W.P.No.34786 of 2015 IN HIGH COURT OF JUDICATURE AT MADRAS Reserved on : 27.08.2019 Pronounced on : 24.09.2019 CORAM HONOURABLE MR. JUSTICE M.S.RAMESH W.P.No.34786 of 2015 and M.P.No.1 of 2015 R.Chitra Petitioner Vs. 1.The Vice Chairman, Income Tax Settlement Commission, Additional Bench, 640 Anna Salai, Nandanam, Chennai-600 035. 2.The Principal Commissioner of Income Tax, Central 2, Chennai-34. 3.The Deputy Commissioner of Income Tax, Central Circle 2, Coimbatore. ... Respondents PRAYER: Writ Petition is filed under Article 226 of Constitution of India, praying for Writ of Certiorari, calling for records comprised in File No.TN/N-53/2013-14/45/IT dated 14.09.2015 on file of first respondent and to quash same insofar as it relates to determination of deemed dividend as income of petitioner for assessment years 2009-10 to 2013-14. 1/94 http://www.judis.nic.in W.P.No.34786 of 2015 For Petitioner : Mr.Jehangir D.J.Mistri,Sr. Counsel for Mr.R.Srinivasan For Respondents : Mr.ANR. Jaya Prathap, JSC & Mr.A.P.Srinivas Senior Standing Counsel ORDER order of Income Tax Settlement Commission dated 14.09.2015, insofar as it includes deemed dividend for purpose of determining total income of petitioner for assessment years 2009-10 to 2013-14 is concerned, is under challenge in present Writ Petition. 2. Heard Mr.Jehangir D.J.Mistri, learned Senior counsel for petitioner and Mr.ANR. Jaya Prathap, JSC & Mr.A.P. Srinivas, learned Senior Standing Counsel appearing on behalf of respondents. 3. brief facts of case are as follows: a) M/s. Rasi Seeds Private Limited and Rasi Tex Private Limited are two Private Limited Companies in both of which, Mrs. Chitra, petitioner herein, is shareholder. On 10.01.2013, search and seizure operations were carried out in residential and business premises of 2/94 http://www.judis.nic.in W.P.No.34786 of 2015 petitioner, by Income Tax Department under Section 132 of Income Tax Act (hereinafter referred to as 'the Act'). During course of search, Department seized cash to extent of Rs.35 lakhs from residential premises of petitioner. In pursuance to search, jurisdictional Assessing Officer issued notice dated 30.09.2013 to petitioner under Section 153A, r/w. Section 153 C of Act, for assessment years 2007-2008 to 2012-2013. petitioner had responded to said notices by filing Returns of Income for each of these years on 28.02.2014. petitioner had also filed Returns of Income for assessment years 2013-2014 under Section 139 of Act on 30.09.2013. b) Pending assessment of her income for assessment years 2007-2008 to 2012-2013 under Section 153 C and for assessment year 2013-2014 under Section 143 of Act, petitioner had made application under Section 245 C of Act for settlement of her cases. petitioner offered income of Rs.35 lakhs seized from her residence as additional income for assessment year 2013-2014 and also disclosed that said income was derived out of sale of Silver Oak trees which were felled at her 3/94 http://www.judis.nic.in W.P.No.34786 of 2015 agricultural lands. application for settlement was claimed to have been made since petitioner was not able to prove that seized cash is out of sale of such trees. c) In application before Income Tax Settlement Commission (hereafter referred to as Commission ), petitioner had disclosed that she was shareholder, holding more than 20% of equity share capital in each of two Companies namely, M/s. Rasi seeds Private Limited (RSPL) and M/s. Rasi Tex India Private Limited (RTPL) and that RSPL had advanced monies in ordinary course of its business as inter corporate loans to RTPL. d) second respondent submitted report under Rule 9 of Income Tax Settlement Commission Procedure Rules, requesting Commission to hold that petitioner is liable to be taxed on deemed dividend under Section 2 (22) (e) of Act and alternatively to treat application is invalid. e) Commission, through impugned order dated 14.09.2015 held that sum of Rs.137,19,75,000/- advanced by 4/94 http://www.judis.nic.in W.P.No.34786 of 2015 RSPL to RTPL is to be assessed as deemed dividend in hands of petitioner, along with income returned in each of years and additional income offered in application. This order is put under challenge in present Writ Petition. 4. Mr.Jehangir D.J.Mistri, learned Senior Counsel for petitioner assailed impugned order on following grounds: a. While Circular No. 19 of 2017 directs that deemed dividend under Section 2(22) (e) of Act cannot apply where transactions entered are in nature of commercial transactions, Circular No. 495 of 1987 directs that deemed dividend will be taxable in hands of concern were loan/advances is made by company to concern with common shareholder. These circulars of CBDT are binding in nature and are required to be followed, even where they mitigate rigors of act. b. There is no dispute that current account transactions between RSPL and RTPL are in normal/ordinary course of business and thus, deemed dividend should not apply. c. Even assuming that assessment of dividend under Section 2(22)(e) can be made in hands of shareholders, even then, 5/94 http://www.judis.nic.in W.P.No.34786 of 2015 dividend is not taxable as per provisions of Section 10 (34). d. Since there were more than two shareholders in assessment years 2012-2013 and 2013-2014 namely, petitioner and M. Ramasamy, provisions of Section 2(22)(e) cannot be applied for those years as computation mechanism fails. e. Even assuming that amount advanced for first time by RSPL to RTPL is treated as deemed dividend, any transfer of money by RTPL to RSPL and subsequent repayment by RSPL to RTPL thereafter should not be taxed as deemed dividend. As such by adjusting such payments by RTPL to RSPL, deemed dividend ought to have been limited to Rs.35,47,20,422/- as against Rs.137,19,75, 000/-. f. No incriminating material was found during search in relation to deemed dividend and thus proceedings under Section 153 r/w. 153 C are not valid. Though this argument was advanced before Commission, issue was not adjudicated. 5. In support of all aforesaid contentions, learned Senior counsel for petitioner relied on various decisions, which I shall 6/94 http://www.judis.nic.in W.P.No.34786 of 2015 address while discussing such contentions. 6. Substantiating findings of Commission in impugned order, Mr.A.P. Srinivas, learned Senior Standing counsel for Department countered aforesaid submissions of petitioner, in following manner: a. Circulars of CBDT will not bind Courts, especially, when it is against provisions of law. Even otherwise, without explaining how transactions between two Companies constitute ordinary commercial transactions, petitioner cannot rely on circulars. b. case of petitioner does not fall within exclusion as defined in Section 2(22)(e)(ii) of Act. There is factual finding of fact by Commission in impugned order that lending of money was not substantial part of business of RSPL. According to Department, word ordinary course of business is qualified by words where lending of money is substantial part of business . c. exemption under Section 10 (34) will apply only when dividend distribution tax is paid under Section 115-O. Further, 7/94 http://www.judis.nic.in W.P.No.34786 of 2015 definition of Income under Section 2 (24) includes dividend and Section 2(22)(e) applies to deemed dividend. Section 8 is basis of charge and Section 115-O is relating to special provisions of tax on distributed profits of domestic Companies. d. other shareholder, Mr. Ramasamy, was not petitioner before Settlement Commission. Initially, it was projected by petitioner as if she was only one having more than 20% shareholding. argument raised by petitioner of failure of computation mechanism is hypothetical since Mr.Ramasamy is not taxed on same income. e. Even when advance of loan is subsequently repaid in its entirety during relevant years, still deemed dividend is applicable. f. plea of lack of incriminating material will not arise since petitioner himself had filed application before Settlement Commission to adjudicate issue of deemed dividend. During course of search, specific question in relation to applicability of deemed dividend was put to Senthil Nathan. 7. By distinguishing decisions relied upon by learned 8/94 http://www.judis.nic.in W.P.No.34786 of 2015 Senior counsel for petitioner, learned Standing counsel for Department also relied upon various decisions, which I shall deal with later. 8. I have given careful consideration to submissions made by respective counsels and have carefully perused all materials placed before me. MAINTAINABILITY OF WRIT PETITION AGAINST ORDER OF SETTLEMENT COMMISSION 9. Before addressing various submissions put forth by petitioner, it would be necessary to address preliminary objection raised by learned Standing counsel for respondent on jurisdiction of this Court under Article 226 of Constitution of India to deal with order passed by Settlement Commission under Section 245 D (4) of Act. 10. By relying on decisions of Hon ble Apex Court in case of Jyotendrasinhji Versus S.I. Tripathi and others reported 9/94 http://www.judis.nic.in W.P.No.34786 of 2015 in (1993) 201 ITR 611 (SC); C.A. Abraham V. ACIT in 255 ITR 340; and Mathurbhai Bhimjbhai Rudani V. ITSC in 37 Taxman.com 333 Gujarat High Court, learned Standing counsel submitted that decision making process alone can be challenged and not decision itself. Even otherwise, piecemeal acceptance of Settlement Commission s order and challenge to remaining portion is impermissible. 11. various arguments advanced by learned Senior counsel for petitioner, which have been extracted above, are to effect that impugned order of Commission is not in accordance with provisions of Act. Among various grounds raised by petitioner, two primary grounds are to effect that advances in nature of commercial transactions would not fall within ambit of Section 2 (22) (e) and that dividend is not taxable as per provisions of Section 10 (34) of Act. These grounds are predominantly to effect that findings rendered by Settlement Commission in impugned order are not in accordance with provisions of Act. 10/94 http://www.judis.nic.in W.P.No.34786 of 2015 12. In Jyotendrasinhji (supra), Hon'ble Apex Court had held that only ground upon which Court could interfere against order of Commission is that when such order is contrary to provisions of Act and that such contravention had prejudiced appellant. This proposition has been reiterated in various other subsequent decisions of various High Courts. In said decision, Hon'ble Apex Court had also referred to decision of Hon'ble Supreme Court in R.B. Shreeram Durga Prasad & Fatechand Nursing Das Vs Settlement Commission [(1989) 176 ITR 169], wherein it was held that judicial review is permissible, not with decision, but with decision making process. Nevertheless, it was ultimately held that order of Settlement Commission could be interfered with, if it is in contrary to provisions of Act. relevant portion in Jyotendrasinhji s case reads as follows: Indeed, it would be difficult to predicate reasons and considerations which induce commission to make particular order, unless of course commission itself chooses to, give reasons for its order. Even if it gives reasons in given case, scope of enquiry in appeal remains same as indicated above viz., whether it is,contrary to any of provisions of 11/94 http://www.judis.nic.in W.P.No.34786 of 2015 Act. In this context, it is relevant to note that principle of natural justice (and alteram partem) has been incorporated in Section 245-D itself. sole overall limitation upon tire Commission thus appears, to be that it should act in accordance with provisions of Act. scope of enquiry, whether by High Court under Article 226 or by this Court under Article 136 is also same whether order of Commission is contrary to any of provisions of Act and if so, has it prejudiced petitioner/appellant apart from ground of bias, fraud & malice which, of course, constitute separate and independent category. Reference in this behalf may be had to decision of this Court in Sri Ram Durga Prasad v. Settlement Commission 176 I.T.R. 169, which too was appeal against orders of Settlement Commission. Sabyasachi Mukharji J., speaking for Bench comprising himself and S.R. Pandian, J. observed that in such case this Court is " concerned with legality of procedure followed and not with validity of order.' learned Judge added 'judicial review is concerned not with decision but with decision-making process." Reliance was placed upon decision of House of Lords in 12/94 http://www.judis.nic.in W.P.No.34786 of 2015 Chief Constable of N.W. Police v. Evans, [1982] 1 W.L.R.1155. Thus, appellate power under Article 136 was equated to power of judicial review, where appeal is directed against orders' of Settlement Commission. For all above reasons, we are of opinion that only ground upon which this Court can interfere in these appeals is that order of Commission is contrary to provisions of Act and that such contravention has prejudiced appellant main controversy in these appeals relates to interpretation of settlement deeds though it is true, some contentions of law are also raised. commission has interpreted trust deeds in particular manner, Even if interpretation placed by commission said deeds is not correct, it would not be ground for interference in these appeals, since wrong interpretation of deed of trust cannot be said to be violation of provisions of Income Tax Act. it is equally clear that interpretation placed upon said deeds by Commission does not bind authorities under Act in proceedings relating to other assessment years. 