Commissioner of Income-tax v. Subrata Roy
[Citation -2015-LL-0317-4]

Citation 2015-LL-0317-4
Appellant Name Commissioner of Income-tax
Respondent Name Subrata Roy
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 17/03/2015
Assessment Year 1992-93
Judgment View Judgment
Keyword Tags application for rectification • declaration of dividend • beneficial shareholder • compulsory acquisition • hindu undivided family • profit sharing ratio • undisclosed income • deeming provision • repayment of loan • managing director • lending of money • mistake apparent • deemed dividend • capital account • payment of tax • share capital • voting power • tax evasion • evade tax • cash flow • karta
Bot Summary: The firm in tune with its contractual obligations had to remit Rs. 26,24,12,222 on March 31, 1992, which it had collected and was payable to SISICOL. Between April 1, 1991, and March 31, 1992, the firm advanced Rs. 1,88,96,202 to the assessee. The Judicial Member found that, in the facts and circumstances of the case, Rs. 1.88 crores loan to the assessee by the firm was not an advance out of the amounts payable by the firm to SISICOL. The firm had sufficient funds from other sources-a fact also noted by the Commissioner of Income-tax in paragraph 4 of his order. The Accountant Member held that the two transactions, one from company, SISICOL, to the firm, and from the firm to the assessee should be treated as a combined one, amounting to payment of loan from SISICOL to the assessee. So far as the contention that the two transactions one from SISICOL to the firm and the second from the firm to the assessee should be treated as one, is not based on any valid justification. The court observed pertinently that: If the contention of the assessee is accepted, in no case a partnership firm can come within the mischief of section 2(22)(e) of the Act because of the reason that shares would be purchased by the firm in the name of its partners as the firm is not having any separate entity of its own. If the partnership firm which has purchased the shares is not treated as shareholder merely because the shares were purchased in the name of the partners, that too because of the legal compulsion that shares could not be allotted to the said partnership firm which is a non-legal entity, it would be impossible for such a condition to be fulfilled. With the purchase of shares by the firm in the name of its partners, it is the firm which is to be treated as shareholder for the purposes of section 2(22)(e) of the Act.


JUDGMENT judgment of court was delivered by S. Ravindra Bhat J.-The question of law urged by Revenue in this appeal (and writ petition) is: "Whether amount of Rs. 1,84,19,305 was deemed dividend in hands of assessee under provisions of section 2(22)(e) of Income-tax Act, 1961?" assessee was managing director of Sahara India Savings and Investment Corporation Ltd. (hereafter "SISICOL") during assessment year (AY) 1992-93; he was also partner of M/s. Sahara India (hereafter referred to as "the firm"). In terms of agreement dated August 17, 1987, firm was to act as agent to promote, conduct, introduce and secure business under SISICOL's schemes. firm in tune with its contractual obligations had to remit Rs. 26,24,12,222 on March 31, 1992, which it had collected and was payable to SISICOL. Between April 1, 1991, and March 31, 1992, firm advanced Rs. 1,88,96,202 to assessee. Assessing Officer ("the AO") held that amount was loan from SISICOL to assessee through use of company's agent, firm, which was "conduit" and device adopted to bypass application of section 2(22)(e) of Income-tax Act, 1961 (hereinafter, referred to as "the Act"). amount of Rs. 1,88,96,202 being loan out of SISICOL's accumulated profits to assessee-shareholder was treated as "deemed dividend" under section 2(22)(e) of Income-tax Act ("the Act") and added to assessee's income. On appeal, learned Commissioner of Income-tax (Appeals) hereafter "the CIT (A)" held that SISICOL had advanced sums to concern (the firm) in which assessee had substantial interest. Taking note that section 2(22)(e) as applicable after its amendment with effect from May 31, 1987, for assessment year 1988-89, included concerns in which shareholder is member or partner, Commissioner of Income-tax (Appeals) upheld addition made. assessee carried matter in appeal to Income-tax Appellate Tribunal. There was divergence of views of two members who originally heard appeal; Judicial Member held that section 2(22)(e) was inapplicable; Accountant Member held to contrary and that provision was attracted to circumstances of case. Judicial member noted that assessee was managing director of SISICOL, which had many deposit schemes and 290 units or branches to aid its operations. He was also partner of firm, which entered into understanding with SISICOL on August 17, 1987, to conduct, promote, introduce and secure business through various schemes for company. firm also collected amounts through several schemes of SISICOL. Referring to schemes, and terms of 1987 agreement, it was noted that there was no time limit stipulated for remittance of amounts collected by firm on behalf of SISICOL to it. amounts were to be collected in ordinary course of business. affidavit of Shri O. P. Srivastava dated July 6, 1996, was also relied on; it stated that such sums collected and retained before remission