Itxa/50/2012 Of The Commissioner Of Income Tax - 22 v. Pravin Bhimshi Chheda

*1* IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.50 OF 2012 The Commissioner of Income Tax-22..Appellant-Versus-Pravin Bhimshi Chheda..Respondent ..Respondent ........... Mr. Abhay Ahuja for the Appellant.Dr. K. Shivram, Senior Advocate, with Ms. Neelam Jadhav i/b. Mr. A. R. Singh and Paras S. Savla for the Respondent. ........... CORAM: S.C. DHARMADHIKARIAND B.P. COLABAWALLA, JJ. DATE :- 17[th] June, 2014 P.C.: 1]This appeal is directed against the order passed by the Income Tax Appellate Tribunal dated 31[st] May, 2011. The assessment year in question is 2006-07. The appellant before the Tribunal was the respondent-assessee and one M/s. Sujyoti Enterprises had also filed an appeal as Income Tax Appeal No.6319/Mum/2009. The appeal filed by M/s. Sujyoti Enterprises was heard together with the appeal of the present respondent. 2]We are concerned with the appeal of the present respondent-assessee essentially. Mr. Ahuja, learned counsel appearing in support of 1/10 this appeal for the revenue submits that the Tribunal's order and specially its conclusion with regard to applicability of section 2(22)(e) of the Income Tax Act, 1961, raises substantial questions of law. He submits that the Tribunal was impressed by the circuitous entries in which the money was advanced by a company namely M/s. Swati Energy & Projects Pvt. Ltd. That is a company admittedly in which the assessee has substantial interest. Equally, the assessee has substantial interest in M/s. Sujyoti Enterprises. The money may have flown from the account of M/s. Swati Energy and Projects Pvt. Ltd. and M/s. Power Services Corporation in which Mr. Manish Dedhia was a sole proprietor and that Manish Dedhia is also an employee of M/s. Swati Energy and Projects Pvt. Ltd. It is in these circumstances, the money, later on went to M/s. Sujyoti Enterprises and it is M/s. Sujyoti Enterprises which returned the same to M/s. Swati Energy and Projects Pvt. Ltd. on the same day. That all this was to circumvent section 2(22)(e) of the Income Tax Act, 1961. Mr. Ahuja, therefore, submits that the present appeal raises a substantial question of law and as formulated at page 4 para4(a) of the present paper book. 3]In support of his submissions, Mr. Ahuja relies upon two judgments delivered by the Hon'ble Supreme Court of India. The first one is reported in 1977 (108) I.T.R. 345 in case of Smt. Tarulata Shyam and Others 2/10 V/s. Commissioner of Income Tax, West Bengal. The other is an order passed by the Hon'ble Supreme Court reported in 2002 (252) I.T.R. 893 in case of L. Alagusundaram Chettiar V/s. Commissioner of Income Tax. 4]On the other hand, Mr. Shivram, learned senior counsel appearing on behalf of the respondent submits that on a plain reading of section 2(22)(e), the conclusion reached by the Tribunal is correct. It is also in consonance with the interpretation placed on the said provision by two Division Benches of this Court one in the case of Commissioner of Income Tax V/s. Universal Medicare Private Limited reported in (2010) 324 ITR 263 and another in the case of Assistant Commissioner of Income Tax V/s. Britto Amusement Pvt. Ltd. reported in (2014) 360 ITR 544. For all these reasons, it is submitted by him that the appeal does not raise any substantial question of law but deserves to be dismissed. 5]The statement of facts in the present memo of appeal, are essentially those recorded by the Tribunal in para-2 of the impugned order. Mr. Ahuja does not dispute that the assessee is an individual. He is a Director in M/s. Swati Energy and Projects Pvt. Ltd. as well as a partner in M/s. Sujyoti Enterprises. He has substantial interest in both concerns. 3/10 5]The statement of facts in the present memo of appeal, are essentially those recorded by the Tribunal in para-2 of the impugned order. Mr. Ahuja does not dispute that the assessee is an individual. He is a Director in M/s. Swati Energy and Projects Pvt. Ltd. as well as a partner in M/s. Sujyoti Enterprises. He has substantial interest in both concerns. 