13. In C Abraham, (supra) Madras High Court had 13/94 http://www.judis.nic.in W.P.No.34786 of 2015 observed in paragraph 16 that it cannot be said that Settlement Commission has followed any legal procedure so as to enable this Court to interfere with order of Commission. Likewise, in Mathurbhai Bhimjbhai Rudani (supra), Gujarat High Court had relied upon Jyotendrasinhji (supra) and concurred that interference can be made to order of Settlement Commission, if order is contrary to provisions of Act and such contravention prejudices appellant. As stated earlier, various legal propositions put forth before this Court, assailing orders of Settlement Commission, are to effect that impugned order of Commission is not in conformity with provisions of Act and by applying ratio laid down in Jyotendrasinhji s case (supra), it can be said that present Writ Petition is maintainable. 14. Likewise, this is not case where petitioner had accepted portion of impugned order and challenged rest. As stated earlier, petitioner offered income of Rs.35 lakhs seized as additional income for assessment year 2013-2014 and also disclosed that said income was derived out of sale of Silver Oak trees which were felled at her agricultural lands. application for 14/94 http://www.judis.nic.in W.P.No.34786 of 2015 settlement was made since petitioner was not able to prove that seized cash was out of sale of such trees. Apprehending that amounts advanced by RSPL to RTPL may be assessed as deemed dividend is in hands of petitioner, mention was made in application that petitioner is shareholder, holding more than 20% of equity share capital in both Companies and that RSPL had advanced money in ordinary course of its business as corporate loans to RTPL. It is nobody s case that petitioner claimed portion of sum of Rs.35 lakhs offered as income, to be taxable. Hence contention of learned Standing counsel for Department that piecemeal challenge to Settlement Commission s order is not maintainable, cannot be sustained. As such, this Court is of view that challenge to impugned order of Settlement Commission by invoking Article 226 of Constitution of India in this Writ Petition, is maintainable. 15. I shall now address various grounds raised and deliberated by respective counsels. RELEVANCE AND VALIDITY OF CDBT CIRCULARS: 15/94 http://www.judis.nic.in W.P.No.34786 of 2015 16. learned Senior counsel for petitioner, would place reliance on two Circulars issued by Central Board of Direct Taxes (CBDT). While Circular No. 19 of 2017 directs that advances in nature of commercial transaction would not fall within ambit of Section 2(22)(e) and that no appeals be filed by Department on this ground and those already filed shall be withdrawn or not pressed upon, Circular No. 495 of 1987 directs that deemed dividend will be taxable in hands of concern were loan/advances are made by Company to concern with common shareholder. Reliance was placed on decisions in UCO Bank V. CIT [(1999) 237 ITR 889 (SC)]; Navnit Lal C. Javeri Vs ACIT [(1965) 56 ITR 198 (SC)]; KP Verghese V. ITO [(1981) 131 ITR 597 (SC)]; and Keshavji Ravji and Company V. CIT [(1990) 183 ITR 1 (SC)] in this regard. 17. learned Standing counsel for Department would oppose this proposition stating that without explaining how transactions between two Companies constitute ordinary commercial transaction, petitioner cannot rely on Circulars. learned counsel also contended that Circulars will not bind 16/94 http://www.judis.nic.in W.P.No.34786 of 2015 Courts, especially when it is against provisions of law. According to learned counsel, proceedings under Section 245 L of Act before Settlement Commission is deemed to be judicial proceedings and therefore, these Circulars will have no binding effect. For such proposition, learned Standing counsel relied upon decisions in Hindustan Aeronautics Limited V. CIT reported in (2000) 243 ITR 808 (SC) and CEEE V. Rattan Melting and Wire Industries reported in (2008) 231 ELT 22 (SC) and submitted that Hon'ble Supreme Court had distinguished applicability of decision in KP Verghese and Navnit Lal relied upon by petitioner. 18. Two issues that arise for consideration at this juncture are as to whether Circulars of CBDT are binding on Settlement Commission and if so, whether contents of these two Circulars would allure to benefit of petitioner? 19. Three Hon ble Judges of Hon'ble Supreme Court had dealt with relevance and binding nature of CBDT s circulars in UCO Bank (supra) and held that these Circulars are legally binding on revenue, even if they be found not in accordance with correct 17/94 http://www.judis.nic.in W.P.No.34786 of 2015 interpretation of Section and they depart or deviate from such construction. following are relevant portions of judgment: ... there is really little probability of loans being repaid. It is considered desirable to extend this principle to banks which, instead of transferring doubtful debts to suspense account, credit interest on such debts to that account provided Income-tax Officer is satisfied that recovery is practically improbable." This circular was in force till 20th of June, 1978 when Central Board of Direct Taxes issued circular dated 20th of June, 1978 withdrawing with immediate effect earlier circular of 6th of October, 1952. reason for withdrawal of circular of 1952 is set out in circular of 20th of June, 1978. reason is stated thus: "the Board has been advised that where accounts are kept on mercantile basis, interest thereon is taxable irrespective of whether interest is credited to suspense account or to interest account. Kerala High Court has also expressed same view in case of State Bank of Travancore v. Commissioner of Income- tax, Kerala [110 ITR 336]. amount of such interest is, therefore, includible in taxable income." withdrawal of circular of 6th of 18/94 http://www.judis.nic.in W.P.No.34786 of 2015 October, 1952 which had been in force for thirty six years was on account of decision of Kerala High Court in State Bank of Travancore v. Commissioner of Income-tax, Kerala (Supra). Central Board of Direct Taxes, however, issued another circular of 9th of October, 1984 under which Central Board of Direct Taxes decided that "interest in respect of doubtful debts credited to suspense account by banking companies will be subjected to tax but interest charged in account where there has been no recovery for three consecutive accounting years will not be subjected to tax in fourth year and onwards. However, if there is any recovery in fourth year or later actual amount recovered only will be subjected to tax in respective years. This procedure will apply to assessment year 1979- 80 and onwards. Board's Instruction No.1186 dated 20.6.78 is modified to this extent." same circular has also further clarified that upto assessment year 1978- 79 taxability of interest on doubtful debts credited to suspense account will be decided in light of Board's earlier circular dated 6.10.1952 as said circular was withdrawn only in June, 1978. new procedure under circular of 9th of 19/94 http://www.judis.nic.in W.P.No.34786 of 2015 October, 1984 will be applicable for and from assessment year 1979-80. All pending disputes on issue should be settled in light of these instructions. Therefore, upto assessment year 1978-79, Central Board of Direct Taxes' circular of 6th October, 1952 would be applicable; while from assessment year 1979-80, Central Board of Direct Taxes' circular of 9th of October, 1984 is made applicable. In present case, assessment was made on basis of Central Board of Direct Taxes circular of 9th of October, 1984, since assessment pertains to assessment year 1981-82 to which circular of 6th October, 1984 is applicable. What is status of these circulars? Section 119(1) of Income-tax Act, 1961 provides that, "The Central Board of Direct Taxes may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for proper administration of this Act and such authorities and all other persons employed in execution of this Act shall observe and follow such orders, instructions and directions of Board. Provided that no such orders, instructions or directions shall be issued (a) so as to require any income-tax 20/94 http://www.judis.nic.in W.P.No.34786 of 2015 authority to make particular assessment or to dispose of particular case in particular manner; or (b) so as to interfere with discretion of Appellate Assistant Commissioner in exercise of his appellate functions". Under sub-section (2) of Section 119, without prejudice to generality of Board's power set out in sub-section (1), specific power is given to Board for purpose of proper and efficient management of work of assessment and collection of revenue to issue from time to time general or special orders in respect of any class of incomes or class of cases setting forth directions or instructions, not being prejudicial to assessees, as guidelines, principles or procedures to be followed in work relating to assessment. Such instructions may be by way of relaxation of any of provisions of sections specified there or otherwise. Board thus has power, inter alia, to tone down rigour of law and ensure fair enforcement of its provisions, by issuing circulars in exercise of its statutory powers under Section 119 of Income-tax Act which are binding on authorities in administration of Act. Under Section 119(2)(a), however, circulars as 21/94 http://www.judis.nic.in W.P.No.34786 of 2015 contemplated therein cannot be adverse to assessee. Thus, authority which wields power for its own advantage under Act is given right to forego advantage when required to wield it in manner it considers just by relaxing rigour of law or in other permissible manners as laid down in Section 119. power is given for purpose of just, proper and efficient management of work of assessment and in public interest. It is beneficial power given to Board for proper administration of fiscal law so that undue hardship may not be caused to assessee and fiscal laws may be correctly applied. Hard cases which can be properly categorised as belonging to class, can thus be given benefit of relaxation of law by issuing circulars binding on taxing authorities. question whether interest earned, on what have come to be known as "sticky" loans, can be considered as income or not until actual realization, is question which may arise before several income tax officers exercising jurisdiction in different parts of country. Under accounting practice, interest which is transferred to suspense account and not brought to profit and loss account of company is not 22/94 http://www.judis.nic.in W.P.No.34786 of 2015 treated as income. question whether in given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, Board has considered it necessary to lay down general test for deciding what is doubtful debt, and directed that all income tax officers should treat such amounts as not forming part of income of assessee until realized, this direction by way of circular cannot be considered as travelling beyond powers of Board under Section 119 of Income Tax Act. Such circular is binding under Section 119. circular of 9th of October, 1984, therefore, provides test for recognising whether claim for interest can be treated as doubtful claim unlikely to be recovered or not. test provided by said circular is to see whether, at end of three years, amount of interest has, in fact, been recovered by bank or not. If it is not recovered for period of three years, then in fourth year and onwards claim for interest has to be treated as doubtful claim which need not be included in income of assessee until it is actually recovered. In case of Navnitlal C. Javeri v. K.K. Sen, Appellate Assistant Commissioner of Income- 23/94 http://www.judis.nic.in W.P.No.34786 of 2015 Tax, 'D' Range, Bombay (1965 (1) SCR 909), legal effect of such circulars is, inter alia, considered by Bench of five judges of this Court. Section 2(6A)(e) and Section 12(1B) were introduced in Income-tax