the provision of Section 2(22)(e) comes into play. 30. But in case where the amount is advanced to the substantial interested shareholder as a....
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....rners of law with an object of maximising the returns. Memorandum of Association and Articles of Association of the company registered with Registrar of Companies authorises the Directors to run the business. It is not the case before us that AOPL has given interest free loan to ABCPL with no condition or the time limit of receiving back the amount from ABCPL. It is also not the case before us that there are various shareholders of AOPL which were deprived of the dividend from the accumulated reserve and surplus. The case before us is that the amount was advanced to AOPL under a documented business plan with Memorandum of Understanding. Amount has actually used for the purpose of investing in real estate companies as appearing in the audited financial statements. ABCPL is not a new entrant to business world. It is a well established company having so many business running under its subsidiaries. The result came up in financial year 2017-18 which may have been profit or loss i.e. not the concern at this stage because the business may end up in loss also. However AOPL was able enough to get a minimum assured return of 12% along with the repayment of original amount advanced to ABCPL.....
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....ng provision of treating such Advance as deemed dividend". 37. Hon'ble Kolkata High Court in the case of CIT V/s Gayatri Chakraborty (2018) 94 Taxman.com 244, Kolkata (SC) has held that "law on this point is clear in the event transaction between a shareholder and a company in which the public were not substantially interested and the former had substantial stake, create mutual benefits and obligations, then the provision of treating any sum received by the shareholder out of accumulated profits as deemed dividend would not apply". 38. Co-ordinate Bench, Vishakapatnam in the case of M.A. Rao V/s DCIT (2016) 67 taxman 15 also observed that provisions of section 2(22)(e) make it clear that the registry wanted to bring to tax the amount paid by the closely held companies to their principle shareholders to avoid dividend distribution tax and that the provisions of section 2(22)(e) must be made applicable, wherein the dividend is paid in the guise of loan/advance to avoid tax. But to apply the provisions of section 2(22)(e) of the Act, an honest attempt is to be made to understand, whether the impugned amount is a loan or advance within the meaning of sub section. 39. In the light of....
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.... Act for deemed dividend is uncalled for since the transaction falls in the list of payments which are not considered as dividend as provided under Sub Clause (ii) to section 2(22)(e) of the Act. We therefore set aside the findings of Ld. CIT(A) and allow Ground No. 1 to 6 of the assessee's appeal and delete the addition for deemed dividend at Rs. 297.75 crores (approx.) made by the Ld. A.O u/s 2(22)(e) of the Act. 41. Apropos to Ground No.7 which is an alternate ground raised without prejudice to Ground No. 1 to 6, assessee has challenged the finding of Ld. CIT(A) holding the view of Ld. A.O in considering the accumulated profits as on the last date of the assessment year i.e. 31st March for the purpose of calculating deemed dividend instead of considering the accumulated profits as on the date the amount was paid by AOPL to ABCPL. 42. Although we have already allowed assessee's Ground No. 1 to 6 holding that the alleged transaction of giving advance by AOPL to ABCPL was for commercial purpose and in the ordinary course of business which do not fall within the category of deemed dividend as provided u/s 2(22)(e) of the Act and no addition of deemed dividend of Rs. 297.75 crores ....
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....its on the date of loan. In other words the repayment of loan during the year of advancement of loan is not to be deducted from the accumulated profits. The Supreme Court in the case of CIT v. Asokbhai Chimanbhai [1965] 56 ITR 42 held that the profits do not accrue from day to day or even from month to month and have to be ascertained by comparison of assets of two stated points. Unless the right to profits comes into existence, there is no accrual of profits and the destination of profits must be determined by the title thereto on the day on which they arise. It further held that the profits do not arise until the contingency, which by operation of law or under a covenant of the partnership deed, gives rise to right. It cannot be said that the Explanation 2 to section 2(22)(e ) is redundant. It is bound to be for a specific purpose. The Legislature has taken into account the fact that whereas the profits from business for the current year may not be determinable in the middle of the year, there are certain sources of income, the income from which is capable of determination which, according to the legislative intent, should also be taken into account while determining the accu....
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.... to the date of each payment/advancement of the loan. (ii )That there is a distinction between the 'accumulated profits' of business and the current year's profits of business. (iii )That the profits of business accrue at the end of the previous year. (iv )That loan or advance treated as deemed income up to the date of fresh loan is to be reduced from accumulated profits. (v )That the repayment of loan during the same year is not to be deducted from the accumulated profits. Thus, the Explanation 2 to section 2(22)(e ) does not have the effect of inclusion of current year's business profits. These are certain examples to show that Explanation 2 to section 2(22)(e) does not become redundant in the light of the decision of the Supreme Court in the case of V. Damodaran (supra). Therefore, whereas the aforementioned adjustments and other adjustments as may be permissible in law are to be made, accordingly, accumulated profits worked out on each day of loan or advance is made to the shareholder. All the profits that have not accrued to the company advancing the loan up to each day of advance/loan have to be taken into account in working out the accumulated profits within the ....
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....a proportionate disallowance of 37% is called for since against the increase in authorised capital from Rs. 5 to 100 crores only fresh capital of Rs. 37 crores was issued during the year. In support of this contention reliance was placed on the decision of Coordinate Bench, Delhi in the case of DCIT V/s Hero Motors Ltd ITA Nos 2919 & 2920/Del/2012 order dated 17/05/2013. 47. Per contra Departmental Representative vehemently argued supporting the orders of both the lower authorities. 48. We have heard rival contentions and perused the records placed before us. Through Ground No.8 assessee has challenged the disallowance of ROC fees and stamp duty charges totalling to Rs. 85,53,900/-. We find that the assessee has increased his share capital from Rs. 5 crores to Rs. 100 crores for which ROC expenses of Rs. 85,53,900/- was incurred. However only share capital of Rs. 37 crores only was issued during the year which means that against total expenses of Rs. 85,53,900/- for increase in share capital from Rs. 5 crores to Rs. 100 crores, the actual share capital issued was of Rs. 37 crores only. 49. In these circumstances the total amount of ROC fees needs to be disallowed also needs to b....
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....the impugned amount was incurred as ROe expenses for enhancement of authorized share capital of the assessee company. 51. In Brooke Bond India Ltd. vs CIT, [1997] 91 Taxman 26 (sq, the Hon'ble Supreme Court has held that expenditure incurred on issuing share to increase its share capital by a company would not be allowable as revenue expenditure. The head note is reproduced below:- Facts During the assessment year 1969-70, the assessee-company issued share to increase its share capital and claimed deduction of expenditure incurred in connection therewith as revenue expenditure but the same was disallowed as capital expenditure by all the lower authorities. On appeal to Supreme Court: Held Though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retains the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Hence, expenditure incurred by the assessee was capital expenditure. 52.In Punjab State Industrial D....