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Asstt. Cit v. Global Agencies (P) Ltd.

Delhi High Court

May 22, 2003

Judgment

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Factual and Procedural Background

This is an appeal by the revenue against the Commissioner (Appeals)'s order dated 16-1-1998 for assessment year 1994-95. The sole ground pressed by the revenue challenged the Commissioner (Appeals)'s deletion of an assessing officer's addition of Rs. 40,50,000 treated as deemed dividend under section 2(22)(e) of the Income Tax Act.

The assessee is a private limited company (Global Agencies (P) Ltd.) acting as a buying agent in India for Sineximco Pvt. Ltd., Singapore. In the course of assessment the assessing officer noticed substantial credit balances in the assessee's books from two exporters — Shipra International (P) Ltd. (SIPL) and Khandelwal International (P) Ltd. (KIPL) — and treated amounts totalling Rs. 40,50,000 as payments by way of loan/advance to a concern in which shareholders of the assessee had substantial interest, invoking section 2(22)(e).

The assessee explained these credits as security deposits or performance guarantees taken from exporters to secure quality and timely delivery to the foreign principal and produced documentary evidence and submissions before the assessing officer and the Commissioner (Appeals). The assessing officer rejected the explanation and made the addition; the Commissioner (Appeals) remanded inquiries, obtained bank statements and a remand report, accepted the assessee's explanation and deleted the addition. The revenue appealed to the tribunal (this opinion) challenging that deletion.

Legal Issues Presented

Whether the credit balances of Rs. 40,50,000 in the assessee's books, received from SIPL and KIPL, represent "advances" or "loans" so as to be treated as deemed dividend under section 2(22)(e) of the Income Tax Act.
Whether the Commissioner (Appeals) erred in holding that the credit balances were security deposits/performance guarantees (received in the course of business by the assessee as a buying agent) rather than loans/advances, and thereby excluding them from the ambit of section 2(22)(e).
Whether, in view of precedent (specifically M.D. Jindal v. CIT), the amounts should nonetheless be treated as deemed dividend despite the assessee's explanation.

Arguments of the Parties

Revenue / Departmental Representative

Assailed the genuineness of the arrangement whereby the assessee claimed to obtain security deposits from exporters; contended the arrangement is a sham because the same two women (Mrs. Suman Gupta and Mrs. Gulab Devi) effectively control both the assessee and the exporter companies (shareholding pattern relied upon).
Pointed to an earlier admission by the assessee (letter dated 7-3-1996) referring to amounts as advances invested in fixed assets, arguing this undermines the later claim that they were security deposits.
Argued that the purported security-deposit arrangement is “farcical” given common control and therefore the amounts should be treated as loans/advances and taxed as deemed dividend under section 2(22)(e).
Relied on judicial precedents (including M.D. Jindal v. CIT, CIT v. L. Alagusundaram Chettiar, L. Alagusundaram Chettiar v. CIT, and CIT v. Jamnadas Khimji Kothari) to support the proposition that such payments may be treated as deemed dividends where agreements are not genuine or where factual indicia point to loans/advances masked as other transactions.