Act by Finance Act 15 of 1955 which came into force on 1st of April, 1955. Government, however, realised that operation of Section 12(1B) would lead to extreme hardship because it would have covered aggregate of all outstanding loans of past years and would impose unreasonably high liability on shareholders to whom loans might have been advanced. Minister, therefore, gave assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to respective companies before 30th of June, 1955. Accordingly, circular was issued by Central Board of Revenue on 10th of May, 1955 pointing out to all income tax officers that it was likely that some of companies might have advanced loans to their shareholders as result of genuine transactions of loans, and idea was not to affect such transactions and not bring them within 24/94 http://www.judis.nic.in W.P.No.34786 of 2015 mischief of new provision. officers, therefore, were asked to intimate to all companies that if loans were repaid before 30th of June, 1955 in genuine manner, they would not be taken into account in determining tax liability of shareholders to whom they may have been advanced despite new section. This circular was held by this court as binding on Revenue, though limiting operation of Section 12(1B) or excluding certain transactions from ambit of Section 12(1B). It was so held because circular was considered as issued for purpose of proper administration of provisions of Section 12(1B) and court did not look upon this circular as being in conflict with Section 12(1B). similar view of CBDT circulars has been taken in case of K.P. Varghese v. Income Tax Officer, Ernakulam and Ors. (1981 (4) SCC 173 [at page 188]), by Bench of two judges consisting of P.N. Bhagwati and E.S. Venkataramiah, JJ. Bench has held that circulars of Central Board of Direct Taxes are legally binding on Revenue and this binding character attaches to circulars even if they be found not in accordance with correct interpretation of section and they depart or 25/94 http://www.judis.nic.in W.P.No.34786 of 2015 deviate from such construction. Citing decision of Navnitlal C. Javeri v. K.K. Sen (Supra), this Court observed that circulars issued by Central Board of Direct Taxes under Section 119 of Act are binding on all officers and persons employed in execution of Act even if they deviate from provisions of Act. In Keshavji Ravji and Co. v. Commissioner of Income-Tax (1990 [183] ITR 1) Bench of three judges of this Court has also taken view that circulars beneficial to assessee which tone town rigour of law and are issued in exercise of statutory powers under Section 119 are binding on authorities in administration of Act. benefit of such circulars is admissible to assessee even though circulars might have departed from strict tenor of statutory provision and mitigated rigour of law. This Court, however, clarified that Board cannot pre-empt judicial interpretation of scope and ambit of provision of Act. Also circular cannot impose on tax-payer burden higher than what Act itself, on true interpretation, envisages. task of interpretation of laws is exclusive domain of courts. However, Board has 26/94 http://www.judis.nic.in W.P.No.34786 of 2015 statutory power under Section 119 to tone down rigour of law for benefit of assessee by issuing circulars to ensure proper administration of fiscal statute and such circulars would be binding on authorities administering Act. In case of C.B. Gautam v. Union of India and Ors. (1993 (199) ITR 530 at page 546) Bench of five judges of this Court considered as enforceable, Instruction No.1A88 issued by Central Board of Direct Taxes relating to enforcement of provisions of Chapter XX-C of Income-tax Act. Central Board pointed out in said instruction that in administering provisions of said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that power of pre- emptive purchase has to be exercised by appropriate authority only when it has good reason to believe that property has been sold at undervalue and there is payment of black money in transaction. instruction that when property is put up for sale by appropriate authority, reserve price should be fixed at minimum of 15% above purchase price shown as apparent 27/94 http://www.judis.nic.in W.P.No.34786 of 2015 consideration under agreement between parties, was held to be binding on authority. Constitution Bench in above case also approved of decision of this Court in K.P. Varghese v. Income Tax Officer (Supra). There are, however, two decisions of this Court which have been strongly relied upon by respondents in present case. first decision is majority judgment in State Bank of Travancore v. Commissioner of Income- Tax, Kerala (1986 (158) ITR 102) decided by Bench of three Judges of this court by majority of two to one. This judgment directly deals with interest on "sticky advances" which have been debited to customer but taken to interest suspense account by banking company. majority judgment has referred to circular of 6th of October, 1952 and its withdrawal by second circular of 20th of June, 1978. majority appears to have proceeded on basis that by second circular of 20th of June, 1978 Central Board had directed that interest in suspense account on "sticky" advances should be includible in taxable income of assessee and all pending cases should be disposed of keeping these instructions in view. subsequent circular of 9th of October, 1984 28/94 http://www.judis.nic.in W.P.No.34786 of 2015 by which, from assessment year 1979-80 banking companies were given benefit of circular of 9th of October, 1984, does not appear to have been pointed out to Court. What was submitted before Court was, that since such interest had been allowed to be exempted for more than half century, practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, Court said that question of how far concept of real income enters into question of taxability in facts and circumstances of case, and how far and to what extent concept of real income should intermingle with accrual of income, will have to be judged "in light of provisions of Act, principles of accountancy recognised and followed, and feasibility". Court said that earlier circulars being executive in character cannot alter provisions of Act. These were in nature of concessions which could always be prospectively withdrawn. Court also observed that circulars cannot detract from Act. decision of Constitution Bench of this Court in Navnitlal C. Javeri v. K.K. Sen (Supra), or subsequent decision in K.P. Varghese v. Income Tax Officer (supra) also do 29/94 http://www.judis.nic.in W.P.No.34786 of 2015 not appear to have been pointed out to Court. Since later circular of 9.10.1984 was not pointed out to Court, Court naturally proceeded on assumption that benefit granted under earlier circular was no longer available to assessee and those circulars could not be resorted to for purpose of overcoming provisions of Act. Interestingly, concurring judgment of second judge has not dealt with this question at all but has decided matter on basis of other provisions of law. said circulars under Section 119 of Income- tax Act were not placed before Court in correct perspective because later circular continuing certain benefits to assessees was overlooked and withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of statute. They are meant for ensuring proper administration of statute, they are designed to mitigate rigours of application of particular provision of statute in certain situations by applying beneficial interpretation to provision in question so as to benefit assessee and make application of fiscal 30/94 http://www.judis.nic.in W.P.No.34786 of 2015 provision, in present case, in consonance with concept of income and in particular, notional income as also treatment of such notional income under accounting practice. In premises majority decision in State Bank of Travancore v. Commissioner of Income-Tax (Supra) cannot be looked upon as laying down that circular which is properly issued under Section 119 of Income-tax Act for proper administration of Act and for relieving rigour of too literal construction of law for benefit of assessee in certain situations would not be binding on departmental authorities. This would be contrary to ratio laid down by Bench of five judges in Navnitlal C. Javeri v. K.K. Sen (Supra). In fact, State Bank of Travancore v. Commissioner of Income- Tax (Supra) has already been distinguished in case of Keshavji Ravji and Co. v. Commissioner of Income-Tax (Supra) by Bench of three judges in similar fashion. It is held only as laying down that circular cannot alter provisions of Act. It being in nature of concession, could always be prospectively withdrawn. In present case, circulars which have been in force are meant to ensure that while assessing income 31/94 http://www.judis.nic.in W.P.No.34786 of 2015 accrued by way of interest on "sticky" loan, notional interest which is transferred to suspense account pertaining to doubtful loans would not be included in income of assessee, if for three years such interest is not actually received. very fact that assessee, although generally using mercantile system of accounting, keeps such interest amounts in suspense account and does not bring these amounts to profit and loss account, goes to show that assessee is following mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to method of accounting so adopted by assessee in such cases, circulars which have been issued are consistent with provisions of Section 145 and are meant to ensure that assessees of kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given benefit under circular and such interest amounts are not included in income of assessee until actually received if conditions of circular are satisfied. circular of 9.10.1984 also serves another practical purpose of laying down uniform test for assessing authority to decide 32/94 http://www.judis.nic.in W.P.No.34786 of 2015 whether interest income which is transferred to suspense account is, in fact, arising in respect of doubtful or "sticky" loan. This is done by providing that non-receipt of interest for first three years will not be treated as interest on doubtful loan. But if after three years payment of interest is not received, from fourth year onwards it will be treated as interest on doubtful loan and will be added to income only when it is actually received. We do not see any inconsistency or contradiction between circular so issued and Section 145 of Income-tax Act. In fact, circular clarifies way in which these amounts are to be treated under accounting practice followed by lender. circular, therefore, cannot be treated as contrary to Section 145 of Income-tax Act or illegal in any form. It is meant for uniform administration of law by all income tax authorities in specific situation and, therefore, validly issued under Section 119 of Income-tax Act. As such, circular would be binding on Department. other judgment on which reliance was placed by Department was judgment of Bench of two judges of this Court in Kerala 33/94 http://www.judis.nic.in W.P.No.34786 of 2015 Financial Corportion V. Commissioner of Income- Tax (1994 (4) SCC 375) where this Court, following majority view in State Bank of Travancore v. Commissioner of Income-Tax (Supra) held that interest which had accrued on "sticky" advance has to be treated as income of assessee and taxable as such. It is said that ultimately, if advance takes shape of bad debt, refund of tax paid on interest would become due and same can be claimed by assessee in accordance with law. For reasons set out above, we are not in agreement with said judgment. relevant circulars of C.B.D.T. cannot be ignored. question is not whether circular can override or detract from provisions of Act; question is whether circular seeks to mitigate rigour of particular section for benefit of assessee in certain specified circumstances. So long as such circular is in force it would be binding on departmental authorities in view of provisions of Section 119 to ensure uniform and proper administration and application of Income-tax Act. aforesaid observations are self-explanatory. Hon ble Apex 34/94 http://www.judis.nic.in W.P.No.34786 of 2015 Court, while delivering decision in UCO bank (supra) had also taken note of findings in Navnit Lal C. Javeri, KP Verghese and Keshavji Ravji (supra). 20. To circumvent proposition laid in UCO Bank (supra), learned Standing counsel placed reliance on Hindustan Aeronautics Ltd (supra) and submitted that Circulars will not bind Courts. It is also his submission that Hon ble Apex Court in Hindustan Aeronautics Ltd has already distinguished applicability of decisions of Navnit Lal C. Javeri and KP Verghese (supra), which were relied upon by petitioner. 