1. The Revenue is in appeal against the order of the CIT(A), Ludhiana, dt. 1st Oct., 2002 in appeal No. ROT/78/IT/2000-01 for the asst. yr.
1998-99 on the following effective ground : The learned CIT(A) on the facts and in the circumstances of the case, has erred in deleting the addition of Rs. 6,29,922 made by the AO on account of interest-free loan paid to Shri Satish Behal, director, under Section 2(22)(e) of the IT Act, 1961.
2. The relevant and material facts for the disposal of this ground of appeal are that the assessee filed its return of income showing total income of Rs. 17,420 for the asst. yr. 1998-99 in the status of the company. During the course of assessment proceedings, the AO noticed that the shareholders Shri Sham Lal Bansal, Shri Satish Behal and Abha Bansal held more than 10 per cent of the shares of the assessee-company. On perusal of the accounts of the assessee, the AO further noticed that the assessee is maintaining imprest account with one of the directors Shri Satish Behal, who is also being assessed to tax. From the imprest account, the AO further noticed that there has hardly been any utilisation of the funds kept with the said director during the year under consideration which were lying idle (details given in the order of the AO). The AO further noticed that this director Shri Satish Behal has also advanced interest-free loans to the assessee-company, as detailed in the order of the AO. Thereafter, the AO looked into the consolidated account of the assessee-company incorporating both the imprest account and the director's account, as detailed in the order of the AO, and from the same, the AO noticed that advancing of sums to the director under imprest account without their utilisation did not have any business expediency and as such the same was clearly in the nature of the short-term interest-free loan to the director Shri Satish Behal. The AO was of the opinion that the amount so advanced clearly falls within the ambit of dividend under Section 2(22)(e) of the Act. The AO issued a detailed notice to the assessee-company inquiring about the nature of such transaction and in its reply, the assessee submitted that the imprest was not liable to Section 2(22)(e) as it is neither in the nature of an advance or loan nor has it been utilised for the individual benefit of the director.
So, after rejecting the reply of the assessee, by giving detailed reasons in her order, the AO came to the conclusion that the imprest was in the nature of interest-free loan to the said director Shri Satish Behal and so it was only logical to merge the interest-free loans under imprest account advanced by the assessee-company to Shri Satish Behal with the interest-free loan account advanced by Shri Satish Behal to the assessee-company to arrive at the correct dividend under Section 2(22)(e) and accordingly is liable for tax as deemed dividend within the meaning of Section 2(22)(e) in the hands of Shri Satish Behal. So, after calculating the interest-free loans of Rs. 6,29,922.58 given by the assessee-company to Shri Satish Behal, the AO added the same as dividend in the hands of Shri Satish Behal.
3. Aggrieved with the order of the AO, the assessee went in appeal before the CIT(A) and submitted that the imprest account with the director cannot be treated as short-term interest-free loan to the director within the ambit of deemed dividend under Section 2(22)(e) of the Act. It was also contended that even the imprest account was also fully utilised and this fact was duly proved during the course of assessment proceedings because the entire details of money utilised were supplied to the AO during the course of assessment proceedings as well as were also filed before the CIT(A) during appellate proceedings.
4. The CIT(A) after considering these submissions of the assessee, directed the AO to delete the impugned addition by making following observations : I have examined the matter carefully and I find force in the contentions of the learned Authorised Representative. Section 2(22)(e) applies to a loan or advance in the ordinary course of business. In the present case, the cash as imprest was given to the director, Shri Satish Behal who is looking after the day-to-day affairs of the company. The cash was kept with him in his capacity as a director which is a common practice in the trade and industry.
The said cash lying as imprest with the director could not be said either a loan or an advance to a shareholder. In the light of the above, I feel that the provisions of Section 2(22)(e) of the IT Act, 1961, were not applicable to the facts of the case. The addition made by the AO, therefore, deserves to be deleted. Accordingly, I direct the AO to delete this addition.
