By TIOL News Service

NEW DELHI, MAR 25, 2015: THE issue before the Bench is - Whether two separate transactions of loan, one by the firm in which the assessee is a partner, to the assessee and the other by a company, in which assessee is a MD, to that firm, can be considered as one transaction merely on the basis of book entries. NO is the answer.

Facts of the case

The assesee, an individual, was managing director of Sahara India Savings and Investment Corporation Ltd.(SISICOL) as well as a partner of M/s. Sahara India (Firm). As per an agreement, the firm was agreed to act as an agent to promote, conduct, introduce and secure business under SISICOL’s schemes. The firm had to remit certain sum on 31-03-1992, which it had collected and was payable to SISICOL. Between 01-04-1991, and 31-03-1992, the firm also advanced certain amounts to the assessee. The AO held that the amount was a loan from SISICOL to the assessee through the use of the company's agent, the firm, which was a “conduit” and a device adopted to bypass application of Section 2(22)(e). Thus, the amount being a loan out of SISICOL’s accumulated profits to the assessee-shareholder was treated as "deemed dividend" u/s 2(22)(e) and added to the assessee’s income. On appeal, CIT(A) held that SISICOL had advanced sums to a concern (the firm) in which the assessee had a substantial interest. Taking note that Section 2(22)(e) as applicable after its amendment w.e.f. from 31-05-1987, for AY year 1988-89, included concerns in which shareholder is a member or partner, the CIT(A) upheld the addition made. On further appeal before Tribunal there was a divergence of views of the two members who originally heard the appeal; the Judicial Member held that Section 2(22)(e) was inapplicable; the Administrative Member held to the contrary. The Judicial member noted that the assessee was managing director of SISICOL, which had many deposit schemes and 290 units or branches to aid its operations. He was also a partner of the firm, which entered into an understanding with SISICOL to conduct, promote, introduce and secure business through various schemes for the company. The firm also collected amounts through several schemes of SISICOL. Referring to the schemes, and the terms of the 1987 agreement, it was noted that there was no time limit stipulated for remittance of amounts collected by the firm on behalf of SISICOL to it. The amounts were to be collected in the ordinary course of business.

The Judicial Member found that to invoke the provisions of Section 2(22)(e), the revenue had to prove that a sum was directed by the company to the firm to pay to the assessee. In such a case, could the firm be said to debit the company’s account and not that of individual partner. It was therefore held that the firm was indebted to the company (in respect of what it collected and which was payable to SISICOL), but it could not be said that such amounts in the hands of the firm were given as loan or advance by SISICOL. The amounts payable in the large running account was unremitted collection, and the relationship was that of a debtor and a creditor in respect of the trade debt but not one of a borrower and a lender. It was also noted that the sums shown as due from the firm to the company was reflected in Schedule VII to the balance-sheet with the heading “Cash, bank and other balances”. Thus, the description for the amount due from the firm was entirely different from normal loan and advance appearing in the relevant accounts. It was held that the loan to assessee by the firm was not an advance out of the amounts payable by the firm to SISICOL. The firm had sufficient funds from other sources. CIT (A) held that 44 % of availability of funds with the firm could be said to belong to SISICOL. The Judicial Member stated that such inference could not be drawn without providing specific link or direct nexus between the two figures. The revenue was unable to connect loan advanced to the assessee with the amount due to SISICOL. Consequently, the judicial member concluded that that there was no payment of any amount by way of loan or advance, either directly to the assessee shareholder or on his behalf or for his benefit. The trade debt payable by the firm in the normal course of business could not be treated to form the genesis of loan to the assessee. It was concluded that the assessee was not liable even in terms of the amendment, to a “concern” as referred to in Explanation 3 to section 2(22)(e) and held that the arrangement could not be treated as a device or conduit to benefit the assessee. The Judicial member held that the corporate veil could not be lifted in the facts of the case. It was observed that the credit balance of Rs. 26.24 crores was retained by the firm in the usual course of business and represented collection for the previous two months. The collection exceeded on an average Rs. 10 crores per month. Consequently, it could not be inferred that amount retained by the firm was for the assessee’s benefit. The credit balance of about Rs. 26 crores was natural and unavoidable in the circumstances of the case and had no nexus whatsoever with loan advanced by the firm to the assessee. The Judicial Member accordingly held that there was no receipt of “deemed dividend” in the hands of the assessee.

The Accountant Member, on the other hand, noticed that as managing director of SISICOL, the assssees controlled the activities of all companies and firms of the Sahara group and was also the main person behind the activities of all concerns. It held that a “payment” was not the same thing as payment in fact and relied on G. R. Govindarajulu Naidu v. CIT [1973] 90 ITR 13 (Mad). It had also observed that the transaction in question could not be treated as being carried out at arm's length. It had observed that there was no dispute that the firm had advanced amounts to the assessee. The Accountant Member held that two transactions, one from company, SISICOL, to the firm, and from the firm to the assessee should be treated as a combined one, amounting to payment of loan from SISICOL, to the assessee. It held that the firm was only a conduit for the loan and that the firm’s loan to the assessee had its roots in the credit balance of SISICOL. It was held that the firm did not have adequate resources and its advance to the assessee was not an independent transaction. Reference was made to the balance-sheet of the firm as on March 31, 1992, which showed that the partner's capital was only Rs. 40,000/-. The Accountant Member concluded that the provision of section 2(22)(e) were applicable in this case. It was noticed that SISICOL had share capital of Rs. 2,95,87,800/- and further reserves and surplus of Rs. 1,84,19,305/- as on 31.3.1992. Thus, it was concluded that the roots of the loan from the firm, to the assessee lay in the credit balance of the company, SISICOL, with the firm.