21. Hindustan Aeronautics Ltd (supra) dealt with scope of Section 264 of Act and observed that there is no doubt that instructions given by CBDT are binding on authorities under Act but when Hon'ble Supreme Court or High Court has declared law on question arising for consideration, it will not be open to Court to direct that Circulars should be given effect to and not view expressed in decision of Hon'ble Supreme Court of High Court. ratio that instructions given by CBDT are 35/94 http://www.judis.nic.in W.P.No.34786 of 2015 binding on authorities had been reiterated in Hindustan Aeronautics Ltd (supra). What has been clarified in said case is that such instructions cannot supersede law declared by Hon'ble Supreme Court of High Court. It is in this background that reference was made to decisions in Navnit Lal C. Javeri and KP Verghese (supra) and perusal of observations made in this regard may not be considered of having been distinguished from position laid down in Hindustan Aeronautics Ltd. Similar findings were rendered in Rattan Melting and Wire Industries. 22. observations made in Hindustan Aeronautics Ltd are as follows: However, learned counsel for appellant relied on decisions in Navnitlal C. Javeri v. K.K.Sen, AAC of Income Tax, 56 ITR 198, Ellerman Lines Ltd. vs. C.I.T, 82 ITR 913 and K.P.Varghese vs. ITO, 131 ITR 597, to contend that circular issued by Board under Section 119 of Act is binding on Commissioner in terms of which he was bound to examine revision of appellant on merits and order of learned Single Judge merely gives effect to such course. Dr. Gauri Shankar, 36/94 http://www.judis.nic.in W.P.No.34786 of 2015 learned senior advocate for Revenue, however, pointed out by referring to several decisions of this Court to effect that circulars or instructions given by Board are no doubt binding in law on authorities under Act but when Supreme Court or High Court has declared law on question arising for consideration it will not be open to Court to direct that circular should be given effect to and not view expressed in decision of Supreme Court or High Court. We find great force in this submission made by learned senior advocate for Revenue and find absolutely no merit in this appeal and same stands dismissed, but in circumstances of case, there shall be no orders as to costs. 23. In Rattan Melting and Wire Industries (supra), Constitutional Bench of Hon'ble Apex Court held thus: 6. Circulars and instructions issued by Board are no doubt binding in law on authorities under respective statutes, but when Supreme Court or High Court declares law on question arising for consideration, it would not be appropriate for Court to direct that circular should be given 37/94 http://www.judis.nic.in W.P.No.34786 of 2015 effect to and not view expressed in decision of this Court or High Court. So far as clarifications/circulars issued by Central Government and of State Government are concerned they represent merely their understanding of statutory provisions. They are not binding upon court. It is for Court to declare what particular provision of statute says and it is not for Executive. Looked at from another angle, circular which is contrary to statutory provisions has really no existence in law. 7. As noted in order of reference correct position vis-`-vis observations in para 11 of Dhiren Chemical's case (supra) has been stated in Kalyani's case (supra). If submissions of learned counsel for assessee are accepted, it would mean that there is no scope for filing appeal. In that case, there is no question of decision of this Court on point being rendered. Obviously, assessee will not file appeal questioning view expressed vis-`-vis circular. It has to be revenue authority who has to question that. To lay content with circular would mean that valuable right of challenge would be denied to him and there would be no scope for adjudication 38/94 http://www.judis.nic.in W.P.No.34786 of 2015 by High Court or Supreme Court. That would be against very concept of majesty of law declared by this Court and binding effect in terms of Article 141 of Constitution. 24. Useful reference could be made to decision of Division Bench of Bombay High Court in case of Commissioner of Income Tax V. Income Tax Settlement Commission and another [(2014) 364 ITR 410 (Bom)] wherein most of decisions discussed above were considered and ultimately held that Circulars of CBDT have binding force. 25. Now that, it is found that Circulars of CBDT are binding in nature, consequent issue as to whether contents of circulars would allure to benefit of petitioner herein, requires consideration. For proper appraisal, (relevant) portions of these two Circulars are extracted hereunder: Circular No. 19/2017 F.No.279/Misc./140/2015/ITJ Government of India Ministry of Finance Central Board of Direct Taxes 39/94 http://www.judis.nic.in W.P.No.34786 of 2015 New Delhi, Dated 12th June, 2017 Sub: Settled View on section 2 (22)(e) of Income Tax Act, trade advances-reg. Section 2(22) clause (e) of Income Tax Act, 1961 (the Act) provides that dividend includes any payment by company, not being company in which public are substantially interested, of any sum by way of advance or loan to shareholder, being person who is beneficial owner of share (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. 2. Board has observed that some Courts in recent past have held that trade advances in nature of commercial transactions would not fall within ambit of provisions of Section 2(22)(e) of Act. Such views have attained finality. 2.1 Some illustrations/examples of trade advances/commercial transactions held to be not covered under Section 2(22)(e) of Act are as follows: i) Advances were made by company to sister concern and adjusted against dues for job work done by sister 40/94 http://www.judis.nic.in W.P.No.34786 of 2015 concern. It was held that amounts advanced for business transactions do not to fall within definition of deemed dividend under Section 2(22)(e) of Act. (CIT V. Creative Dyeing & Printing Pvt. Ltd., Delhi High Court). ii) Advance was made by company to its shareholder to install plant and machinery at shareholder's premises to enable him to do job work for company so that company could fulfill export order. It was held that as assessee proved business expediency, advance was not covered by Section 2(22)(e) of Act. (CIT V. Amrik Singh, P & H, High Court). iii) floating security deposit was given by company to its sister concern against use of electricity generators belonging to sister concern. company utilised gas available to it from GAIL to generate electricity and supplied it to sister concern at concessional rates. It was held that security deposit made by company to its sister concern was business transaction arising in normal course of business between two concerns and transaction arising in normal course of business between two concerns and transaction did not attract section 2(22)(e) of Act. (CIT, Agra V. Atul Engineering Udyog, Allahabad High Court). 3. In view of above it is, settled position that trade advances, which are in nature of commercial transactions would not fall within ambit of word 'advance' in Section 2 (22)(e) of Act. Accordingly, henceforth, appeals may not be filed on this ground by officers of Department and those 41/94 http://www.judis.nic.in W.P.No.34786 of 2015 already filed, in Courts/Tribunals may be withdrawn/not pressed upon. 4. above may be brought to notice of all concerned. 5. Hindi version follows. (Neetika Basal) Deputy Secretary to Government of India Circular No. 495 of 1987: C.B.D.T. Circulars Subject: Finance Act, 1987-Explanatory Notes on provisions relating to direct taxes ... Definition of dividend-Section 2(22)(e): 10.1 Sections 104 to 109 relate to levy of additional tax on certain closely-held companies (other than those in which public are 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 per cent, which is lower than rate for corporation tax on closely-held companies. Sections 104 to 109 have, therefore, been omitted by Finance Act, 1987. 42/94 http://www.judis.nic.in W.P.No.34786 of 2015 10.2 With deletion of sections 104 to 109 there was likelihood of closely held companies not distributing their profits to shareholders by way of dividends but by way of loans or advances so that these are not taxed in hands of shareholders. To forestall this manipulation, sub-clause (e) of clause (22) of Section 2 has been suitably amended. Under existing provisions, payments by way of loans or advances to shareholders having substantial interest in company to extent to which company possesses accumulated profits is treated as dividend. shareholders having substantial interest are those who have shareholding carrying not less than 20 per cent, voting power as per provisions of clause (32) of Section 2. amendment of definition extends its application to payments made (i) to shareholder holding not less than 10 percent of voting power, or (ii) to concern in which shareholder has substantial interest. Concern as per newly inserted Explanation 3(a) to section 2(22) means HUF or firm or association of persons or body of individuals or company. shareholder having substantial interest in concern as per part (b) of Explanation 3 is deemed 43/94 http://www.judis.nic.in W.P.No.34786 of 2015 to be one who is beneficially entitled to not less than 20 per cent of income of such concern. 10.3 new provision would, therefore, be applicable in case where shareholder has 10 per cent or more of equity capital. Further, deemed dividend would be taxed in hands of concern where all following conditions are satisfied: i) where company makes payment by way of loans or advances to concern; ii) where member or partner of concern holds 10 per cent of voting power in company; and iii) where member or partner of concern is also beneficially entitled to 20 per cent of income of such concern. With view to avoid hardship in cases where advances or loans have already been given, new provisions have been made applicable only in cases where loans or advances are given after 31st May, 1987. These amendments will apply in relation to assessment year 1988-89 and subsequent years. ... 44/94 http://www.judis.nic.in W.P.No.34786 of 2015 26. Circular No. 19 of 2017 directs that advances in nature of commercial transaction would not fall within ambit of Section 2 (22)(e) of Act. Accordingly, it was directed therein that appeals may not be filed on this ground by officers of Department and those appeals already filed may be withdrawn or not pressed. If directions of Circular is pressed into service, transaction between RSPL and RTPL, being in nature of commercial transaction, would not fall within ambit of Section 2 (22) (e) of Act. Likewise, Circular No. 494 of 1987 directs that deemed dividend will be taxable in hands of concern were loan or advances are made by Company to concern with common shareholder. learned Standing counsel for respondent had contended that without explaining as to how transaction between two Companies constitute ordinary commercial transaction, petitioner cannot rely on Circular. 27. In application before Settlement Commission, petitioner herein had specifically stated that RSPL had advanced money to RTPL in ordinary course of business. money so 45/94 http://www.judis.nic.in W.P.No.34786 of 2015 received was utilized for its working capital requirements and no part of same was diverted as loan or advance for direct or indirect benefit of any of Directors, including petitioner. It was further stated therein that these funds were given as inter corporate loans on which interest was charged at market rates. interest charged by RSPL have been assessed as business income by same Assessing Officer, who is also Assessing Officer of petitioner. authorized representative of petitioner had reiterated these aspects and stated before Settlement Commission that money advanced by RSPL was in ordinary course of business. Settlement Commission had extracted statement of authorised representative in impugned order and had not disputed fact that loan granted was in ordinary course of business. only finding by Settlement Commission in this regard was that lending of money does not form substantial part of business of RSPL. When fact which was specifically referred to in application and contended before Settlement Commission has not been disputed, it cannot be said that petitioner had failed to explain before Commission that transactions were during ordinary course of business. In this context, objections raised by 46/94 http://www.judis.nic.in W.P.No.34786 of 2015 learned Standing counsel for respondents, cannot be sustained. 