M/s. Bagmane Constructions Pvt. Ltd. v. The Commissioner of Income-tax / The Assistant Commissioner of Income-tax, Central Circle-2(3)
[Citation -2014-LL-0916-45]

Citation 2014-LL-0916-45
Appellant Name M/s. Bagmane Constructions Pvt. Ltd.
Respondent Name The Commissioner of Income-tax / The Assistant Commissioner of Income-tax, Central Circle-2(3)
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 16/09/2014
Assessment Year 2006-07
Judgment View Judgment
Keyword Tags hindu undivided family • commercial expediency • maximum marginal rate • interim dividend • lending of money • deemed dividend • utility service
Bot Summary: The substantial question of law that arise for our consideration is as under :- 28 Whether any payment by a company by way of advance or loan to a shareholder or to any concern made under Section 2(22) of the Income Tax Act, 1961, to the extent to which the company possessed the accumulated profits includes a trade advance and constitutes deemed dividend 3. Under the existing provisions payment by way of loans or advances to shareholders who have substantial interest in a company to the extent to which the company possessed accumulated profits is treated as dividend. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The deeming provisions, as observed by Delhi High Court, as it applies to the case of loans/advances by a Company to a concern in which its shareholders have substantial interest, 52 is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the Company giving the loan or advances. Section 2(22)(e) of the Act is designed to strike balance, i.e., advance or loan to a shareholder and that the word shareholder can mean only a registered shareholder. 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 shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. The learned Counsel for the revenue pointed out clause(ii) of Section 2(22)e which expressly provides that any payment by a company by way of any advance or loan made to a shareholder or the concern in the ordinary course of business where the lending of money is a substantial part of the business of the company and if the case of the assessee does not fall under the said provision, the said advance constitutes dividend.


IN HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS 16TH DAY OF SEPTEMBER, 2014 PRESENT HONBLE MR.JUSTICE N.KUMAR AND HONBLE MRS. JUSTICE RATHNAKALA I.T.A. NO.473/2013 C/W I.T.A. NO.474/2013 & I.T.A. NOS.513-514/2013 I.T.A. NO.475/2013 & I.T.A. NOS.511-512/2013 I.T.A. NO.476/2013
& I.T.A. NOS. 536-537/2013 I.T.A. NO.105/2011, I.T.A. NO.106/2011 I.T.A. NO.107/2011, I.T.A. NO.108/2011 I.T.A. NO.109/2011, I.T.A. NO.110/2011 I.T.A. NO.112/2011, I.T.A. NO.113/2011 I.T.A. NO.115/2011, I.T.A. NO.118/2011 I.T.A. NO.119/2011, I.T.A. NO.124/2011 I.T.A. NO.125/2011, I.T.A. NO.126/2011 I.T.A. NO.127/2011, I.T.A. NO.128/2011 I.T.A. NO.129/2011, I.T.A. NO.114/2011 2 I.T.A NO.473/2013 BETWEEN: M/S. BAGMANE CONSTRUCTIONS PVT. LTD., LAKE VIEW BUILDING, NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK C.V. RAMAN NAGAR, BANGALORE 560 093 (REPRESENTED BY ITS DIRECTOR D.V. RAMAKRISHNA AGED ABOUT 42 YEARS, S/O SRI VENKATARAMANAPPA) APPELLANT (BY SRI K.P.KUMAR, SR.COUNSEL, ALONGWITH SRI A. SHANKAR, ADV, FOR SRI RAVI G.SABHAHIT, ADV.) AND: 1.THE COMMISSIONER OF INCOME TAX CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2 (3), CR BUILDINGS, QUEENS ROAD, BANGALORE 560 001 ...RESPONDENTS (BY SRI. K.V.ARAVIND, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 12/11/2010 PASSED IN ITA NO.446/BANG/2010, FOR ASSESSMENT YEAR 2006- 3 2007, PRAYING TO I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDER PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.446/BANG/2010 DATED 12/11/2010, WHICH UPHOLDS ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS). I.T.A.NO.474/2013 & I.T.A.NOS.513-514/2013 BETWEEN: M/S. CHANDRA DEVELOPERS PVT. LTD., LAKE VIEW BUILDING, NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK C.V. RAMAN NAGAR, BANGALORE 560 093 (REPRESENTED BY ITS DIRECTOR D.V. RAMAKRISHNA AGED ABOUT 42 YEARS, S/O SRI VENKATARAMANAPPA) APPELLANT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) AND: 1. COMMISSIONER OF INCOME TAX CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2 (3), 4 CR BUILDINGS, QUEENS ROAD, BANGALORE 560 001 ...RESPONDENTS (BY SRI. K.V.ARAVIND, ADV.) THESE INCOME TAX APPEALS ARE FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 12/11/2010 PASSED IN ITA NOS.458 TO 460/BANG/2010, FOR ASSESSMENT YEARS 2004- 2005 TO 2006-2007, PRAYING TO: I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDER PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NOS.458 TO 460/BANG/2010 DATED 12/11/2010, WHICH UPHOLDS ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS). I.T.A.NO.475/2013 & I.T.A.NOS.511-512/2013 BETWEEN: M/S. BAGMANE BUILDERS PVT. LTD., LAKE VIEW BUILDING, NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK C.V. RAMAN NAGAR, BANGALORE 560 093 (REPRESENTED BY ITS DIRECTOR D.V. RAMAKRISHNA AGED ABOUT 42 YEARS, S/O SRI VENKATARAMANAPPA) APPELLANT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) 5 AND: 1. COMMISSIONER OF INCOME TAX CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2 (3), CR BUILDINGS, QUEENS ROAD, BANGALORE 560 001 ...RESPONDENTS (BY SRI. K.V.ARAVIND, ADV.) THESE INCOME TAX APPEALS ARE FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 12/11/2010 PASSED IN ITA NOS.447 TO 449/BANG/2010, FOR ASSESSMENT YEARS 2004- 2005 TO 2006-2007, PRAYING TO: I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDER PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NOS.447 TO 449/BANG/2010 DATED 12/11/2010, WHICH UPHOLDS ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS). . I.T.A.NO.476/2013 & I.T.A.NOS.536-537/2013 BETWEEN: M/S. BAGMANE LEASING & FINANCE PVT. LTD., LAKE VIEW BUILDING, NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK 6 C.V. RAMAN NAGAR, BANGALORE 560 093 (REPRESENTED BY ITS DIRECTOR D.V. RAMAKRISHNA AGED ABOUT 42 YEARS, S/O SRI VENKATARAMANAPPA) APPELLANT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) AND: 1. COMMISSIONER OF INCOME TAX CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2 (3), CR BUILDINGS, QUEENS ROAD, BANGALORE 560 001 ...RESPONDENTS (BY SRI. K.V.ARAVIND, ADV.) THESE INCOME TAX APPEALS ARE FILED UNDER SECTION 260-A OF I.T. ACT, 1961, ARISING OUT OF ORDER DATED 04/11/2010 PASSED IN ITA NOS.442 TO 444/BANG/2010, FOR ASSESSMENT YEARS 2004- 2005 TO 2006-2007, PRAYING TO: I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDER PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NOS.442 TO 444/BANG/2010 DATED 04/11/2010, WHICH UPHOLDS ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS). 