The third member to whom the matter was referred, after hearing the submissions of the parties concurred with the opinion of the Judicial Member. Consequently, the assessee’s appeal was allowed.

Held that,

++ it is thus clear that the first limb of the provisions of Section 2(22)(e) has to be followed, i.e., the payment must be to a person who is a registered holder of shares. Here, the assessee is no doubt a shareholder of SISICOL. AO and the CIT (A) were of the opinion that the firm – which gave the amounts as loan to the assessee – a partner, was a ruse a facade and a smokescreen to shield the real payment by SISICOL to him. Whilst there is no gainsaying that the assessee is managing director of SISICOL – equally he is partner of the firm, which advanced the amount to him. However, the question of payment to the concern (in this case, the firm) is a matter that requires to be established. A sum may be a debt but not loan from company to firm or to the assessee. The assessee had relied on Bombay Steam Navigation Co. (1953) P. Ltd. and other decisions to say that there had to be outflow of funds. The third member who agreed with the Judicial member (and therefore spoke for the majority view), correctly surmised that decision of such issues could not be based on entries in books of account. It was, in our opinion correctly stated that the totality of facts and circumstances required consideration. Here, the court notices that the Accountant Member held that two transactions of loan by the firm to the assessee and the other, from SISICOL to the firm- were really one transaction. Indisputably, the assessee obtained the loan from the firm. Consequently, if it is held that the two transactions were in fact one, i.e., loan represented funds of SISICOL, then the case of loan and advance stood established and Section 2(22)(e) applied. Unquestionably, the firm worked for the company as its agent. If an agent had given a loan or advance to the assessee for and on behalf of the company, then there was no need for anything else to be established to attract Section 2 (22) (e). The concomitant issue (with whether the transaction was one whole or separate) was also the question if the assessee had used a smokescreen to evade tax and camouflage the transaction of loan/advance from SISICOL to himself by employing the firm as a conduit;

++ the revenue argued that a device was used and that in such case, the assessee would hardly be expected to show the transaction as a loan from SISICOL to him. It cannot be seriously doubted that as managing director and shareholder of SISICOL, the assessee has sufficient control over its affairs; so is the case with the firm. The firm did advance amounts to him. These facts, however, facially cannot result in an inference that the two transactions are one and that the assessee had adopted a stratagem of securing loan and advance from SISICOL through a conduit, viz. the firm. Apart from the surmise that the transaction was one and the same, the revenue had to probe further and establish from the material before it that the payments were part of a tax evasion ruse. Section 2(22)(e) pulls in notional or artificial income for assessment by a fiction. The primary burden to bring to tax amounts, on the ground that the transaction is a deemed dividend (when it is not so otherwise) is upon it. To discharge that burden, the Revenue cannot rest content on surmises and assumptions; it should premise them, rather on facts and materials on the record. The ITAT held that there is no material on record to show that funds of the company were utilized by the firm to advance loan to the assessee. The firm had advanced Rs.1,88,96,202/- out of total available funds of more than Rs. 60 crores: which belonged to different parties though available with it i.e., the firm. This factual finding does not disclose any error or infirmity;

++ in this petition, the correctness of an order 11.04.2008 by which the revenue’s application for rectification of the majority opinion, in view of the third member not noticing or wrongly appreciating important features has been challenged. The revenue alleged that Judicial Member’s order, especially para 45 was not correctly read by the Third Member, who ruled that the Circular of CBDT dated 22.09.1987 did not go against the spirit of the law. The Third Member held that the circular was inapplicable. The third member noted that the expanded provision in Section 2(22)(e), seeks to cover a “concern” and this is what was explained in the Circular. The judicial Member held that it was not a case of benefit to "concern" as in that situation 'deemed dividend' under Section 2(22)(e) had to be added in the hands of the concerns and not of the assessee. The Revenue objected to the observations in the ultimate para of the third Member that the source of funds utilized for advancing loan to the assessee was not examined and no material was on record to prove that SISICOL’s funds were used to advance loan to the assessee. Therefore, conditions of Section 2(22)(e) were not satisfied. We are of the opinion that the impugned order does not suffer from any infirmity calling for interference. As to whether there was a mistake apparent from the face of the record, in the context of this case, the ITAT felt that the revenue could not establish its case, since the basic contention about applicability of Section 2 (22) (e) was not accepted. The writ petition, i.e., W.P.(C)No. 1162/2012 has to fail. Therefore, both the matters, i.e., WP No. 1162/2012 and ITA 398/2010 are accordingly dismissed.

(See 2015-TIOL-722-HC-DEL-IT)