28. learned Senior counsel for petitioner relied upon decision of CIT V. Creative Dyeing and Printing Private Limited reported in (2009) 318 ITR 476 (Delhi) for aforesaid proposition and relevant portions of said judgment reads as below: Tribunal has also referred to judgment of Bombay High Court in case of C.I.T. Vs. Nagin Das M. Kapadia 177 ITR 393 (Bom) in which it was held that business transactions are outside purview of Section 2(22)(e) of Act. In said case, company in which Kapadia was having substantial interest had paid various amount to Kapadia. Tribunal had ITA 250/2009 Page 6 found that Kapadia had business transactions with company and on verification of accounts, Tribunal deleted amounts which were relating to business transactions and which finding was upheld by High Court. 9. In present case Tribunal on considering decisions in various cases held as under: 47/94 http://www.judis.nic.in W.P.No.34786 of 2015 " From ratio laid down in above cases and on basis of judicial interpretation of words, Loans" or Advances", it can be held that section 2(22)(e) can be applied to Loans" or Advances" simplicitor and not to those transactions carried out in course of business as such. In course of carrying on business transaction between company and stockholder, company may be required to give advance in mutual interest. There is no legal bar in having such transaction. What is to be ascertained is what is purpose of such advance. If amount is given as advance simplicitor or as such per se without any further obligation behind receiving such advances, may be treated is deemed dividend", but if it is otherwise, amount given cannot be branded as advances" within meaning of deemed dividend under section 2(22)(e). Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by company in ordinary course of business where lending of money is substantial part of business of company advance in ordinary course of carrying on business cannot be considered as dividend" within meaning of section 2(22)(c ). By granting advance if 48/94 http://www.judis.nic.in W.P.No.34786 of 2015 business purpose of company is served and which is not sum, which it otherwise would have distributed as dividend, cannot be brought within deeming provision of treating such Advance" as deemed dividend" 10. We agree with aforesaid observations. finding of facts, arrived at by Tribunal in present case is that transaction in question was ITA 250/2009 Page 7 business transaction and which transaction would have benefited both assessee company and M/s. Pee Empro Exports Pvt. Ltd. In fact, as stated above, counsel for appellant has conceded that amount is in fact not loan but only advance because amount paid to assessee company would be adjusted against entitlement of moneys of assessee company payable by M/s. Pee Empro Exports Pvt. Ltd. in subsequent years. 11. counsel for appellant has very strenuously urged that neither Tribunal nor judgment of this Court in Rajkumar"s case(supra) deals with that part of definition of deemed dividend under Section 2(22)(e) which states that deemed dividend does not include 49/94 http://www.judis.nic.in W.P.No.34786 of 2015 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 [Section 2(22)(e)(ii)] i.e. there is no deemed dividend only if lending of moneys is by company which is engaged in business of money lending. Dilating further counsel for appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into business of lending of money, payments made by it to assessee company would therefore be covered by Section 2(22)(e)(ii) and consequently payments even for business transactions would be deemed dividend. We do not agree. Tribunal has dealt with this aspect as reproduced in para (9) above. provision of Section 2(22)(e)(ii) is basically in nature of explanation. That cannot however, have bearing on interpretation of main provision of Section 2(22)(e) and once it is held that ITA 250/2009 Page 8 business transactions does not fall within Section 2(22)(e), we need not to go further to Section 2(22)(e)(ii). provision of Section 2(22)(e)(ii) gives example only of one of situations where loan/advance will not be treated as deemed dividend, but that"s 50/94 http://www.judis.nic.in W.P.No.34786 of 2015 all. same cannot be expanded further to take away basic meaning, intent and purport of main part of Section 2(22)(e). We feel that this interpretation of ours is in accordance with legislative intention of introducing Section 2(22)(e) and which has been extensively dealt with by this Court in judgment in Raj Kumar"s case(supra). This Court in Raj Kumar"s case (supra) extensively referred to report of Taxation Enquiry Commission and speech of Finance Minister in Budget while introducing Finance Bill. Ultimately, this Court in said judgment held as under: "10.3 bare reading of recommendations of Commission and Speech of then Finance Minister would show that purpose of insertion of clause (e) to section 2(6A) in 1922 Act was to bring within tax net monies paid by closely held companies to their principal shareholders in guise of loans and advances to avoid payment of tax. 10.4 Therefore, if said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of Act, which is pari material with clause (e) of section 2(6A) of 1922 Act, 51/94 http://www.judis.nic.in W.P.No.34786 of 2015 plainly seeks to bring within tax net accumulated profits which are distributed by closely held companies to its shareholders in form of loans. 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 taxes by having these companies pay or distribute, what would legitimately be dividend in hands of shareholders, money in form of advance or loan. 10.5 If this purpose is kept in mind then, in our view, ITA 250/2009 Page 9 word advance" has to be read in conjunction with word loan". Usually attributes of loan are that it involves positive act of lending coupled with acceptance by other side of money as loan: it generally carries interest and there is obligation of repayment. On other hand, in its widest meaning term advance" may or may not include lending. word advance" if not found in company of or in conjunction with word loan" may or may not include obligation of repayment. If it does then it would be loan. Thus, arises conundrum as to what meaning one would attribute to term advance". 52/94 http://www.judis.nic.in W.P.No.34786 of 2015 rule of construction to our minds which answers this conundrum is noscitur sociis. said rule has been explained both by Privy Council in of Angus Robertson v. George Day (1879) 5 AC 63 by observing "it is legitimate rule of construction to construe words in Act of Parliament with reference to words found in immediate connection with them" and our Supreme Court in case of Rohit Pulp & Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610." 12. Therefore, we hold that Tribunal was correct in holding that amounts advanced for business transaction between parties, namely, assessee company and M/s. Pee Empro Exports Pvt. Ltd. was not such to fall within definition of deemed dividend under Section 2(22)(e). present appeal is therefore dismissed. aforesaid decision in Creative Dyeing and Printing Private Limited was upheld by Hon'ble Supreme Court in order dated 22.09.2009 in special leave to appeal. 53/94 http://www.judis.nic.in W.P.No.34786 of 2015 29. In CIT V. C. Subba Reddy, (2017) 77 Taxmann. com 320 (Madras High Court), Hon'ble Division Bench of this Court held thus: 3. decision of Calcutta High Court in case of M.D.Jindal vs. Commissioner of Income Tax (164 ITR 28) was relied upon to counter objection of Assessee to effect that credit arose out of business transaction to which provisions of section 2(22)(e) would not stand attracted. officer pressed into service clause (ii) of exclusion to section 2(22)(e) of Act to 3 state that only ordinary business transactions carried on by companies engaged substantially in business of money lending would stand excluded from mischief of section 2(22)(e) of Act. 4. Assessee s appeal before Commissioner of Income Tax (Appeals) (CIT(A) was allowed by order dated 31.08.2004. account copy of CHPL for period from 01.04.1997 to 31.03.2002 was examined. It was found that for period from 01.04.1996 to 30.03.2001, funds of Assessee were, in fact, lying with company and not vice-versa. Commissioner notes that during 01.04.1996 to 31.03.2000, quantum of funds of 54/94 http://www.judis.nic.in W.P.No.34786 of 2015 assessee with company ranged between 1.5 crores to 6.92 crores and during previous year relevant to AY 2001-02, i.e. between 01.04.2000 to 31.03.2001, it ranged between 6.92 crores to 7.19 crores. CHPL raised invoice for amount of Rs.8.43 crores and after giving credit to assessee s monies available with CHIL, debit balance of Rs.1.61 crores as on 31.03.2001 was arrived at. credit balance thus arose solely on account of construction work carried on by CHIL as subcontractor of CPD. Commissioner (Appeals) also finds as fact that account copy for period 01.04.2001 to 31.03.2002 revealed that amount had been settled next year and 4 balance squared off. Thus there was no benefit derived by assessee by reason of credit of Rs.1.61 crores. 5. order of CIT(A) was carried in appeal before Income Tax Appellate Tribunal ( Tribunal ) which confirmed aforesaid factual findings, dismissing appeal of Revenue by order dated 09.02.2007, assailed in appeal before us. appeal raises following Substantial Question of Law for our consideration: i)Whether on facts and circumstances of case, Tribunal was right 55/94 http://www.judis.nic.in W.P.No.34786 of 2015 in holding that provisions of Section 2(22)(e) treating loan or advance as deemed dividend does not apply if loan is given as part of contractual obligation? ii)Whether on facts and circumstances of case, Tribunal was right in interpreting Section on basis of intention of legislature, when words of Section are clear and unambiguous? iii)Whether on facts and circumstances of case, Tribunal was right in looking at transaction between two companies in other years to arrive at conclusion that loan granted in relevant financial year does not amount to deemed dividend under Section 2(22)(e)of Act? 6. We have heard submissions of Mr.T.Ravikumar, learned counsel appearing for Revenue and Mr.S.Sri Mr.S.Sridhar, learned 5 counsel appearing for Assessee. 7. provisions of Section 2(22)(e) impose deeming fiction and conditions imposed therein call for strict and concurrent satisfaction being (i) payment by closely held company, (ii) of nature of advance or loan, (iii) to share holder or beneficial owners of shares, (iv) with more than 10% voting power, (v) for his individual benefit. 56/94 http://www.judis.nic.in W.P.No.34786 of 2015 8. In present case, credit arises by virtue of contractual obligation and business transaction and has been settled very next year. There is no individual benefit derived by Assessee. Moreover, credit does not satisfy definition of advance or loan . fiction thus fails on several counts. Revenue relies upon judgment of Supreme Court in case of Miss P.Sarada vs. Commissioner of Income Tax (229 ITR 444) and decision of Calcutta High Court in M.D.Jindal vs. Commissioner of Income Tax (164 ITR 28). 9. In first case, assessee had made withdrawals from out of accumulated profits that were deemed to be dividend u/s 2(22)(e) of Act. defence taken was that withdrawals 6 could be taken to have been paid from out of monies lying to credit of another shareholder. This was negatived by Supreme Court. In present case, there are no withdrawals and as findings of fact by lower authorities reveal, frequency of advances by Assessee to company was more than in reverse. Calcutta High Court, in case of M.D.Jindal, dealt with transaction that was found to be colourable. concurrent finding of fact in that case was to effect that 57/94 http://www.judis.nic.in W.P.No.34786 of 2015 transaction was device designed to circumvent provisions of Section 2(22)(e) of Act. veil was thus lifted and true facts brought to light. In present case, there is no such allegation and on contrary, concurrent finding is to effect that no benefit has accrued to assessee, credit is result of business transaction and is neither in nature of loan or deposit. decisions relied upon by revenue do not advance its case, being distinguishable on facts. 10. Various case laws have been cited by counsel appearing for Assessee but we do not consider it necessary to advert to same in view of our conclusion on facts of present case, that provisions of Sections 2(22)(e) of Act do not stand attracted. 