7 I.T.A.NO.105/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. CHANDRA DEVELOPERS PVT. LTD., LAKE VIEW BUILDING, NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12/11/2010 PASSED IN ITA NO.460/BANG/2010, FOR ASSESSMENT YEAR 2006-2007, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDER PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA 8 NO.460/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.106/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX, C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. CHANDRA DEVELOPERS PVT. LTD., LAKE VIEW BUILDING, NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL, ALONGWITH SRI A.SHANKAR, ADVOCATE, FOR SRI RAVI G.SABHAHIT, ADV.) 9 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12/11/2010 PASSED IN ITA NO.461/BANG/2010, FOR ASSESSMENT YEAR 2007-2008, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDER PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.461/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.107/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. BAGMANE LEASING & FINANCE PVT. LTD., BLOCK, 8TH FLOOR, BAGMANE TECH PARK, 10 C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL, FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.444/BANG/2010, FOR ASSESSMENT YEAR 2006-2007, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.444/BANG/2010 DATED 04/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.108/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) 11 AND: M/S. BAGMANE LEASING & FINANCE PVT. LTD., BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.443/BANG/2010, FOR ASSESSMENT YEAR 2005-2006, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.443/BANG/2010 DATED 04/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.109/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, 12 CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. BAGMANE LEASING & FINANCE PVT. LTD., BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.442/BANG/2010, FOR ASSESSMENT YEAR 2004-2005, PRAYING TO: I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.442/BANG/2010 DATED 04/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. 13 I.T.A.NO.110/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. BAGMANE LEASING & FINANCE PVT. LTD., BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12-11-2010 PASSED IN ITA NO.446/BANG/2010, FOR ASSESSMENT YEAR 2006-2007, PRAYING TO: I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA 14 NO.446/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.112/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. BAGMANE BUILDERS PVT. LTD., LAKE VIEW BUILDING NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) 15 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12-11-2010 PASSED IN ITA NO.449/BANG/2010, FOR ASSESSMENT YEAR 2006-2007, PRAYING TO: I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.449/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.113/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX, C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. BAGMANE BUILDERS PVT. LTD., LAKE VIEW BUILDING NO.66/1-4, BLOCK, 8TH FLOOR, 16 BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL, FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12-11-2010 PASSED IN ITA NO.450/BANG/2010, FOR ASSESSMENT YEAR 2007-2008, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.450/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.115/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX, C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) 17 AND: M/S. BAGMANE BUILDERS PVT. LTD., LAKE VIEW BUILDING NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL, ALONGWITH SRI A.SHANKAR, ADVOCATE, FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12-11-2010 PASSED IN ITA NO.447/BANG/2010, FOR ASSESSMENT YEAR 2004-2005, PRAYING TO:I. FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.447/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.118/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX, C R BUILDING, QUEENS ROAD, BANGALORE. 18 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. CHANDRA DEVELOPERS PVT. LTD., LAKE VIEW BUILDING NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12-11-2010 PASSED IN ITA NO.458/BANG/2010, FOR ASSESSMENT YEAR 2004-2005, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.458/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. 19 I.T.A.NO.119/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX, C R BUILDING, QUEENS ROAD, BANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2 (3), C.R BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S. CHANDRA DEVELOPERS PVT. LTD., LAKE VIEW BUILDING , NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12-11-2010 PASSED IN ITA NO.459/BANG/2010, FOR ASSESSMENT YEAR 2005-2006, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA 20 NO.459/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.124/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III, CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (3), BANGALORE. ...APPELLANTS (BY SRI. E.I.SANMATHI, ADV.) AND: MR. RAJA BAGMANE NO.497, 14TH MAIN, 3RD BLOCK, KORAMANGALA, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.490/BANG/2010, FOR ASSESSMENT YEAR 2007-2008, PRAYING TO: 21 I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE APPELLATE ORDER DATED 04/11/2010 PASSED IN ITA NO.490/BANG/2010 BY INCOME TAX APPELLATE TRIBUNAL, B BENCH, BANGALORE. IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.125/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III, CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (3), BANGALORE. ...APPELLANTS (BY SRI. E.I.SANMATHI, ADV.) AND: MR. RAJA BAGMANE, NO.497, 14TH MAIN, 3RD BLOCK, KORAMANGALA, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.485/BANG/2010, FOR ASSESSMENT YEAR 2002-2003, PRAYING TO: 22 I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE APPELLATE ORDER DATED 04/11/2010 PASSED IN ITA NO.485/2010 BY INCOME TAX APPELLATE TRIBUNAL, B BENCH, BANGALORE, IN INTEREST OF