Sri. Tobby Simon, vs Department Of Income Tax

Deputy Commissioner of Income-tax, Circle 12(3), Bangalore. ... Appellant

Vs.

Shri Tobby Simon, 1st floor, Embassy Dimante, 34, Vittal Mallya Road, Bangalore-560001. ... Respondent PAN:AAOPS8164P

Appellant by: Shri P.Dhivahar, JCIT(DR). Respondent by: Shri S.Parthasarathi, Advocate.

Date of hearing : 15/04/2015 Date of pronouncement: 17/04/2015

Per Smt. P.MADHAVI DEVI, JM:

This appeal by the Revenue is against the order of the

CIT(A)-III, Bangalore, dated 20/03/2013 deleting the addition

made by the Assessing Officer (AO) u/s 2(22)(e) of the Income-

tax Act, 1961 [hereinafter referred to as 'the Act' for short] for the

assessment year 209-10.

2. Brief facts of the case are that the assessee, an

individual, filed his return of income on 29/9/2009 which was ITA Nos.916/Bang/2013 Shri Tobby Simon.

Page 2 of 8 subsequently revised on 9/12/2009 declaring an income of

Rs.61,18,311/-. During the assessment proceedings u/s 143(3) of

the Act, the AO observed that the assessee has drawn a

loan/advance of Rs.1,53,42,534/- from M/s.Synergia Consultant

Pvt. Ltd., wherein he is a Director holding 50% shares. He also

observed that the assessee-company has accumulated profit of

Rs.22,66,96,403/- during the year. Therefore, he observed that

the provisions of sec.2(22)(e) of the Act are attracted and the

advances received from the company have to be treated as

deemed dividend in the hands of the assessee. In view of the

same, a show cause notice was issued to the assessee to which

the assessee, vide letter dated 27/9/2011 stated that the amounts

were advanced by the assessee to the company M/s.Synergia

Consultant Pvt. Ltd., during the year for various business purposes

like payment of salary, statutory payments etc., and in turn,

M/s.Synergia Consultant Pvt. Ltd., had debited his account for his

expenses on the credit card which was utilized for both the

company and the proprietorship concern. It was stated that the

payments were apportioned to the respective accounts. It was

submitted that during the relevant financial year, the transfer of

funds has been done from and to both the entities for short term

business requirements and therefore the transactions do not come

under the purview of sec.2(22)(e) of the Act. The AO was,

however, not convinced by the assessee's contention and held

that in the account of the assessee in the books of the company ITA Nos.916/Bang/2013 Shri Tobby Simon.

Page 3 of 8 always showed debit balance which would amount to loan or

advance by the company to the assessee. Therefore, he brought

it to tax u/s 2(22)(e) of the Act.

3. Aggrieved, the assessee preferred an appeal before the

CIT(A), who deleted the addition by holding that the account of

the company began with a debit balance and ended with a credit

balance on numerous transactions in between, indicating clearly

that it is in the nature of a running account for business purposes

and therefore the provisions of sec.2(22)(e) are not applicable to

the assessee's case. Against the relief given by the CIT(A), the

revenue is in appeal before us.

4. The learned Departmental Representative, while supporting

the order of the AO submitted that the accouont of the assessee in

the books of account also showed that the loans or advances were

towards personal expenses of the assessee. Therefore, according

to him, the CIT(A) has failed to appreciate that all the payments

made by the assessee through his credit card were not towards

the business expenses of the company. Thus, according to him,

the CIT(A) has erred in granting relief to the assessee

The learned counsel for the assessee, on the other hand,

supported the order of the CIT(A) and submitted that the ledger

account of the assessee in the company was a running account

and the CIT(A) has rightly appreciated that the assessee was

making payments on behalf of the company which was being

reimbursed to him and therefore the expenditure was clearly in ITA Nos.916/Bang/2013 Shri Tobby Simon.

Page 4 of 8 the nature of business expenditure for the purpose of business of

the company and the assessee has not gained any personal

benefit out of the same. Further he placed reliance upon the

judgment of the Hon'ble Karnataka High Court in the case of

M/s.Bagmane Constructions Pvt. Ltd. vs. CIT & others (ITA

No.473/2013 etc. dated 16/09/2014) for the proposition that the

provisions of sec.2(22)(e) would apply only to gratuitous loan or

advance given by a company to those classes of shareholders but

not to cases where the loan or advance is given to such

shareholder as a consequence of any further consideration which

is beneficial to the company. Copy of the said order is filed before

us.

5. Having regard to the rival contentions and the material

on record, we find that the undisputed facts are that the assessee

is a director and also a 50% shareholder of the company

M/s.Synergia Consultant Pvt. Ltd. It is also not in dispute that

there were debit and credit entries in the ledger account of the

assessee in the books of account of the company. The assessee's

contention that the assessee has made payments on behalf of the

company using his credit card which have been reimbursed by the

company by credit entries in his ledger account has not been

rebutted by the revenue. We find that the CIT(A) has properly

appreciated the facts to hold that the payments made by the

assessee were for the business purposes of the company which

has been reimbursed to the assessee and therefore such ITA Nos.916/Bang/2013 Shri Tobby Simon.