5. Before us, learned Departmental Representative for the Revenue, besides placing strong reliance on the reasoning given in the order of the AO, submitted that we have to carefully examine the facts of the instant case of the assessee to see whether the amount given to the director is an amount towards the imprest account in real sense or in fact it was an amount advanced to the director as a short-term loan and for that purpose one has to go behind the transaction and know the real motive of the transaction because from the order of the AO, it is evident that from 5th June, 1997 to 3rd Feb., 1998, there were huge deposits in the imprest account but the assessee has not been able to answer as to why there was no withdrawal indicating the utilisation of those funds during the year and so, according to the learned Departmental Representative for the Revenue, the AO in the well-reasoned and well discussed order, has rightly come to the conclusion that the assessee has advanced to its director a short-term loan and so the impugned addition of Rs. 6,29,922 was rightly made by the AO on account of interest-free loan paid to its director Shri Satish Behal under Section 2(22)(e) of the Act. In support of his contention, learned Departmental Representative for the Revenue placed reliance on the following decisions wherein their Lordships upholding the addition made under Section 2(22)(e) of the Act had held as under : The question was whether there was any payment by the trust company of a sum by way of an advance or loan to a shareholder. Though the assessee had a current account with the trust company, the nature of the account showed that there were only a few isolated transactions and that at the end of the year the account was completely squared off. The argument of the assessee was that it was not the intention of the legislature to include within the definition of the word "dividend" in Section 2(6A)(e) a mere temporary advance or loan for a few days. Undoubtedly, if regard be had to the items in Clause.
(a) to (d) of the definition of the word "dividend" in Section 2(6A), they refer to permanent distribution of the amount by the company. The provisions of Clause (e) are entirely different. By introduction of Clause (e) the intention of the legislature was that in the case of a company in which the public are not substantially interested within the meaning of Section 23A, any payment by such company of a sum by way of loan or advance to a shareholder or any payment by such company on behalf of such shareholder or for the individual benefit of such shareholder is to be treated as dividend.
The fact that the payment by the company to the assessee was a loan was made amply clear by the fact that interest was paid on the amount. The exception contained in Sub-clause (ii) of Section 2(6A)(e) of the Act is not available to the assessee in the present case as it was not established that the giving of loan or advance was in the ordinary course of business of the trust company or that lending of money was a substantial part of its business. The decision of the Tribunal that the sum of Rs. 1,62,264 was rightly treated as dividend was correct.
(ii) In the case of Smt. Tarulata Shyam and Ors. v. CIT , their Lordships of apex Court while observing The statutory fiction created by Section 2(6A)(e) of the Indian IT Act, 1922, would come into operation at the time of the payment of advance or loan to a shareholder by a company in which the public are not substantially interested and tax is attracted to the loan or advance to the extent to which the company possesses accumulated profits the moment of the loan or advance is received. Even if the loan or advance ceases to be outstanding at the end of the previous year in which the loan or advance was taken, it can still be deemed to be 'dividend' if the conditions of Section 2(6A)(e) are satisfied. Except for the specific provision in Section 12(1B) for the asst. yr. 1955-56, the legislature has deliberately not made the subsistence of the loan or advance or its remaining outstanding on the last date of the previous year relevant to the assessment year a prerequisite for raising the statutory fiction.
Accordingly, that the assessee was taxable on the sum of Rs. 2,72,708 received by him as loan or advance during the calendar year 1956 relevant to the asst. yr. 1957-58 from a private company of which he was a shareholder, even though at the end of 1956 no advance or loan was due to the company by the assessee as a result of credits made in his favour in his account in excess of that amount.
The language of Sections 2(6A)(e) and 12(1B) is clear and unambiguous. There is no scope for importing into the statute words which are not there. Such importation would be not to construe but to amend, the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation.
Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however, great the hardship may appear to the judicial mind to be.Miss P. Sarada v. CIT the Dismissing the appeal, that Section 2(22)(e) as it stood at the material time defined dividend to include 'any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who has a substantial interest in the company...to the extent to which the company... possesses accumulated profits'.