JUSTICE. I.T.A.NO.126/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III, CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (3), BANGALORE. ...APPELLANTS (BY SRI. E.I.SANMATHI, ADV.) AND: MR. RAJA BAGMANE, NO.497, 14TH MAIN, 3RD BLOCK, KORAMANGALA, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.488/BANG/2010, FOR ASSESSMENT YEAR 2005-2006, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW 23 STATED THEREIN, II. SET ASIDE APPELLATE ORDER DATED 04/11/2010 IN ITA NO.488/BANG/2010 PASSED BY INCOME TAX APPELLATE TRIBUNAL, B BENCH, BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.127/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III, CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (3), BANGALORE. ...APPELLANTS (BY SRI. E.I.SANMATHI, ADV.) AND: MR. RAJA BAGMANE, NO.497, 14TH MAIN, 3RD BLOCK, KORAMANGALA, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.487/BANG/2010, FOR ASSESSMENT YEAR 2004-2005, PRAYING TO: 24 I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE APPELLATE ORDER DATED 04/11/2010 IN ITA NO.487/BANG/2010 PASSED BY INCOME TAX APPELLATE TRIBUNAL, B BENCH, BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.128/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III, CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (3), BANGALORE. ...APPELLANTS (BY SRI. E.I.SANMATHI, ADV.) AND: MR. RAJA BAGMANE NO.497, 14TH MAIN, 3RD BLOCK, KORAMANGALA, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL, ALONGWITH SRI A.SHANKAR, ADVOCATE, FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.486/BANG/2010, 25 FOR ASSESSMENT YEAR 2003-2004, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE APPELLATE ORDER DATED 04/11/2010 IN ITA NO.486/BANG/2010 PASSED BY INCOME TAX APPELLATE TRIBUNAL, B BENCH, BANGALORE, IN INTEREST OF JUSTICE. I.T.A.NO.129/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III, CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE 560 001. 2. ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (3), BANGALORE. ...APPELLANTS (BY SRI. E.I.SANMATHI, ADV.) AND: MR. RAJA BAGMANE NO.497, 14TH MAIN, 3RD BLOCK, KORAMANGALA, BANGALORE. RESPONDENT (BY SRI K.P.KUMAR, SR.COUNSEL, ALONGWITH SRI A.SHANKAR, ADVOCATE, FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 04-11-2010 PASSED IN ITA NO.489/BANG/2010, 26 FOR ASSESSMENT YEAR 2006-2007, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE APPELLATE ORDER DATED 04/11/2010 IN ITA NO.489/BANG/2010 PASSED BY INCOME TAX APPELLATE TRIBUNAL, B BENCH, BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A.NO.114/2011 BETWEEN: 1. COMMISSIONER OF INCOME TAX, C.R. BUILDING, QUEENS ROAD, BANGALORE. 2. ASST. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE - 2 (3), C.R.BUILDING, QUEENS ROAD, BANGALORE. ...APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: M/S.BAGMANE BUILDERS PVT. LTD., LAKE VIEW BUILDING , NO.66/1-4, BLOCK, 8TH FLOOR, BAGMANE TECH PARK, C.V. RAMAN NAGAR, BANGALORE. RESPONDENT 27 (BY SRI K.P.KUMAR, SR.COUNSEL, ALONGWITH SRI A.SHANKAR, ADVOCATE, FOR SRI RAVI G.SABHAHIT, ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12-11-2010 PASSED IN ITA NO.448/BANG/2010, FOR ASSESSMENT YEAR 2005-2006, PRAYING TO: I.FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW APPEAL AND SET ASIDE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.448/BANG/2010 DATED 12/11/2010 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(3), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. THESE INCOME TAX APPEALS COMING ON FOR ADMISSION THIS DAY, N.KUMAR J., DELIVERED FOLLOWING: JUDGMENT All these appeals are taken up for consideration together as common question of law is involved and therefore by common order all these appeals are disposed of. 2. substantial question of law that arise for our consideration is as under :- 28 Whether any payment by company by way of advance or loan to shareholder or to any concern made under Section 2(22) (e) of Income Tax Act, 1961, to extent to which company possessed accumulated profits includes trade advance and constitutes deemed dividend ? 3. ITA Nos.105, 106, 107, 108, 109, 110, 112, 113, 114, 115, 118 and 119/2011 are all appeals preferred by Revenue in which assessee is concern. ITA Nos.124, 125, 126, 127, 128, 129/2011 are also appeals preferred by Revenue in which assessee is individual shareholder. ITA Nos.473, 474, 475, 476, 511, 512, 513, 514, 536 and 537/2013 are all appeals by assessee challenging portion of order of Tribunal which is against its interest. 4. factual background which has given rise to substantial question of law are broadly as under:- 29 M/s. Bagmane Development Private Limited is closely held Company (for short hereinafter referred to as M/s. BDPL ). Sri Raja Bagmane was substantial shareholder. M/s. BDPL advanced money to its sister concerns namely Bagmane Builders Pvt. Ltd., Chandra Developers Pvt. Ltd., Bagmane Leasing and Finance Pvt. Ltd., Bagmane Construction Pvt. Ltd., and Raja Bagmane, shareholder, who is having 99% of equity share capital in M/s. BDPL. It was amounts advanced by M/s. BDPL to these sister concerns for different assessment years 2004 05 to 2007 08, and insofar as shareholder of Raja Bagmane is concerned, amounts were advanced for assessment years 2002-03 to 2007 2008. 5. recipient of these advances are assessees before Court. Proceedings were initiated under Section 153C insofar as Companies are concerned and in case of individual assessee, proceedings under Section 153A were initiated, contending that aforesaid amounts 30 received by assessees by way of loans were advanced to extent of accumulated profits is treated as dividend. assessees were called upon to explain why they should not be taxed accordingly. They have shown in their accounts, said amounts under caption of unsecured loans and advances . case of assessees was, M/s. BDPL advanced said amounts to them for sourcing land on account of joint venture agreement. funds were given in connection with property purchased because in Karnataka, Companies were not allowed to buy land which is of agricultural status. Therefore, funds were given by M/s. BDPL to procure land in name of directors and hold same in form of capital asset and then transfer back to company after obtaining conversion order. Earlier also, Sri Raja Bagmane had procured and transferred lands to M/s. BDPL after obtaining conversion during assessment year 1997 98. Since funds are not given for individual benefit of directors, deemed dividend is not applicable. They also furnished 31 details of such purchases and amounts paid and survey numbers of land which was to be procured under aforesaid documents. They relied on several judgments of various Courts in support of their contentions. 