Assessee / Learned Counsel for Assessee

Contended that the credit balances were security deposits or performance guarantees taken during the course of business by the assessee acting as buying agent for its Singapore principal (Sineximco Pvt. Ltd.), not loans or advances.
Explained that transferable, irrevocable letters of credit were opened in favour of the assessee by the foreign buyer, which were endorsed/negotiated in favour of exporters; the assessee had no control over realization by the exporters and obtained security deposits to protect the foreign principal against claims for quality or delayed delivery.
Submitted that the words "advance" and "loan" do not capture the nature of security deposits: an "advance" is something paid ahead of when due, and a "loan" implies a duty on the debtor to seek out the creditor and repay — features absent here.
Relied on decisions of the Delhi Tribunal and Delhi High Court (Ardee Finvest (P) Ltd. v. Dy. CIT; Baidya Nath Plastic Industries (P) Ltd. v. ITO; Directorate of IT v. Alarippa) to support the distinction between deposits/security guarantees and loans/advances.
Also contended, alternatively, that if the amount were to be treated as deemed dividend, the addition should be in the hands of shareholders (relying on CIT v. L. Alagusundaram Chettiar and a Tribunal decision in Expo Leasing (P) Ltd.), not the assessee-company itself.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
M.D. Jindal v. CIT (1987) 164 ITR 28 (Cal)	Authority where agreements were found not genuine and entered into to circumvent section 2(22)(e).	Relied upon by revenue; court distinguished it on facts because no finding of non-genuineness was recorded in the present case and the evidence did not support such a finding.
CIT v. Bazpur Co-operative Sugar Factory Ltd. (1988) 172 ITR 321 (SC)	Construction of the word "deposit": essence is liability to return on fulfillment of certain conditions.	Applied by the court to hold that the security deposits/performance guarantees in this case satisfy the test of a "deposit" and therefore cannot be treated as loan or advance under section 2(22)(e).
CIT v. L. Alagusundaram Chettiar (1977) 109 ITR 508 (Mad)	Used by revenue to support taxability by treating payments as loans/advances where facts show conduit payments/admissions.	Distinguished: court found facts in that case (admission and conduit via employee) clearly different and therefore not helpful to the revenue here.
L. Alagusundaram Chettiar v. CIT (2001) 252 ITR 893 (SC)	Supreme Court authority on related factual issue (relied on by revenue).	Not relied upon to alter outcome; the court considered distinctions in facts and did not find it applicable to the present case.
CIT v. Jamnadas Khimji Kothari (1973) 92 ITR 105 (Bom)	Authority where debit balance in share-holder's account represented loan advanced to shareholder.	Distinguished: present case involved credit balances representing deposits/guarantees, not loans to shareholders; decision did not assist the revenue.
Ardee Finvest (P) Ltd. v. Dy. CIT (2001) 79 ITD 547 (Del)	Tribunal decision construing the word "advance" and its applicability.	Relied on by the assessee to support the proposition that security deposits taken in the course of business are not "advances" for section 2(22)(e); the court cited this line of authority in support of its interpretation.
Baidya Nath Plastic Industries (P) Ltd. v. ITO (1998) 230 ITR 522 (Del)	Delhi High Court distinction between loan and deposit; describes procedural differences in who seeks repayment and nature of obligation.	Adopted in reasoning to show security deposits are deposits (liable to return on fulfilment of conditions) and thus fall outside 'loan' under section 2(22)(e).
Directorate of IT v. Alarippa (2000) 244 ITR 358 (Del)	Construction of "loan" and "deposit" (in context of section 11) — deposit does not cover loan; deposit implies liability to return upon fulfillment of conditions.	Relied upon and used to reinforce view that performance guarantees/security deposits are deposits and not loans/advances for the purposes of section 2(22)(e).
Expo Leasing (P) Ltd. — Tribunal decision dated 4-2-1998 (ITA No. 5741/Del/1996)	Tribunal authority on the point that if an amount is to be treated as deemed dividend, the addition may be to a shareholder's hands rather than to the company.	Placed before the tribunal by the assessee as an alternate contention; the court noted this line of authority in considering the assessee's alternate plea.

Court's Reasoning and Analysis

The tribunal analysed the legal and factual matrix in the following sequence:

Fact-finding and relationships: The tribunal noted the shareholding patterns showing common control between the assessee and the two exporter companies (SIPL and KIPL). The assessing officer treated payments from those exporters as caught by Explanation 3(b) to section 2(22)(e).
Assessee's explanation: The assessee asserted that the amounts were security deposits or performance guarantees taken during the course of business as a buying agent for Sineximco (Singapore) to secure quality and delivery commitments; these deposits were released after the foreign principal's clearance. The assessee produced letters of credit, bank statements and ultimately a confirmation letter from Sineximco confirming the agency arrangement and authority to negotiate/endorse LCs and require security/performance guarantees.
Procedural inquiries and remand: The Commissioner (Appeals) obtained a remand report from the assessing officer; bank manager statements and further enquiries were recorded. The assessing officer had earlier rejected the explanation but the Commissioner (Appeals) confronted the assessing officer with additional evidence and obtained a remand report.
Legal construction of section 2(22)(e): The tribunal reiterated that section 2(22)(e) is a deeming fiction and must be strictly construed — it should not be given a meaning broader than its purpose. The court stated that the provision was not intended to stifle normal business transactions conducted in the course of business, and must be applied only within its true limits.
Application of precedents and tests: The tribunal applied the test articulated by the Supreme Court in CIT v. Bazpur Co-operative Sugar Factory Ltd. concerning the essence of a "deposit" — namely, that a deposit entails a liability to return the money on fulfillment of specified conditions. The tribunal also relied on Delhi authorities interpreting "loan" and "advance" to note characteristic features of loans (obligation on debtor to repay) and advances (something paid prior to it being due without an implied obligation of repayment).
Factual conclusion: On the facts and documentary record — including the remand enquiries, bank manager's statement, the endorsed transferable LCs, negotiation practice and the confirmation letter dated 28-5-1997 from Sineximco — the tribunal concluded that the credit balances were security deposits/performance guarantees received in the course of business by the assessee as buying agent, and not loans or advances by SIPL and KIPL to the assessee.
Treatment of revenue's non-genuineness plea: The tribunal observed that the revenue's attack on genuineness was raised belatedly at the appellate stage and was not made by the assessing officer in the assessment order. Because the assessing officer's enquiries and remand report confirmed the commercial methodology (endorsement of LCs, negotiation procedures), and because the assessee produced a direct confirmation from its foreign principal, the tribunal was not inclined to accept the belated plea of non-genuineness.
Distinguishing adverse precedents: The tribunal examined cases relied upon by the revenue (including M.D. Jindal, L. Alagusundaram Chettiar and Jamnadas Khimji Kothari) and found them factually distinguishable — principally because those cases involved findings of sham arrangements, admissions or debit balances representing loans to shareholders, which were absent here.
Conclusion on statutory application: Applying the strict construction of the deeming fiction in section 2(22)(e), and taking the deposit/loan distinctions and factual record together, the tribunal concluded that the amounts did not fall within section 2(22)(e)'s scope.