In the instant case there was no dispute that the appellant had a substantial interest in the company. The nature of the company was also not in dispute. The withdrawals made by the appellant from the company amounted to grant of loan or advance by the company to the shareholder. The legal fiction came into play as soon as the monies were paid by the company to the appellant. The High Court had proceeded on the basis of the facts found by the Tribunal. There was no dispute that the appellant had withdrawn various sums of money between 3rd July, 1972 and 22nd March, 1973 when she did not have any credit balance with the company. In order to pay her these sums of money, the account of M was not debited at all. The entire credit balance of M stood as it was till the very last day of the accounting year. Subsequently adjustment of the account made on the very last day of the accounting year would not alter the position that the appellant had received notional dividends on the various dates when she withdrew the aforesaid amounts from the company.
6. On the other hand, learned Authorised Representative for the assessee referring to paper book pp. 4, 13 and 14, submitted that it is not material if the cash is kept in the company's chest or with the director, so, the amount kept in the imprest account of the director cannot be treated as short-term loan or advance because it is not disputed by the Department that the entire amount was utilised in the next year, is not clear from paper book p. 14. The utilisation of this amount has been shown in the balance sheet to indicate that this amount was utilised by the director from the imprest account. Further, learned Authorised Representative for the assessee referring to paper book p.
13, submitted that the minimum amount of Rs. 1 lakh was reflected in the imprest account of the assessee being utilised in the previous year and the AO has not treated the same as dividend, so in the year under consideration, the AO was not justified in treating the amount in the imprest account of the director as dividend.
7. In the alternative, learned Authorised Representative for the assessee referring to the concluding para of the impugned order of the AO submitted that the addition, if any, was required to be made in the hands of Shri Satish Behal, director, and not in the hands of the assessee-company. In support of his contention, he placed reliance on the following decisions :Ardee Finvest (P) Ltd. v. Dy. CIT (2001) 70 TTJ (Del) 378 : (2001) 79 ITD 547 (Del) the Tribunal Delhi Bench "E" held as under: The companies to which Section 2(22)(e) applies include inter alia, companies in which majority of the voting power lies in the hands of the persons other than the public. These companies are controlled by group of persons allied together and having the same interest". It is for this group to determine whether the profits made by the company should be distributed as dividends or not. When the legislature realised that though money was reasonably available with the company in the form of profits, those in charge of the company deliberately refused to distribute it as dividends to the shareholders but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits. Section 2(22)(e) was enacted for curing this mischief.
Loan means a lending delivery by one party to and receipt by another party of sum of moneys upon agreement, express or implied, to repay with or without interest. For a loan there must be a lender, a borrower, a thing loaned for use, as well as a contract between the parties for the return of the thing loaned. A loan contracted no doubt creates a debt, but there may be a debt, without contracting a loan. In a loan, the mind and intention of the two parties, the lender and the borrower must be ad idem. The expression 'advance' means something which is due to a person but which is paid to him ahead of time when it is due to be paid.
Loans and advances alone can only be considered 'deemed dividend' for the purpose of Section 2(22)(e), it is, therefore, sine qua non to ascertain the correct nature of payments.
(ii) In the case of CIT v. Mother India Refrigeration Industries (P) Ltd. , their Lordships of apex Court held as under : It is well settled that legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field.8. We have considered the rival submissions, perused the records and carefully gone through the orders of the tax authorities below as well as the case law relied upon by both the parties.
9. In order to resolve the issue whether the interest-free loan has been advanced by the assessee to its directors/shareholder Shri Satish Behal, falls under Section 2(22)(e) of the Act, we are required to decide the following points : First, whether Section 2(22)(e) applies to the case of the assessee company; Second, if the assessee to the first point is positive, then in whose hands the addition of the impugned amount is to be made.
Now we shall take up the first point. Both the parties before us have not disputed that at the relevant time, the payment made by the assessee-company was a company in which public is not substantially interested. The amount in question has been given to the director Shri Satish Behal who is a shareholder and who has a substantial interest in the company. This amount has been given by the assessee to the extent to which the company possessed accumulated profits. Now the only condition required to be fulfilled under Section 2(22)(e) of the IT Act is that the impugned amount given by the assessee-company to its director/shareholder Shri Satish Behal was a loan or advance by the company. In the instant case, according to the learned Authorised Representative for the assessee (the company) has not granted any loan or advance to its director/shareholder Shri Satish Behal but this amount was kept as an imprest amount with the director. If we carefully examine the facts emerging from the instant case of the assessee, we find that the amount given to the director/shareholder towards the imprest amount, in real sense was, in fact, not an amount given to the director towards the imprest but was a short-term loan because admittedly it is evident from the accounts that from 5th June, 1997 to 3rd Feb., 1998, there were huge deposits in the imprest account of the shareholder/director, and there were no withdrawals indicating the utilisation of those funds during the year and so, this imprest account was a sham creation by the assessee though in fact, this amount advanced by the assessee-company to its director/shareholder was a short-term loan. We may also mention here that our above exercise was a step towards unearthing the real nature of the transaction to see whether the apparent is real or not and for doing so, we had to carefully examine the facts and circumstances of the instant case of the assessee to arrive at our above conclusion.
