Commissioner of Income Tax vs Alpex Exports Pvt. Ltd.

This appeal by the Revenue, which pertains to the assessment year 2008-09, has to be rejected in view of the findings recorded by the Tribunal

that Rs. 1,00,00,000 was received as share application money and Rs. 3,96,888 was received on account of advance against order. The Tribunal

has held that the provision of deemed dividend, viz., section 2(22)(e) of the income tax Act, 1961 (Act, for short), was not applicable as the

transactions/payments were not towards loan or advance.

Learned counsel for the appellant-Revenue has submitted that the shares were issued belatedly after thirty months and intimation was sent to the

Registrar of Companies on November 23, 2010, and the assessment order was passed on November 5, 2010. In other words, he has questioned

the claim of the respondent-assessee that Rs. 1,00,00,000 was received as share application money.

The assessment order records as under :

In the books of account of M/s. Karishma Machines Tools Pvt. Ltd. it is seen that at annexure D to the balance-sheet that ''investments'' of Rs.

1,00,00,000 is shown as share application money to M/s. Alpex Exports Pvt. Ltd. Further, Rs. 63,58,573 is shown as sundry debtors and Rs.

3,96,888 is shown as ''advance paid against orders''. The balance-sheet, of M/s. Karishma Machines Tools Pvt. Ltd. also shows reserve and

surplus of Rs. 3,42,23,672.26?

Thereafter, the Assessing Officer referred to a decision of the Jharkhand High Court in Bhalotia Engineering Works Pvt. Ltd. Vs. Commissioner

of Income Tax, . He observed that the share application money had remained with the respondent-assessee for more than three months during the

relevant assessment year and the shares were issued in the subsequent assessment year. Therefore, deposit in the nature of advance was available

for use to the assessee during this period. Further, there was a delay of four months in informing the Registrar of Companies about the allotment of

shares as per the board resolution dated July 22, 2010. He has recorded that preponderance of probability was that the shares were allotted only

after the Assessing Officer had sought explanation why section 2(22)(e) should not be invoked.

The Commissioner of income tax (Appeals), on the other hand, accepted the case of the respondent-assessee after referring to the proceedings

and the communications exchanged between the Assessing Officer, the assessee and Karishma Machines and Tools Pvt. Ltd. Reference was also

made to the balance-sheets of Karishma Machines and Tools Pvt. Ltd. as audited on June 28, 2008. The audited accounts and balance-sheet of

Karishma Machines and Tools Pvt. Ltd. were filed with their Assessing Officer earlier in point of time and before issue of notices by the Assessing

Officer in the present case. The relevant forms, i.e., balance-sheets of Karishma Machines and Tools Pvt. Ltd. have been referred to show and

prove that the entry towards share application money were not made belatedly and only after queries had been raised by the Assessing Officer in

the present case. Thus, in the audited accounts, ledger books, etc., of Karishma Machines and Tools Pvt. Ltd., payment of Rs. 1,00,00,000 was

always treated and recorded as share application money. In support of the said factual position, the respondent-assessee had filed a copy of

income tax return of Karishma Machines and Tools Pvt. Ltd.

The said findings have been affirmed by the Tribunal and it has been held that the payment of Rs. 1,00,00,000 was on account of share

application money. The said factual finding does not merit interference.

The second question is whether the receipt of share application money can be treated and recorded as loan, deposits and ""any payment"" for

invoking the provisions of section 2(22)(e) of the Act. The said issue whether the share application money is loan or deposit is covered by the

decision of this court in The Commissioner of Income Tax Delhi IV Vs. I.P. India Pvt. Ltd., . In the said case, the decision of the Jharkhand High

Court in Bhalotia Engineering Works Pvt. Ltd. (supra) has been distinguished.

The Tribunal in the impugned order has referred to the decision in I.P. India Pvt. Ltd. (supra) wherein it has been held (page 357) :

On a careful consideration of the matter, we find that the Assessing Officer has relied on the judgment of the Jharkhand High Court (supra) and

referred the issue of levying penalty to the Additional Commissioner of income tax. He did not examine whether the share application monies can

be treated as ''loan'' or ''deposit'' within the meaning of section 269SS. The Additional Commissioner of income tax has merely endorsed the view

of the Assessing Officer in passing the penalty order. The Commissioner of income tax (Appeals) has found as a fact that the shares were

subsequently allotted to the applicant-companies as shown by the form filed before the Registrar of Companies. Neither the Assessing Officer nor

the Additional Commissioner of income tax has taken the trouble to examine this aspect while imposing the penalty. They have merely relied on the

judgment of the Jharkhand High Court (supra). The reliance on this judgment appears to us to be misplaced. In Baidya Nath Plastic Industries (P)

Ltd. and Others Vs. K.L. Anand, Income Tax Officer, , a learned single judge of this court pointed out that the distinction between a loan and a

deposit is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money, according to the

agreement, while in the case of a deposit it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and

make a demand for it. This judgment was approvingly cited by a Division Bench of this court in Director of Income Tax Vs. Acme Educational