6. Assessing Authority on consideration of aforesaid material and submission of assessees held that materials do not indicate existence of any agreement between M/s BDPL and assessee-companies till 15/12/2008 though assessees made submission on various dates had not claimed even on single occasion that there was written agreement between assessee- company and M/s BDPL. It appears that agreement is only off record and to give it with different colour. said agreement was also not registered with concerned Government Authority. deed is dated 13/11/2002. period of limitation for specific performance of contract is three years from date fixed for performance. There is no mention in agreement about time limit within 32 which performance is to be completed. Therefore, these facts indicate that agreement was submitted before department for camouflaging transaction when question of deemed dividend had been raised. 7. transaction of funds and payments by M/s. BDPL to assessees were made bit by bit during whole year and hence assessees were given loan or advance bit by bit from its profits during year. Therefore, assessees cannot take plea that loans or advances do not attract provisions of Section 2(22)(e) of Income Tax Act, 1961. Therefore, tax was levied on such loans and advances received to extent of accumulated profits earned by M/s. BDPL. Aggrieved by said orders, assessees preferred appeals before Commissioner of Income Tax (Appeals). Appellate Commissioner on consideration of aforesaid material, declined to interfere with said finding recorded by Assessing Authority. Aggrieved by same, assessees preferred appeals 33 before Tribunal. Tribunal on consideration of rival contentions and after taking note of various Judgments relied upon by parties and also statutory provisions, held that material on record shows that funds have flown from M/s.BDPL to assessee-companies. In balance sheet funds received could have been shown inadvertently as unsecured loans/advances , by persons who are at helm of affairs in accounting section of assessees. However, it does not alter nature and character of transaction of funds which took place and it cannot be sole reason to brand that those were unsecured loans and that provisions of Section 2(22)(e) of Act have come to play role. It further held that balance sheet s journal entries in books of accounts amply make it clear that funds were provided during course of business. It was also held that assessees in fact produced agreement in midst of assessment proceedings. Therefore on ground of belated production, said documents cannot be rejected. M/s.BDPL was not 34 engaged in business of money lending. funds so allocated to assessee during course of business is purely on business exigencies and thus, amount so funded do not fall within sphere of loans or advances as case may be so as to bring it within purview of Act. Section 2(22)(e) brings in deeming fiction. In certain circumstances it provides advance or loan treated as dividend in hands of shareholders. Advances and loans have to be interpreted in its true sense. Any payment made out of business does not fall within ambit of advance and loans, through accounting entries which are passed as such. true nature of transaction has to be seen as to whether transaction is attributable to loan or advance. Thus, it is obvious that fiction created in Section 2(22)(e) only refers to pure advances or loans. Any amount paid on account of business transactions between entities fall outside ambit of Section 2(22)(e). As result of globalization during recent past, various giant infrastructure projects have come up and many are in 35 pipeline. Multifarious activities are involved in promoting these projects, for which activity different kinds of commercial agreements and technical agreements are involved. finance structure of every activity differs. risk of reward involved in every activity has difference. In order to meet such complex constraints, flagship company/promoter may create various distinct entities being Special Utility Vehicles (SUV) to deal in each of these activities independently. promoter along with these SUVs jointly works to complete overall project. In such situation, funds being bloodline for all these entities flow from one entity to other. Such transfer of funds arising out of commercial expediency may not be in nature of advance or loans in all circumstances. 8. After looking into details in each of these cases, it was held that assessing authority was not justified in invoking provisions of Section 2(22)(e) of Act which assessees disputed before CIT (A), 36 Appellate Authority. order passed by Appellate Authority upholding order of Assessing Authority was held to be unjustified and therefore, appeal was allowed and it was held that advances made by flagship company i.e., M/s.BDPL to these assessees would not fall within definition of dividend as contained in Section 2(22)(e) of Act and not taxable. Aggrieved by this, revenue has preferred appeals. 9. In assessees appeals they have challenged very institution of proceedings under Section 153C and 153A of Act on ground that satisfaction of Assessing Authority was not recorded in writing as held by Apex Court in case of Manish Maheshwari v. Assistant Commissioner of Income Tax and another (289 ITR 341). 10. Therefore all these appeals were taken up for consideration together. 37 RIVAL CONTENTIONS 11. Learned counsel for revenue assailing these impugned orders contended that advancing of money from flagship company to its sister company is not in dispute. assessees in their account have entered these amounts under heading of unsecured loans . At time of advancing money no agreements were entered into and no such agreement was seized or was available at time of search under Section 132 of Act. It is only at fag end of proceedings on 15/12/2008 memorandum of agreement was produced. material on record clearly establishes that it is document created to support claim of assessees and it is not genuine document. It is in nature of after thought. That document is not registered. As is clear from Section 2(22)(e) of Act, any payment made by way of advance or loan to concern or to shareholder to extent company possessed accumulated profits would be deemed to be dividend. word any payment includes even trade advance or 38 monies lent or advanced by way of business expedience or commercial expedience. legislature by way of exception has provided that where any advance or loan is made to share holder or concern in ordinary course of business, where, lending of money is substantial part of business of company, such advances or loans fall outside purview of dividend. 