by firm to company, SISICOL, constitute neither "loan" nor "advance". Judicial Member then considered question whether credit balances lying with firm could be treated as loan or advance from company. It was held that, in facts and circumstances of case, amount required to be remitted by firm could be branded as trade debt and not as loan or advance. Reference was made to Chamber's Dictionary meaning of term "loan". observations of Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 (SC) were relied upon to say that loan of money undoubtedly results in debt but every debt does not involve loan. distinction between loan and debt and pre-requisite for loan-being existence of lender, borrower, thing loaned for use and contract between parties for return of thing loaned was also noticed. It was held that dictionary meaning of term "advance" was premised on outgoing or flow of money from company to shareholder; consequently, notional payments by way of book entries would not be included. It was held that to invoke provisions of section 2(22)(e), Revenue had to prove that sum was directed by company to firm to pay to assessee. In such case, could firm be said to debit company's account and not that of individual partner. It was, therefore, held that firm was indebted to individual partner. It was, therefore, held that firm was indebted to company (in respect of what it collected and which was payable to SISICOL) but by no stretch of imagination could it be said such amounts in hands of firm were given as loan or advance by SISICOL. amounts payable in large running account was unremitted collection and relationship was that of debtor and creditor in respect of trade debt but not one of borrower and lender. Reference was made to schedule IX appended to profit and loss account of SISICOL for relevant period. He noted that sums shown as due from firm to company was reflected in schedule VII to balance- sheet with heading "cash, bank and other balances". Thus, description for amount due from firm was entirely different from normal loan and advance appearing in relevant accounts. Judicial Member found that, in facts and circumstances of case, Rs. 1.88 crores loan to assessee by firm was not advance out of amounts payable by firm to SISICOL. firm had sufficient funds from other sources-a fact also noted by Commissioner of Income-tax (Appeals) in paragraph 4 of his order. total funds available with firm at relevant time was Rs. 60,61,54,638, including Rs. 26.24 crores payable to SISICOL. detail of Rs. 60,61,54,638, amount payable is noted at page 25 of order. Therefore, on facts, it could not be said that Rs. 1.88 crores loan given by firm to assessee was part of credit balances of SISICOL with firm. Commissioner of Income-tax (Appeals) held that 44 per cent. of availability of funds with firm could be said to belong to SISICOL. Judicial Member stated that such inference could not be drawn without providing specific link or direct nexus between two figures. Revenue was unable to connect loan advanced to assessee with amount due to SISICOL. Consequently, Judicial Member concluded that that there was no payment of any amount by way of loan or advance, either directly to assessee shareholder or on his behalf or for his benefit. trade debt payable by firm in normal course of business could not be treated to form genesis of loan of Rs. 1.88 crores to assessee. Judicial Member further observed that firm had been advancing interest-free amounts to its partners, evident from materials on record and that details of repayment of loan by assessee in immediately succeeding year were made. He further noted that assessee had taken loan from firm right from April 1, 1990, but provisions of section 2(22)(e) was never invoked before by Department. It was concluded that assessee was not liable even in terms of amendment, to "concern" as referred to in Explanation 3 to section 2(22)(e) of Act and held that arrangement could not be treated as device or conduit to benefit assessee. Judicial Member held that corporate veil could not be lifted in facts of case. It was observed that credit balance of Rs. 26.24 crores was retained by firm in usual course of business and represented collection for previous two months. collection exceeded on average Rs. 10 crores per month. Consequently, it could not be inferred that amount retained by firm was for assessee's benefit. credit balance of about Rs. 26 crores was natural and unavoidable in circumstances of case and had no nexus whatsoever with loan advanced by firm to assessee. Judicial Member, accordingly, held that there was no receipt of "deemed dividend" in hands of assessee. Accountant Member, on other hand, noticed that as managing director of SISICOL, assessee controlled activities of all companies and firms of Sahara group and was also main person behind activities of all concerns. He held that "payment" is not same thing as payment in fact and relied on G. R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13 (Mad). He also observed that transaction in question could not be treated as being carried out at arm's length. He observed that there was no dispute that firm had advanced amounts to assessee. Accountant Member held that two transactions, one from company, SISICOL, to firm, and from firm to assessee should be treated as combined one, amounting to payment of loan from