Per P. Pradhan, Accountant Member - This appeal by the assessee is directed against the order of the CIT(A)-III, Hyderabad, dated 10-7-1996 for the assessment year 1993-94.
2. The effective grievance of the assessee in this appeal relates to an addition of Rs. 41,05,122 made in terms of section 2(22)( e) of the Income-tax Act.
3. Brief facts leading to the filing of this appeal are as under—
(a)Assessee is a closely held company. In the return filed for the year under appeal, it filed ‘nil’ income. Though the return was originally processed under section 143(1)(a), it was later taken up for scrutiny. A perusal of the assessee’s balance sheet disclosed that it has received unsecured loan of Rs. 50,32,161. Details of the said loan furnished by the assessee vide letter dated 27-9-1994 confirmed that the loan was obtained from M/s. Hyderabad Chemical Supplies Ltd. On examination of the share-holding pattern of the assessee-company and the said lender company, it was found by the Assessing Officer that the loan in question attracted the provisions of section 2(22)(e) of the Income-tax Act. He noted that provisions of section 2(22)(e) are applicable if the shareholder holds 10% voting power in the lender company and such shareholder also carried not less than 20% of the voting power under section 2(32) of the Act. After tabulating the shareholding pattern of Dr. Ramesh Gandhi and Dr. (Mrs.) Nandini Gandhi in these two companies, the Assessing Officer concluded that these two shareholders of Hyderabad Chemical Supplies Ltd. are holding substantial interest in Hyderabad Chemical Products (P.) Ltd. also and as such provisions of section 2(22)(e) are attracted in the case of the assessee-company and the unsecured loan taken by the company has to be taxed in the hands of the assessee as deemed dividend. He also noted that since the business of Hyderabad Chemical Supplies Ltd. is not money lending, the loan given to the assessee-company is not in its usual course of business and hence exemption under proviso (ii) to section 2(22) is not available to the assessee-company. He further noted that the accumulated profits of lender company for the year ending on 31-3-1993 relevant to assessment year 1993-94 after providing for taxes and also tax in respect of earlier year is Rs. 1,10,40,275, and it was out of this available surplus that the loan in question was given. He also noted that since the unsecured loan taken from the lender-company was utilised by it for the purpose of construction of factory building, and thus the loan given was for the benefit of the assessee-company. For these reasons, when the Assessing Officer proposed to treat the unsecured loan received in the year under appeal as deemed dividend under section 2(22)( e) of the Act, assessee resisted the said move vide its letters dated 25-10-1994 and 30-10-1994. It stated that in the succeeding year, the unsecured loan was converted into share-capital and as such the nature of investment has not remained unsecured loan in the succeeding year. It was also stated that the lender-company has given the unsecured loan wanted to expand its business by manufacturing its raw-material which are in short supply. In view of certain commercial and other reasons, it was decided to promote a separate company. However, it was to overcome the hurdles of the various Government agencies like Central Insecticides Board, Pollution Control Board, Industrial Safety Department, etc. that the assessee-company was started. By floating a new company, it was stated that high salaries and trade union problems could be avoided, and the labour regulations like ESI, PF, Bonus, etc. could be avoided for some years, and several incentives like concessions in the form of subsidised interest, sales-tax subsidy, power tariff concessions could be obtained. It was also contended that the intention of the principal company was to form a subsidiary company, but as per the Companies Act, it was not possible to form a subsidiary company in the beginning itself, and as such the main directors of the company have become the shareholders in the newly incorporated company, viz. Hyderabad Chemicals Products (P.) Ltd. and subsequently this company has become a subsidiary company to the principal company. It was clarified that after the incorporation of the new company, the Directors/ shareholders of the lender-company, M/s. Hyderabad Chemical Supplies Ltd. have not invested any further sums. It was also contended that the lender company, M/s. Hyderabad Chemical Supplies Ltd. has been declaring handsome dividends ranging from 50% to 60% and as such it has no intention of diverting accumulated profits by making payment to its few shareholders. It was further contended that the Hyderabad Chemical Supplies Ltd. started the product of manufacture of insecticides in its own name, and as such the provisions of section 2(22)(e) would not have been attracted. Assessee also placed reliance on the Board’s Circular No. 495 in support of the above contentions, and submitted that the loan given to Hyderabad Chemical Products (P.) Ltd. was not for the benefit of the shareholders of the company.