Holding and Implications

Holding: The tribunal upheld the Commissioner (Appeals)'s order deleting the addition of Rs. 40,50,000 and dismissed the revenue's appeal. The core ruling is:

DISMISSED — The appeal of the revenue is dismissed; the addition of Rs. 40,50,000 treated as deemed dividend under section 2(22)(e) is deleted.

Implications:

Direct effect: The addition made by the assessing officer treating the credit balances as deemed dividend under section 2(22)(e) is set aside and the assessed-company is relieved of the tax consequence of that addition for assessment year 1994-95.
Scope of law: The tribunal emphasised that the deeming fiction in section 2(22)(e) must be strictly construed and is not intended to capture genuine business transactions such as security deposits or performance guarantees taken by a buying agent in the ordinary course of business where factual and documentary evidence supports that characterization.
Precedential effect: The tribunal distinguished several authorities relied upon by the revenue on the basis of differing factual matrices; the decision rests on the facts and documents of this case (remand report, bank confirmations, LCs and a confirmation from the foreign principal). The opinion did not purport to lay down a broader novel legal principle beyond applying existing authority and established interpretive rules for deeming fictions.

Show all summary ...

T.N. Chopra, A.M.

This appeal is filed by the revenue against the order of the Commissioner (Appeals) dated 16-1-1998, for the assessment year 1994-95. The sole ground raised by the revenue is against the deletion of the addition of Rs. 40,50,000 made by the assessing officer as deemed dividend under section 2(22)(e). The revenue has raised the ground as under :

"On the facts and in the circumstances of the case the Commissioner (Appeals) has erred

(i) in holding that the credit balances represented security deposits/performance guarantee and not loans or advances and thereby holding that the assessed's case did not fall within the purview of section 2(22)(e) of the Income Tax Act.

(ii) in holding that the amount of Rs. 40,50,000 did not represent deemed dividend within the meaning of section 2(22)(e) despite the decision of the Hon'ble Calcutta High Court in the case of M.D. Jindal v. CIT (1987) 164 ITR 28 (Cal)."

2. On behalf of the assessed, Shri Ajay Vohra, learned counsel appeared and has been heard. Paper book running into 97 pages including, inter alia, written submissions on the issue made before the assessing officer as well as the Commissioner (Appeals) along with the accompanying documents has been filed by the learned counsel. On behalf of the revenue, Shri Naveen Chandra, departmental Representative appeared and has been heard.

3. Briefly stated, the facts are that the assessed is a private limited company working as buying agent in India for and on behalf of Seneximco Pvt. Ltd., Singapore. The Singapore party purchases garments from India mainly from Shipra International (P) Ltd, (here in after reffered to as SIPL) and Khandelwal International (P) Ltd. ( hereinafter refferred to as KIPL) as well as few other exporters in India. As a buying agent, the assessed- company ensures quality and time schedule for the export of garments by its principals.

4. During assessment proceedings, the assessing officer noticed that assessed- company has been receiving money from the two exporters namely, SIPL and KIPL and there were substantial credits appearing in the accounts of these two parties as per books of account of assessed- company, When called upon to explain regarding the nature of these deposits, the assessed- company explained vide its letter dated 7-3-1996, as under:

"That the amount advanced to the assessed- company by M/s Global Ventures, Shipra Intl. (P) Ltd. and M/s Khandelwal Intl. (P) Ltd. were invested by the assessed- company in fixed assets to develop infrastructure and environment to run a smooth business and the balance part was invested as a working capital, which is evident in the balance sheet."

