Deputy Commissioner of Income-tax v. Lakra Brothers
[Citation -2006-LL-0424-1]

Citation 2006-LL-0424-1
Appellant Name Deputy Commissioner of Income-tax
Respondent Name Lakra Brothers
Court ITAT-Chandigarh
Relevant Act Income-tax
Date of Order 24/04/2006
Assessment Year 2001-02
Judgment View Judgment
Keyword Tags accumulated profit • deeming provision • managing director • show-cause notice • deemed dividend • capital account • credit balance • voting power
Bot Summary: The two among the five partners of the firm are holding more than 10 per cent holdings in the said company and a sum of Rs. 19,48,000 advanced by the said firm benefited the two partners of the firm, implicitly used for the benefit of two partners who are shareholders of the said company because the two partners are eligible for profit derived from the said firm. The major plea of the learned Departmental Representative is that M/s Ariel Exports Ltd. is the sister-concern of the assessee and dividend includes any payment by a company, not being a company in which the public are substantially interested or any sum made after 31st of May, 1997 by way of advance or loan to a shareholder being a person who is the beneficial owner of shares. Of s. 2(22) of the Act which is reproduced herewith : any payment by a company, not being a company in which the public are substantially interested or any sum made after 31st day of May, 1987, by way of advance or loan to a shareholder being a person who is the beneficial owner of shares 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 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. The Hon ble apex Court in the case of Bombay Steam Navigation Company Ltd. vs. CIT 56 ITR 52 wherein the company taking over asset holding shares for part of price, it was held that the expression capital used in s. 10(2)(iii) in the context in which it had occurred meant money and not any other asset. The Hon ble Calcutta High Court in the case of Mukund Ray K. Shah vs. CIT 197 CTR 503 : 277 ITR 128 in the case of closely held companies of the assessee, the assessee withdrawing sums from his capital accounts and making investment, the sums debited in the assessee s capital account with respective firms and included any balance sheet, PL a/c of assessee in his return in regular course of assessment, it was held that transaction not satisfying test of s. 2(22)(e) and the provision is not applicable. 1957-58 from a profit company to which he was a shareholder, even though at the end of 1956 no advance or loan was due to the company by the assessee, as a result of credits made in his favour in his accounts in excess of that amount. The second condition is that the loan was advanced to a shareholder at the date when the loan was advanced; The third condition is that the loan advanced to a shareholder by such a company can be deemed to be dividend only to the extent to which it is shown that the company possessed accumulated profit on the date of the loan; The fourth condition is that the loan must not have been advanced by the company in the ordinary course of its business.


JOGINDER SINGH, J.M.: Order This appeal is by Revenue challenging order of learned CIT(A) dt. 9th July, 2004 on following grounds : "1. That learned CIT(A) has erred in law and facts in deleting addition of Rs. 17,09,299 made by AO on account of deemed dividend under s. 2(22)(e) of IT Act, 1961. 2. It is prayed that order of learned CIT(A) be set aside and that of AO be restored. 3. appellant craves leave to add or amend grounds of appeal before it is finally disposed of." 2. Though assessee has taken as many as three grounds of appeal but only effective ground pertains to deleting addition of Rs. 17,09,299 on account of deemed dividend under s. 2(22)(e) of Act. 3. assessee showed income of Rs. 9,99,126 in its return filed on 24th Oct., 2001 by declaring deduction of Rs. 82,300 under s. 80HHC. M/s Ariel Exports (P) Ltd. advanced money to assessee and there was credit balance in account of M/s Ariel Exports (P) Ltd. in books of M/s Lakra Bros., i.e., assessee, for substantial period. details of advance and account of M/s Ariel Exports (P) Ltd. in books of assessee-firm is as under : Date Particulars Debit Credit Balance To balance b/f : 1-4- Dr. 2000 To 10,000 10,000 Cheque No. 4-8- 5,000 Dr. 54517 paid to 2000 15,000 Satyam Infoways To 12- Cheque No. Dr. 12,000 9-2000 54687 for Adv. 27,000 Tax To 13- Cheque No. Dr. 50,000 9-2000 54687 dt. 13-9- 77,000 2000 By 25- Cheque No. Cr. 7,00,000 9-2000 54688 dt. 13-9- 6,23,000 2000 To 30- Cheque No. Cr. 3,00,000 9-2000 103855 dt. 30- 9,23,000 9-2000 To Bill No. 4- 929 dt. 4-10- Cr. 1,06,501 10-2000 2000 Wt. 665- 8,16,499 630 To Bill No. 4- 930 dt. 4-10- Cr. 1,05,797 10-2000 2000 Wt. 661- 7,10,702 230 By 9- Cheque No. Cr. 2,48,000 10-2000 103558 