(b)The Assessing Officer was not convinced with the objections of the assessee to the proposed addition in terms of section 2(22)(e) of the Act. He was of the view that what has happened to the unsecured loan in the subsequent year is immaterial and even a journal entry reflecting the nature of transaction as an unsecured loan would be enough to attract the mischief of section 2(22)( e) of the Act. The contentions of the assessee, according to the Assessing Officer indicate that the lender-company has promoted another company, separately for its own benefit for manufacture of raw-material which in turn would be useful for it. The newly promoted company which is an off-shoot of Hyderabad Chemical Supplies Ltd. is a company in which public are not substantially interested and in which having tried to circumvent or rather escape various State and Central Laws for its own benefit by promoting a new company, according to the Assessing Officer, assessee cannot claim it as reasonable cause for exemptions under the provisions of section 2(22)(e) of the Act. He noted that the authorised capital of the assessee-company was only Rs. 25 lakhs only, and if the unsecured loan was treated as capital of the assessee in the year under appeal itself, it would have been over and above the authorised capital of the company, and the move to convert the unsecured loan into share capital in the succeeding year, and making the assessee-company into a subsidiary company of its principal might be a mere after-thought. He was also of the view that the track-record of the dividend payments of lender-company are of no significance, and the point that clinches the issue was whether the unsecured loan in question was given out of the accumulated profit or not. For these and other detailed reasons discussed in the assessment order, and relying on the decisions of the Supreme Court in CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170; of the Kerala High Court in CIT v. P.V. John [1990] 181 ITR 1/ 52 Taxman 221 treating the unsecured loan of Rs. 41,05,122 taken during the year as a deemed dividend under section 2(22) of the Act, made an addition of Rs. 41,05,122, and completed the assessment under section 143(3) read with section 144A of the Act, vide order dated 18-9-1995.
(c)On appeal before the CIT(A), it was contended that in the balance-sheet of the assessee-company the amount standing to the credit of M/s. Hyderabad Chemical Supplies Ltd. was by mistake was described as unsecured loans, whereas it in fact represented share application money. It was pointed out that though the lender-company, M/s. HCSL intended to float a 10096 subsidiary company in the name of M/s. Hyderabad Chemical Products (P) Ltd., for manufacture of intermediate goods for pesticides which the principal company (M/s. HCSL) was manufacturing, and the entire estimated cost of Rs. 2 crores was to be subscribed by the said principal company, in view of the restrictions in section 372 of the Companies Act the principal company was handicapped, and as such straightway no application could be moved by the principal company, though the amount was extended to the assessee-company was meant to be share application money. In that behalf, attention was invited to the Board of Directors’ resolution at its meeting on 17-10-1989, and allotment of shares to the tune of Rs. 24,99,100 in favour of the principal company (M/s. HCSL) in the succeeding year. Attention was also invited to the Annual Report of the principal company (M/s. HCSL) dated 27-8-1993 particularly explanatory statement under section 173(2) of the Companies Act, 1956. In support of the above factual position, it was argued for the assessee that the nomenclature of an amount is not decisive of the character, and its real nature determines the character, and though the amount in the instant case was described as unsecured loan, it was in reality share application money. It was also contended before the CIT(A) that Dr. Ramesh Gandhi and Dr. Nandini R. Gandhi were shareholders not in their individual capacities, and as such no benefit accrued to them, and they were representing the principal company M/s. HCSL. In this view of the matter, it was contended that the provisions of section 2(22)(e) are not attracted. In this connection reliance was also placed on the decision of the Supreme Court in the case of Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 . It was also contended that the provisions of section 2( 22)(e) were intended to take care of situations where a company without declaring adequate dividends, diverts its income, and the said provisions have no application in the instant case. Even if the amount is not accepted as a share application money, it was contended that it cannot be treated as a loan in the absence of jural relationship between the debtor and creditor. Since there is no agreement between M/s. HCSL and the assessee-company, it was contended that there was no jural relationship. Reliance in this behalf was made on the decisions of Madras High Court in T. Sundaram Chettiar v. Commissioner Of Income-Tax, Madras. [1963] 49 ITR 287 and Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 (Bom.). It was also submitted that since in the instant case Dr. Ramesh Gandhi and Dr. Nandini Gandhi became shareholders as nominees of M/s. HCSL for the limited purpose of incorporation and secondly they were not entitled to 20% of the income of the assessee-company since it did not earn any income in the relevant previous year, the provisions of section 2(22 )(e) were not attracted. Even if the amount in question is not treated as share application money, it can at best be called as a trade advance, which is again outside the scope of section 2(22)( a) of the Act. Further placing reliance on the decisions of the Supreme Court in the case of CIT v. British Paints (India) Ltd. [1991] 188 ITR 44 / 54 Taxman 499 and in the case of K. Sreedharan v. CIT [1993] 201 ITR 973 (Ker.), it was submitted that description in the books of account cannot clinch the issue, and the Assessing Officer was not bound by the description in the books, as there was no estoppel as to the accounts. It was also argued before the CIT(A) that strict construction of provisions of section 2(22)(e ) should not mean only construction in favour of the Department.