Society, . In this decision, it was held that a loan grants temporary use of money, or temporary accommodation, and that the essence of a deposit

is that there must be a liability to return it to the party by whom or on whose behalf it has been made, on fulfilment of certain conditions. If these

tests are applied to the facts of the case before us, it may be seen that the receipt of share application monies from the three private limited

companies for allotment of shares in the assessee-company cannot be treated as receipt of loan or deposit. In any case, the Tribunal has rightly

noticed the cleavage of judicial opinion on the point and held that in that situation there was reasonable cause u/s 273B, applying the judgment of

the Supreme Court in The Commissioner of Income Tax, West Bengal 1, Calcutta Vs. Vegetables Products Ltd., .

In I P. India Pvt. Ltd. (supra), the question raised was whether penalty u/s 271B for violation of section 269SS was justified and as per law as

the respondent-assessee had pleaded that they had not received loan or deposit but share application money. Share application money was neither

loan nor deposit. The plea and contention of the respondent-assessee was accepted. Once we accept the findings of the Tribunal and proceed on

the basis that Karishma Machines and Tools Pvt. Ltd. had paid share application money of Rs. 1,00,00,000, then it cannot be held that the same

would be loan or deposit. Similarly, in Commissioner of Income Tax Vs. Creative Dyeing and Printing Pvt. Ltd., , it has been held that the amount

advance/paid for business transactions to a person, who also happened to be a shareholder, would not fall within the ambit of deemed dividend u/s

2(22)(e). The said decision takes into consideration the object and purpose behind section 2(22)(e). Another decision of the Delhi High Court in

Commissioner of Income Tax Vs. Shri Raj Kumar, takes a similar view. In the said case, the expression ""any payment"" used in section 2(22)(e)

was also considered and it was observed as under (page 473) :

Therefore, if the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is in pari materia with sub-clause

(e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies

to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in

a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be

dividend in the hands of the shareholders, money in the form of an advance or loan.

If this purpose is kept in mind then, in our view, the word ''advance'' has to be read in conjunction with the word ''loan''. Usually attributes of a loan

are that it involves positive act of lending coupled with acceptance by the other side of the money as loan : it generally carries an interest and there

is an obligation of repayment. On the other hand, in its widest meaning the term ''advance'' may or may not include lending. The word ''advance'' if

not found in the company of or in conjunction with a word ''loan'' may or may not include the obligation of repayment. If it does, then it would be a

loan. Thus, arises the conundrum as to what meaning one would attribute to the term ''advance''. The rule of construction to our minds which

answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George

Day [1879] 5 AC 63 by observing ''it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found

in immediate connection with them'' and our Supreme Court in the case of M/s. Rohit Pulp and Paper Mills Ltd. Vs. Collector of Central Excise,

Baroda, and The State of Bombay and Others Vs. The Hospital Mazdoor Sabha and Others, .

It is important to note that M/s. Rohit Pulp and Paper Mills Ltd. Vs. Collector of Central Excise, Baroda, , was the case dealing with taxation. In

brief in the said case the assessee was seeking to take benefit of an exemption notification. The Department denied the benefit of the ''notification''

on the ground that the paper manufactured by the assessee was ''coated paper'' to which as per the proviso to the said notification the concession

was not available. The Supreme Court in coming to the conclusion that the assessee''s case did not fall within the proviso and was thus entitled to

the benefit of the notification applied the rule of construction of noscitur a sociis.

Importantly, the broad principles which emerge from the judgment of the Supreme Court with regard to the applicability of the said rule of

construction are briefly as follows :

(i) does the term in issue have more than one meaning attributed to it, i.e., based on the setting or the context one could apply the narrower or

wider meaning;

(ii) are words or terms used found in a group totally ''dissimilar'' or is there a ''common thread'' running through them;

(iii) the purpose behind the insertion of the term.

Let us examine as to whether based on the aforesaid tests the said rule of construction noscitur a sociis ought to be applied in the instant case.

(i) the term ''advance'' has undoubtedly more than one meaning depending on the context in which it is used;

(ii) both the terms, that is, advance or loan are related to the ''accumulated profits'' of the company;

(iii) and last but not the least the purpose behind the insertion of the term ''advance'' was to bring within the tax net payments made in the guise of

loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders;

Keeping the aforesaid rule in mind we are of the opinion that the word ''advance'' which appears in the company of the word ''loan'' could only

mean such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to

commercial transactions would not, in our view, fall within the ambit of the provisions of section 2(22)(e) of the Act. This interpretation would

allow the rule of purposive construction with noscitur a sociis, as was done by the Supreme Court in the case of Life Insurance Corporation of

India and Others Vs. Retired L.I.C. Officers Association and Others, .

Accordingly, we do not find merit in the present appeal and the same is dismissed.