Case Law Details
Brief of the case
The assesse was managing director of Sahara India Savings and Investment Corporation Ltd. (hereafter “SISICOL”) during assessment year (AY) 1992-93; he was also a partner of M/s. Sahara India (hereafter referred to as “the firm”). In terms of an agreement, the firm was to act as an agent to promote, conduct, introduce and secure business under SISICOL’s schemes. The firm -in tune with its contractual obligations, had to remit Rs. 26,24,12,222/- on 31-03-1992, which it had collected and was payable to SISICOL. Between 01-04-1991, and 31-03-1992, the firm advanced Rs. 1,88,96,202/- to the assessee.
The Assessing Officer (AO) held that the amount was a loan from SISICOL to the assessee through the use of the company’s agent, the firm, which was a “conduit” and a device adopted to bypass application of Section 2(22)(e) of the Income-tax Act, 1961. The amount of Rs. 1,88,96,202/- being a loan out of SISICOL’s accumulated profits to the assessee-shareholder was treated as “deemed dividend” under section 2(22)(e) of the Income-tax Act (“the Act”) and added to the assessee’s income.
Question of Law
If the firm had outstanding balances payable to the companyand the firm advanced loan to its partner who is also the MD of the company then whether such loan can be treated as deemed dividend under setion 2(22)(e)?
Contention of the Assessee
The assessee submitted that he was managing director of SISICOL, which had many deposit schemes and 290 units or branches to aid its operations. He was also a partner of the firm, which entered into an understanding with SISICOL, to conduct, promote, introduce and secure business through various schemes for the company. The firm also collected amounts through several schemes of SISICOL. Referring to the schemes, and the terms of the 1987 agreement, it was noted that there was no time limit stipulated for remittance of amounts collected by the firm on behalf of SISICOL to it. The amounts were to be collected in the ordinary course of business. He also submitted that such sums collected and retained before remission by firm to the company, SISICOL, constitute neither “loan” nor “advance”.
He further submitted that in facts and circumstances of the case, the amount required to be remitted by the firm could be branded as a trade debt and not as loan or advance.
In the facts and circumstances of the case, the Rs. 1.88 crores loan to the assessee by the firm was not an advance out of the amounts payable by the firm to SISICOL. The firm had sufficient funds from other sources. The total funds available with the firm at the relevant time was Rs. 60,61,54,638/-, including Rs. 26.24 crores payable to SISICOL. Therefore, on facts, it could not be said that Rs. 1.88 crores loan given by the firm to the assessee was part of credit balances of the SISICOL with the firm.
Contention of the Revenue
The Revenue, noticed that as managing director of SISICOL, the assessee controlled the activities of all companies and firms of the Sahara group and was also the main person behind the activities of all concerns. He held that a “payment” is not the same thing as payment in fact and relied on G. R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13 (Mad). He also observed that the transaction in question could not be treated as being carried out at arm’s length. He observed that there was no dispute that the firm had advanced amounts to the assessee. The Revenue held that two transactions, one from company, SISICOL, to the firm, and from the firm to the assessee should be treated as a combined one, amounting to payment of loan from SISICOL, to the assessee. He held that the firm was only a conduit for the loan and that the firm’s loan to the assessee had its roots in the credit balance of SISICOL.
The Revenue argued that the assessee, as managing director (of SISICOL) was controlling it and the firm as well and, as a result, could use the firms as a conduit or a device to funnel and utilize the said company’s funds for his personal benefit. It was loan or advance by SISICOL to its shareholder, i.e., the assessee, who de facto was Sahara. It was argued that the assessee was also a shareholder of SISICOL; the firm became a convenient device to funnel SISICOL’s amounts, advanced to it. The Revenue said that once it was proved that a substantial amount i.e., Rs. 26,24,12,223/- stood to the credit of SISICOL, that some amounts were paid by the firm to the assessee reinforced the inference that they were out of that company’s funds. Counsel submitted that Section 2 (22) (e) enacts a deeming fiction and that in such cases, it is open to the revenue to follow that fiction and not allow the mind to boggle at some intervening facts. Consequently, in reality, the firm being a device or mechanism to avoid the provision, should be ignored and the fact that the amounts were flowing from SISICOL to the assessee, should be given due weight.
Held by the High Court
So far as the contention that the two transactions -one from SISICOL to the firm and the second from the firm to the assessee should be treated as one, is not based on any valid justification. The firm has a legal existence separate and independent of SISICOL. It carried on significant commercial activity and collected substantial amounts (crores of rupees). Therefore, the finding that the two transactions, i.e., one of advancing loan (by the firm to the assessee) and the other of the use of funds of SISICOL by the firm being in reality one transaction is without basis. The presumption was drawn without any material to support the case of the Revenue that funds of the company were utilized to advance the loan.
Granted, the assessee is a shareholder of SISICOL; he is also a partner of the firm. However, neither did SISICOL give him the money nor did it advance the amount to the firm. The firm has an independent existence and it had over Rs. 60 crores in its account. That a significant part of it, i.e., 44% or over Rs. 26 crores was payable to SISICOL could not have blinded the revenue to the fact that the other amount was available and given as a loan to the assessee. In these circumstances at least, it could not have been said that the loan to the assessee and the loan (in the form of credits in favour of SISICOL) were really one transaction. It is also a matter of record that the firm had over 290 branches or units and collection by it exceeded- on an average Rs. 10 crores per month. Therefore, it could not be legitimately held that amount retained by the firm was for the assessee’s benefit.
For the foregoing reasons, it is held that the question of law framed has to be answered and is so answered in favour of the assessee and against the revenue.
The appeal is consequently dismissed.
