Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has reiterated that a loan account is different from a current account and provisions of Section 2(22)(e) of the Income Tax Act, 1961 are not applicable to transactions which are in the nature of current account

Case Details:
ITA No.151/Kol/2013 AY : 2009-10
ITO (Appellant) vs Smt. Gayatri Chakraborty (Respondent)
Date of Order: 30-10-2015

Brief Facts of the Case:
The appellant assessee was director in a company namely M/S. Bright Advertising Pvt. Ltd., (BAPL) holding 25.24% shares in BAPL. There were transactions between the Assessee and BAPL of giving money by the Assessee to BAPL as well by BAPL to the Assessee. The AO from the ledger Account of BAPL in the books of the Assessee, took note only of the transaction whereby BAPL gave money to the Assessee and was of the view that the same was “Loan or Advance” within the meaning of Sec.2(22)(e) of the Act by BAPL to appellant who held substantial interest in BAPL taxed it as deemed dividend to the extent the company possessed accumulated profits.

Assessee preferred appeal before CIT(A). Before CIT(A), the Assessee contended that the transactions between the Assessee and BAPL in which the Assessee was a Director represented not a loan account but a current and mutual account. It was submitted that a current or mutual account is different from a loan account in the sense that it has the feature of mutuality which is not present in a loan account.

Assessee also relied on the observations of the Hon'ble Calcutta High Court in the case of Daga& Co. (P) Ltd. vs CIT reported in 227-ITR-480 wherein it has been held that "to constitute a current account or an account in the course of business of the company, there must be each side creating an independent obligation on the other. Mere credit entries with adjustment entries like payment of interest and deduction of tax at source cannot make an account, a current account or an account in the course of business transaction". The A.R. has also referred to another decision of the Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra (338-ITR-538) wherein it has been held that gratuitous loan or advance given by a Company to those classes of shareholders would come within the purview of Sec.2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such a shareholder. It was thus submitted that the transactions between the Assessee and BAPL cannot be treated as a loan account and consequently the A.O. was not justified in treating the sum of Rs.15,76,77,411/- as deemed dividend in the hand of the Assessee in terms of Sec.2(22)(e) of the I.T. Act.”

The CIT(A) agreed with the contentions on behalf of the Assessee and deleted the addition. Aggrieved by the order of the CIT(A), the Revenue preferred appeal before the Tribunal.

Excerpts from ITAT Judgment
A perusal of the statement of balances of transactions between the Assessee and BAPL shows that as on 2.4.2008 BAPL owed Assessee a sum of 1,95,000. BAPL paid the Assessee a sum of Rs.2.4.2008 a sum of Rs.21,05,000 and the Assessee owed BAPL a sum of Rs.19,10,000. The amounts given in the bracket in the last column of the enclosed balances in the running current account is the amount which BAPL owed the Assessee. Mutual transactions go on in this fashion throughout the previous year and as on the last date of the previous year the account is squared i.e., neither the Assessee owes BAPL nor BAPL owes Assessee any sum. The Assessee was beneficiary of the sums given by BAPL at some point of time during the previous year and BAPL was the beneficiary of the sums given by the Assessee at another point of time during the previous year. It was therefore a case of mutual running or current account which created independent obligations on the other and not merely transactions which created obligations on the other side, those on the other being merely complete or partial discharge of such obligations. There were reciprocal demands between the parties and the account was mutual.

This tribunal in the case of Mr.Purushottam Das Mimani (supra) on identical facts came to the conclusion that the account between the Assessee and a public limited company was a running mutual current account and thereafter following the decision of the Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra (supra) held as follows:

