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Provision of Section 2(22)(e) cannot be attracted to current account transactions

M/s Mirik Commercial Pvt. Ltd. Vs Pr. CIT (ITAT Kolkata)

The purpose of Section 2(22)(e) of the Act is to tax the benefit extended by private limited company to its shareholders holding shares not less than 10% as beneficial owner of shares (not being shares entitled to a fixed rate of dividend income). There is no dispute with regard to shareholding of the assessee. Now coming to the amount of advance taken by assessee, we note that assessee has not only taken loan / advance from DVPL, but also it has sometime given advance to DVPL. Thus, there was change in the balance shown by assessee. Thus, it cannot be termed as advance taken by assessee as it was fluctuating during the year.

Section 2(22)(e) enacts a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the section. Such a deeming fiction would not be given a wider meaning than hat it purports to do. The provisions would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking Section 2(22)(e) of the Act is that payment must be by way of loan or advances. Since there is a clear distinction between the inter-corporate deposits viz-a-vz loans/advances, according to us the authorities below were not right in treating the same as deemed dividend u/. 2(22)(e) of the Act.

The phrase “by way of advance or loan” appearing in sub-clause (e) of section 2(22) of the Income-tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of share (not being share 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; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a share-holder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act. thus, gratuitous loan or advance given by a company to those clauses of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

From the foregoing discussion, there remains no doubt that the transactions between assessee and DVPL is representing current account transactions. Therefore, the provision of Section 2(22)(e) of the Act cannot be attracted to such transactions.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The assessee has filed this appeal disputing the order of Pr. Commissioner of Income Tax-2, Kolkata passed u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 27.03.2014 who set aside the assessment order date 04.03.2014 for assessment year 2011-12 with a direction to re-do the assessment in respect of issue therein.

Shri Ravi Tulsiyan, Ld. Authorized Representative appeared on behalf of assessee and Shri G. Hanghing, Ld. Departmental Representative appeared on behalf of Revenue.

The assessee has raised the following grounds:-

“1. That the Ld. Principal CIT, Kolkata-2 on the facts and in the circumstances of the case. erred in assuming jurisdiction u/s. 263 of the Act in order to impose his own views on the Ld. AO. by holding that the order passed by the Ld. AO. u/s. 153A1143(3) of the l.T. Act. 1961 on 27.03.2014 was erroneous inasmuch as it was prejudicial to the interest of revenue.

2. That the Ld. AO. after verifying the audited account including Balance Sheet of the assessee and Ledger of M/s. Design Vinimoy P. Ltd. in the assessee’s book took a judicious view not to invoke provision of sec.2(22)( e) of the Act and hence the assessment order passed by him not found to be incorrect was neither erroneous nor prejudicial to the interest of revenue and the impugned proceeding u/s. 263 on the same set of facts and evidence on record was thus bad in law.

3. That the Ld. Principal C.l.T. erred in invoking provisions of sec. 263 of the Act on the sole ground that the A.O. has not looked into/verified the issue of deemed dividend in respect of Mzs.Design Vinimoy P. Ltd. in spite of the fact that the assessee never owed any sum from the said company warranting application of provisions of sec. 2(22)(e) of the Act and the debit balance of Rs.2.20 crores was in reality advance to the said company.

4. That the Ld. Principle CIT erred in not properly appreciating that ledger of M/s. Design Vinimoy P. Ltd. in the assessee’s books having shifting balance was a mutual account between the parties and it constituted a current account and not a loan account, which is outside the purview of s.2(22)( e) of the Act and that being so, his order u/s. 263 of the Act was erroneous, uncalled for and bad in law.

5. That the Ld. Principle C.I.T. erred in not at all appreciating several case laws in support of the case and simply on presumption that the A.O. might not have looked into the matter in light of provisions of s.2(22)(e) of the Act set aside the assessment with a direction to pass a fresh assessment order and the said action was devoid of any merit, arbitrary and not sustainable in law.

6. That as the order of the Ld. Principal C.l.T. directing de novo assessment was against the express provisions of sec.2(22)(e) of the Act, his action in treating the order passed by the Ld. AO. erroneous and prejudicial to the interest of revenue was wholly arbitrary, erroneous, unlawful and perverse.

7. That as the order of Ld. Principal C.l.T. on the above issues suffers from illegality and is devoid of any merit, the same should be quashed and your appellant be given such relief(s) as prayed for.

8. That the appellant craves leave to amend, alter, modify, substitute, add to, abridge and! or rescind any or all of the above grounds.”

3. Though assessee has raised as many as eight grounds of appeal, however as per our considered view the sole and substantial ground of appeal is that Ld. Pr. CIT erred in holding the order of Assessing Officer as erroneous in so far as prejudicial to the interest of Revenue.