5. The assessing officer analysed the share holding patterns of the assessed- company as well as the aforesaid two exporters namely, SIPL and KIPL and found that three companies are closely related companies with the following share pattern as reproduced in the assessment order :

Shipra International (P) Ltd.

Suman Gupta 999 shares 99,900 99,900 Mrs. Shyam Kishore Khandelwal 1 share M/s Khandelwal International (P) Ltd.

Mrs. Gulab Devi 210 shares 21,000 Mr. Shyam Kishore Khandelwal 10 shares 1,000 Ms. Shipra Gutpa 10 shares 1,000 Now the share holding details of Global Agencies (P) Ltd. was procured which is as follows :

Mrs. Suman Gupta 500 shares 50,000 50,000

Mrs. Gulab Devi 250 shares 25,000

Ms. Shipra Gupta 10 shares 1,000

6. From the above details, it clearly emerges that

(i) Mrs. Suman Gupta holds 65.79 per cent share holding in the assessed-company, namely, M/s Global Agencies (P) Ltd. and 99.9 per cent in SIPL and

(ii) Mrs. Gulab Devi holds 32.89 per cent share holding in the assessed-company, namely, M/s Global Agencies (P) Ltd. and 93.9 per cent in KIPL.

7. On the basis of these facts, the assessing officer came to the conclusion that payments made by SIPL and KIPL are hit by the mischief of section 2(22)(e) since the recipients are covered under Expln. 3(b). The assessing officer, therefore, called upon the assessed as to why the credit balances be not treated as deemed dividend under section 2(22)(e). The assessed made written submissions vide letter dated 25-3-1996, opposing the proposed action of the assessing officer. In this letter, the assessed contended :

"That your proposal to treat the credit balances in the accounts of either M/s Khandelwal International (P) Ltd. or of M/s Shipra International (P) Ltd. is not in accordance with the law and is based on erroneous interpretation of section 2(22)(e) of the Income Tax Act (which statutory provision probably you intend to invoke). It is submitted that section 2(22)(e) of the Income Tax Act does not provide that the credit balances of a company is to be assessed as deemed dividend in the hands of a share holder in which such a shareholder is a member or partner in which he has substantial interest. Even otherwise, too in the instant case the credit balances in the account of the assessed, a company who is neither a shareholder nor a member or partner in which the assessed- company has substantial interests. Further in order to appreciate the facts of the instant case and the nature of credit balances in the aforesaid accounts the assessed submits that, the assessed is a private Ltd. company and had been incorporated on 28-11-1990. It is mainly acting as a buying agent of M/s Sin Eximco (P) Ltd., Singapore on whose behalf it makes purchase of garments in India by placing orders on various suppliers. The assessed- company is also engaged in the business of developing and supplying of designs. This company was incorporated with three shareholders namely, Smt. Suman Gupta, Smt. Gulab Devi and Ms. Shipra Gupta out of the total shareholding of 760 shares, shares held by Smt. Suman Gutpa were 500 shares, whereas Smt. Gulab Devi had 250 shares and Ms. Shipra Gupta has 10 shares.

As a buying agent of M/s Sin Eximco (P) Ltd., the assessed- company had placed orders of supply of readymade garments on the two above named suppliers, namely, M/s Shipra International (P) Ltd. and M/s Khandelwal International (P) Ltd. The aforesaid two private limited companies are also the companies who are having some common shareholders.

In case of M/s Shipra International (P) Ltd., M/s Global Agencies (P) Ltd. placed orders for more than Rs. 2.2 crores. Against cash payment (L/C terms) as 100 per cent defect free garments, are difficult to produce in India. Some complaints were always coming. The buyers M/s Sin Eximco (P) Ltd. requested as to buy some goods on credit basis from M/s Shipra International (P) Ltd. to compensate any claims arising. However, M/s Shipra International (P) Ltd. was not agreeing to ship any goods on credit basis. Hence some amounts were always taken from M/s Shipra International (P) Ltd. as security deposit/performance guarantee which was also released to them regularly after getting clearance from buyers. The amount of Rs. 15,40,014.08 has been also released within four months after getting clearance of buyers. Hence, the amount of Rs. 15,40,014.08 was not on account of any advance or loan made to assessed- company and, therefore, was also changing depending upon orders placed with M/s Shipra International (P) Ltd.