3/10 According to Mr. Ahuja, Mr. Manish Dedhia is an employee of M/s. Swati Energy and Projects Pvt. Ltd. He is also a proprietor of M/s. Power Service Corporation. Pertinently, Mr. Ahuja does not say that the assessee has a substantial interest or is a member or partner in M/s. Power Service Corporation. Loan or advance was given to M/s. Power Services Corporation by M/s. Swati Energy and Projects Pvt. Ltd. on 24[th] October, 2005. On that day itself M/s. Power Service Corporation gave a loan of an amount of Rs.1,40,00,000/- to M/s. Sujyoti Enterprises. M/s. Sujyoti Enterprises gave back the money to M/s. Swati Energy and Projects Pvt. Ltd. on 24[th] October, 2005 itself. The assessee as also Mr. Manish Dedhia claimed that the amount of Rs.1,40,00,000/- was advanced against the purchase orders and it did ultimately take place. We need not go into further facts after the whole transaction is seen by us in this manner and its entirety. It is in this backdrop that the Tribunal was called upon to consider the issue of applicability of section 2(22)(e) of the Income Tax Act, 1961. That reads 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 31[st] day of May, 1987, by way of advance or loan to 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 per cent of the voting power, or to any concern in which such shareholders 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; but “dividend” does not include – (i) a distribution made in accordance with sub-clause(c) or sub-clause(d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; [(ia) a distribution made in accordance with sub-clause(c) or sub-clause(d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its enquity shareholders after the 31[st] day of March, 1964, [and before the 1[st] day of April, 1965];] (ii) any advance or loan made to a shareholder [for 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; (iii) and dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause(e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).]” (iii) and dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause(e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).]” 6]Upon a bare perusal of the said provision and the transaction in question, the Tribunal concluded that in this case the transaction was a circuitous transaction and the money which initially belongs to M/s. Swati Energy and Projects Pvt. Ltd. was returned to the same company on the very same day through M/s. Power Service Corporation. The object and purpose of section 2(22)(e) was noted by the Tribunal. We need not go into that aspect or any wider controversy. The Tribunal, then, analyses this transaction and holds that there is no flow of fund or any benefit from M/s. Swati Energy and Projects Pvt. Ltd. to M/s. Sujyoti Enterprises or to its partner Mr. Pravin B. Chheda. Mr. Pravin Bhimshi Chheda is the respondent-assessee before us. It is in these circumstances, that the Tribunal concluded that this is not a loan or advance so as to attract section 2(22)(e). We are not required to go into any further controversy or larger question. The Tribunal may have addressed itself to the status of Mr. Manish Dedhia and the financial position of M/s. Power Service *7* 903.itxa50.12 Corporation possibly to take care of the argument of the revenue that these were entities closely connected and possibly the money was routed through them although there was no genuine business transaction. In taking care of that argument, the status and financial position of all the entities, their annual income has been referred by the Tribunal. Once, we are of the view that the transaction essentially carried out in this case is not falling under section 2(22)(e), then, the finding of fact rendered by the Tribunal cannot be said to be perverse or vitiated by any error of law apparent on the face of the record. 7]The reliance by Mr. Ahuja on the two decisions of the Supreme Court is totally misplaced. In the first decision, in the case of Smt.Tarulata Shyam and Others, the assessee is a shareholder and the Managing Director of M/s. Dolaguri Tea Co.(P) Ltd. That was a private limited company. At the relevant time, section 2(22)(e) of the Income Tax Act, 1961 may have been identical and similarly to the relevant provision in the Income Tax Act, 1922. However, on facts, the Hon'ble Supreme Court found that there was a credit balance in the books of the company in the assessee's account. That was brought forward from the earlier year. Between the two dates in the concerned assessment year, the assessee has withdrawn cash from time to time, amounting aggregating Rs.4,97,442/-. 7]The reliance by Mr. Ahuja on the two decisions of the Supreme Court is totally misplaced. In the first decision, in the case of Smt.Tarulata Shyam and Others, the assessee is a shareholder and the Managing Director of M/s. Dolaguri Tea Co.