Loans Advance given on interest not deemed dividend u/s 2(22)(e) as the shareholder do not derive any benefit from the funds of the company

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When the company was compensated by way of interest on loan taken, the assessee shareholder in real sense did not derive any benefit from the funds of the Company so as to attract the provisions deemed dividend under section 2(22)(e).

INCOME TAX APPELLATE TRIBUNAL, KOLKATA ‘C’ BENCH, KOLKATA

I.T.A. No. 1817/KOL/ 2009 Assessment Year: 2006-2007

Smt. Sangita Jain …..Appellant vs. Income Tax Officer … Respondent

Date of Order: 11/03/2016

ORDER

Per Shri P.M. Jagtap :-

This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-XX, Kolkata dated 28.08.2009 for the assessment year 2006-07.

2. Grounds no. 1 & 2 of the assessee’s appeal involve a common issue relating to the addition made by the Assessing Officer and sustained by the ld. CIT(Appeals) on account of deemed dividend under section 2(22)(e) of the Act to the extent of Rs.49,01,812/-.

3. The assessee in the present case is an individual, who filed her return of income for the year under consideration declaring total income of Rs.4,04,690/-. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has received a total sum of Rs.64,55,800/- as loan from M/s. Surya Business Pvt. Limited. Since the provisions of section 2(22)(e) were attracted in case of the said loan amount, the Assessing Officer required the assessee to show-cause as to why the same should not be added to her total income treating the same as deemed dividend. In reply, various contentions were raised by the assessee to challenge the applicability of section 2(22)(e) to the loan amount received by her from M/s. Surya Business Pvt. Limited. The Assessing Officer, however, did not find merit in the said contentions and after giving reasons to reject the same in the assessment order, he made an addition of Rs.64,55,800/- to the total income of the assessee on account of deemed dividend under section 2(22)(e) of the Act.

4. The addition made by the Assessing Officer on account of deemed dividend under section 2(22)(e) was disputed by the assessee, in the appeal filed before the ld. CIT(Appeals) and the submissions made before the Assessing Officer were reiterated on behalf of the assessee in support of her case. The ld. CIT(Appeals), however, did not find the same to be acceptable except in respect of one aspect whereby he found the accumulated profit of M/s. Surya Business Pvt. Limited at the relevant point of time to be only to the extent of Rs.49,01,812/-. Accordingly he sustained the addition made by the Assessing Officer on account of deemed dividend to the extent of Rs.49,01,812/- after recording his observations in paragraph no. 3.3 as under:-

“3.3. I have considered the submission of the appellant and perused the assessment order. On facts, there is no dispute that during the previous year the appellant has taken loan and advances amounting to Rs.64,55,800/- from the company M/s Surya Business Pvt. Ltd. The opening balance as on 1-4-2005 was Rs.6,22,058/- and the closing balance as on 31.3.2006 was Rs.26,90,949/-. On perusal of the copy of account of M/s. Surya Business Pvt. Ltd in the books of appellant, it is seen that besides opening balance of loan as on 1-4-2005, the appellant has taken loans amounting to Rs.64,55,800/- from 26-05-2005 to 24-10- 2005 and she has also repaid certain amounts of loan from 22- 07-2005 to 22-03-2006.

There is also no dispute that the total share holding of the company M/ s. Surya Business Pvt. Ltd was 1,50,000 equity shares of Rs.100/- each, out of which, the appellant was holding 22,678 equity shares, meaning thereby that the appellant was holding more than 10% of equity shares. The provisions of section 2(22)(e) read as under:-

“any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31s t day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.”

Thus, to invoke the provisions of section 2(22)(e), the following conditions should be satisfied- (i) there should be a payment by a company by way advance or loan to a shareholder and the public should not be substantially interested in the said company; (ii) such share holder should be beneficial owner of shares holding not less than ten percent of the voting power.

In the case of the appellant, both these conditions are satisfied as the company M/s. Surya Business Pvt. Ltd. has made payment to the appellant by way of advance or loan and the public is not substantially interested in the said company. The shareholder i.e. the appellant is holding more than ten percent of the voting power in the said company. Therefore, I am of the opinion that the provisions of section 2(22)(e) are applicable in the case of appellant. The amount of advance or loan will not be treated as deemed dividend within the meaning of section 2(22)(e) provided any of the conditions mentioned in clauses (i) to (v) of section 2(22)(e) is satisfied. The appellant has contended before the AO as well as before me that, in her case, clause (ii) of section 2(22)(e) is applicable and hence the AO was not justified in taxing the amount of loan and advance from M/ s Surya Business Pvt. Ltd. as deemed dividend. Clause (ii) of section 2(22)(e) reads as under-

“Any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company”.