12. In instant case, M/s.BDPL is not in business of money lending and therefore, any payment made by said company to these assessees is deemed to be dividend and liable to tax. Tribunal has erred in interfering with well considered order passed by lower authorities. Therefore, said order requires to be set aside. 13. Per contra, learned counsel appearing for assessees submitted that material on record clearly discloses that flagship company - M/s.BDPL is in 39 business of development of land and building. It is company registered under Companies Act, 1956 in State of Karnataka. In view of provisions of Karnataka Land Reforms Act, non-agriculturist including company cannot purchase or own agricultural land. In those circumstances, for purpose of acquiring agricultural land and development of such agricultural land, they form sister companies/sister concerns and advance money to them to enable them to acquire agricultural land and get it converted for non-agricultural purposes and then convey such land. Therefore, amounts were given to these assessees as trade advance. It is not given out of accumulated profits. In fact, material on record shows that major portion of such advances are not out of such accumulated profits and therefore, he submits that word advance or loan referred to in Section 2(22)(e) of Act has to be interpreted in context in which said provisions was brought on statute book and object was sought to be achieved. literal interpretation of said provision would lead to 40 absurdity and injustice and therefore, purposive construction has to be placed on said provision i.e., precisely what Tribunal has done and hence, there is no substance in these appeals. STATUTORY PROVISIONS 14. In order to appreciate these rival contentions, first we have to look at word dividend , which is defined in Companies Act. word dividend is inserted by Companies (Amendment) Act, 2000 which came into force on 13/12/2000 as Section 2(14)(a), which reads as under:- Dividend includes any interim dividend 15. Section 206 of Companies Act defines to whom dividend is payable, which reads as under:- Dividend not to be paid except to registered shareholders or to their order or to their bankers. 41 206. (1) No dividend shall be paid by company in respect of any share therein, except : - (a) to registered holder of such share or to his order or to his bankers; or (b) in case share warrant has been issued in respect of share in pursuance of section 114, to bearer of such warrant or to his bankers. (2) Nothing contained in sub-section (1) shall be deemed to require bankers of registered shareholder to make separate application to company for payment of dividend. As could be seen from aforesaid provisions, only person who is entitled to dividend is registered holder of any share in company. Even person who holds shares as trustee, for any person is registered as shareholder. Shareholder is only person recognized by company, who is entitled to payment of dividend. 42 16. word dividend has been defined under Act in Section 2(22). It reads as under:- Definitions. 2. In this Act, unless context otherwise requires,- (22) dividend includes- (e) any payment by company, not being company in which public are substantially interested, of 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; 43 17. Sections 104 to 109 of Act relate to levy of additional tax on certain closely held companies other than those in which public was substantially interested, if they fail to distribute specified percentage of their distributable profits as dividends. These provisions had lost much of their relevance with reduction of maximum marginal rate of personal tax to 50% which is lower than rate of corporation tax on closely held companies. Therefore, Sections 104 to 109 have been omitted by Finance Act, 1987. If on deletion of Sections 104 to 109, there was likelihood of closely held companies not distributing their profits to share holders by way of dividends but by way of loans or advances so that these are not taxed in hands of shareholders, to forestall manipulation, Section 2(22) has been suitably amended. Under existing provisions payment by way of loans or advances to shareholders who have substantial interest in company to extent to which company possessed accumulated profits is treated as dividend. shareholders who have substantial interest 44 are those who have shares carrying not less than 20% of voting power as per provision of clause (32) of Section 2 of Act. Amendment to definition extends its application to payments made (1) to shareholder holding not less than 10% of voting power or (2) to concern in which shareholder has substantial interest. Concern as per newly inserted Explanation 3(a) to Section 2(22) means Hindu undivided family, or firm or association of persons or body of individuals or company. shareholder having substantial interest in concern as per Explanation 3(b) to Section 2(22), is deemed to be one who is beneficially entitled to not less than twenty percent of income of such concern. 