4. Briefly stated facts are that assessee is a private limited company and declared its income under the head business and profession for ₹18,914/-only. Thereafter scrutiny assessment was made u/s 153C/143(3) of the Act at the income declared in the return. Subsequently, the Ld. Pr. CIT observed that assessee availed a loan of ₹2,93,29,950/- from M/s Design Vinimoy Pvt. Ltd., (DVPL for short) in which assessee is holding shares to the tune of 27.1%. Thus, Ld. PR. CIT found that assessee was holding substantial interest in DVPL and accordingly the provisions of deemed dividend are attracted u/s 2(22)(e) of the Act to the amount of loan received by assessee to the extent the amount of accumulated profit shown by DVPL. However the Pr. CIT observed that Assessing Officer has not looked into the matter of deemed dividend as specified u/s 2(22)(e) of the Act during the course of assessment proceedings. Accordingly, Ld. Pr. CIT issued notice u/s 263 of the Act for seeking clarification from the assessee in connection with the application of provision of deemed dividend to the amount of loan received by it during the year. In compliance thereto, assessee submitted that no loan / advance was received from DVPL during the financial year 2010-11. The assessee further submitted that if at all the loan has been shown by the assessee then it represents the loan taken in the earlier years. Therefore, there is no question of applying the provision of Sec. 2(22)(e) of the Act to the amount of loan for ₹2,93,29,950/- only. However, Ld. Pr. CIT disregarded the contention of assessee and held that the order passed by AO is erroneous in so far as prejudicial to the interest of revenue by observing as under:-

“… …. I have considered the matter. On perusal of the assessment records, it is seen that the AO has not looked into the issue of demand dividend and has not made any verification in this regard. This has rendered the assessment erroneous and prejudicial to revenue. I therefore, set aside the assessment and direct the AO to pass the assessment a fresh after carrying out necessary enquiry and verification bout the deemed dividend issue.”

Being aggrieved by this order of Ld. Pr. CIT assessee has come up in appeal before us.

5. Ld. AR before us filed paper book which is comprising of pages 1 to 67 and submitted that assessee was maintaining the current account with DVPL. Therefore the provision of Section 2(22)(e) of the Act are not applicable to the impugned loan received by assessee. Ld. AR in support of assessee’s claim filed the ledger copy of DVPL maintained in its books of account which is reproduced as under:-

4. AR for the assessee before us further that initially there was opening carried forward debit balance of Rs.2,20,00,000/- in the name of the DVPL. Thereafter another payment was made for Rs. 2,50,000.00 to DVPL on 25-6-2010. Subsequently the payment was made by DVPL to the assessee for Rs. 5,13,29,950.00 only leaving the credit balance in the books of assessee for Rs. 2,90,79,950.00 only as on 27.1.2011 which was repaid on 4.3.2011. At the end of the year, the account of the assessee with DVPL was closed. Thus the above amount was representing the current account and accordingly the same cannot be treated as dividend income under section 2(22)(e) of the Act.

On the other hand, Ld. DR vehemently relied on the order of Ld. Pr. CIT.

5. We have heard the rival contentions and perused the material available on record. In the instant case, Ld. Pr. CIT u/s 263 of the Act held that the order of AO is erroneous in so far as prejudicial to the interest of revenue on the ground that AO has not treated the amount of loan received by the assessee from DVPL as deemed dividend income in pursuance to Sec. 2(22)(e) of the Act.

As per the assessee, the loan taken by assessee is representing the current account transaction, therefore the provision of Section 2(22)(e) of the Act cannot be attracted to such loan. The copy of the ledger representing the transactions between assessee and the DVPL in the books of assessee has already been extracted in the preceding paragraph.

On perusal of the above ledger, it is revealed that there are several transactions between assessee and DVPL. Initially the assessee has given loan to DVPL and similarly on later occasions, assessee has taken loan / advance from DVPL.

The purpose of Section 2(22)(e) of the Act is to tax the benefit extended by private limited company to its shareholders holding shares not less than 10% as beneficial owner of shares (not being shares entitled to a fixed rate of dividend income). There is no dispute with regard to shareholding of the assessee. Now coming to the amount of advance taken by assessee, we note that assessee has not only taken loan / advance from DVPL, but also it has sometime given advance to DVPL. Thus, there was change in the balance shown by assessee. Thus, it cannot be termed as advance taken by assessee as it was fluctuating during the year. In holding so, we find support and guidance from the order of co-ordinate Bench of this Tribunal in the case of Bombay Oil Industries Ltd. vs. DCIT reported in [2009] 28 SOT 383 (Bom), wherein it was held as under:-

From the above it is clear there is distinction between deposits viz-a-vis loans/advances. Section 2(22)(e) enacts a deeming fiction whereby the scope and ambit of the word dividend has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the section. Such a deeming fiction would not be given a wider meaning than hat it purports to do. The provisions would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. The requisite condition for invoking Section 2(22)(e) of the Act is that payment must be by way of loan or advances. Since there is a clear distinction between the inter-corporate deposits viz-a-vz loans/advances, according to us the authorities below were not right in treating the same as deemed dividend u/. 2(22)(e) of the Act” [emphasis supplied]

Similarly, we also support and guidance from the judgment of Hon’ble jurisdictional High Court in the case of Pradip Kumar Malhotra v. CIT 338 ITR 538 (Cal) wherein the Hon’ble High Court held as under:-

“The phrase “by way of advance or loan” appearing in sub-clause (e) of section 2(22) of the Income-tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of share (not being share 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; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a share-holder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act. thus, gratuitous loan or advance given by a company to those clauses of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.” [emphasis supplied]

From the foregoing discussion, there remains no doubt that the transactions between assessee and DVPL is representing current account transactions. Therefore, the provision of Section 2(22)(e) of the Act cannot be attracted to such transactions. Keeping in view the above discussions, and also bearing in mind the entire facts of the case, we deem it fit and proper to uphold the grievance of the assessee and quash the impugned revision order as devoid of jurisdiction. The assessee gets the relief, accordingly.

6. In the result, assessee’s appeal stands allowed.

Order pronounced in the open court 04/03/2018

Categories: Income Tax
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