30. Likewise, in CIT V. Gayatri Chakroborty reported in (2018) 407 IT 730 (Calcutta), it was held as follows: submission of Mr.Khaitan, learned Senior counsel, appearing for assessee is that transactions between assessee and company bore character of mutual running or current account. He points out that there was concurrent finding on this count by two statutory appellate for upon appreciation of evidence and in exercise of our 58/94 http://www.judis.nic.in W.P.No.34786 of 2015 jurisdiction under Section 260A of Act, we ought not to enter into fresh exercise of appreciation of evidence. He has drawn our attention to that part of decision of Tribunal in which analysis has been made of ledger of assessee in books of company. We shall revert to finding of Tribunal on this count later in this judgment. Law on this point is clear. In event of transactions between shareholder and company in which public are not substantially interested and former has substantial stake, create mutual benefits and obligations, then provision of treating any sum received by shareholder out of accumulated profits as deemed dividend would not apply. company in instant case fits description conceived in aforesaid provision to come within ambit of Section 2(22)(e) of Act. controversy which falls for determination is whether sum received by assessee formed part of running current account giving rise to mutual obligations or payment formed one-way traffic, assuming character of laon or advance out of accumulated profit. Co-ordinate Bench of this Court in case of Pradip Kumar Malhotra V. CIT 2001 (338) ITR 538 (Cal) has laid down factors for testing transactions between company and its shareholder in light of aforesaid provision (page 545 of 338 59/94 http://www.judis.nic.in W.P.No.34786 of 2015 ITR): ... 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 share (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; 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 be deemed dividend within meaning of Act. Thus, for gratuitous loan or advance given by company to those classes of share holders 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. 31. There is yet another aspect to applicability of Circular No. 19 of 2017. Circular was issued on basis of various judicial precedents, which has been referred to in Circular itself. 60/94 http://www.judis.nic.in W.P.No.34786 of 2015 References were made in said Circular to Creative Dyeing and Printing Private Limited (supra), wherein it was held that amounts advanced for business transactions do not fall within definition of deemed dividend under Section 2 (22) (e) of Act. Likewise, CBDT Circular had placed reliance on decisions in CIT V. Amrik Singh, Punjab and Haryana High Court reported in 2015-LL- 0429-5, ITA No. 347 of 2013 and CIT, Agra V. Atul engineering Udyog, Allahabad High Court reported in 2014-LL-0926-121, wherein advances and security deposits made were held to be transactions which did not attract Section 2 (22) (e). Thus, it is clear that even prior to issue of this 2017 Circular, position in law was clear that deemed dividend would not apply to normal commercial transactions. Viewing from this angle also, petitioner would be entitled to succeed on this ground. WHETHER DEEMED DIVIDEND IS TAXABLE IN HANDS OF SHAREHOLDERS OR CONCERN? 32. learned Senior counsel for petitioner would submit that, even assuming that deemed dividend will be taxable, in view of 61/94 http://www.judis.nic.in W.P.No.34786 of 2015 Circular No. 494 of 1987, such deemed dividend will be taxable in hands of concern only and there is no justification for casting liability on shareholder. Attention of this Court was brought to diverging views of Hon ble Apex Court in case of Madhur Housing (TS-462-SC-2017), wherein decision of Delhi High Court in case of Ankitech Private Limited [(2012) 340 ITR 14 (Delhi)] was relied on and held that deemed dividend is taxable in hands of shareholder, while in case of Gopal and sons (HUF) [391 ITR 1], it was held that deemed dividend is taxable in hands of concern. When issue came up for consideration in National Travel Services (Appeal No. 837), Hon ble Apex Court had referred matter to larger Bench to have relook into controversy. 33. While petitioner contends that deemed dividend is not taxable in hands of shareholders, learned Standing counsel for Department would contend that it is taxable in hands of shareholder. To substantiate such submission, learned counsel for Department would attempt to justify that Circular No. 495 of 1987 runs contrary to provisions. learned Counsel also 62/94 http://www.judis.nic.in W.P.No.34786 of 2015 submitted that reference to larger Bench in case of National Travel Services (supra) will not have any inference on this case. It will not be out of place to point out that in National Travel Services one of learned Judges in quorum had held that decision in case of Ankitech, as upheld by Madhur Housing, was wrongly decided. Nevertheless, since matter has now been referred to larger Bench for reconsideration, this Court does not intend to fix liability of taxation either in hands of concern or in hands of shareholder, on assumption that deemed dividend is taxable. In any view of matter, now that this Court has held that Circulars of CBDT have binding effect, it can be safely held that deemed dividend is not taxable in hands of shareholders, without reference to issue which has been referred to larger Bench. WHETHER DIVIDEND IS TAXABLE UNDER SECTION 10 (34) OF ACT? 34. definition of term dividend under Section 2 (22) envisages various situations under which payment made by Company to its shareholders would amount to distribution of dividend. However, Section 10 (34) of Act exempts from payment of tax, 63/94 http://www.judis.nic.in W.P.No.34786 of 2015 any income by way of dividend referred to in Section 115-O. 35. Section 10 (34), as inserted by Finance Act, 2003 with effect from 01.04.2004, reads thus: INCOMES NOT INCLUDED IN TOTAL INCOME: Section 10: In computing total income of previous year of any person, any income falling within any of following clauses shall not be included (34) any income by way of dividends referred to in Section 115- O. Provided that nothing in this clause shall apply to any income by way of dividend chargeable to tax in accordance with provisions of Section 115BBDDA; Section 115-O of Income Tax Act reads as follows: 115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to provisions of this section, in addition to income tax chargeable in respect of total income of domestic company for any assessment year, any amount declared, distributed or paid by such company by way of 64/94 http://www.judis.nic.in W.P.No.34786 of 2015 dividends (whether interim or otherwise) on or after first day of April 2003, whether out of current or accumulated profits shall be charged two additional income tax (hereafter referred to as tax on distributed profits) at rate of 15%. 36. Section 115-O, which falls under Chapter XII-D of Act, does not define term 'dividend'. However, explanation to Section 115-Q, which also falls under Chapter XII-D, makes it clear that 'dividend' referred to in Section 115-O also includes 'deemed dividend' as defined in Section 2 (22) (e) of Act. explanation to Section 115Q reads thus: 115Q. If any principal officer of domestic company and company does not pay tax on distributed profits in accordance with provisions of section 115-O, then, he or it shall be deemed to be assessee in default in respect of amount of tax payable by him or it and all provisions of this act for collection and recovery of income tax shall apply. Explanation - For purposes of this chapter, expression dividends shall have same meaning as is given to dividend in clause (22) of section 2 but shall not include sub-clause (e) 65/94 http://www.judis.nic.in W.P.No.34786 of 2015 thereof. 37. phrase for purposes of this Chapter in explanation above refers to term 'dividend' mentioned in Section 115-O which also falls under Chapter XII-D. explanation to Section 115-Q was not required if 'deemed dividend' under Section 2 (22) (e) was not referred to in Chapter XII-D. provision makes specific reference to unpaid distribution tax by Company. explanation to Section 115-Q which existed at relevant time but was omitted by Finance Act, 2018 provided that for purposes of said Chapter namely, Chapter XIID, which contains Sections 115-O and 115-Q, expression dividend shall have same meaning, as is given to dividend under Sub Section (22) of Section 2, but shall not include sub-clause (e). Thus, there was no need to omit explanation to Section 115Q with effect from 01.04.2018, whereby deemed dividend is now payable even on dividend referred to in Section 2 (22) (e) of Act. 38. On comprehensive reading of Section 10 (34), 115-O and explanation to 115Q, it is explicit that dividend is not taxable under 66/94 http://www.judis.nic.in W.P.No.34786 of 2015 Section 10 (34) of Act, since such dividend would be exempted from tax in hands of receiver in terms of Section 10 (34). If Section 10 (34) stipulates that dividend is not taxable, Settlement Commission cannot tax same. In view of this, order passed by Settlement Commission can only be deemed to be contrary to provisions of Act namely, Section 10 (34) r/w. Section 115-O of Act. 39. proviso to Section 10 (34) stipulates that income by way of dividends referred to in Section 115-O shall not apply to any income by way of dividend chargeable to tax in accordance with provisions of Section 115 BBDDA. In Section 115BBDA, specific explanation has been inserted to exclude deemed dividend as referred to in Section 2 (22) (e) from scope of dividend as referred to in Section 115BBDA. In Section 115BBDA, exclusion is not for entire Chapter but has been generally excluded. Therefore, it is quite evident that, wherever term 'dividend' is used in Section 115BBDA, Section 2(22)(e) is not covered. 40. It is not in dispute that Section 2 (24) includes dividend 67/94 http://www.judis.nic.in W.P.No.34786 of 2015 income also. What is pertinent is that such dividend, including deemed dividend under Section 2(22)(e) of Act, is exempted under Section 10 (34) of Act, in hands of petitioner. Section 10 (34) of Act does not provide to say that dividend will be exempted in hands of shareholders only when dividend distribution tax is paid. On other hand, it only refers to say that as long as dividend is referred to in Section 115-O of Act, it will be exempted from tax under Section 10 (34) of Act. 41. Bombay High Court, in decision in case of PCIT V. Smt. Kayan Jamshid Pandole reported in (2018) 100 Taxmann.com 284 had held as follows: 2. Following questions are presented for our consideration: "(a) Whether on facts and in circumstances of case and in law, Hon'ble Income-tax Appellate Tribunal was justified in holding that amount of Rs.2,78,46,000/- received by assessee from Spirax Marshall (P) Ltd on sale of its shares to said company under Scheme of Arrangement, which is treated as deemed dividend under section 68/94 http://www.judis.nic.in W.P.No.34786 of 2015 2(22)(d) of Act, is exempt under Section 10(34) of Act? (b) Whether on facts and in circumstances of case and in law, in this peculiar case, assessee can claim exemption under section 10(34) of Act when company Priya Soparkar 2 7 itxa 387-16-o M/s Spirax Marshall (P) Ltd has not paid additional income-tax under section 115-O of Act?" 6. On other hand, learned counsel Mr.Porus Kaka appearing for assessee submitted that income generated by way of buy back of shares by company was in nature of capital gain. Assessee had offered same to tax accordingly. If Revenue contends that income is in nature of deemed dividend, effect of Section 10(34) of Act would automatically follow. He further submitted that all other assessees who were shareholders of same company and who formed common group had made declaration in income tax returns declaring gain as capital gain. Revenue has not opposed these claims in their cases. Revenue has isolated cases of only two assessees for differential treatment. 69/94 http://www.judis.nic.in W.P.No.34786 of 2015 He 1 (2018) 400 ITR 1(SC) Priya Soparkar 5 7 itxa 387-16-o further pointed out that case of Kamal Imran Panju also arose out of same arrangement. In said case, revenue chose not to pursue issue beyond level of Tribunal. On question of consistency, therefore, he argued that revenue would be precluded from pursuing present appeal. 8. Section 2(22) of Act as is well known includes range of situations under which payment by company to its shareholders would amount to distribution of dividend. Clause (d) of Section 2(22) provides that any distribution to its Priya Soparkar 6 7 itxa 387-16- o shareholders by company on reduction of capital to extent to which company possesses accumulated profit which arose after end of previous year, under certain circumstances would be included in term "dividend". 