18. Apex Court in case of K.P.Varghese v. Income Tax Officer, Ernakulam and another, reported in [131 ITR 597], dealing with interpretation to be placed on sub-section (2) of Section 52 of Act explaining scope of literal construction held as under:- 45 task of interpretation of statutory enactment is not mechanical task. It is more than mere reading of mathematical formulae because few words possess precision of mathematical symbols. It is attempt to discover intent of Legislature from language used by it and it must always be remembered that language is at best imperfect instrument for expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be drafted with divine prescience and perfect clarity . We can do no better than repeat famous words of judge Learned Hand when he said . it is true that words used, even in their literal sense, are primary and ordinarily most reliable source of interpreting meaning of any writing: be it statute, contract or anything else. But it is one of surest indexes of mature and developed jurisprudence not to make fortress out of dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is surest guide to their meaning. Xxx 46 We must, therefore, eschew literalness in interpretation of Section 52, sub-section (2), and try to arrive at interpretation which avoids this absurdity and mischief and makes provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from tyranny of literal interpretation. It is now well-settled rule of construction that where plain literal interpretation of statutory provision produces manifestly absurd and unjust result which could never have been intended by Legislature, court may modify language used by Legislature or even do some violence to it, so as to achieve obvious intention of Legislature and produce rational construction. 19. Apex Court again explained meaning of deeming provision under Income Tax Act in case of Commissioner of Income Tax, Kanpur v. Mother India Refrigeration Industries P.Ltd. [155 ITR 711] as under:- legal fictions are created only for some definite purpose and these must be limited to that 47 purpose and should not be extended beyond that legitimate field. 20. Delhi High Court had occasion to consider scope of Section 2(22)(e) in case of Commissioner of Income Tax v. Rajkumar [2009 318 ITR 462] wherein it was held as under:- 21. This, however, leaves us with submission of Revenue that even trade advance could fall within ambit of section 2(22)(e) of Act. In order to deal with this submission it would be convenient to extract relevant part of provision of section 2(22)(e) of Act: 2. In this Act, unless context otherwise requires,- (22) dividend includes- (e) any payment by company, not being company in which public are substantially interested, of 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 48 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 (hereinafter 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. 21. Calcutta High Court explaining Section 22(e) in case of Pradeep Kumar v. Income Tax Officer [2011 338 ITR 538], held as under:- After hearing learned counsel for parties and after going through aforesaid provisions of Act, we are of opinion that phrase by way of advance or loan appearing in sub-clause (e) must be construed to mean those advances or loans which shareholder enjoys for simply on account of being person who is beneficial owner of shares (not being shares entitled 49 to fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent of voting power; but if such loan or advance is given to such shareholder as consequence of any further consideration which is beneficial to company received from such shareholder, in such case, such advance or loan cannot be said to deemed dividend within meaning of Act. Thus, for gratuitous loan or advance given by company to those classes of shareholders would come within purview of section 2(22) but not to cases where loan or advance is given in return to advantage conferred upon company by such shareholder . 22. Delhi High Court in case of Commissioner of Income-Tax v. Ankitech P. Ltd. [(2012) 340 ITR 14 (Delhi)], explaining meaning of word concern found in provisions as well as Explanation (3), where meaning of said word is expressly given, held as under:- 50 24. intention behind enacting provisions of section 2(22)(e) is that closely-held companies (i.e., companies in which public are not substantially interested), which are controlled by group of members, even though company has accumulated profits would not distribute such profit as dividend because if so distributed dividend income would become taxable in hands of shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for individual benefit of such shareholder. In such event, by deeming provisions, such payment by company is treated as dividend. intention behind provisions of section 2(22)(e) of he Act is to tax dividend in hands of shareholders. deeming provisions as it applies to case of loans or advances by company to concern in which its shareholder has substantial interest, is based on presumption that loans or advances would ultimately be made available to shareholders of company giving loan or advance. 51 23. Following said judgment, this Court in case of Chief Commissioner of Income Tax-III v. M/s.Sarva Equity Pvt. Ltd. in ITA.No.322/12 and other connected matters, disposed of on 08/01/2014 held as under:- 16. In present case, we are concerned with second limb of Section 2(22)(e) of Act namely, to any concern, like respondent- assessee, in which such shareholder is member or partner and in which he has substantial interest. respondent asseessee is admittedly not shareholder of M/s.Ittina. It is not even case of assessee that it is shareholder of M/s.Ittina, though, shareholders of respondent- assessee and M/s.Ittina are common and/or members of same family. In this backdrop when we look at provisions contained in Section 2(22)(e) of Act, intendment of Legislature is clear, which means to tax dividend in hands of shareholders. deeming provisions, as observed by Delhi High Court, as it applies to case of loans/advances by Company to concern in which its shareholders have substantial interest, 52 is based on presumption that loans or advances would ultimately be made available to shareholders of Company giving loan or advances. Loan or advance given to shareholders or to concern, under normal circumstances would not qualify as dividend, but it is so made by legal fiction created under Section 2(22)(e) of Act. Thus, definition of dividend has been enlarged, and that loan or advances given under conditions specified under this provision would also be treated as dividend. fiction, however, is not to be extended for enlarging concept of shareholders. Dividend is to be given by any company, to its shareholders. Thus, in second category under Section 2(22)(e) of Act, loan or advances given to concern, like assessee in present case, which is admittedly not shareholder of payee company, under no circumstances, could be treated as shareholder receiving dividend. As observed by Delhi High Court, if intention of Legislature was to tax such loan or advance as deemed dividend at hands of deeming shareholder, then