“4. We have heard rival submissions and gone through facts and circumstances of the case. We have gone through the facts of the case and found from the perusal of ledger account of assessee in the books of account of Ganesh Wheat Products (P) Ltd., the lender company, it is seen that as on the first day of the relevant accounting year 2005- 06 (A.Y. 2006-07) opening balance is at Rs.28,07,584/-. Thereafter, on several dates during the entire financial year there were several transactions through cheques and some in cash by either parties, i.e. the assessee and the loan giving company, resulting in shifting balances. On many occasions the balance was in favour of the assessee and on some other occasions the balance was in favour of Ganesh Wheat Products (P) Ltd. The ledger of the assessee further reveals that no payment by loan creditor is followed by a repayment by the loan debtor and, in fact, the payments by the assessee and Ganesh Wheat Products (P) Ltd. are independent of one another. No interest was charged by either side for advancing money on mutuality inasmuch as the loan account was a current account in nature. It is thus evident that there were reciprocal demands between the parties and thus mutual in characteristic. At the close of accounting year as on 31-03-2006, debit balance stood at a sum of Rs.18,87,522/- which was duly reflected in the balance sheet under the head Loans & Advances. Similarly, in respect of Mima Flour Mills opening balance was Nil and there were several shifting of balance and the resultant debit balance was Rs.5,00,833/-. For A.Y. 2007-08, in respect of Mima Flour Mills, opening balance was Rs.5,00,833/- and after shifting balance, the debit balance came to nil. In respect of Ganesh Wheat Products, opening balance was Rs.18,87,522/- and after shifting balance the credit balance came to Rs.9 lakhs. On perusal of the ledger account of the assessee in the books of M/s. Mima Flour Mills (P) Ltd. it is seen that on several dates there were shifting balances. On many occasions the balance was in favour of the assessee and on some other occasions the balance was in favour of Ganesh Wheat Products (P) Ltd. It is thus evident that there were reciprocal demands between the parties and thus mutual in characteristic. The account so maintained in respect of such mutual transfer of amount by way of giving and taking financial assistance is, therefore, a current account and this current account is different from a loan account for the sole reason that feature of mutuality is not present in a loan transaction.

5. Here in the present case, from the facts narrated above, it is clear that both the parties are beneficiary of the transaction being current account of the above transactions i.e. shifting balances. This issue has been answered by Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra v. CIT 338 ITR 538 (Cal) wherein Hon’ble High Court held as under:

“The phrase “by way of advance or loan” appearing in sub-clause (e) of section 2(22) of the Income-tax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of 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 ín profits) holding not less than ten per cent. of the voting power; but if such loan or advance is given to such shareholder as a consequence of any further consíderation which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to be deemed dividend withín the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of section 2(22) but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.”

From the above facts and legal proposition decided by Hon’ble jurisdictional High Court, it is clear that section 2(22)(e) of the Act was inserted to bring within the purview of taxation those amounts which are actually a distribution of profits but are disbursed as a loan so that tax thereon can be avoided. It is pertinent to note here that when dividends are declared by a company, it is solely the shareholders who benefit from the transaction. No benefits accrue to the company by way of dividend distribution. Thus, section 2(22)(e) of the Act covers only such situations, where the shareholder alone benefits from the loan transaction, because if the company also benefits from the said transaction, it will take the character of a commercial transaction and hence will not qualify to be dividend. In the case of the assessee, by giving and taking financial assistance from each other, both the assessee and the company were benefited and such transactions between them were nothing but commercial IT(SS)A No.60-62 & 73-76/Kol/2011 A.Ys.06-07 to 08-09 and 02-03 to 05-06Mr. Purushottam Das Mimani. v. DCIT, CC-V, Kol Page 5 transactions and dividend attributable to the shareholder is nothing to do with such business transaction. From the above discussions it can be said that sec. 2(22)(e) of the Act covers only those transactions which benefit the shareholder alone and results in no benefit to the company. On the other hand, if the transaction is mutual by which both sides are benefited, it is undoubtedly outside the purview of provisions of sec. 2(22)(e) of the Act. From the above, it is clear that the loan account differs from current account and the provisions of section 2(22)(e) of the Act, being a deeming section, cannot be applied to current account. In such circumstances, we delete the addition and this common issue of assessee’s appeals is allowed.”

We are of the view that in the present case also the transactions in question does not benefit the shareholder i.e., the Assessee alone and the results in no benefit to the Company BAPL. The loan account is different from a current account with a shareholder and the transactions between the Assessee and BAPL are in the nature of current account and provisions of Sec.2(22)(e ) of the Act will not be applicable to the case of the Assessee. We therefore concur with the decision of the CIT(A) and dismiss the appeal of the Revenue.

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