(d)The CIT(A) was not convinced by any of the arguments of the learned representative for the assessee. According to him the affidavits of Dr. Nandini R. Gandhi and N. Sukumar filed before him are not of much avail, since they were of self-serving nature. According to him, the books of account of the company are to be statutorily maintained and they therefore constitute good evidence to determine the nature of transaction. Even if the restrictions on the principal company (M/s. HCSL) in applying for shares in view of section 372 were real, on that ground, according to him, it cannot be held that the amount extended to the assessee partook the character of share application money for that reason. He noted that the claims which have no statutory recognition in terms of company law cannot be termed to be real in the eye of law. On a perusal of the ledger of Hyderabad Supplies Ltd. in the books of the assessee-company, the CIT(A) noted that Hyderabad Chemical Supplies Ltd. was making payments on behalf of the assessee-company to various parties from time to time spread over a large number of days throughout the year and some of their names are mentioned in the ledger account itself. He noted that the entire amount was thus not paid in one day to the assessee-company, and there are many sums which are in round figures and many are mathemetically odd figures, and all these figures total up to Rs. 65,32,219 at the end of the ledger, bifurcated into Rs. 15,00,000 and Rs. 50,32,161. The purpose of this bifurcation and arriving at the net figure of Rs. 50,32,161 by jettisoning the other sum of Rs. 15,00,000 was not known. He noted that out of this sum of Rs. 50,32,161, in the assessment year 1994-95 Rs. 24,99,100 was adjusted towards allotment of shares and the balance was taken as advance towards material to be supplied in future. The facts mentioned in the ledger account of M/s. HCSL in the books of the assessee, according to the CIT(A), would demolish the contention of the assessee that it was share application money. He agreed with the assessing officer that the absence of agreement between the assessee and M/s. HCSL is of no consequence insofar as the nature of the receipt of the amount in question by the assessee was concerned; that the affidavits of Dr. Nandini R. Gandhi and N. Sukumar were mere self-serving documents which cannot be relied upon. He was of the view that actual benefit to Dr. Ramesh Gandhi or Dr. Nandini Gandhi is immaterial to the determination of applicability of provisions of section 2(22)(e) of the Act, and once the conditionalities of section 2(22)(e) are satisfied, the amount of loan or advance has to be treated as dividend. In the absence of any ambiguity in the provisions of section 2(22)(e) of the Act, according to him, the legislative intent in incorporating the said provision is not significant, and one has to go by the letter of law as available in the statute. Dealing with the contentions of the assessee that it was to overcome the procedural hurdles in terms of section 370 of the Companies Act, 1956 that HCSL has adopted this route of advancing money to the assessee, so as to adjust the same latter into share capital of the assessee, etc., the CIT(A) without going into the details of provisions of section 370 of the Companies Act, rejected the sanctity of the assessee’s contentions, on the ground that actions that are not permissible in law would not be regarded as non-action only for the reason that it was not permissible in law or for that reason that there were procedural violations. In the instant case, he noted that by the conduct of the assessee as well as the entries in the books of account, which are statutory requirements, loan or advance is extended to the assessee-company and that reality cannot be treated as unreal for the reason that there was a procedural violation. For these reasons, he held that the provisions of section 2(22)(e) are clearly applicable in the instant case and the Assessing Officer was very much correct in treating the unsecured loan of Rs. 41,05,122 as the deemed dividend in the hands of the assessee.