10. The argument of the learned Authorised Representative for the assessee that since this entire amount was utilised in the subsequent year so the purpose of creating imprest account with the director/shareholder does not get frustrated merely because this amount was not utilised in the year under consideration, has no force. In view of the ratio of the decision of the apex Court in the case of Smt.
Tarulata Shyam and Ors. (supra) wherein their Lordships of the apex Court held that even if the loan or amount ceased to be outstanding at the end of the previous year in which the loan or advance was taken, it can still be deemed to be dividend, if the other conditions of the section are satisfied. In the instant case, admittedly, the entire impugned amount created as a sham imprest account with the director/shareholder was not utilised during the entire year and no explanation as to why the entire amount created during the period 5th June, 1997 to 3rd Feb., 1998 was not utilised in the relevant year even though there were huge deposits in this account by the assessee. The case law in the case of Ardee Finvest (P) Ltd. (supra) decided by the Tribunal, relied upon by the learned Authorised Representative for the assessee does not apply to the facts of the instant case of the assessee because the Tribunal in this case has simply defined the loans and advances which could be considered deemed dividend for the purpose of Section 2(22)(e) of the Act and then in the facts of that case (supra), the Tribunal concluded whether it was a loan or advance.
11. Whereas, in the instant case of the assessee, in the present facts and circumstances, we are not to be simply carried away by the nature of the transaction of the imprest account created with the director by the assessee but in order to see the real motive behind the creation of this imprest account, we have to see the real nature and purpose of this account and thereafter conclude whether the assessee has given short-term loan to its director/shareholder because the other conditions of Section 2(22)(e) for treating the same as deemed dividend have not been disputed by the assessee before us.
12. We may further mention that after examining the facts and circumstances of the case of the assessee in detail, as discussed hereinabove, we came to the conclusion that the creation of imprest account with the director/shareholder by the assessee was a loan transaction by giving short-term interest-free loan to its director/shareholder to evade the payment of the tax on accumulated profits. Hence, the case of Ardee Finvest (supra) decided by the Tribunal and similarly, the case of Mother India Refrigeration (supra) decided by the apex Court and relied upon by the learned Authorised Representative for the assessee are of no assistance to the assessee.
13. Whereas, on the other hand, from the case law (supra) relied upon by the learned Departmental Representative for the Revenue as well as on account of our detailed discussion hereinabove, in this order, we have come to the conclusion that the AO has rightly held that the impugned amount deposited in the imprest account of the director/shareholder Shri Satish Behal by the assessee-company amounted to the grant of loan or advance by the company to its shareholder and treated the same as dividend as per Section 2(22)(e) of the Act.
Accordingly, the order of the CIT(A) is set aside and the finding of the AO is upheld.14. Now we shall take up the second point as to in whose hands the impugned addition is to be made. From the ratio of the decisions (supra) relied upon by the learned Departmental Representative for the Revenue and learned Authorised Representative for the assessee as well as from the order of the AO, it, is clear that as per the provisions of Section 2(22)(e) the impugned amount is only liable to tax as deemed dividend in the hands of the director/shareholder Shri Satish Behal, of the assessee-company and not in the hands of the assessee-company.
Since the second point is decided in favour of the assessee and against the Revenue, so on that basis, the impugned addition made in the hands of the assessee is liable to be deleted.
15. For the reasons mentioned hereinabove, the order of the CIT(A) in this regard is upheld and the ground of appeal taken by the Revenue is allowed in part.