Page 5 of 8 payments cannot be considered as loans or advances u/s 2(22)(e)

of the Act. This is so held in the judgment of the Hon'ble

Karnataka High Court in the case of M/s.Bagmane Constructions

Pvt. Ltd. (cited supra). The relevant paragraphs are reproduced

hereunder for ready reference:

"27. In this background when we look at the aforesaid provision, it is clear that any payment made by a company by way of advance or loan has to be understood in the context of the object with which the said provision is introduced. Though the legislature has introduced 'advance' as well as 'loan' which ae two different words, the meaning of each of those words have to be understood in the context in which they are used. Each word takes its colour from the other. The meaning of the word 'advance' is to be understood by the meaning of the word loan which is used immediately thereafter. Associated words take their meaning from one another under the doctrine of noscuntur a sociis, the philosophy of which is that the meaning of a doubtful word mayh ;be ascertained by reference to the meaning of words associated with it. This rule, according to Maxwell, means that, when two or more words which are susceptible of analogus meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogus to a less general. In the case of a loan, money is advanced generally on payment of interest. In other words the loan advanced has to be repaid with interest. In the case of an advance also, the element of repayment of there but such a repayment may be with interest or without interest. Therefore, when the said two words are used in the aforesaid provision with the purpose of levying tax, if the intention of such advance or loan is to avoid payment of dividend distribution of tax under section 115-O of the Act, such a payment by a company certainly constitutes a deemed dividend. But if such a payment is made firstly not out of accumulated profits and secondly even if it is out of accumulated profits, but as trade advance as a consideration; for the goods received or for purchase of a capital asset which indirectly would benefit the company advancing the loan, such advance cannot be brought within the word 'advance' used in the aforesaid provision. The trade advance which is in the nature of money transacted to give effect to commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) of the Act.

28. In this context, it is useful to refer to the judgment of the Apex Court in the case of LIC of India vs. Retired LIC ITA Nos.916/Bang/2013 Shri Tobby Simon.

Page 6 of 8 Officers Association(2008(3)SCC 321) where it was held that each word employed in a statute must take colour from the purpose and the object for which it is used. Principle of purposive interpretation should be taken recourse to. If a literal interpretation is given to the said words, it means all trade advances are to be taxed as deemed dividend. If such an interpretation is placed, it would lead to absurdity. That was not the intention of the legislature in enacting the aforesaid provision. Even if the accumulated profit which ought to have been paid to the shareholders as the dividend paid to a sister concern for the purpose of acquisition of capital assets or as a consideration for the goods received which is required for carrying on the business, it would not fall within the definition of section 2(22)(e) of the Act as the object was not to pay the said amount to the shareholders after avoiding payment of dividend distribution tax under section 115-O of the Act. In that view of the matter, it is not possible to accept the interpretation sought to be placed by the revenue.

29. The learned counsel for the revenue pointed out clause

(ii) of section 2(22)(e) which expressly provides that any payment by a company by way of any advance or loan made to a shareholder or the concern in the ordinary course of business where the lending of money is a substantial part of the business of the company and if the case of the assessee does not fall under the said provision, the said advance constitutes dividend. The question of looking into the aforesaid provision would arise only when all the conditions prescribed in clause (e) of sub-section (2) of section 22 are complied with. If a payment is made by way of trade or business, advance or loan, clause (e) of sub-section (2) of section 22 of the Act is not at all attracted and the question of applying the aforesaid clause (ii) would not arise and therefore, we do not see any substance in the said contention.

30. It was also contended on behalf of the revenue that having regard to the plain words used in clause (e) 'to any concern', when the amount is paid or when any payment is made to a concern, the tax is levied on the concern and not on the shareholders. As far as this question is concerned, this Court following the judgment of the Bombay High Court in the case of Commissioner of Income Tax vs. Universal Medicare (P) Limited reported in 324 ITR 263 has categorically held that when any payment is made by a company to any concern, which falls under clause (e), the tax is leviable on the shareholder only and not on the concern.

We respectfully agree with the aforesaid judgment and we do not see any justification to take another view of this matter. Therefore, the finding recorded by the Tribunal that, these advances made by the BDPL to the sister concern as well as to its shareholders do not constitute deemed dividend under ITA Nos.916/Bang/2013 Shri Tobby Simon.

Page 7 of 8 section 2(22)(e) of the Act, is legal and valid and do not call for any interference."

6. Respectfully following the above judgment, we agree with

the findings of the CIT(A) that the payments made by the

assessee on behalf of the company, for its business purposes and

the reimbursement thereof to the assessee by the said company

cannot be treated as deemed dividend u/s 2(22)(e) of the Act.

However, it is seen from the paper book filed by the assessee that

some of the payments using his credit card were also towards his

personal expenditure. Such payments for personal expenditure, if

reimbursed by the company, have to be treated as loans or

advances u/s 2(22)(e) of the Act. Therefore, we deem it fit and

proper to remand the issue to the file of the AO only for

verification of the personal expenditure reimbursed by the

company to the assessee and treat only such expenditure out of

the accumulated profits of the assessee as deemed dividend u/s

2(22)(e) of the Act.

7. In the result, the revenue's appeal is partly allowed for

statistical purposes.

Pronounced in the open court on 17th April, 2015.

sd/- sd/- (Pramod Kumar) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER

eksrinivasulu ITA Nos.916/Bang/2013 Shri Tobby Simon. Page 8 of 8 Copy to:

1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore