Commissioner of Income Tax vs Suraj Dev Dada

Ajay Kumar Mittal, J.—This appeal has been preferred by the Revenue u/s 260A of the income tax Act, 1961 (in short, "the Act"), for the assessment year 2008-09 against the order of the income tax Appellate Tribunal, Chandigarh Bench "B" (in short, "the Tribunal"), dated August 22, 2012, annexure A3 in I.T.A. No. 109/Chd/2012, claiming the following substantial questions of law:

"(i) Whether, on the facts and in law, the hon''ble income tax Appellate Tribunal was right in holding that the provisions u/s 2(22)(e) of the income tax Act, 1961, are not attracted in this case?

(ii) Whether the hon''ble income tax Appellate Tribunal was right in law in holding that the transactions of advancing of money by the assessee to the company and earning interest on it amounted to business transactions?

(iii) Whether the hon''ble income tax Appellate Tribunal was right in law in holding that no disallowance u/s 36(1)(iii) is called for in this case, failing to appreciate that the assessee has not been able to establish that the initial purpose of advancing amount to M/s. Nalanda Spinners Ltd. was for the purpose of commercial expediency?"

A few facts relevant for the decision of the controversy involved, as narrated in the appeal, may be noticed. The respondent-assessee is engaged in trading of vehicle and spare parts, running of vehicle workshop, insurance commission, DMA commission from banks and finance companies and C & F agent. It filed its return of income for the assessment year under consideration on August 23, 2008, declaring loss of Rs. 30,61,523. The case was selected for scrutiny and assessment u/s 143(3) of the Act was made by the Assessing Officer on November 26, 2010, annexure A.1 at an income of Rs. 2,55,79,453. Additions/disallowances of Rs. 2,75,00,000 u/s 2(22)(e) of the Act, Rs. 7,90,796 u/s 14A of the Act and Rs. 3,50,000 u/s 36(1)(iii) of the Act were made. Aggrieved by the order, the assessee filed appeal before the Commissioner of income tax (Appeal)-II, Ludhiana (Commissioner of income tax (Appeals)). Vide order dated November 30, 2011, annexure A.2, the Commissioner of income tax (Appeals) partly allowed the appeal and deleted the above additions. Not satisfied with the order, the Revenue filed an appeal before the Tribunal. Vide order dated August 22, 2012, annexure A.3, the Tribunal partly allowed the appeal. Hence, the present appeal by the Revenue.

We have heard learned counsel for the parties and perused the record.

Learned counsel for the Revenue submitted that there was no commercial expediency and in such a situation, the interest paid by the assessee to M/s. Dada Motors Pvt. Ltd. was rightly disallowed by the Assessing Officer u/s 36(1)(iii) of the Act. Reference was made to the judgment of the apex court in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another,

On the other hand, the learned counsel for the assessee supported the orders passed by the Commissioner of income tax (Appeals) and the Tribunal.

Taking up question No. (iii), it would be apposite to notice the observations of the Commissioner of income tax (Appeals) who, vide order dated November 30, 2011, annexure A. 2 recorded as under:

"8. I have gone through the contention of the appellant''s counsel and also perused the relevant assessment order and the rival submissions of the appellant. The Assessing Officer disallowed the interest of Rs. 3,50,000 on notional basis on the ground that the loan advanced to the said party without any commercial expediency. From a perusal of copy of reply of the appellant, reproduced as above, it reveals that the principal amount of the said loan was recovered after filing suit in civil courts and with the help of some influential persons. The hon''ble income tax Appellate Tribunal, Chandigarh Bench, in the appellant''s own case for the preceding assessment year has also upheld the order of the Commissioner of income tax (Appeals) on this issue. Considering the totality of the facts and circumstances of the case and documents filed along with the submissions, I am in agreement with, the appellant''s counsel that the appellant not charged any interest on the amount advanced to M/s. Nalanda Spinners, therefore, the Assessing Officer''s action to charge interest on notional basis is not sustainable and is directed to be deleted. Thus, this ground of the appellant is hereby allowed."

While upholding the findings recorded by the Commissioner of income tax (Appeals), the Tribunal, vide order dated August 22, 2012, annexure A. 3 noticed as under:

"12. In ground No. 3, the Revenue contended that the Commissioner of income tax (Appeals) erred on facts as well as in law, in deleting the disallowance made by the Assessing Officer u/s 36(1)(iii) of the Act.

In the course of the present proceedings, it transpired that the issue is squarely covered by the decision of the Tribunal in the assessee''s own case in I.T.A. No. 783/Chd/2011 and I.T.A. No. 789/Chd/2011, order dated October 21, 2011. The issue before the Bench was as under:

''1. (a) That the Commissioner of income tax (Appeals)-II, Ludhiana, on facts as well as in law, has erred in deleting the disallowance of Rs. 3,60,000 made u/s 36(1)(iii) of the income tax Act, 1961.

(b) The learned Commissioner of income tax (Appeals) II, Ludhiana, has erred in deleting the above disallowance despite the fact that the assessee has been unable to explain the purpose of giving the advance of M/s. Nalanda Spinners.''

The relevant and operative part of the decision of the Tribunal, as recorded in paragraph 13 of the order, is reproduced hereunder:

''13. We have considered the rival submissions and have perused the materials available on record. We find that the reply filed by the assessee before the Assessing Officer is self-explanatory. The Assessing Officer charged interest of Rs. 2,60,000 on notional basis on the ground that the loan advanced to the Nalanda Spinners Ltd. was without any commercial expediency. There is no dispute that the loan was advanced by the assessee on March 27, 2006, i.e., during the assessment year 2006-07. It is also apparent from record that the principal amount of the said loan was recovered after filing recovery suit in civil court. It is also apparent from the record that the assessee managed to get part payment, vide cheques on different dates leaving balance to the tune of Rs. 7,50,000. Considering the entire facts and circumstances of the present case, we are of the view that since the principal amount was at stake, there was no occasion for the assessee to charge interest on the advanced amount. At this stage, we may also observe that there is no material on record to controvert the explanation of the assessee. We, therefore, uphold the order of the Commissioner of income tax (Appeals) in holding that the assessee has not charged any interest on the amount advanced to M/s. Nalanda Spinners, therefore, the Assessing Officer''s action to charge interest on notional basis is not sustainable. In view of the above, we uphold the order of the Commissioner of income tax (Appeals) and dismiss ground No. 1 of the Revenue''s appeal.''

We have carefully perused the rival submissions, facts of the case and the relevant record and found that the issue in question is covered by the decision of the Bench, as reproduced above, in the assessee''s own case. Respectfully following the decision, this ground of appeal of the Revenue is dismissed."

In view of the findings recorded by the Commissioner of income tax (Appeals) as well as the Tribunal, there was no justification for making an addition of Rs. 3,50,000 u/s 36(1)(iii) of the Act. The assessee had not charged any interest on the amount advanced to M/s. Nalanda Spinners as the amount advanced to Nalanda Spinners was not returned for which a civil suit was filed and with the assistance of influential people, the same was recovered. Moreover, for the assessment years 2006-07 and 2007-08, similar additions had been deleted which has attained finality. The judgment in S.A. Builders'' case (supra), thus, does not help the Revenue.

Incidentally, it may be noticed that on March 18, 2013, notice of motion was issued on question No. (iii) only when the following order was passed :

"Present : Ms. Savita Saxena, advocate for the appellant.

Notice of motion for May 27, 2013, in respect of substantial question No. (iii) only.

(Sd.).............. (Hemant Gupta) Judge

March 18, 2013

(Sd.) .............. (Ritu Bahri) Judge"

The learned counsel for the Revenue argued that no reasons have been assigned while declining questions Nos. (i) and (ii), which are substantial questions of law and in view of the proviso to section 260A(4) of the Act, are required to be adjudicated by this court. Accordingly, we proceed to decide questions Nos. (i) and (ii) as well. It would be apposite to refer to the findings of the Commissioner of income tax (Appeals) and the Tribunal on questions Nos. (i) and (ii). The Commissioner of income tax (Appeals) with respect to questions Nos. (i) and (ii) had noticed as under:

"4. I have gone through the assessment order passed by the Assessing Officer and reply submitted by the counsel of the appellant. I am of the considered opinion that section 2(22)(e) of the Act is a deeming provision which assumes existence of certain facts if the conditions specified in a particular section are fulfilled. We agree that these provisions are to be construed strictly. This legal fiction has to be carried out to logical ends and not to illogical length. The copy of account of the appellant in the books of the company clearly shows that the appellant has running current account with the company and in fact the appellant had been advancing monies to the company as and when required for the purpose of business of the company. It was only for 55 days in between the year that balance of the appellant in books of account turned credit. It is beyond doubt that this section can be invoked to curtail the misuse of the funds belonging to a private limited company by its shareholders but not when there is running current account of the appellant with the company and the appellant has in fact for most the time lent the money to the company. This section had been inserted to stop the misuse of the taxing provisions by the assessees by taking the funds out of the company by way of loans or advances instead of dividends and thus avoid tax. But in this case where there is no such intention of the appellant and he had in fact advanced money to the company, credit in that account for some days cannot be treated as deemed dividend u/s 2(22)(e). It is evident fact that the appellant in real sense not derived any benefit from the funds of the company and, therefore, by no stretch of imagination it can be said that the company has disbursed or given dividend to its shareholder/director in the guise of loan. It will be travesty of law to apply the provisions of section 2(22)(e) of the Act to the facts of the present case whether in fact the person concerned has not gained any benefit from the funds of the company and one has to consider the totality of the facts and circumstances of the case before applying the provisions of this section. Hence, the provisions of section 2(22)(e) could not be invoked when there is a genuine business transaction between the two entities and funds of the appellant-director were in fact lying with the company for most of the time.

4.1 In view of the above discussed position of the case, the addition made by the Assessing Officer is not sustainable and deserves to be deleted. Hence, the same is hereby deleted. Therefore, this ground of appeal of the appellant is allowed."

The aforesaid findings were affirmed in appeal by the Tribunal.

From the above, it emerges that the Commissioner of income tax (Appeals) and the Tribunal had concurrently recorded that the assessee had running account with the company--M/s. Dada Motors Pvt. Ltd. and had been advancing money to it. It was further observed that the provisions of section 2(22)(e) of the Act were not attracted in the present case as this provision was inserted to stop the misuse by the assessee by taking the funds out of the company by way of loan advances instead of dividends and thereby avoid tax. In the present case, the assessee had in fact advanced money to the company and there was credit for only 55 days for which the provisions of section 2(22)(e) of the Act could not be invoked. These findings were not shown to be erroneous or perverse in any manner. In view of the above, no substantial question of law arises in this appeal. Consequently, finding no merit in the appeal, the same is hereby dismissed.