On The Other Hand, Sri B.chandrasen Reddy, Learned Counsel Forthe Respondent-Assessee, Would Submit That Where The Transaction Is Forthe Beneficial Interest Of v. Creative Dyeing And Printing P. Ltd.[[1

THE HON’BLE SRI JUSTICE RAMESH RANGANATHANANDTHE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHY I.T.T.A.No.106 of 2015 JUDGMENT:(per Hon’ble Sri Justice Ramesh Ranganathan) This appeal, under Section 260-A of the Income Tax Act, 1961 (forshort “the Act”), is preferred by the Revenue against the order passed bythe Income Tax Appellate Tribunal in I.T.A.No.376 of 2013 dated31.10.2013 for the assessment year 2009-10. In the order under appeal, the Tribunal noted that the assessee wasone of the directors of M/s.Charan Life Devices Pvt. Ltd which did nothave any landed property or building of its own; the company was facinghurdles in obtaining loans and financial assistance from banks and otherfinancial institutions to conduct their business; the directors hadmortgaged their personal properties to enable the company to obtaincash credit facilities/term loans from banks and financial institutions; thisprocess continued from the inception; the directors desired to change thisprocess, and decided to transfer their personal assets in favour of thecompany to obviate such a situation in future; the company had facedserious problems when they had earlier applied for loans for investmentin its subsidiary PHEPL; the directors entered into an agreement with thecompany for the sale of their properties in the latter’s favour; the totalvalue of the sale consideration was Rs.1,70,00,000/-; copies of theagreement of sale were on record; as on date, the full consideration wasnot received; to facilitate transfer of property, the company had paid theman advance of Rs.94,75,000/- as part payment; the property was nottotally handed over by the builder by the time of the search; theregistration process could not be completed as the original documentswere pledged with the bank for the purpose of obtaining loan for thebusiness of the company; the sanction letter of Citi Bank had also beenproduced; the intention of the directors was only to transfer the property tothe company; the transaction was not beneficial to the shareholders, butwas in the interests of the company and for its benefit; and the advance paid by the company to the directors, towards part-payment of the saleconsideration of the property, could not be treated as deemed dividendas it had not been proved that the transaction was for the benefit of theshareholders/directors. The Tribunal further observed that it was the intention of thedirectors to transfer the property to the company, for which they receivedadvance; the directors were mortgaging their personal properties assecurity for the cash credit facilities/terms loans extended to M/s.CharanLife Devices Pvt. Ltd earlier; it is in such circumstances that they haddecided to transfer their personal assets to the company, and hadentered into an agreement of sale; it is only if there is a beneficial transferto the shareholders/directors, can a loan or advance be considered asdeemed dividend; in the present case, the advance paid was not for thebenefit of the shareholders; and as it was a non-gratuitous advance, forthe purpose of the company’s business, it could not be treated asdeemed dividend. The Tribunal further observed that it was the intention of thedirectors to transfer the property to the company, for which they receivedadvance; the directors were mortgaging their personal properties assecurity for the cash credit facilities/terms loans extended to M/s.CharanLife Devices Pvt. Ltd earlier; it is in such circumstances that they haddecided to transfer their personal assets to the company, and hadentered into an agreement of sale; it is only if there is a beneficial transferto the shareholders/directors, can a loan or advance be considered asdeemed dividend; in the present case, the advance paid was not for thebenefit of the shareholders; and as it was a non-gratuitous advance, forthe purpose of the company’s business, it could not be treated asdeemed dividend. Sri J.V. Prasad, learned Senior Standing Counsel for Income Tax,would submit that any advance by the company, in which the public hasno substantial interest, to a shareholder, being a person who is thebeneficial owner of the shares, would fall within the definition of‘dividend’ under Section 2(22)(e) of the Act; it is only if it falls within theexception under Clauses (i) to (v) thereunder would it not fall within thedefinition of ‘dividend’; Clause (ii) of Section 2(22)(e) of the Act makes anexception, of any advance or loan made to a shareholder by a company,in the ordinary course of its business, where lending of money is asubstantial part of the business of the company; in the present case,M/s.Charan Life Devices Pvt. Ltd. is not carrying business of lendingmoney; consequently the advance paid by the company to the assesseewould fall within the definition of “dividend” under Section 2(22)(e) of theAct; and the Tribunal had erred in holding otherwise. On the other hand, Sri B.Chandrasen Reddy, learned counsel forthe respondent-assessee, would submit that where the transaction is forthe beneficial interest of the company, and not for the benefit of the director/shareholder, it would be a transaction in the normal course ofbusiness; such transaction would not fall within the definition of ‘dividend’under Section 2(22)(e) of the Act; as such transactions do not fall withinthe main part of Section 2(22)(e) itself, it is unnecessary to examinewhether it is excluded in terms of Clauses (i) to (v) thereunder; and thequestion, which arises for consideration in this appeal, is covered by thejudgment of the Delhi High Court in Commissioner of Income Tax vs. Creative Dyeing and Printing P. Ltd.[[1]]. In Creative Dyeing and Printing P. Ltd.[1], a Division Bench of theDelhi High Court held that Section 2(22)(e) of the Act can be applied to‘loans’ or ‘advances’ simpliciter, and not to those transactions carried outin the course of business as such; in the course of business transactionsbetween a company and a stockholder, the company may be required togive advance in mutual interest; there is no legal bar in having suchtransactions; what is to be ascertained is the purpose of such atransaction; if the amount is given as an advance simpliciter, without anyfurther obligation behind receiving such an advance, it may be treated as‘deemed dividend’; if it is otherwise, the amount given cannot be brandedas an ‘advance’ within the meaning of ‘deemed dividend’ under Section2(22)(e) of the Act; like Clause (ii) of Section 22(2)(e), dividend does notinclude advance or loan made by a company in the ordinary course of itsbusiness; by granting advance if the business purpose of the company isserved, and is not a sum which it would otherwise have distributed asdividend, it cannot be brought within the deeming provision; and such an‘advance’ cannot be treated as deemed dividend. The Division Bench of the Delhi High Court further held thatSection 2(22)(e) is in the nature of an explanation; Clause (ii) thereundercannot have a bearing on the interpretation of the main provision ofSection 2(22)(e) itself; once it is held that the business transaction doesnot fall within Section 2(22)(e), it is unnecessary to examine clause (ii) ofSection 2(22)(e) of the Act as it gives an example of one of the situationswhere the loan/advance will not be treated as a deemed dividend; that cannot be expanded to take away the basic meaning, intent and purportof the main part of Section 2(22)(e); and, therefore, transactions in theordinary course of business would not fall within the ambit of Section2(22)(e) of the Act. S.L.P (Civil).No.18197 of 2010 preferred against thejudgment in Commissioner of Income Tax vs. Creative Dyeing andPrinting P. Ltd,was dismissed by the Supreme Court. As has been rightly held by the Tribunal, transfer of property, whichbelonged to the assessee-director, to the company was to enable thelatter to secure loans from banks. It is evident from the material placed onrecord that even earlier the assessee, as a director of the Company, hadmortgaged their personal property to enable the company to obtain loansfrom banks/financial institutions. It is evident, therefore, that the advancereceived by the assessee, for sale of the subject property in favour of thecompany, was in the normal course of business; and it was a transactionin the interests of the company to enable it to offer the said building assecurity for the loan to be obtained from banks/financial institutions. As held by the Delhi High Court, in Creative Dyeing and PrintingP. Ltd.[1], it is only if the advance paid is for the benefit of theshareholder/director, can it be said to be “deemed dividend” within themeaning of Section 2(22)(e) of the Act. The Tribunal has rightly held thatthe subject transaction is not for the benefit of the assessee, but is for thebenefit of the company; and it is a transaction in the ordinary course ofbusiness. The conclusion of the Tribunal, that such transactions wouldnot fall within the definition of deemed dividend under Section 2(22)(e) ofthe Act, is in accordance with law. No substantial question of law arisesfor consideration in this appeal necessitating interference under Section260-A of the Act. The appeal fails and is, accordingly, dismissed. Themiscellaneous petitions pending, if any, shall also stand dismissed.There shall be no order as to costs. _____________________________ RAMESH RANGANATHAN, J ___________________________________ Date: 29.03.2016 JSU M. SATYANARAYANA MURTHY, J THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE M.SATYANARAYANA MURTHY I.T.T.A.No.106 of 2015 JSU Date:29.03.2016 [1](2009) 318 ITR 476 (DELHI)