Similarly in case of M/s Khandelwal International (P) Ltd. the assessed placed orders worth Rs. 1.90 crores out of which the shipped boots worth Rs. 1.70 crores, 1005 against cash payments (L/C terms). Thus, time to time security deposit was taken to ensure timely supply of the contracted export of garments and of proper quality. It may be added that condition was imposed to ensure that, in case there is any failure/claims from the buyer, the deposit received by way of security deposit, shall be forfeited."

8. The assessed further explained vide letter dated 31-1-1997 (placed in the paper book at p. 21) that security deposits have not been received only from the aforesaid two companies but also from other exporters like Time Fashion, Skylark Garments, Bawa Traders and Formost India Exports). Copies of account of such exporters were also enclosed by the assessed.

9. The assessing officer, however, rejected the explanation furnished by the assessedcompany and proceeded to treat the amount of Rs. 18,50,000 received from SIPL and Rs. 22,00,000 from KIPL as deemed divided under section 2(22)(e) and accordingly made an addition of Rs. 40,50,000.

10. Aggrieved, the assessed carried the matter in appeal before the Commissioner (Appeals). The assessed made detailed submissions before the Commissioner (Appeals) and reiterated its stand that amounts received from the two parties by way of security deposits/performance guarantees could not be treated as advance or loan and further that such payments have been received with a view to safeguard the interest of the Singapore party in the matter of adherence to the quality and time schedule as agreed to by the exporters. The assessed further explained that it would only act as intermediatary between its principal, the Singapore party and the exporter, namely, SIPL and KIPL. Letters of credit were opened by the buyer in favor of the assessed- company. Such letters of credit were transferable and irrevocable. The assessed endorsed these letters of credits in favor of the exporters and the negotiations of the bills were made by the exporters directly with the bank authorities with the result that the assessed had no excess or control over the realization of the sale proceeds by the exporters. It was, in these circumstances, the assessed obtained security deposit from the sellers so as to ensure that the quality of goods exported as well as the time schedule thereof was according to the satisfaction of the Singapore party. As soon as, the clearance was received from the Singapore party the assessed released the security deposit of the exporter. The Commissioner (Appeals) called for a remand report from the assessing officer so as to verify the veracity of the explanation furnished by the assessed-company. The assessing officer made the necessary enquiries from the Bank authorities and sent the remand report dated 12-3-1997 which is placed at pp. 22 to 25 of the paper book. From this report, it is evident that the statement of the Manager, Syndicate Bank was recorded by the Inspector, Income-tax confirming that letter of credit favoring the assessed was endorsed in favor of various exporters by the assessed. A further report of the Addl. CIT, Range 25, New Delhi dated 8-3-1997 is placed in the paper book at pp. 26 to 28 wherein following points have been raised by the assessing officer in respect of the evidence furnished by the assessed

(i) The assessed- company has not submitted any evidence whatsoever to prove that there was a change in the business arrangement with the foreign principals and that the negotiations were being made with the foreign principals by the exporters themselves. Even the assessing officer has not requisitioned any evidence from the assessed in this regard.

(ii) No confirmation from the foreign principals has been submitted which could authentically prove that there was a change in the business arrangement which necessitated a security deposit by the exporters in favor of the assessed-company.

(iii) The affidavits submitted by M/s Shipra International (P) Ltd. and M/s Khandelwal International (P) Ltd. cannot be solely relied upon as these concerns are the sister concerns of the assessed- company. The assessed-company has alleged that the security deposits were also received from other exporters also, viz. Time Fashion, Skylab Garments, Baba Traders and Foremost India Exports but no affidavit/evidence has been submitted on behalf of these exporters. Moreover, the assessing officer has not requisitioned the same.

(iv) Copies of the letters of credit submitted by the assessed- company pertaining to financial year 1993-94 show Global Agencies (P) Ltd. as the beneficiary, which ratifies the earlier arrangement which the assessed- company had with its foreign principals. However, no such documents has been submitted which could prove that there was a change in the business arrangement and that negotiations were being made with the foreign principals by the exporters concerned. Moreover, the assessing officer has not sought any such evidence from the assessed- company. In these circumstances, the enquiries got conducted by the assessing officer appear to be futile and do not solve any purpose.

11. The Commissioner (Appeals) proceeded to consider the facts and circumstances of the case as well as the submissions made by the assessed- company as well as the assessing officer and came to the conclusion that the amounts received by the assessed-company from the two exporters, SIPL and KIPL, were during the course of business transactions and such amounts have been received by the assessed as buying agent and not by way of advance or loan. In support of his conclusion, the Commissioner (Appeals) placed reliance on the decision of the Supreme Court reported in CIT v. Bazpur Co-operative Sugar Factory Ltd. (1988) 172 ITR 321 (SC).

