THE issue before the Bench is - Whether loan & advances made by a company to its shareholder from the profit reserve account, would fall within the purview of Section 2(22)(e), if such company is not in the business of money lending. YES is the answer.
Facts of the case
The assessee is an individual. He had filed his return for A.Y 2009-2010, declaring an income of Rs.24.33,877/-, which was processed u/s 143(1). The case was selected for scrutiny and a notice u/s 143(2) was issued on the assessee on 25th Aug, 2010. The assessee responded to the said notice and appeared before the AO. During scrutiny, the assessee was asked to file the financial statement of M/s.Kapoor Imaging Pvt., Ltd. (KIPL) for the A.Y 2009-2010. On perusal of the same, the AO came to hold that the assessee had taken loans and advances on various dates from the company in a total sum of Rs.76,86,829/-. The AO also noticed that there were certain payments as on 31st Mar, 2009 and the balance due to the company was Rs.39,32,345/-. It is also recorded by the AO that the assessee was having more than 60% of the shares in KIPL. Therefore, the AO was of the view that the provisions of Section 2(22)(e) stood attracted in respect of the loans and advances taken by the assessee from KIPL. The stand of the assessee was that in the books of accounts of the company, there was credit balance in favour of the assessee in a sum of Rs.45,44,303/-, while there was a debit balance of Rs.39,32,345/-. It was the further stand of the assessee that if the payments made by the assessee to KIPL was given credit to and after taking note of the credit balance of Rs.45,44,303/- and the debit balance of Rs.39,32,345/-, the company itself had to pay Rs.6,11,957/-. The AO, taking note of the fact that the loan outstanding in the books of accounts of the company in favour of the assessee as on 31st Mar, 2009 was Rs.45,44,303/-, held that the amount of Rs.76,86,829/- received by the assessee from KIPL had not been repaid as on that date and, therefore, all the payments made by KIPL to the assessee upto 31st Mar, 2009 by way of loans and advances should be treated as "deemed dividend" in terms of Section 2(22)(e). The AO also held that in the books of accounts, the assessee had shown two separate accounts, one for loan taken from the company, viz., KIPL and one for loan given. Accordingly, the AO held that irrespective of the amount paid by the assessee to KIPL, the entire amount received by the assessee from KIPL under the head loans and advances amounting to Rs.76,86,829/- was to be treated as 'deemed dividend'. On appeal, the CIT(A) was of the opinion that the provisions of Section 2(22)(e) stood attracted. However, in calculating the dividend amount, the AO had erred in not taking into consideration the amount that had been repaid by the assessee to KIPL. Therefore, the AO was directed to verify each and every transaction and, accordingly, was directed to redetermine the dividend amount. On further appeal, the Tribunal upheld the order of CIT(A).
Having heard the parties, the High Court held that,
++ the issue that requires determination in this case is whether the Tribunal was justified in holding that the transaction in the present case would fall under the definition of "Deemed Dividend" u/s 2(22)(e). On a perusal of the documents available on record, it is to be pointed out here that the contention of the counsel for assessee that the two transactions are done by a single entity, viz., the assessee and, therefore, the same has to be treated as a single transaction, is per se, not correct. The said issue has been dealt with more clarity by the CIT(A), where it has been clearly held that there are two separate accounts, one as Sunil Kapoor loan account, which is in a sum of Rs.45,44,303/- for which interest of Rs.2,12,783/- has been paid and TDS of Rs.24,108/- has been deducted and paid over to the department and the other account is a running account, which has been reconciled as on 31st Mar, 2009 at a sum of Rs.76,86,829/- and after giving credit to the various amounts, balance due was determined as Rs.39,32,345/-. This finding of the CIT(A) was upheld by the Tribunal stating that the two accounts are distinct and separate, which, this Court is of the considered opinion, on the facts of the present case, appears to be correct and justified, warranting no interference;
++ however, at the present time, the larger issue before this Court is with regard to the interpretation of Section 2(22)(e) on which much reliance has been placed by the Department to hold that the amount pending in the books of accounts of KIPL under the head loans and advances to the assessee is to be construed as 'deemed dividend'. It is seen that the Supreme Court in the case of Navnit Lal C.Javeri vs. K.K.Sen, Appellate ACIT, Bombay, while upholding the constitutional validity of Section 2(6A)(e), as it stood then, which is pari materia with the present Section 2(22)(e), observed that if the legislature realises that private controlled companies generally adopt the device of making advances or giving loans to their shareholders with the object of evading payment of tax, it can step in to meet this mischief and create a fiction by which the amount ostensibly and nominally advanced to a shareholder as a loan is treated in reality for tax purposes as the payment of dividend to him, such a fiction created cannot be said to be beyond the scope of legislative competence. Following the view of the Supreme Court in Navnit Lal Javeri's case, the Calcutta High Court, in the case of Smt. Tarulata Shyam & Ors. vs. CIT, West Bengal II, Calcutta, held that tax is attracted at the point when the loan is borrowed by the member/shareholder. Keeping these guidelines, as postulated by the Supreme Court in mind, a cursory look into the facts of the present case would disclose that there is no dispute that the company is a controlled (private limited) company in which the public are not substantially interested. Further, the assessee is admittedly a shareholder and Director of KIPL. It is also beyond controversy that at all material times, the company possessed "accumulated profits" in excess of the amount which the assessee shareholder was paid during the previous year. The ITO found that surplus reserve of the company for the year ending 31st Mar, 2009 stood at Rs.10,26,62,126/-. The assessee drew money for the purpose of making payments, which were personal in nature, aggregating Rs. 76,86,829/-, which amount was shown as loan or advance in the books of accounts of KIPL. The company's business is not money-lending and it could not be said that the loans had been advanced by the company in the ordinary course of its business. In such circumstances, in the instant case, all the amounts advanced to the assessee under the head loans and advances fall squarely within the ambit of Section 2 (22)(e);
++ the object of the Legislature in enacting section 2 (22) (e) is to prevent the escapement of tax by some shareholders. Under section 2 (22) (e) of the Act, by a deeming provision, the Legislature has made payment of any advance or loan to a shareholder a deemed dividend so as to subject such payments to the levy of tax in the hands of the receiver of the said amount. It should be noted that pari materia provision, viz., clause (e) of section 2(6A) of the Act was substituted for the original provision by the Finance Act, 1955, with effect from 1st April, 1955. The object of the provision is to prevent avoidance of tax by the shareholders of a closely held company. In such a company, a 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 a higher tax incidence resulting from the distribution of dividend. Therefore, any amount paid to the assessee by the company during the relevant year, less the amount repaid by the assessee in the same year, should be deemed to be construed as "dividend" for all purposes. However, in the case on hand, the AO has taken the entire amount of Rs.76,86,829/- received by the assessee from the company as dividend, while computing the income, but has lost sight of the payment made. In such circumstances, this Court is of the considered opinion that the CIT(A) has rightly come to the conclusion that "the position as regards each debit will have to be individually considered, because it may or may not be a loan. The AO is, therefore, directed to verify each debit entry on the aforesaid line and treat only the excess amount as deemed dividend u/s 2(22)(e), and only those amounts, which reflect in the debit side of the books of accounts of the company falling under the definition of loans and advances, with regard
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