9. Section 10(34) in turn exempts from payment of tax, any income by way of dividend referred to Section 115-O. As per Sub-section (1) of Section 115-O notwithstanding anything contained in provisions of Act and subject to provisions of said section in addition to income tax chargeable in respect of total 70/94 http://www.judis.nic.in W.P.No.34786 of 2015 income of domestic company, any amount declared, distributed or paid by such company by way of dividend on or after 1st April, 2003 would be chargeable to additional income tax referred to as tax on distributed profits. 10. question would be whether deemed dividend under Section 2(22)(d) would fall within purview of Sub- Section 1 of Section 115-O of Act. However, legislature has advisedly cleared this position by providing explanation to Section 115-Q of Act. Before we refer to explanation, Priya Soparkar 7 7 itxa 387-16-o we may note that Section 115-Q provides that if any Principal Officer of domestic company and company does not pay tax on distributed profits in accordance with provisions of Section 115- O then he or it shall be deemed to be assessee in default in respect of amount of tax payable by him or it and all provisions of Act for collection and recovery of income tax shall apply. This provision thus makes specific reference to unpaid distribution tax by company. explanation to Section 115-Q which existed at relevant time but which was omitted by Finance Act, 2018 and provided that for purposes of said Chapter 71/94 http://www.judis.nic.in W.P.No.34786 of 2015 (Chapter XIID) which contains Section 115- O and 115-Q, expression "dividend" shall have same meaning as it given to dividend under Sub-Section (22) of Section 2, but shall not include sub-clause (e) thereof. 11. plain effect of explanation, therefore, would be that even deemed dividend under Section 2(22)(d) of Act would be covered from purpose of Chapter XIID. In turn, therefore, such deemed dividend would be one which is referred to Section 115-O of Act. Inescapable conclusion, therefore, Priya Soparkar 8 7 itxa 387-16-o would be that such dividend also would be exempt from tax in hands of receiver in terms of Section 10(34) of Act. 12. contention of counsel for Revenue that company having not paid such dividend distribution tax, exemption under Section 10(34) should be deprived to assessee needs to be noted only for rejection. If certain income is exempt at hands of receiptant by virtue of statutory provision, unless provision is made in statute itself, such exemption cannot be withdrawn only because payer has not paid tax. statute has made 72/94 http://www.judis.nic.in W.P.No.34786 of 2015 specific provision for recovery or unpaid tax from company. In result, tax appeal is dismissed. In aforesaid observations, Bombay High Court has emphatically held that if certain income is exempted in hands of recipient by virtue of statutory provisions, such exemption cannot be withdrawn only because payer has not paid tax, unless such provisions are made in statute itself. 42. In light of aforesaid decision, it can be held that Settlement Commission ought to have passed orders only in accordance with provisions of Act and contrary findings in impugned order of Commission, cannot be sustained. As such, conclusion which this Court is able to arrive on this proposition is that dividend is not taxable as per provisions of Section 10 (34) of Act and contrary findings in impugned order of Settlement Commission is deemed to be violative of statutory provisions and therefore illegal. 43. learned Standing counsel for Department submitted that decision of Bombay High Court in Kayan Jamshid Pandole 73/94 http://www.judis.nic.in W.P.No.34786 of 2015 (supra) is distinguishable on facts. I am unable to endorse such submission. plain reading of paragraphs 8 to 11 of said decision reveals that Bombay High Court had laid down proposition of law that dividend referred therein, is not taxable, without reference to facts of that case. Hence it cannot be said that findings therein could to be distinguished, by applying facts of that case. WHETHER PROVISIONS OF Section 2(22)(E) CAN BE APPLIED FOR ASSESSMENT YEARS WHERE THERE ARE MORE THAN TWO SHAREHOLDERS? 44. learned Senior counsel for petitioner had raised further ground stating that when there are more than one shareholder having substantial interest in RTPL for assessment years 2012-13 and 2013-14, provisions of Section 2(22)(e) cannot be applied for those years as computation mechanism fails. Department had accepted that no addition can be made under Section 2(22)(e) in case of other shareholder namely, Mr. M.Ramasamy under Section 153A. 45. During assessment years 2012-13 and 2013-14, Mr. Ramasamy held more than 20% shareholding in RSPL and RTPL. 74/94 http://www.judis.nic.in W.P.No.34786 of 2015 specific contention was raised by petitioner before Settlement Commission that since there are more than two shareholders in assessment years 2012-13 and 2013-14, provisions of Section 2(22)(e) cannot be applied for those years as computation mechanism fails. Settlement Commission, had simply rejected this contention stating that Mr. M.Ramasamy was not applicant before Commission. learned Standing counsel for Department reiterated this finding of Commission and further stated argument of petitioner that computation mechanism would fail, is hypothetical. 46. It is not in dispute that during assessment years 2012- 13 and 2013-14, there were more than one shareholder holding substantial interest in RSPL and RTPL. Settlement Commission was also appraised of this fact that there are two shareholders having substantial interest in RTPL. loan from RSPL was not made directly to specific shareholder and as more than one shareholder is to be treated as specified shareholder for purposes of Section 2(22)(e) for loan from RSPL to RTPL, Section cannot be applied for relevant assessment years for reason that computation of 75/94 http://www.judis.nic.in W.P.No.34786 of 2015 Section fails since Section does not provide making amount of loan to be added in hands of more than one shareholder or dividing amount of loan between specified shareholders in any ratio. Since computation of Section itself fails, it necessarily would follow that charge of Section for assessment years 2012-13 and 2013-14 would also fail. 47. Hon ble Apex court in CIT Vs. B C Srinivasa Shetty reported in (1981) (128 ITR 294) (SC) had held as follows: Section 45 charges profits or gains arising from transfer of capital asset to income tax. Thus it must be one which falls within contemplation of section. It must bear that quality which brings Section 45 into play. To determine whether goodwill of new business is such asset, it is permissible, as we shall presently show, to refer to certain other sections of head capital gains . Section 45 is charging section. For purpose of imposing charge, Parliament has enacted detailed provisions in order to compute profits or gains under that head. No existing principle or provision at variance with them can be applied for determining chargeable profits and gains. 76/94 http://www.judis.nic.in W.P.No.34786 of 2015 All transactions encompassed by Section 45 must fall under governance of its computation provisions. transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be subject of charge. This inference flows from general arrangement of provisions in Income Tax Act, where under each head of income, charging provision is accompanied by set of provisions for computing income subject to charge. character of computation provisions in each case bears relationship to nature of charge. Thus, charging Section and computation provisions together constitute integrated code. When there is case to which computation provisions cannot apply at all it is evident that such case was not intended to fall within charging section. Otherwise, one would be driven to conclude that while certain income seems to fall within charging Section there is no scheme of computation for quantifying it. legislative pattern discernible in Act is against such conclusion. It must be borne in mind that legislative intent is presumed to run uniformly through entire conspectus of provisions pertaining to each head of income. 77/94 http://www.judis.nic.in W.P.No.34786 of 2015 48. It is contention of Department that argument raised by petitioner of failure of computation mechanism is hypothetical situation since Mr.Ramasamy is not taxed on same income. Such contention of Department came to be diluted when petitioner had produced copy of reassessment order under Section 147 of Act , whereby deemed dividend was taxed in hands of Mr. Ramasamy also. As seen in facts of instant case, whole amount was already taxed in hands of petitioner and present reassessment order of Mr.Ramasamy amounted to double taxation. What was claimed to be hypothetical situation has now been disproved in view of reassessment order of Mr.Ramasamy. It is stated that matter is now pending for adjudication before ITAT, Chennai. 49. In Govind Saran Ganga Saran V. Commissioner of Sales Tax and others [(1985) 155 ITR 144 (SC)], Hon'ble Supreme Court had held as hereunder: Where turnover of goods declared under Section 14 of central sales tax act, 1956, to be of special importance in interstate trade or 78/94 http://www.judis.nic.in W.P.No.34786 of 2015 commerce is subjected to tax under sales tax law of state, Section 15 of that act prescribes maximum rate at which such tax may be imposed and requires that such tax shall not be levied at more than one point. If either of these two conditions, which are essential to validity of impost by state on such goods, is not satisfied, impost will be invalid. In order that tax should not be levied at more than one stage, it is imperative that sales tax law of state should specify either expressly or by necessary implication single point at which tax may be levied. Alternatively, it may empower statutory authority to prescribe such single point for purpose. When such point is not prescribed, either by statute or by statutory delegate, no compliance is possible with Section 15. single point at which tax may be imposed must be definite ascertainable point so that both dealer and sales tax authorities may know clearly point at which tax is to be levied. 50. learned Senior counsel for petitioner contended that 79/94 http://www.judis.nic.in W.P.No.34786 of 2015 even assuming that amount advanced for first time by RSPL to RTPL is treated as deemed dividend, any transfer of money by RTPL to RSPL and subsequent repayment by RSPL to RTPL thereafter should not be taxed as 'deemed dividend'. As such by adjusting such payments by RTPL to RSPL, deemed dividend ought to have been limited to Rs.35,47,20,422/- as against Rs.137,19,75,000/-. Opposing such contention, learned Standing counsel for respondent submitted that even when advance of loan is subsequently repaid in its entirety during relevant years, still deemed dividend is applicable. In support of such contention, learned counsel placed reliance of decisions in Smt. Tarulata Shyam V. CIT [(1977) 108 IT 345(SC)] and P. Sarada V. CIT [(1998) 229 ITR 444 (SC)]. 51. It is case of petitioner that if loans advanced first by RSPL to RTPL is considered as dividend, any payment made by RTPL to RSPL ought to be considered as loan by RTPL to RSPL. Settlement Commission had not considered such contention put forth before it but had relied upon decisions in Tarulata Shyam and P Sarada (supra). decisions may not be relevant since it is not 80/94 http://www.judis.nic.in W.P.No.34786 of 2015 argument of petitioner that tax closing balance of loan outstanding at year end as deemed dividend, but that amount repaid by shareholder to Company should be construed as loan since shareholder never repaid dividend back to Company. 52. Settlement Commission was of view that even if advance of loan is subsequently repaid in its entirety during relevant previous year, still deemed dividend is applicable, for which purpose reliance was placed on Tarulata Shyam and P. Sarada (supra). It is not case of petitioner that tax closing balance of loan outstanding at year-end should be deemed dividend for that particular year and so on for subsequent years. On other hand, it is submission that if loans advanced first by RSPL to RTPL is considered as dividend, any payment made by RTPL to RSPL ought to be considered as loan by RTPL to RSPL. This was made as specific contention before Settlement Commission which was ignored, by placing reliance on Tarulata Shyam and P. Sarada (supra). 