12. The revenue is aggrieved and hence the appeal.

13. The learned departmental Representative at the very outset, assailed the genuineness of the arrangement entered into by the assessed as a buying agent whereby security deposit have been obtained from the exporters so as to ensure compliance with the quality of the goods exported to the Singapore party. Learned departmental Representative strongly urged that the assessed-company is being controlled and run by the two ladies, namely, Mrs. Suman Gupta and Mrs. Gulab Devi and these ladies also controlled the two exporter companies as the share holding pattern would indicate. He submitted that Mrs. Suman Gupta is the Managing Director of SIPL holding 999 shares out of total share capital of 1000 shares whereas the second lady, namely, Mrs. Gulab Devi controls and runs KIPL having 210 shares out of 230 shares of the company. According to the learned departmental Representative, the very idea of obtaining security deposits by the assessed as a buying agent from such companies controlled and managed by the two ladies, who are also managing the assessed-company, is on the face of it farcical and is devoid of credibility. According to the learned departmental Representative, the assessed- company vide its first letter dated 7-3-1996, clearly admitted that advances have been received from the two companies, SIPL and KIPL, for developing infrastructure. Subsequently, however, when the assessing officer confronted the assessed-company with the proposed invocation of the provisions of section 2(22)(e) for bringing to tax credit balances as deemed dividend, the assessed- company, the learned departmental Representative argued, shifted its stand and came forward with the plea that the amounts have been received by way of security deposited or performance guarantee. According to the learned departmental Representative, the entire store is a make believe affair and deserves to be rejected. In support of his contentions, the learned departmental Representative placed reliance on the following decisions :

(i) CIT v. L. Alagusundaram Chettiar (1977) 109 ITR 508 (Mad)

(ii) L. Alagusundaram Chettiar v. CIT (2001) 252 ITR 893 (SC)

(iii) CIT v. Jamnadas Khimji Kothari (1973) 92 ITR 105 (Bom)

14. Learned counsel, on the other hand, strongly supported the impugned order of the learned Commissioner (Appeals) and argued that the allegation that the arrangement made by the assessed is not genuine are being raised for the first time at the appellate-stage and no such allegation has been made by the assessing officer. He further added that even in the grounds of appeal raised by the revenue, no such claim that the arrangement was non-genuine has been made. Learned counsel referred to the submissions made at the assessment stage by the assessed vide letter dated 25-3-1996 and submitted that the facts and circumstances under which security deposits or performance guarantees have to be obtained from the exporters have been duly explained. He submitted that security deposits obtained during the course of business operations by the assessed acting as buying agent for and on behalf of its principal cannot be treated as advance or loan for the purposes of section 2(22)(e). Learned counsel submitted that the word 'advance' mean something which is due to a person but which is paid to him ahead of time when it is due to be paid. In support of his contention, reliance is placed on the decision of Delhi Bench of the Tribunal in the case of Ardee Finvest (P) Ltd. v. Dy. CIT (2001) 79 ITD 547 (Del). With regard to the word 'loan' learned counsel referred to the decision of Delhi High Court in the case of Baidya Nath Plastic Industries (P) Ltd. v. Income Tax Officer (1998) 230 ITR 522 (Del) wherein the distinction between a loan and a deposit has been explained by the Hon'ble Court. The court observed that in the case of a loan, it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement and in the case of the deposit, it is generally the duty of the depositor to go to the Banker or to the deposite as the case may be and make a demand for it. Learned counsel pointed out that security deposit are liable to be construed as deposit and would in any case fall outside the purview of the expression loan used in section 2(22)(e).

15. Learned counsel further referred to the decision of Delhi High Court reported in Directorate of IT v. Alarippa (2000) 244 ITR 358 (Del) wherein the words loan and deposit had been construed in the context of the provisions of section 11 of the Income Tax Act. The court observed that the word deposit does not cover the transaction of loan which can be more appropriately described as direct bailment. According to the High Court, the essence of deposit is that. there must be a liability to return to the party by whom or on whose behalf it has been made on fulfillment of certain conditions. Learned counsel strongly urged that applying the construction placed by the Hon'ble Delhi High Court, the performance guarantee or security deposit would be clearly a deposit accompanied with a liability to return it on fulfillment of certain conditions.