It was contended by the appellant that the Memorandum and Articles of Association of the Company of M/s. Surya Business Pvt. Limited authorized it to carry on the business of the financiers and money lenders. Since past many years, the company has been carrying on money lending business and has received interest income, which has been assessed as business income. It was contended that during the years ending 31-03- 2004, 31-03-2005 and 31-03-2006, the status of loans given and interest earned by the company was as under-

year                       Amount of loan given                       Interest earned

31.03.2004                 Rs.43,51,396/-                               Rs.4,86,351/-

31.03.2005                 Rs.41,74,307/-                               Rs.1,88,360/-

31.03.2006                 Rs.97,85,333/-                              Rs.2,65,810/-

Thus, the company has advanced loan to the appellant in the ordinary course of its business and the lending of money is a substantial part of the business of the company.

I have considered the submission of the appellant but I do not agree with it. On perusal of the Tax Audit Report of the company M/ s Surya Business Pvt. Ltd as on 31.03.2006, it is seen that the nature of business or profession of the company has been mentioned as “Trading in Watches, Electronics’ Items, Cellular Phones, Home Appliances, Cameras, Calculators, Sun Glasses and Beverages, etc.” Nowhere the Auditors have mentioned that the money lending is a substantial part of the business of the company. On perusal of schedule 3, 4 & 9 of the balance sheet of the company as on 31.3.2006, it is seen that it has taken secured and unsecured loans amounting to Rs.8,85,13,627/ and has advanced loan to the extent of Rs.97,85,333/- only. On perusal of the profit & loss account of the company as on 31.3.2006, it is seen that the total turnover on account of trading of various items was Rs.29,71,68,775/-, while the interest received on loan was only Rs.2,65,810/-, which was included under the head “Other Income”. Thus it cannot be said that the lending of the money is a substantial part of the business of the company. Merely because the company has advanced certain loans and advances and has earned certain amount of interest, it cannot be said that the company was engaged in the business of money lending. Even turnover-wise, the percentage of loans and advances of Rs.97,85,333/- advanced by the company vis-a-vis total turnover of Rs.29,85,30,665/- works out to 3.2% only. Thus, it could be totally unjustified to assume that the company was carrying on the business of money lending. In view of above facts, it is held that the AO was justified in arriving at the conclusion that the company M/ s Surya Business Pvt. Ltd. was not engaged in the business of money lending and that lending of money is not a substantial part of the business of the company. And therefore, the provisions of section 2(22)(e)(ii) are not applicable in the case of the appellant. I uphold the view taken by the AO.

During the course of appellate proceedings, it was contended by the appellant that the addition, if at all is to be made u/s. 2(22)(e), cannot exceed the sum of Rs.17,89,923/- being the actual amount of loan outstanding as on 31-3-2006 after merging accounts of individual and the proprietary concerns located at Kolkata and Jorhat, It was further submitted by the appellant that under no circumstances, the amount of addition u/s 2(22)(e) could exceed the accumulated profits of the company which was Rs.49,01,812/-. Addition of Rs.64,55,800/- is therefore, in any case, basically wrong and outside the provisions of the Act.

I find no substance in the argument of the appellant that the addition under section 2(22)(e) should be restricted to the extent of actual loan due as on 31-3-2006. If the appellant was maintaining current account with the aforesaid company, even then, for the purposes of section 2(22)(e), each entry of loan taken is to be considered separately and the entire amount of loan taken during the relevant previous year is covered under section 2(22)(e). However, I find force in the submission of the appellant that, under no circumstances, the addition u/ s 2(22)(e) could be more than the accumulated profits of the company. On perusal of the balance sheet of the company as on 31-3-2006 it is seen that, as per schedule 2 of the balance sheet, the “Reserve and Surplus” was Rs.99,01,812/ -. It consists of accumulated profits on account of profit & loss account amounting to Rs.49,01,812/ – and share premium account amounting to Rs.50,00,000/-. Thus, the company was having accumulated profits of Rs.49,01,812/- only and the share premium account cannot be considered as accumulated profits for the purposes of section 2(22)(e). The accumulated profit is the profit which has been taken to the balance sheet from the profit and loss account and available for declaration of dividend in normal course. In the case of appellant, such accumulated profit amounts to Rs.49,01,812/- and hence the AO is directed to restrict the addition u/s. 2(22)(e) to the extent of Rs.49,01,812/-. Ground no. 1 & 2 are dismissed and ground no. 3 is partly allowed”.