(e)Aggrieved by the order of the CIT(A), assessee has preferred this second appeal before us.
4. The learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that the provisions of section 2(22)(e) are not at all applicable in the instant case. He submitted that the amounts paid by M/s. Hyderabad Chemical Supplies Ltd. to the assessee was wrongly shown in Balance Sheet as Unsecured Loan, while in reality it is a share-application money/trade advance. In this connection, it was submitted that the entries of unsecured loan were reversed by rectification in the Balance Sheets, as per minutes of the respective companies. He submitted that the reasons given by the CIT(A) are contradictory. He sumitted that the share application money need not be in a roundsum and can be made periodically as Hyderabad Chemical Supplies Ltd. is the promoter of HCPL, viz., the assessee and it is the common practice among the holding and subsidiary companies to make payments on behalf of the other companies with the intention to get shares allotted subsequently, in respect of the payments made earlier. He submitted that the lower authorities were not justified in ignoring the circular of the Board No. 495 explaining the provisions of section 2(22)(e) as amended by the Finance Act, 1987 and not properly appreciating the case-law cited before them. He has also filed written submissions on the above lines, wherein it is contended that by the resolution of the Board of Directors of Hyderabad Chemical Supplies Ltd., at its meeting dated 17-10-1989, by a resolution, it was resolved to authorise the directors of HCSL to promote a new company so that the new company could then become a subsidiary of HCSL, and it was acting at the behest of HCSL, its directors promoted the assessee-company on 20-5-1990, and in the memorandum and articles of association of the assessee-company, the directors of HCSL were the signatories. The shares necessary for floating the assessee-company were purchased by HCSL in the name of its Directors by giving the money from its funds. In the first meeting of the assessee-company held on 2-7-1990, the subscribers of the Memorandum and Articles of Association constituted themselves into Board of Directors, and passed several resolutions, approving the meeting of preliminary expenses in the floating of the assessee-company by M/s. HCSL and receiving of an amount of Rs. 50,00,000 as equity from HCSL for starting its project and receiving of any additional amount as a trade advance to be adjusted against supply of material. Our attention in this behalf is invited to the resolutions of the Board of M/s. HCSL at pages-65 & 65A of the paper-book and that of the assessee at pages 57 to 64 of the paper-book, with particular emphasis on the relevant portions at pages 59, 62 and 63. It is contended that the resolutions of the Board meetings maintained under section 193 of the Companies Act are conclusive evidence of the fact that the assessee was always intended only to be a wholly owned subsidiary of HCSL and of the fact that the money expended by HCSL for the purpose of floating the assessee and for establishing the project of the assessee was to be treated as share application money towards its contribution to the equity share capital of the assessee. In any event, it is submitted that the affidavits of the Directors and the Auditor of the assessee-company also independently conform the correctness of the assessee’s version. Even the events that took place in the succeeding year clearly establish the correctness of the assessee’s version that what is received in the year under appeal was mere share application money/advances towards material to be supplied to M/s. HCSL in future. Inviting our attention to the balance-sheets filed in the paper-book at pages 16 and 41 of the paper-book and the first show-cause notice issued by the Assessing Officer invoking the provisions of section 2(22)(e) of the Act to make the impugned addition at page 90 of the paper-book, it is contended that the balance sheet for the financial year ended on 31-3-1994 was finalised and signed on 3-9-1994 whereas the notice was issued by the Assessing Officer only later on 6-10-1994. Also inviting our attention to the Directors’ Report filed at page-8 of the paper-book, for the financial year ending on 31-3-1994, dated 3-9-1994, it was pointed out that it was very clearly stated therein that the assessee had become a subsidiary company of HCSL on 26-4-1994, that the assessee was promoted by HCSL and that a total of Rs. 4,991 equity shares were allotted to HCSL upto the date of the report and that further shares for Rs. 25,00,000 were proposed to be issued to HCSL. It is contended that the persons who has subscribed to the Memorandum and Articles of Association held the shares only on behalf of HCSL, and the said fact is affirmed by the affidavits of the two surviving directors filed before the Assessing Officer. In this behalf, our attention is invited to the said affidavits filed at pages 71 and 74 of the paper-book. In this behalf, our attention is invited also to the Will dated 28-5-1992 filed at page 64 of the paper-book of one of the deceased Directors, to point out that it contains no mention about the shares allotted in his name by the assessee-company, since they were allotted to him on behalf of M/s. HCSL. Our attention is also invited to the wealth-tax returns of those shareholders, copies of which are filed at pages 75 and 83 of the paper-book. It is further contended that the amount allegedly given by HCSL to the assessee by way of loan or advance was not money actually given to the assessee-company as is made out by the Assessing Officer, but this represents the amounts paid by HCSL to third parties on behalf of the assessee-company for the completion of the project of the assessee. As such, it was contended that no cash or money was actually given to the assessee by HCSL and it is not a loan or an advance given to the assessee by HCSL, but it may at worst be considered as a payment made by HCSL on behalf or for the benefit of the assessee, and consequently the provisions of section 2(22)(e) are not applicable to the facts of the instant case.