16. Learned counsel raised an alternate contention that if at all the amount is to be treated as deemed dividend, such addition can be made in the hands of a shareholder and not the assessed- company. In support of his contention, he placed reliance on the decision of CIT v. L. Alagusundaram Chettiar (supra). Further, reliance is placed on the decision of the Delhi Bench of the Tribunal in the case of Expo Leasing (P) Ltd. A copy of the decision dated 4-2-1998, in ITA No. 5741/Del/1996 has been placed on record.

17. We have carefully considered the rival submissions as well as the orders of the tax authorities below. The documents and evidence placed in the paper book filed by the learned, counsel, to which our attention has been drawn during the course of hearing have also been carefully perused by us. Various judicial authorities cited by the learned representatives on both sides have also been gone through. After giving our thoughtful consideration to the matter, we have come to the conclusion that credit balances in the accounts of the two exporters, SIPL & KIPL, represent security deposit or performance guarantees received during the course of business by the assessed in its capacity as a buying agent for the Singapore party and such balances cannot be treated as advances or loan for the purposes of section 2(22)(e). The addition of Rs. 40,50,000 made as deemed dividend under section 2(22)(e) by the assessing officer has, therefore, been rightly deleted by the learned Commissioner (Appeals). From the facts on record, it is clear that the assessed- company in its capacity as buying agent has obtained security deposit from the exporters so as to ensure that quality of goods exported to the Singapore party are to the satisfaction of the latter. Such guarantees have been realised by the assessed- company after securing clearance from its principal, i.e., the Singapore party. During the course of hearing before us, learned departmental Representative initially made an attempt to controvert the factual submission of the assessed- company that security deposits received from the exporters are linked with the endorsementof the letter of credit and the return of the such credits are linked with the receipt of goods by the Singapore party. The Bench, therefore, called upon the learned representative to verify the factual position with reference to the letter of credits opened by the Singapore party, endorsements of such LCs by the assessed and further sale bills issued by the exporters and the goods received by the Singapore party to be corroborated with the receipt of security deposit and release thereof in the accounts of the exporters as appeared in the books of the assessed- company after carrying out the exercise, the learned departmental Representative could not reiterate his contention that the credit balance in the accounts of SIPL & KIPL were not related with the performance guarantees obtained by the assessed in its capacity as buying agent.

18. Regarding the main thrust of the revenue's case before us that the entire arrangement was non-genuine, we are not inclined to accept the belated plea of the revenue raised before us. In fact, no such allegation has been made by the assessing officer in the impugned assessment order. At the instance of the learned Commissioner (Appeals), the assessing officer has carried out detailed enquiries from the Bank authorities and the statement of the Bank manager has also been recorded and a remand report submitted by the assessing officer. From these documents, it is evidently clear that the entire methodology of exports by SIPL & KIPL to the Singapore party with the assessed- company acting as the intermediatary agent has been confirmed. Apart from this, we find that the assessed- company has also produced a confirmation letter dated 28-5-1997, from Sineximco Pvt. Ltd. Singapore wherein the facts as pleaded by the assessed have been confirmed by the Singapore party. The letter of confirmation, placed at p. 41 of the paper book, reads as under :

"We do hereby confirm that M/s Global Agencies (P) Ltd. New Delhi are acting as our buying agents for rbadymade garments since 1990.

They are fully authorized to negotiate with the exporters regarding the terms and conditions, mode of payment and security/performance guarantees or any other terms to safeguard our interests in India, as they are alone responsible for any losses to us arising out of late delivery/non delivery or bad quality of goods.

For the payment of export invoices, we open transferable LCs in favor of Global Agencies (P) Ltd.

They are authorized to negotiate themselves/or sub-distribute the transferable LCs to different exporters by endorsing the LCs in parts, which authorizes them to negotiate the bills directly with their respective Bank ers and get the payment in their respective accounts.

They are sole buying agents and we do all business transactions of readymade garments in India through them and do not entertain any exporter to negotiate or deal directly with us. Accordingly, all date, all LCs have been opened to Global agencies (P) Ltd. and we have not opened any LC directly to any exporter since 1990."

19. At this stage, we may point out that there are certain additional evidences which have been furnished by the assessed before the Commissioner (Appeals) for the first time and the same have been considered while deciding the issue. We feel that even though Commissioner (Appeals) has not specifically referred to r. 46A of IT Rules, 1962, while considering such additional evidence, he has duly confronted the assessing officer with the evidence so filed and obtained remand report thereon. In the circumstances, we feel that the additional evidence has been validly admitted and considered while adjudicating the issue by the Commissioner (Appeals). In any case, we may note here that the assessment proceedings for assessment year 1994-95 particularly with regard to the implications of the credit balances of the accounts of SIPL & KIPL have been initiated by the assessing officer towards the close of the time limitation and hurriedly concluded on 29-3-1996. Therefore, assessed was clearly prevented by sufficient cause from producing the evidence which was relevant for determination of point in issue.