dt. 9- 8,98,702 10-2000 To Draft 16- Cr. No. 25789 to 60,000 10-2000 8,98,702 Taj Hotel To Bill No. 17- 981 dt. 17-10- Cr. 2,11,688 10-2000 2000 Wt. 1323- 6,87,014 050 To 1- Cheque No. Cr. 10,000 11-2000 357506 To 6,77,014 Raman Kumar To 1- Cheque No. Cr. 78,318 11-2000 357507 To Taj 5,98,696 Hotel To 7- Cheque No. Cr. 50,000 12-2000 357514 To JMD 5,48,696 Grafix To Bill No. 18- 1226 dt. 18-12- Cr. 2,37,975 12-2000 2000 Wt. 3,10,721 147000 By 7-2- Cheque No. Cr. 2,00,000 2001 873038 Of 5,10,721 Super Woollen By 14- Cheque No. Cr. 1,60,000 2-2001 17549 Of Super 6,70,721 Woollen By 15- Cheque No. Cr. 3,40,000 2-2001 873039 Of 10,10,721 Super Woollen To Bill No. 16- 1535 dt. 16-2- Cr. 53,550 2-2001 2001 Wt. 9,57,171 32,000 To Bill No. 8-3- 1632 dt. 8-3- Cr. 3,19,200 2001 2001 Wt. 6,37,971 285,000 To Bill No. 9-3- 1643 dt.9-3- Cr. 3,44,960 2001 2001 2,93,011 Wt.308,000 To Bill No. 17- 1701 dt. 17-3- Cr. 1,92,135 3-2001 2001 Wt. 1,00,876 2,08,000 To Bill No. 21- 1711 dt. 21-3- Cr. 8,080 3-2001 2001 Wt. 92,796 101,000 To Bill No. 24- 1728 dt. 24-3- Dr. 3,79,569 3-2001 2001 Wt. 2,86,773 167,000 To Bill No. 24- 1729 dt. 24-3- Dr. 5,12,610 3-2001 2001 Wt. 7,99,383 192,000 Dr. By 19,48,000 7,99,383 26- Cheque No. 27,47,383 3-2001 103869 dt. 26- 2,00,000 Dr. 3-2001 5,99,383 27,47,383 21,48,000 4 . As per AO, amount of Rs. 19,48,000 advanced by M/s Ariel Exports (P) Ltd. is for benefit of assessee-firm in which shareholder is holding substantial interest. two among five partners of firm are holding more than 10 per cent holdings in said company and sum of Rs. 19,48,000 advanced by said firm benefited two partners of firm, implicitly used for benefit of two partners who are shareholders of said company because two partners are eligible for profit derived from said firm. detailed show-cause notice was issued to assessee on 20th Jan., 2004 by giving opportunity to explain as to why payment of Rs. 17,09,299 advanced by M/s Ariel Exports (P) Ltd. be considered for addition under s. 2(22)(e) of Act. AO added back Rs. 17,09,299 to income of assessee and taxable income was computed at Rs. 27,08,425. order was successfully carried in appeal before learned CIT(A). Now, Revenue is aggrieved and is in appeal before Tribunal. 5 . During arguments, we have heard Smt. Sukhwinder Khanna, learned senior Departmental Representative and Shri Sudhir Sehgal, learned counsel for assessee. major plea of learned Departmental Representative is that M/s Ariel Exports (P) Ltd. is sister-concern of assessee and dividend includes "any payment by company, not being company in which public are substantially interested or any sum made after 31st of May, 1997 by way of advance or loan to shareholder being person who is beneficial owner of shares". Our attention was also invited to conditions laid down under s. 2(22)(e) of Act. In nutshell, order of learned AO was supported. On other hand, major plea of learned counsel for assessee is that no discrepancy whatsoever was found by Revenue in books of account of assessee. Our attention was invited to various pages of paper book by contending that in end of year there is debit balance. Both learned counsel relied upon certain judicial pronouncements which we will discuss while concluding issue. It was also contended by learned counsel for assessee that sales of assessee-firm have been duly accepted. In nutshell, order of learned CIT(A) was supported. 6. On perusal of record and after hearing rival contentions, it is seen that assessee is engaged in business of manufacturing and trading of knitted fibres and manufacturing and export of readymade garments. main issue in present appeal is whether deemed dividend under s. 2(22)(e) of Act were given to assessee-firm by sister-concern, M/s Ariel Exports (P) Ltd. said firm advanced money to assessee from time-to-time and there was credit balance of said firm in books of assessee for substantial period, details of which have been given by us in para 3. assessee-firm incurred certain expenses on behalf of M/s Ariel Exports (P) Ltd. from April to middle September, 2000 and also agreed for purpose of exhibition and on completion of exhibition, company intimated assessee that goods will have to be despatched to dealers simultaneously. manufacturing of "reverie" product was started and all goods were to be supplied through M/s Ariel Exports (P) Ltd. There is no dispute to fact that exhibition was held and certain photographs were also produced before AO claiming successful exhibition of items. During arguments, learned counsel for assessee also invited our attention to fact that key person of M/s Madhav Mktg. (P) Ltd., Shri Ashok Singhania died in tragic accident in November, 2001 and all plans of company for supplying goods to various dealers came to standstill and despatches, etc., could be started from