SISICOL to assessee. He held that firm was only conduit for loan and that firm's loan to assessee had its roots in credit balance of SISICOL. Reliance was placed in this regard upon T. Sundaram Chettiar v. CIT [1963] 49 ITR 287 (Mad) and M. D. Jindal v. CIT [1987] 164 ITR 28 (Cal). It was held that firm did not have adequate resources and its advance to assessee was not independent transaction. Reference was made to balance-sheet of firm as on March 31, 1992, which showed that partner's capital was only Rs. 40,000. learned Accountant Member partner's capital was only Rs. 40,000. learned Accountant Member concluded that provisions of section 2(22)(e) were applicable in this case. It was noticed that SISICOL had share capital of Rs. 2,95,87,800 and further reserves and surplus of Rs. 1,84,19,305 as on March 31, 1992. These facts and figures supported conclusion that roots of loan from firm to assessee lay in credit balance of company, SISICOL, with firm. Dealing with question whether credit balance of SISICOL with firm was trade debt or not, Accountant Member noted exception to definition of dividend in sub-clause (ii) of section 2(22)(e) and observed that it operated only if there was advance or loan to shareholder by SISICOL and that assessee had to show that his case fell within exception clause and that no material had been placed before Income-tax Appellate Tribunal to establish it. Accountant Member noticed that of total credit balance of several concerns aggregating to Rs. 60,61,54,638, only Rs. 26,24,12,223 stood in name of SISICOL and also addressed issue of whether any nexus could be established between credit balance in name of SISICOL and loan advanced by firm to assessee. Third Member to whom matter was referred, after hearing submissions of parties concurred with opinion of Judicial Member. Consequently, assessee's appeal was allowed. Revenue argues that majority opinion of Income-tax Appellate Tribunal is erroneous, given text of section 2(22)(e) and object behind its enactment. Heavy reliance was placed on order of Accountant Member and of Revenue authorities. Counsel argued that assessee, as managing director (of SISICOL) was controlling it and firm as well and, as result, could use firms as conduit or device to funnel and utilise said company's funds for his personal benefit. It was loan or advance by SISICOL to its shareholder, i.e., assessee, who de facto was Sahara. It was argued that assessee was also shareholder of SISICOL; firm became convenient device to funnel SISICOL's amounts, advanced to it. Counsel said that once it was proved that substantial amount, i.e., Rs. 26,24,12,223 stood to credit of SISICOL, that some amounts were paid by firm to assessee reinforced inference that they were out of that company's funds. Counsel submitted that section 2(22)(e) enacts deeming fiction and that in such cases, it is open to Revenue to follow that fiction and not allow mind to boggle at some intervening facts. Consequently, in reality, firm being device or mechanism to avoid provision, should be ignored and fact that amounts were flowing from SISICOL to assessee, should be given due weight. Learned counsel relied on judgment of Supreme Court in CIT v. Mukundray K. Shah [2007] 290 ITR 433 (SC), where it was held that (page 444): "The companies having accumulated profits and companies in which substantial voting power lies in hands of person other than public (controlled companies) are required to distribute accumulated profits as dividends to shareholders. In such companies, controlling group can do what it likes with management of company, its affairs and its profits. It is for this group to decide whether profits should be distributed as dividends or not. declaration of dividend is entirely within discretion of this group. Therefore, Legislature realised that though funds were available with company in form of profits, controlling group refused to distribute accumulated profits as dividends to shareholders but adopted device of advancing said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was main reason for enacting section 2(22)(e) of Act. In case of CIT v. L. Alagusundaram Chettiar [1977] 109 ITR 508, Madras High Court held that word'payment' in said section means act of paying and, therefore, in that case it was held that payment by company to Karuppiah Chettiar was for benefit of assessee, managing director of company, L. Alagusundaram Chettiar, and was, therefore, assessable as dividend in hands of assessee. In said judgment it has been held that basic test to be applied in such cases is not whether loan given is benefit but whether payment by company to Karuppiah Chettiar was for benefit of assessee who was managing director of paying company. Applying above test to facts of present case, we are of view that Tribunal was right in holding, on examination of cash flow statement, that MKSEPL had made payments to MKF and MKI for benefit of assessee which enabled assessee to buy 9 per cent. RBI Relief Bonds in financial which enabled assessee to buy 9 per cent. RBI Relief Bonds in financial year 1999-2000. It is in this sense that Tribunal was right in holding that two firms were used as conduits by assessee. It is not in dispute that assessee had more than 10 per cent. of voting power in MKSEPL during block period. It is not in dispute that assessee had substantial interest of