20. section 2(22)(e) enacted a deeming fiction whereby the scope and ambit of the word "dividend" has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in section 2(22)(e). It is a settled rule of interpretation of a fiction that the court should ascertain for what purpose the fiction is created and after ascertaining the purpose, the court has to assume all facts which are incidental to the giving effect to that fiction. Such a deeming fiction would not be given a wider meaning than what it purports to do. The provision would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. section 2(22)(a) has not been enacted to stifle normal business transaction carried out during the course of business. It would not obviously bring within its limited purview security deposit or performance guarantees secured by a buying agent from a seller so as to ensure adherence to the quality standard agreed to between buyer and the seller as well as delivery schedule to be observed. The section, by indicating a deeming faction, would being within its sweep any payment by a company "by way of advance or loan to shareholder .... to any concern in which such shareholder is a member and in which he has a substantial interest." The basic issue to be examined in the present case is whether credit balances in the accounts of SIPL & KIPL can be construed as "advance" or "loan" by these companies. In so far as other ingredients as required to be fulfillled under section 2(22)(e) are concerned, there is no dispute raised before us.

21. In our consideration opinion, security deposit received by the assessed-company can neither be treated as loan or advance for the purposes of section 2(22)(e). A loan is granted for temporary use of money or temporary accommodation. In the instant case, such basic features which characteristics, a loan transaction are conspicuous by their absence. Therefore, the security deposit, in the instant case, cannot be construed as a loan. Reliance is placed on the decision of Delhi High Court in (2000) 161 CTR (Del) 432 : (2000) 244 ITR 358 (Del) (supra) cited by the learned counsel before us. Similarly, with regard to advance, the word connotes something that precedes, something paid in advance before it is due. The second important feature of advance is that it does not connote any idea of repayment. Both these features are missing in this case of security deposit received by the assessed. In support of the view taken by us, reliance is placed on the decisions of Delhi High Court in (2000) 244 ITR 358 (Del) (supra) and (1998) 146 CTR (Del) 421 : (1998) 230 ITR 522 (Del) (supra) relied upon by the learned counsel.

22. Further reference will be made to the decision of Supreme Court in the case of CIT v. Bazpur Co-operative Sugar Factory Ltd. (supra). The Supreme Court, construing the word deposit held that the essence of a deposit is that there must be a liability to return it to the party by whom or whose behalf it is made on the fulfillment of certain conditions. Security deposit in the case of the assessed essentially fulfills the test laid down by the Hon'ble Supreme Court and, therefore, such deposit could neither be treated as loan nor advance received by the assessed- company. The addition of Rs. 40,50,000 treating the credit balances as deemed dividend is liable to be deleted.

23. We may briefly refer to the decisions cited by the learned departmental Representative.

23.2 The first decision cited by the learned departmental Representative is Calcutta High Court in the case of MD Jindal v. CIT (supra). In this decision, the facts are entirely distinguishable inasmuch a finding of fact had been recorded that agreements arrived at with the assessed- company by the Directorates of the Company were not genuine and had been entered into with a view to circumvent the provisions of section 2(22)(e). No such finding has been recorded by the assessing officer and no such finding, in our opinion, flows from the facts and evidence on record.

23.3 learned departmental Representative next relied upon the Madras High Court decision in the case of CIT v. L. Alagusuhdaram Chettiar (supra). The facts, in this case are clearly distinguishable inasmuch as there was an admission by the recipient to the fact that the assessed received money from the company using a low paid employee as a conduct for such payment. The decision, therefore, does not help the revenue.

23.4 In CIT v. Jamnadas Khimji Kothari (supra), relied upon by the learned departmental Representative, the decision is clearly distinguishable inasmuch as there was a debit balance in the account of the shareholder in the books of the company which represent loan advanced to the shareholder. The decision does not render any assistance to the case of the revenue.

25. For the aforesaid reasons, we uphold the conclusion of the learned Commissioner (Appeals) that credit balance, in the accounts of SIPL and KIPL of Rs. 40,50,000, did not represent deemed dividend under section 2(22)(e). The appeal of the revenue is, therefore, dismissed.