March, 2001. learned AO has discussed provisions of s. 2(22)(e) and concluded that amount of Rs. 19,48,000 is deemed dividend. Before reaching to conclusion, we are supposed to analyse sub-cl. (e) of s. 2(22) of Act which is reproduced herewith : "any payment by company, not being company in which public are substantially interested or any sum (whether as representing part of assets of company or otherwise) made after 31st day of May, 1987, by way of advance or loan to shareholder being person who is beneficial owner of shares (not being shares entitled to fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent of voting power, or to any concern in which such shareholder is member or partner and in which he has substantial interest (hereafter in this clause referred to as said concern) or any payment by any such company on behalf, or for individual benefit, of any such shareholder, to extent to which company in either case possesses accumulated profits." Sub-cl. (e) of s. 2(22) shows that for purpose of Act any payment made by company of any sum of money by way of advance or loan to its shareholder is deemed to be dividend since Act has not provided for any other definition of word "dividend" except words enumerated in s. 2(22), it should be construed that this definition would be applicable to all provisions which contains term dividend in Act. Distribution can be physical or constructive. expression accumulated profits occurring in sub-cl. (e) of s. 2(6A) of 1922 Act [corresponding to s. 2(22)(e) of 1961 Act] was or for manner in any other clause means profit in commercial sense and not assessable or taxable profits liable to tax as income under Act. Sec. 2(22)(e) creates fiction bringing in amounts paid otherwise than as dividend into net of dividend. Sec. 2(22)(e) must, therefore, be given strict interpretation. "Dividend in its ordinary connotation means sum paid to or received by shareholder proportionate to his shareholding in company out of total sum distributed. Dividend distributed by company being share of its profit declared as distributable among shareholders is not impressed with character of profit from which it reaches hands of shareholder. Hon ble Bombay High Court in case of Sadhna Textile Mills (P) Ltd. vs. CIT (1991) 188 ITR 318 (Bom) concluded that provisions of s. 2(22)(e) are applicable also to advances or loans made to corporate entity. Hon ble High Court of Delhi in case of R. Dalmia vs. CIT (1981) 24 CTR (Del) 16 : (1982) 133 ITR 169 (Del) held that payments made by way of loan or advance to shareholder or any payment made on behalf or for benefit of shareholders are to be treated as dividend in either case to extent to which company possesses accumulated profit, emphasis in this connection must be on word "possesses". If company does not possess amount, i t cannot pay same. company can be said to have profits or to be possessed of profit when it actually possesses amount or is in its control. At p. 11 of paper book filed by assessee, there is letter addressed to Dy. CIT dt. 8th Feb., 2004 wherein it has been mentioned that assessee appointed M/s Ariel Exports (P) Ltd. for marketing new products namely "reverie" and for that purpose M/s Ariel Exports (P) Ltd. was authorised t o appoint dealers for which company had undertaken survey through M / s Madhav Mktg. (P) Ltd. in north and west zone of India for knowing sentiments of market for home furnishing products to be launched by assessee-firm. In para 2 of said letter, there is mention of exhibition of products for making publicity of said products for which certain advances were taken from assessee-company and various products were exhibited at Hotel Taj Palace, New Delhi. Undisputedly, exhibition took place as per schedule and thereafter dealers were in process of being appointed but during that period Sh. Ashok Singhania, managing director of M/s Madhav Mktg. (P) Ltd. died as is mentioned in para 5, p. 12 of paper book. In next para of said letter, there is mention of certain payments like Rs. 2 lakhs as security with M/s Ariel Exports (P) Ltd. on 7th Feb., 2001 vide Cheque No. 873038, Rs. 1.60 lakhs vide Cheque No. 17549 on 14th Feb., 2001 and Rs. 3.40 lakhs vide Cheque No. 873039 on 15th Feb., 2001. Our attention was also invited to account of M/s Ariel Exports (P) Ltd. which is available at pp. 15 and 16 of paper book and on 1st April, 2001 opening balance was Rs. 5,99,383. assessee also furnished photocopies of certain photographs in paper book which are available at pp. 26 to 31 in which there is mention of demand of C&F agents and distributors in India. Hon ble apex Court in case of Bombay Steam Navigation Company (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC) wherein company taking over asset holding shares for part of price, it was held that expression "capital" used in s. 10(2)(iii) in context in which it had occurred meant money and not any other asset. agreement to pay balance of consideration due by purchaser contain any truth give rise to loan. Hon ble Madras High Court in case of G.R. Gobindarajulu Naidu vs. CIT (1973) 90 ITR 13 (Mad) under facts and circumstances of case held that s. 2(6A)(e) cannot be invoked unless legislature introduced available deeming provision to fact that joint family which is beneficial owner of shares shall be deemed to be registered shareholder of company. Hon ble Calcutta High Court in case of Mukund Ray K. Shah vs. CIT (2005) 197 CTR (Cal) 503 : (2005) 277 ITR 128 (Cal) in case of closely held companies of assessee, assessee withdrawing sums from his capital accounts and making investment, sums debited in assessee s capital account with respective firms and included any balance sheet, P&L a/c of assessee in his return in regular course of assessment, it was held that transaction not satisfying test of s. 2(22)(e) and provision is not applicable. Hon ble apex Court in case of Smt. Tarulata Shyam & Ors. vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC) held that assessee was taxable on sum of Rs. 2,72,708 received by him as loan or advance during calendar year 1956, related to asst. yr. 1957-58 from profit company to which he was shareholder, even though at end of 1956 no advance or loan was due to company by assessee, as result of credits made in his favour in his accounts in excess of that amount. Hon ble Court further observed that once it is shown that case of assessee comes within ambit of law, he must be taxed, however great hardship may appear to judicial mind to be. While coming to this conclusion, Hon ble apex Court affirmed decision of Hon ble High Court. Hon ble Court held that there are four conditions which must be specified before this provision can be invoked against shareholder which are as under : (i) first condition is that company in question must be one in which public are not substantially interested. (ii) second condition is that loan was advanced to shareholder at date when loan was advanced; (iii) third condition is that loan advanced to shareholder by such company can be deemed to be dividend only to extent to which it is shown that company possessed accumulated profit on date of loan; (iv) fourth condition is that loan must not have been advanced by company in ordinary course of its business. learned CIT(A) concluded that AO stretched definition of s. 2(22)(e) to include even legitimate transactions carried out in ordinary course of business where intention is neither to give loan or advance or to confer some individual benefit on shareholders. important words in section are loan or advance and for individual benefit of such shareholders. loan is something different from debt. For loan there must be lender, borrower as well as contract/agreement between parties for return of loan amount. Every sale of goods on credit does not amount to transaction of loan. Reliance can be placed on decision of Hon ble High Court of Madhya Pradesh pronounced in case of Lakhmichand Muchhal vs. CIT (1961) 43 ITR 315 (MP) and also CIT vs. Saurashtra Cement & Chemical Industries Ltd. (1975) 101 ITR 502 (Guj). In case of assessee, there was debit balance on account of advance paid by M/s Ariel Exports (P) Ltd. and this was purely advance during ordinary course of business for business expediencies. It cannot be said that there was intention of company to give loan. learned Departmental Representative during arguments has not disputed first three conditions and stressed about condition No. (iv) of s. 2(22)(e) of Act. learned CIT(A) has also found that amount in question was given by M/s Super Woollen (P) Ltd. and it was transfer entry only. In view of these facts, decision of Madras High Court in case of G.R. Gobindarajulu Naidu & Ors. vs. CIT (supra) having regard to word "payment by way of loan or advance" there should be outgoing or flow of money from company to shareholder so as to attract said provision and notional payment by way of book entries which will not be included. One important point pertinent to mention here is that learned AO has never doubted sequence of market service, exhibition at Taj Palace and execution of orders in pursuance of advance. We agree with conclusion of learned CIT(A) that it would have been different story if M/s Ariel Exports (P) Ltd. would have made payment by way of loan or advance to partners of assessee not for purpose of business, but for their individual benefit. No specific defect has been pointed out in conclusion of learned CIT(A). same is upheld. 7. In result, appeal of Revenue is dismissed. *** Deputy Commissioner of Income-tax v. Lakra Brother
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