about 16 per cent. in MKF. It is not in dispute that three companies were controlled companies. There is one more point which needs to be mentioned. timing of so-called repayments by company to MKF and MKI and immediate withdrawal of funds by assesseecum-director-cum- shareholder-cum-partner and timing of investment in purchase of bonds were around same time. Moreover, in MKSEPL assessee is not only shareholder having more than 10 per cent. of total voting power, he is also director of that company. said company is also partner in MKF and MKI which explains why amount of Rs. 5.99 crores was routed by splitting said amount into two parts of Rs. 2.79 crores and Rs. 3.20 crores. In present case, most important aspect, which has not been considered by High Court, was that withdrawal of money by assessee from his capital account, in books of MKI, during financial year 1999-2000 led to debit balance of Rs. 8.18 crores as on March 31, 2000. To this extent, finding given by Assessing Officer and by Tribunal remains unchallenged. Lastly, on maintainability of block assessment, we are of view that Department was right in assessing said amount as deemed dividend in hands of assessee under section 2(22)(e) of Act. impugned assessment order was passed under section 158BC. That assessment originated on account of search conducted under section 132(1) of Act. In that search diary'ML-20' was identified. That identification was starting point of connected enquiries resulting in detection of undisclosed income of Rs. 5.99 crores. In other words, undisclosed income, in nature of deemed dividend, did not arise from any scrutiny proceedings, tax evasion petitions, surveys, information received from external agency, etc. undisclosed income was detected by Assessing Officer wholly and exclusively as result of search and, therefore, Department was right in invoking provisions of Chapter XIV-B. There is one more aspect in this regard. From facts, indicated above, Department has established sort of circular trading in this case. One of important features of circular trading is to route funds through conduits. In such cases picture emerges only after seeing cash flow statements. In present case, ML-20 made Assessing Officer to hold enquiries and in that enquiry cash flow statement emerged, therefore, Department was right in invoking provisions of Chapter XIV-B in present case. five payments had direct co-relation with Rs. 5.99 crores paid by MKSEPL to MKF and MKI and payments by said two firms to assessee who used said money to buy 9 per cent. RBI Relief Bonds. Therefore, said payment by company through two firms was for benefit of assessee. Therefore, said funds were not repayment of loans, they were for purchase of 9 per cent. RBI Relief Bonds by respondent." Revenue's counsel also relied on CIT v. National Travel Services [2012] 347 ITR 305 (Delhi) and urged that in similar circumstances, partners of firm were held to have received advances and subjected to tax under section 2(22)(e). Counsel for assessee urged this court to uphold Income-tax Appellate Tribunal's majority view. He submitted that once there was factual finding with respect to absence of nexus between amounts payable to SISICOL and balance of firm's moneys (which was in excess of Rs. 33 crores) there was no question of applicability of section 2(22)(e). Counsel submitted that although provision creates fiction, before proceeding to "logical conclusion" strict terms of statute are to be construed and applied. Section 2(22)(e) of Act reads as follows: "(22)'dividend' includes- (a) any distribution by company of accumulated profits, whether capitalised or not, if such distribution entails release by company to its shareholders of all or any part of assets of company; (b) any distribution to its shareholders by company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to extent to which company possesses accumulated profits, whether capitalised or not; (c) any distribution made to shareholders of company on its liquidation, to extent to which distribution is attributable to accumulated profits of company immediately before its liquidation, whether capitalised or not; (d) any distribution to its shareholders by company on reduction of its capital, to extent to which company possesses accumulated profits which arose after end of previous year ending next before 1st day of April, 1933, whether such accumulated profits have been capitalised or not; (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) by way of advance or loan to shareholder, being person who has substantial interest in company, 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; but'dividend' does not include- (i) distribution made in accordance with sub-clause (c) or subclause (d) in respect of any share issued for full cash consideration, where holder of share is not entitled in event of liquidation to participate in surplus assets; (ii) any advance or loan made to shareholder by company in ordinary course of its business, where lending of money is substantial part of business of company; (iii) any dividend paid by company which is set off by company against whole or any part of any sum previously paid by it and treated as dividend within meaning of sub-clause (e), to extent to which it is so set off. Explanation 1.