53. In decision of Hon'ble Division Bench of Madras High Court in case of Sunil Kapoor V. CIT reported in 63 81/94 http://www.judis.nic.in W.P.No.34786 of 2015 Taxmann.com 97, decision of Tarulata Shyam (supra) was considered and ultimately held that amounts advanced to assessee during relevant year, less amount repaid by assessee in same year, would be treated as deemed dividend under Section 2(22)(e) of Act. relevant observations of decision reads as follows: 15. Following view of Supreme Court in Navnit Lal Javeri's case (supra), Calcutta High Court, in case of Smt. Tarulata Shyam & Ors. Vs - Commissioner of Income Tax, West Bengal II, Calcutta (1971 (82) ITR 485 (Cal)), held that tax is attracted at point when loan is borrowed by member/shareholder. For better clarity, relevant portion of order is quoted hereunder :- It is clear from above cited passage that if controlled company adopted device of making loan or advance to one of its shareholders such shareholder would be deemed to have received said amount out of accumulated profits and would be liable to pay tax on basis that he had received said loan by way of dividend. Whether loan is ultimately repaid to company or not is 82/94 http://www.judis.nic.in W.P.No.34786 of 2015 immaterial. This decision would seem to answer all contentions raised by Mr. Choudhury against assessment of amount as dividend. Further, as pointed out by both Accountant Member and President of Income-tax Appellate Tribunal, neither Bombay High Court nor Madras High Court, who had also occasion to consider this question, had any doubts that liability to tax attached as soon as loan was taken from company. For instance, in Madras case of K. M. S. Lakshmana Aiyar v. Additional Income-tax Officer, it was observed that under section 2(6A)(e) loan or advance by controlled company to its shareholder would attract tax liability though such loan might be repaid subsequently even during that year. Again, Bombay High Court in Navnit Lal C. Javeri v. K. K. Sen, from which aforesaid appeal was taken to Supreme Court, has observed as follows : "The tax is attracted at point of time when said loan is borrowed by members." We have, therefore, no hesitation in holding that liability to be taxed attaches to any amount taken as loan by shareholder from 83/94 http://www.judis.nic.in W.P.No.34786 of 2015 company at moment loan is borrowed and it is immaterial whether loan is repaid before end of accounting year or not. answer to question referred must, therefore, be in affirmative and in favour of department. 16. Supreme Court in case of Smt. Tarulata Shyam & Ors. Vs - Commissioner of Income Tax, West Bengal (1977 (108) ITR 345 (SC)), which appeal is product of above referred to decision from Calcutta High Court, has culled out situation in which payments made to shareholder are to be treated as taxable dividend, wherein five conditions have been laid down for purpose of determination of head on which amount is to be taxed. For better clarity, said portion of order is extracted hereinbelow :- From above discussion it emerges clear that fiction created by section 2(6A)(e) read with section 12(1B) of Act is inexorably attracted as soon as all conditions necessary for its application exist in case. In Navnit Lal's case [1965] 56 ITR 198, 202 (SC) this court, after analysis of these provisions, listed these conditions, as follows " . . . . . combined 84/94 http://www.judis.nic.in W.P.No.34786 of 2015 effect of these two provisions is that three kinds of payments made to shareholder of company to which said provisions apply, are treated as taxable dividend to extent of accumulated profits held by company. There three kinds of payments are: (1) payments made to shareholder by way of advance or loan; (2) payments made on his behalf; and (3) payments made for his individual benefit. There are five conditions which must be satisfied before section 12(1B) can be invoked against shareholder. first condition is that company in question must be one in which public are not substantially interested within meaning of section 23A as it stood in year in which loan was advanced. second condition is that borrower must be shareholder at date when loan was advanced ; it is immaterial what extent of his shareholding is. third condition is that loan advanced to shareholder by such company can be deemed to be dividend only to extent to which it is shown that company possessed accumulated profit at date of loan. This is important limit prescribed by relevant section. fourth condition is that loan must not have been advanced by 85/94 http://www.judis.nic.in W.P.No.34786 of 2015 company in ordinary course of its business. In other words, this provision would not apply to cases where company which advances loan to its shareholder carries on business of money lending itself ; and last condition is that loan must have remained outstanding at commencement of shareholder's previous year in relation to assessment year 1955-56. (Emphasis supplied). first four conditions factually exist in instant case. last condition is not applicable because it was transitory provision applicable to assessment year 1955-56 only, while we are concerned with assessment year 1957-58, and previous year is calendar year 1956. 17. Keeping above guidelines, as postulated by Supreme Court in mind, cursory look into facts of present case would disclose that there is no dispute that company is controlled (private limited) company in which public are not substantially interested. Further, assessee is admittedly shareholder and Director of KIPL. It is also beyond controversy that at all material times, company possessed "accumulated profits" in 86/94 http://www.judis.nic.in W.P.No.34786 of 2015 excess of amount which assessee- shareholder was paid during previous year. Income-tax Officer found that surplus reserve of company for year ending 31.3.09 stood at Rs.10,26,62,126/=. assessee drew money for purpose of making payments, which were personal in nature, aggregating Rs. 76,86,829/=, which amount was shown as loan or advance in books of accounts of KIPL. company's business is not money-lending and it could not be said that loans had been advanced by company in ordinary course of its business. In such circumstances, in instant case, all amounts advanced to assessee/appellant under head loans and advances fall squarely within ambit of Section 2 (22) (e) of Income Tax Act. 18. object of Legislature in enacting section 2 (22) (e) is to prevent escapement of tax by some shareholders. Under section 2 (22) (e) of Act, by deeming provision, Legislature has made payment of any advance or loan to shareholder deemed dividend so as to subject such payments to levy of tax in hands of receiver of said amount. It should be noted that pari materia 87/94 http://www.judis.nic.in W.P.No.34786 of 2015 provision, viz., clause (e) of section 2(6A) of Act was substituted for original provision by Finance Act, 1955, with effect from 1st April, 1955. object of provision is to prevent avoidance of tax by shareholders of closely- held company. In such company, few shareholders, who effectively control it, can easily exploit its juristic personality, by restraining it from distributing its yearly dividends and thereby accumulating its profits, and thus saving themselves from higher tax incidence resulting from distribution of dividend. 19. In such backdrop, above provision came to be inserted so as to make any payment made by company by way of advances and loans to shareholders, who satisfy certain conditions, as enumerated above, to fall under head dividend as defined under Section 2 (22) (e) of Income Tax Act. In case on hand, assessee/appellant having received above amount from KIPL under head loans and advances as shown in books of accounts of KIPL, five ingredients, as propounded by Supreme Court in Tarulata Shyam's case (supra) to bring said amount under ambit of dividend are wholly satisfied in present 88/94 http://www.judis.nic.in W.P.No.34786 of 2015 case and four parameters, as enumerated by Assessing Officer, are also squarely attracted to case of assessee herein. Therefore, any amount paid to assessee by company during relevant year, less amount repaid by assessee in same year, should be deemed to be construed as dividend for all purposes. 20. However, in case on hand, Assessing Officer has taken entire amount of Rs.76,86,829/= received by assessee from company as dividend, while computing income, but has lost sight of payment made. In such circumstances, this Court is of considered opinion that CIT (Appeals) has rightly come to conclusion that position as regards each debit will have to be individually considered, because it may or may not be loan. AO is, therefore, directed to verify each debit entry on aforesaid line and treat only excess amount as deemed dividend u/s 2 (22) (e) of Act. We find such direction issued by CIT (Appeals), as upheld by Tribunal is in consonance with provision of Section 2 (22) (e) of Act, and only those amounts, which reflect in debit side of books of accounts of company falling under definition of 89/94 http://www.judis.nic.in W.P.No.34786 of 2015 loans and advances, with regard to shareholder, in relevant year will be entitled to be taken as deemed dividend. 21. For foregoing reasons, it is ordered as follows :- i) On question of law raised, we are of view that Tribunal was justified in dismissing appeal filed by assessee/appellant and, consequently, order of Tribunal dated 25.6.2013 stands confirmed. ii) Consequently, issue as framed by this Court is answered in favour of Revenue and against assessee. 54. final point raised by learned Senior counsel for petitioner is that no incriminating material was found during search in relation to deemed dividend and thus, proceedings under Section 153A r/w. 153C are not valid. Though this argument was advanced before Commission, issue was not adjudicated. To such contention, learned Standing counsel submitted that plea of lack of incriminating material will not arise since petitioner himself had filed application before Settlement Commission to 90/94 http://www.judis.nic.in W.P.No.34786 of 2015 adjudicate issue of deemed dividend. During course of search, specific question in relation to applicability of deemed dividend was put to Senthil Nathan, husband of petitioner. 55. It is fact that that ground of absence of incriminating material in relation to deemed dividend, was placed before Settlement Commission but not considered. petitioner, by letter dated 31.08.2015, had submitted that there was no incriminating material in relation to deemed dividend found during search and accordingly, no addition can be made under Section 2(22)(e). said contention was taken note of by Settlement Commission in paragraph 7.2 of its order but however, had failed to address issue. 56. Hon'ble Division Bench of Bombay High Court in CIT V. Continental Warehousing Corporation Ltd [(2015) 374 ITR 645 (Bom)] held that power under Section 153A cannot be routinely exercised in absence of any incriminating material during search. In CIT V. Kabul Chawla (2016) [380 ITR 0573 (Delhi)], it was held that since no incriminating material was 91/94 http://www.judis.nic.in W.P.No.34786 of 2015 unearthed during search, no additions could have been made to income already assessed. jurisdiction of such assessment is to assess what is found during search and thus, there has to be some incriminating material found during course of search. As stated earlier, petitioner had submitted before Settlement Commission during course of search under Section 132 of Act that no fresh incriminating material with respect to deemed dividend was found. Unfortunately, Settlement Commission has not addressed this issue at all. Thus, proceedings under Section 153A r/w. 153C of Act are not valid. 57. For all foregoing reasons, this Court is of affirmed view that order of Settlement Commission is not in accordance with provisions of Act and therefore, this Court would be justified in invoking its extraordinary powers under Article 226 of Constitution of India. Accordingly, impugned order of Income Tax Settlement Commission comprised in file number No. TN/CN- 53/2013-14/45/IT dated 14.09.2015, insofar as it relates to determination of deemed dividend as income of petitioner for assessment years 2009-2010 to 2013-2014 are concerned, is 92/94 http://www.judis.nic.in W.P.No.34786 of 2015 hereby quashed. petitioner herein shall be entitled to claim refund of any tax paid, pursuant to impugned order of Settlement Commission. Writ Petition stands allowed accordingly. Consequently, connected Miscellaneous Petition is closed. No costs. 24.09.2019 DP Index: Yes Order: Speaking To 1.The Vice Chairman, Income Tax Settlement Commission, Additional Bench, 640 Anna Salai, Nandanam, Chennai-600 035. 2.The Principal Commissioner of Income Tax, Central 2, Chennai-34. 3.The Deputy Commissioner of Income Tax, Central Circle 2, Coimbatore. 93/94 http://www.judis.nic.in W.P.No.34786 of 2015 M.S.RAMESH, J. DP Order made in W.P.No.34786 of 2015 and M.P.No.1 of 2015 24.09.2019 94/94 http://www.judis.nic.in R. Chitra v. Vice Chairman, Income-tax Settlement Commission, Additional Bench, Chennai / Principal Commissioner of Income-tax, Central 2, Chennai / DCIT, Central Circle 2, Coimbatore