(P) Ltd. That was a private limited company. At the relevant time, section 2(22)(e) of the Income Tax Act, 1961 may have been identical and similarly to the relevant provision in the Income Tax Act, 1922. However, on facts, the Hon'ble Supreme Court found that there was a credit balance in the books of the company in the assessee's account. That was brought forward from the earlier year. Between the two dates in the concerned assessment year, the assessee has withdrawn cash from time to time, amounting aggregating Rs.4,97,442/-. The first two cash amounts were taken as well. Deducting therefrom the pending balance and other two items being outstanding dividends declared of his major son, and transferred to his account, and a further dividend credited to the account of the assessee from Kathoni Tea Estate a debit balance was shown in the books of the company as on 12[th ]November, 1956. On 29[th] December, 1956, the assessee paid back to the company a sum of Rs.1,90,000/-. On 31[st] December, 1956, the assessee's account was credited with another sum of Rs.80,000/- in respect of the dividend due to him and his wife, and with a further sum of Rs.29,326/- for hypothecation. That is how before the end of the previous year, the credits obtained in the account of the assessee. At the end of the relevant previous year, no advance or loan was given by the company to the assessee. However, the Income Tax Officer found that the accumulated profits of the company as on 1[st] January, 1956, amounted to Rs.6,83,005/-. Therefore, the Income Tax Officer deducted the two cash amounts paid to the assessee and treated the balance of Rs.2,72,703/- as net dividend income in the hands of the assessee within the meaning of the relevant provision. That is how the assessee before the Hon'ble Supreme Court failed throughout. Though there was a contrary opinion rendered in the Income Tax Appellate Tribunal, ultimately the question was referred to the President of the Tribunal. The President agreed with 8/10 *9* 903.itxa50.12 the accountant member and the majority dismissed the assessee's appeal. However, a question was referred for opinion to the High Court. The High Court held that the tax was attracted at the point of time when the loan was borrowed by the shareholder and it was immaterial whether the loan was repaid before the end of the accounting year or not. That is how the question was answered in favour of the revenue and against the assessee. It is in these circumstances, that the Hon'ble Supreme Court dismissed the appeal of the assessee and it referred to the entire facts, the backdrop in which the provision like section 2(22)(e) was brought on the statute book. The Hon'ble Supreme Court, then, referred to the rival contentions and concluded that the arguments of the assessee cannot be accepted. The assesssee could not escape the rigour of the law merely because the transaction has been routed by the assessee in a different way. He reads that transaction to mean that once the business of the company's is not money lending and the amount could be paid in advance in the ordinary course of his business, that the requirement of section 2(22)(e) which is similarly worded in the 1922 Act is not satisfied. The conditions are not met. The Hon'ble Supreme Court rejected this argument and equally the other argument that the loan or advance must be outstanding at the end of the previous year. True, it is that the Hon'ble Supreme Court held that it need not be shown as outstanding but the fact remains that essential 9/10 9/10 conditions have to be satisfied for the applicability of section 2(22)(e) of the Income Tax Act, 1961. In our case, the Tribunal, as a matter of fact, found that the circuitous transaction does not fall within the sub-section concerned. Equally, in the other case the Hon'ble Supreme Court concluded that the loan given to assessee can be treated as dividend. There, the employee was a small time paid worker/employee. He advanced loan to the assessee who was a Managing Director of the company. The advance was given to the employee for benefit of assessee. It is in these circumstances, that the payment attracted the similar provision. In such circumstances, we are of the opinion that both these decisions are distinguishable on facts. 8]As a result of the above discussion, the appeal does not raise any substantial question of law. It is accordingly dismissed. No costs. (B.P.COLABAWALLA, J.) (S.C. DHARMADHIKARI, J.) wadhwa