legislature would have inserted deeming provision in respect of 53 shareholder as well. legislature has not done so. 17. Section 2(22)(e) of Act is designed to strike balance, i.e., advance or loan to shareholder and that word shareholder can mean only registered shareholder. beneficial owner of shares whose name does not appear in Register of shareholders of Company cannot be stated to be shareholder. He may be beneficially entitled to share but he is certainly not shareholder. In other words, it is only person whose name is entered in Register of shareholders of Company as holder of shares who can be said to be shareholder qua Company and not person beneficially entitled to shares. We are therefore, of view that it is only where loan is advanced by Company to registered shareholder and other conditions set out in Section 2(22)(e) of Act are satisfied, that amount of loan would be liable to be regarded as deemed dividend within meaning of this section. 54 24. Therefore, from aforesaid judgments, it is clear that purpose of insertion of sub-clause (e) of Section 2(22) of Act was to bring within tax net accumulated profits which are distributed by closely held companies to his shareholders in form of loans to avoid payment of dividend distribution tax under Section 115-O of Act. purpose being that persons who manage such closely held companies should not arrange their affairs in manner that they assist shareholders in avoiding payment of tax by having these companies pay or distribute money in form of advance or loan. Loan or advance given to shareholders or to concern, under normal circumstances would not qualify as dividend. If such loan or advance is given to such shareholder as consequence of any further consideration which is beneficial to company received from such shareholder, in such case, such advance or loan cannot be said to deemed dividend within meaning of Act. Instead of distributing accumulated profits as dividend, companies distribute them as loan or 55 advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for individual benefit of such shareholder, in such event, by deeming provisions, such payment by company is treated as dividend. It is so made by legal fiction created under Section 2(22)(e) of Act. Thus, definition of dividend has been enlarged, and that loan or advances given under conditions specified under this provision would also be treated as dividend. Thus, for gratuitous loan or advance given by company to those classes of shareholders would come within purview of section 2(22) but not to cases where loan or advance is given in return to advantage conferred upon company by such shareholder. intention behind provisions of section 2(22)(e) of Act is to tax dividend in hands of shareholders. 25. It is in this background, word any payment , by company, by way of advances or loans, has 56 to be interpreted. attribute of loan is that it is positive act of lending money coupled with acceptance by other side of money as loan and generally carries interest and there is obligation of repayment. term advance may or may not include lending. word advance if not found in company or in conjunction with word loan may or may not include obligation of repayment. If it does then it would be loan. However, Legislature has used expression by way of advance or loan. Therefore, both these words are used to mean different things. principle of statutory interpretation by which generic word receives limited interpretation by reason of its company is well established. In such circumstance, one can legitimately draw on noscuntur sociis principle. In fact this latter maxim is only illustration or specific application and broader than maxim ejusdem generies. 26. Apex Court in case of State of Bombay and Others v. Hospital Mazdoor Sabha and Others reported in AIR 1960 SC 610 has observed as under:- 57 9. It is, however, contended that, in construing definition, we must adopt rule of construction noscuntur sociis. This rule, according to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, more general is restricted to sense analogous to less general. same rule is thus interpreted in Words and Phrases (Vol. XIV, p. 207): Associated words take their meaning from one another under doctrine of noscuntur sociis, philosophy of which is that meaning of doubtful word may be ascertained by reference to meaning of words associated with it; such doctrine is broader than maxim Ejusdem Generis. In fact latter maxim is only illustration or specific application of broader maxim noscuntur sociis . argument is that certain essential features or attributes are invariably associated with words business and trade as understood in popular and conventional sense, and it is colour of these attributes which is taken by other words used 58 in definition though their normal import may be much wider. We are not impressed by this argument. It must be borne in mind that noscutur sociis is merely rule of construction and it cannot prevail in cases where it is clear that wider words have been deliberately used in order to make scope of defined word correspondingly wider. It is only where intention of legislature in associating wider words with words of narrower significance is doubtful, or otherwise not clear that present rule of construction can be usefully applied. It can also be applied where meaning of words of wider import is doubtful; but, where object of legislature in using wider words is clear and free of ambiguity, rule of construction in question cannot be pressed into service. As has been observed by Earl of Halsbury, L.C., in Corporation of Glasgow v. Glasgow Tramway and Omnibus Co. Ltd. [ (1898) AC 631 at p. 634] in dealing with wider words used in Section 6 of Valuation of Lands (Scotland) Act, 1854, words free from all expenses whatever in connection with said tramways' appear to me to be so wide in their application that I should 59 have thought it impossible to qualify or cut them down by their being associated with other words on principle of their being ejusdem generis with previous words enumerated . If object and scope of statute are considered there would be no difficulty in holding that relevant words of wide import have been deliberately used by legislature in defining industry in Section 2(j). object of Act was to make provision for investigation and settlement of industrial disputes, and extent and scope of its provisions would be realised if we bear in mind definition of industrial dispute given by Section 2(k), of wages by Section 2(rr), workman by Section 2(s), and of employer by Section 2(g). Besides, definition of public utility service prescribed by Section 2(m) is very significant. One has merely to glance at six categories of public utility service mentioned by Section 2(m) to realise that rule of construction on which appellant relies is inapplicable in interpreting definition prescribed by Section 2(j). 60 27. In this background when we look at aforesaid provision, it is clear that any payment made by company by way of advance or loan has to be understood in context of object with which said provision is introduced. Though legislature has introduced advance as well as loan which are two different words, meaning of each of those words have to be understood in context in which they are used. Each word takes its colour from other. meaning of word advance is to be understood by meaning of word loan which is used immediately thereafter. Associated words take their meaning from one another under doctrine of noscuntur sociis, philosophy of which is that meaning of doubtful word may be ascertained by reference to meaning of words associated with it. This rule, according to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, more 61 general is restricted to sense analogous to less general. In case of loan, money is advanced generally on payment of interest. In other words loan advanced has to be repaid with interest. In case of advance also, element of repayment is there but such repayment may be with interest or without interest. Therefore, when said two words are used in aforesaid provision with purpose of levying tax, if intention of such advance or loan is to avoid payment of dividend distribution of tax under Section 115-O of Act, such payment by company certainly constitutes deemed dividend. But if such payment is made firstly not out of accumulated profits and secondly even if it is out of accumulated profits, but as trade advance as consideration for goods received or for purchase of capital asset which indirectly would benefit company advancing loan, such advance cannot be brought within word advance used in aforesaid provision. trade advance which is in nature of money transacted to give effect to commercial transactions 62 would not fall within ambit of provisions of Section 2(22)e of Act. 28. In this context, it is useful to refer to judgment of Apex Court in case of LIC of India vs- Retired LIC Officers Association [2008(3) SCC 321] where it was held that each word employed in statute must take colour from purport and object for which it is used. Principle of purposive interpretation should be taken recourse to. If literal interpretation is given to said words, it means all trade advances are to be taxed as deemed dividend. If such interpretation is placed, it would lead to absurdity. That was not intention of legislature in enacting aforesaid provision. Even if accumulated profit which ought to have been paid to shareholders as dividend paid to sister concern for purpose of acquisition of capital assets or as consideration for goods received which is required for carrying on business, it would not fall within definition of Section 63 2(22)e of Act as object was not to pay said amount to shareholders after avoiding payment of dividend distribution tax under Section 115-O of Act. In that view of matter, it is not possible to accept interpretation sought to be placed by revenue. 29. learned Counsel for revenue pointed out clause(ii) of Section 2(22)e which expressly provides that any payment by company by way of any advance or loan made to shareholder or concern in ordinary course of business where lending of money is substantial part of business of company and if case of assessee does not fall under said provision, said advance constitutes dividend. question of looking into aforesaid provision would arise only when all conditions prescribed in clause (e) of Sub-Section (2) of Section 22 are complied with. If payment is made by way of trade or business, advance or loan, clause (e) of Sub-section (2) of Section 22 of Act is not at all attracted and question 64 of applying aforesaid clause (ii) would not arise and therefore, we do not see any substance in said contention. 30. It was also contended on behalf of revenue that having regard to plain words used in clause (e) to any concern , when amount is paid or when any payment is made to concern, tax is levied on concern and not on shareholders. As far as this question is concerned, this Court following judgment of Bombay High Court in case of Commissioner of Income Tax vs Universal Medicare (P) Limited reported in 324 ITR 263 has categorically held that when any payment is made by company to any concern, which falls under clause (e), tax is leviable on shareholder only and not on concern. We respectfully agree with aforesaid judgment and we do not see any justification to take another view of this matter. Therefore, finding recorded by Tribunal that, these advances made by BDPL to sister concern 65 as well as to its shareholder do not constitute deemed dividend under Section 2(22)(e) of Act, is legal and valid and do not call for any interference. 31. In so far as appeals filed by assesses are concerned, as we have held there is no primary liability to pay tax, we are not going into other contentions and we leave it open to be adjudicated at appropriate time in appropriate forum. In view of our findings that advances made do not fall within definition of deemed dividend under Section 2(22)(e) of Act, we have not gone into merits of contemporaneous issues which are raised in appeal and they are kept open to be adjudicated in appropriate forum. 32. Consequently substantial question of law is answered in favour of assessee and against revenue and assesses appeals are all disposed of. 66 33. finding recorded by Tribunal in ITA 127/2011 that once assessee has taken advance amount of Rs.49.35 lakhs and returns of same, even in absence of any documentary evidence evidencing same is acceptable, cannot be found fault with. Accordingly, we do not find any merit in said contention. Sd/- JUDGE Sd/- JUDGE Ng/nvj/mvs/nsu M/s. Bagmane Constructions Pvt. Ltd. v. Commissioner of Income-tax / Assistant Commissioner of Income-tax, Central Circle-2(3)
Report Error