-The expression'accumulated profits', wherever it occurs in this clause, shall not include capital gains arising before 1st day of April, 1946, or after 31st day of March, 1948, and before 1st day of April, 1956. 1946, or after 31st day of March, 1948, and before 1st day of April, 1956. Explanation 2.-The expression'accumulated profits' in subclauses (a), (b), (d) and (e), shall include all profits of company up to date of distribution or payment referred to in those subclauses, and in sub-clause (c) shall include all profits of company up to date of liquidation, but shall not, where liquidation is consequent on compulsory acquisition of its undertaking by Government or corporation owned or controlled by Government under any law for time being in force, include any profits of company prior to three successive previous years immediately preceding previous year in which such acquisition took place. Explanation 3.-For purposes of this clause,- (a)'concern' means Hindu undivided family, or firm or association of persons or body of individuals or company; (b) person shall be deemed to have substantial interest in concern, other than company, if he is, at any time during previous year, beneficially entitled to not less than twenty per cent. of income of such concern;" term "dividend" takes in any disbursal, by company, of accumulated profits, distribution to its shareholders-by company-of debenture-stock, or deposit certificates in any form, (with or without interest), any sharing with its shareholders-by company, on its liquidation, any distribution made to shareholder by company on reduction of its capital. All these are spelt out by sub-clauses (a) to (d) of section 2(22) of Act. Section 2(22)(e) enacts that payment by company and not being company in which public are substantially interested, of any sum (whether as representing part of assets of company or otherwise) made after May 31, 1987, but 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 10 per cent. voting power is deemed to be dividend. second class of payment is by way of advance or loan to any concern in which such shareholder is member or partner and in which he has substantial interest. third class is payment by any such company for individual benefit of any such shareholders to extent of which company in either case possesses accumulated profits. later part of section 2(22)(e) spells out exclusions from term "dividend". Parliament pointedly clarified that any loan given or advance made, to shareholder, or concern (in which shareholder is member or partner and in which he has substantial interest), by company in ordinary course of his business where lending of money is substantial part of business of company or any dividend paid by company which is set off by company against whole or any part of sum previously paid by it and treated as dividend under section 2(22)(e) to extent of set off, is not "dividend" and, therefore, excluded. In CIT v. C. P. Sarathy Mudaliar [1972] 83 ITR 170 (SC), section 2(6A)(e) of Indian Income-tax Act, 1922 (which was identical to section 2(22)(e)) was considered. There, members of Hindu undivided family (HUF) acquired shares in company with family's funds. Loans were given to Hindu undivided family and question was whether those loans could be treated as family's dividend income in terms of section 2(6A)(e). Supreme Court held that only loans advanced to shareholders could be deemed to be dividends under section 2(6A)(e) of Act and that Hindu undivided family could not be considered to be "shareholder". Therefore, amounts loaned to Hindu undivided family were not loans of company to its shareholders and could not, therefore, be deemed to be its income. court further held that when Act speaks of shareholder it refers to registered shareholder. C. P. Sarathy Mudaliar was followed by Supreme Court in Rameshwarlal Sanwarmal v. CIT [1980] 122 ITR 1 (SC). In that case, company advanced loans to assessee-Hindu undivided family who was beneficial owners of shares (in company), though shares were registered in name of individual karta, who held them for and on behalf of family. Supreme Court held that Hindu undivided family being only beneficial shareholder and not registered shareholder would not fall within purview of section 2(6A)(e) of 1922 Act. court held as follows (page 8): "What section 2(6A)(e) is designed to strike at is advance or loan to a'shareholder' and word'shareholder' can mean only registered shareholder. It is difficult to see how beneficial owner of shares whose name does not appear in register of shareholders of company can be said to be a'shareholder'. He may be beneficially entitled to share but he is certainly not a'shareholder'. 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. It is former who is a'shareholder' within matrix and scheme of company law and not latter. 