|CORAM:||B. C. Meena (AM), I. C. Sudhir (JM)|
|CATCH WORDS:||deemed dividend|
|DATE:||May 29, 2015 (Date of pronouncement)|
|DATE:||June 10, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 2(22)(e): loans and advances given for business transaction between the parties does not fall within the definition of “deemed dividend”|
(i) Sub-clause (e) of section 2(22) of the Act, which is pari material with 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. …. Amounts advanced for business transaction between the parties, was not such to fall within the definition of deemed dividend under Section 2(22)(e) (CIT vs. Creative Dyeing and Printing (P) Ltd. 318 ITR 476 (Del) followed).
(ii) Payments made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course of business carried on by both the parties could not be treated as deemed dividend for the purpose of section 2(22)(e). The deeming provisions of law contained in section 2(22)(e) apply in such cases where the company pays to a related person an amount as advance or a loan as such and not in any other context. The law does not prohibit business transactions between related concerns, and, therefore, payments made in the ordinary course of business cannot be treated as loans and advances (NH Securities Ltd. vs. DCIT 11 SOT 302).