5. We have heard the arguments of both the sides and also perused the relevant material available on record. One of the main contentions raised by the ld. counsel for the assessee at the time of hearing before us is that the loan in question treated as deemed dividend under section 2(22)(e) by the authorities below was taken by the assessee from M/s. Surya Business Pvt. Limited on interest and since the said Company was compensated by way of interest paid by the assessee on loan, the assessee in real sense did not derive any benefit from the funds of the Company so as to attract the provisions of section 2(22)(e). Although the ld. D.R. has vehemently opposed this contention of the ld. counsel for the assessee by submitting that the payment of interest alone cannot be considered from the benefit angle as envisaged under section 2(22)(e), it is observed that the judicial pronouncements cited by the ld. counsel for the assessee clearly support the case of the assessee.

6. In the case of Pradip Kumar Malhotra reported in 338 ITR 538 cited by the ld. counsel for the assesese, it was held by the Hon’ble Calcutta High Court that the phrase “by way of advance or loan” appearing in section 2(22)(e) must be construed to mean those advances or loans, which a shareholder enjoys for simply on account of being a partner, who is the beneficial owner of shares, but if such loan or advance is given to such shareholder as a consequence of any further consideration, which is beneficial to the Company, received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act. It was held that gratuitous loan or advance given by a Company to those classes of shareholders thus would come within the purview of section 2(22)(e) but not the cases where the loan or advance is given in return to an advantage conferred upon the Company by such shareholder. In the case of ACIT –vs.- M/s. Zenon (India) Pvt. Limited, a loan taken by the assessee was treated by the Assessing Officer as deemed dividend under section 2(22)(e), but the ld. CIT(Appeals) did not approve the action of the Assessing Officer after having noticed that interest at the rate of 9% per annum was paid by the assessee on such loan, which, according to him, was a consideration received from her shareholders, which was beneficial to the Company and the order of the ld. CIT(Appeals) giving relief to the assessee was upheld by the Tribunal vide its order dated 29.06.2015 passed in ITA No. 1124/KOL/2012 by relying on the decision of the Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra). Keeping in view the said decision of the Hon’ble Calcutta High Court which has been followed by the Coordinate Bench of this Tribunal in the case of M/s. Zenon (India) Pvt. Limited (supra), we hold that the addition made by the Assessing Officer and sustained by the ld. CIT(Appeals) under section 2(22)(e) on account of loan received by the assessee from M/s. Surya Business Pvt. Limited on which consideration in the form of interest was paid by the assessee to the benefit of the Company is not sustainable. We, therefore, delete the same and allow Grounds No. 1 & 2 of the assessee’s appeal.

7. As regards the issue involved in Ground No. 3 of the assessee’s appeal relating to the disallowance of Rs.28,267/-, Rs.11,869/- and Rs.38,353/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) out of travelling & conveyance, telephone expenses and sales promotion expenses respectively, it is observed that these disallowances to the extent of 10% out of corresponding expenses were made by the Assessing Officer and confirmed by the ld. CIT(Appeals) for the involvement of personal element. At the time of hearing before us, the ld. counsel for the assessee has not been able to establish that proper record in the form of log book, call register, etc. is maintained by the assessee in order to show that all the expenses incurred under these three heads are wholly and exclusively for the purpose of assessee’s business. Keeping in view this failure of the assessee and having regard to the nature of expenses claimed, we find ourselves in agreement with the authorities below that the involvement of personal element in these expenses cannot be ruled out and since the disallowance made at 10% for such personal element, in our opinion, is quite fair and reasonable, we find no justifiable reason to interfere with the same. Ground No. 3 of the assessee’s appeal is accordingly dismissed.

8. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open Court on March 11, 2016.

(S.S. Viswanethra Ravi) Judicial Member  (P.M. Jagtap) Accountant Member

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