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(6A)(e) are satisfied that amount of loan would be liable to be regarded as'deemed dividend' within meaning of section 2(6A)(e)." It is thus clear that first limb of provisions of section 2(22)(e) has to be followed, i.e., payment must be to person who is registered holder of shares. Here, assessee is no doubt shareholder of SISICOL. However, was payment made by company? elaborate exercise of Revenue asking Income-tax Appellate Tribunal and this court to lift "corporate veil" and see reality, piercing dissimilative position of assessee is to be understood as its compulsion to deal with text of section 2(22)(e), which enacts that payment "by company... of any sum (whether as representing part of assets of company or otherwise) by way of advance or loan to shareholder..." and such shareholder being one who has substantial interest in company. It is undisputed that payments were not made to assessee "by company" (SISICOL); nor in his capacity as its "shareholder". They were paid by firm (of which he is undoubtedly partner). Assessing Officer and Commissioner of Income-tax (Appeals) were of opinion that firm-which gave amounts as loan to assessee-a partner, was ruse facade and smokescreen to shield real payment by SISICOL to him. Whilst there is no gainsaying that assessee is managing director of SISICOL-equally he is partner of firm, which advanced amount to him. However, question of payment to concern (in this case, firm) is matter that requires to be established. Here factual findings are important. sum may be debt but not loan from factual findings are important. sum may be debt but not loan from company to firm or to assessee. assessee had relied on Bombay Steam Navigation Co. (1953) P. Ltd. (supra) and other decisions to say that there had to be outflow of funds. Third Member who agreed with Judicial Member (and, therefore, spoke for majority view), correctly surmised that decision of such issues could not be based on entries in books of account. It was, in our opinion correctly stated that totality of facts and circumstances required consideration. Here, court notices that Accountant Member (of ITAT) held that two transactions of loan by firm to assessee and other, from SISICOL to firm were really one transaction. Indisputably, assessee obtained loan from firm. Consequently, if it is held that two transactions were in fact one, i.e., loan represented funds of SISICOL, then case of loan and advance stood established and section 2(22)(e) applied. Unquestionably, firm worked for company as its agent. If agent had given loan or advance to assessee for and on behalf of company, then there was no need for anything else to be established to attract section 2(22)(e). concomitant issue (with whether transaction was one whole or separate) was also question if assessee had used smokescreen to evade tax and camouflage transaction of loan/ advance from SISICOL to himself by employing firm as conduit. Revenue argued that device was used and that in such case, assessee would hardly be expected to show transaction as loan from SISICOL to him. It cannot be seriously doubted that as managing director and shareholder of SISICOL, assessee has sufficient control over its affairs; so is case with firm. firm did advance amounts to him. These facts, however, facially cannot result in inference that two transactions are one and that assessee had adopted stratagem of securing loan and advance from SISICOL through conduit, viz., firm. Apart from surmise that transaction was one and same, Revenue had to probe further and establish from material before it that payments were part of tax evasion ruse. Section 2(22)(e) pulls in notional or artificial income for assessment by fiction. primary burden to bring to tax amounts, on ground that transaction is deemed dividend (when it is not so otherwise) is upon it. To discharge that burden, Revenue cannot rest content on surmises and assumptions; it should premise them, rather on facts and materials on record. Income-tax Appellate Tribunal held that there is no material on record to show that funds of company were utilised by firm to advance loan to assessee. firm had advanced Rs. 1,88,96,202 out of total available funds of more than Rs. 60 crores: which belonged to different parties though available with it, i.e., firm. This factual finding does not disclose any error or infirmity. So far as contention that two transactions one from SISICOL to firm and second from firm to assessee should be treated as one, is not based on any valid justification. firm has legal existence separate and independent of SISICOL. It carried on significant commercial activity and collected substantial amounts (crores of rupees). Therefore, finding that two transactions, i.e., one of advancing loan (by firm to assessee) and other of use of funds of SISICOL by firm being in reality one transaction is without basis. presumption was drawn without any material to support case of Revenue that funds of company were utilised to advance loan. Speaking about this, Third Member, who spoke for majority view of Income-tax Appellate Tribunal since he concurred with Judicial Member, said (page 262 of 294 ITR (AT)): "There is no nexus between funds of company with firm and advancement of loan to assessee. In fact evidence, as pointed out by learned Judicial Member, is to contrary. He has pointed out that on April 25, 1991, Rs. 20 lakhs were advanced by firm to assessee. This amount could not have come out of credit balance of Rs 26.41 crores which represented money collections in February and March, 1992. There is no contravention of above factual finding at any stage of proceedings including Third Member hearing before me. main and solid finding that Rs. 26.24 crores shown as credit balance payable to company by firm represented collections made by assessee in course of business for months of February, March and partly for January, 1992, has also not been challenged or refuted with reference to any material on record. It is also not in dispute that firm was making on average collection of more than Rs. 10 crores per month through 290 centers spread throughout length and breadth of country and that time was taken in making accounts, reconciliation, trial balances and in providing other details of collection and in remittance of money to SISICOL. Having regard to huge turnover, two months cannot be said to be unreasonable. This is what learned Judicial Member has recorded and my attention has not been drawn to any material, which would show that such finding on facts of case, could not be recorded. factual finding has also not been shown to be erroneous. device cannot be presumed, it has to be established by bringing on record facts and circumstances from which reasonable inference of device could be drawn. No such attempt appears to have been made here." This court relies on decision in CIT v. Ankitech P. Ltd. [2012] 340 ITR 14 (Delhi). In Ankitech, during assessment proceedings, Assessing Officer noticed that assessee, company received advance of Rs. 6,32,72,265 by way of book entry from one JGPL. shareholders who had substantial interest in assessee also had 10 per cent. voting power in JGPL. Assessing Officer specifically took note of shareholding pattern in assessee-company as well as in JGPL. It was held that two individuals were members holding substantial interests in JGPL which had provided loans and advances to assessee and same individuals had substantial interest in assessee as well, for purpose of section 2(22)(e). amount received by assessee from JGPL, therefore, was held to constitute "advances and loans" and treated as deemed dividend under section 2(22)(e) of Act and added that amount to assessee's income despite their plea to contrary. Highlighting limits to which fiction can be carried, this court ruled that (page 35): "... under normal circumstances, such loan or advance given to shareholders or to concern, would not qualify as dividend. It has been made so by legal fiction created under section 2(22)(e) of Act. We have to keep in mind that this legal provision relates to 'dividend'. Thus, by deeming provision, it is definition of dividend which is enlarged. Legal fiction does not extend to'shareholder'. When we keep in mind this aspect, conclusion would be obvious, viz., loan or advance given under conditions specified under section 2(22)(e) of Act would also be treated as dividend. fiction has to stop here and is not to be extended further for broadening concept of shareholders by way of legal fiction. It is common case that any company is supposed to way of legal fiction. It is common case that any company is supposed to distribute profits in form of dividend to its shareholders/members and such dividend cannot be given to non-members. second category specified under section 2(22)(e) of Act, viz., concern (like assessee herein), which is given loan or advance is admittedly not shareholder/member of payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. 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 shareholder as well, that has not happened. Most of arguments of learned counsel for Revenue would stand answered, once we look into matter from this perspective." Revenue had relied on CIT v. National Travel Services [2012] 347 ITR 305 (Delhi) to say that in similar circumstances, partners of firm were held to have received advances and subjected to tax under section 2(22)(e). This court notices that in that case, assessee-firm consisted of three partners, N, S and JE having profit sharing ratio of 35 per cent.; 15 per cent. and 50 per cent., respectively. It had taken loan of Rs. 28,52,41,516 from JP in which assessee-firm had invested. assessee had subscribed to equity shares which constituted 48.18 per cent. of share capital. shares were purchased in names of two partners, N and S but assessee-firm was beneficial owner. Assessing Officer assessed loan as deemed dividend under section 2(22)(e) but Tribunal set aside order. On appeal, this court ruled in favour of Revenue, on basis of cumulative reading of section 2(22)(e) especially Explanation regarding "concern" as extending to firm and entitlement of shares on basis of "beneficial entitlement". court observed pertinently that (page 318): "If contention of assessee is accepted, in no case partnership firm can come within mischief of section 2(22)(e) of Act because of reason that shares would be purchased by firm in name of its partners as firm is not having any separate entity of its own. With name of partner entering into register of members of company as shareholder, said partner shall be the'shareholder' in records of company but not beneficial owner as'beneficial owner' is partnership firm. This would mean that loan or advance given by company would never be treated as deemed dividend either in hands of partners or in hands of partnership firm. In this way very purpose for which this provision was enacted would get defeated... No doubt, when section 2(22)(e) of Act enacts deeming provision, it has to be strictly construed. At same time, it is also trite that such deeming provision has to be taken to its logical conclusion. If partnership firm which has purchased shares is not treated as shareholder merely because shares were purchased in name of partners, that too because of legal compulsion that shares could not be allotted to said partnership firm which is non-legal entity, it would be impossible for such condition to be fulfilled. That is not purpose of law. partnership firm is synonym of partners. As per Circular issued by SEBI dated March 31, 1975, interpreting section 187C of Companies Act, relied on by learned counsel for assessee himself, partnership firm is not person capable of being a'member' within meaning of section 47 of Companies Act. It is further explained that since partnership firm is not legal entity by itself but only compendious way of describing partners constituting firm, it is necessary that names of all members of partnership firm should be entered in register of members. Obviously then, with purchase of shares by firm in name of its partners, it is firm which is to be treated as shareholder for purposes of section 2(22)(e) of Act." This court is of opinion that above decision does not advance Revenue's cause in this appeal. Granted, assessee is shareholder of SISICOL; he is also partner of firm. However, neither did SISICOL give him money nor did it advance amount to firm. firm has independent existence and it had over Rs. 60 crores in its account. That significant part of it, i.e., 44 per cent. or over Rs. 26 crores was payable to SISICOL could not have blinded Revenue to fact that other amount was available and given as loan to assessee. In these circumstances at least, it could not have been said that loan to assessee and loan (in form of credits in favour of SISICOL) were really one transaction. It is also the form of credits in favour of SISICOL) were really one transaction. It is also matter of record that firm had over 290 branches or units and collection by it exceeded on average Rs. 10 crores per month. Therefore, it could not be legitimately held that amount retained by firm was for assessee's benefit. For foregoing reasons, it is held that question of law framed has to be answered and is so answered in favour of assessee and against Revenue. appeal is consequently dismissed. WP No. 1162 of 2012 In this petition, correctness of order April 11, 2008, by which Revenue's application for rectification of majority opinion, in view of Third Member not noticing or wrongly appreciating important features has been challenged. Revenue alleged that Judicial Member's order, especially paragraph 45 was not correctly read by Third Member, who ruled that Circular of Central Board of Direct Taxes dated September 22, 1987, did not go against spirit of law. Third Member held that circular was inapplicable. Third Member noted that expanded provision in section 2(22)(e), seeks to cover "concern" and this is what was explained in Circular. Judicial Member held that it was not case of benefit to "concern" as in that situation "deemed dividend" under section 2(22)(e) had to be added in hands of concerns and not of assessee. Revenue objected to observations in ultimate paragraph of Third Member that source of funds utilised for advancing loan to assessee was not examined and no material was on record to prove that SISICOL's funds were used to advance loan to assessee. Therefore, conditions of section 2(22)(e) were not satisfied. Dealing with these submissions, Income-tax Appellate Tribunal held that: "8. It is contended in application that Third Member was expected to evaluate himself factual position and material which had been brought by both parties. He should have called for detailed information before deciding issue in favour of assessee as Income-tax Appellate Tribunal is final fact finding body. 9. contention advanced is without any substance. Evidence on record has been evaluated and finding of fact recorded by Third Member as noted above. Further, Third Member has very limited jurisdiction to agree with one of differing Members of Bench. As matter of fact, Third Member found that Revenue failed to establish that amount of SISICOL with Sahara India was utilised for giving loan to assessee. Observation about no material and no attempt to connect to establish nexus between funds of SISICOL and advancement of loan to assessee was, in consonance with observations and findings already recorded by learned Judicial member. Third Member could not ask for further enquiries or investigation and permit fresh-inning to Revenue as suggested in miscellaneous application. contention raised is devoid of substance. 10. At any rate, I do not find any mistake, which can be treated as a'mistake apparent from record', permitted to be rectified under section 254(2) of Income-tax Act, in order dated July 17, 2007. Revenue authorities are merely seeking review of order, which is not permissible. miscellaneous application is devoid of any substance and is dismissed." We are of opinion that impugned order does not suffer from any infirmity calling for interference. As to whether there was mistake apparent from face of record, in context of this case, Income-tax Appellate Tribunal felt that Revenue could not establish its case since basic contention about applicability of section 2(22)(e) was not accepted. writ petition, i.e., W. P. (C) No. 1162 of 2012 has to fail. Therefore, both matters, i.e., WP No. 1162 of 2012 and ITA 398 of 2010 are accordingly dismissed. *** Commissioner of Income-tax v. Subrata Roy
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