5. Contending that a loan necessarily presupposes a Jural relationship and an intention to return or recover the money loaned, the learned counsel for the assessee placed reliance on the decisions of Supreme Court in CIT v. Bazpur Co-operative Sugar Factory Ltd. [1989] 177 ITR 469/ 44 Taxman 281 of Gujarat High Court in CIT v. Rajkot Seeds Oil & Bullion Merchants Association Ltd. [1975] 101 ITR 748 ; of the Bombay High Court in CIT v. Dwarkadas Vasanji [1953] 23 ITR 109 and of the Madras High Court in T. Sundaram Chettiar’s case (supra). He also submitted placing reliance on the decision of the Bombay High Court in the case of Commissioner Of Income-Tax v. Nagindas M. Kapadia. [l989] 177 ITR 393 / 42 Taxman 128 that trade advances are not deemed dividends under section 2(22)(e ) of the Act. Placing reliance on the decisions of the Madhya Pradesh High Court in Gulabchand Motilal v. CIT [1988] 174 ITR 117 /[1987] 34 Taxman 456 of the Allahabad High Court in Commissioner Of Income-Tax, M.P-I v. Krishna Kumar [1988] 173 ITR 561 /[1987] 34 Taxman 179 and of the Kerala High Court in the case of K. Sreedharan (supra) , he submitted that while interpreting a deeming provision such as section 2(22)(e), a strict interpretation is to be given and all attendant facts and circumstances are to be considered. Placing further reliance on the decisions of the Supreme Court in M/S. Rameshwarlal Sanwarmal… v. Commissioner Of Income-Tax Assam…. [1980] 122 ITR 1/3 Taxman 1 and C.P. Sarathy Mudaliar’ s case (supra ), it is contended that the terms ‘shareholder’ and ‘beneficial owner’ are not synonymous and they are to be interpreted strictly. He also submitted that payments made towards a pre-existing liability are not loans or advances and section 2(22)(e) would not apply, and relied on the decision of the Bombay High Court in the case of CIT v. P.K Badiani [1970] 76 ITR 369 in this behalf. He also submitted that the minutes of a board meeting are evidence of the proceedings therein and it has to be presumed that all the proceedings recorded therein have duly taken place, and invited our attention to the provision of section 195 of the Companies Act. Taking us through the various papers and letters exchanged with the lower authorities filed in the voluminous paper-book running into 124 pages, the learned counsel for the assessee submitted that the provisions of section 2(22)( e) of the Act have no application to the facts of the case on hand, and the addition made by the Assessing Officer treating the unsecured loan as deemed dividend should be deleted.
6. On the other hand, the learned Departmental Representative strongly supported the reasoning given by the lower authorities in their respective orders. Inviting our attention to page-1 of the paper-book of the assessee, which is the balance-sheet of the assessee-company, it is contended that the authorised capital of the assessee is only Rs. 25,00,000, and as such the assessee could not have received anything more towards share capital. This would simply demolish the theory of the assessee that what was received by the assessee from M/s. HCSL was mere share application money and trade advances and not unsecured loans as depicted in the said balance-sheet. He submitted that subsequent events which took place in the succeeding year cannot alter the nature of events which have taken place during the accounting year relevant to the year under consideration. He also invited our attention to pages 78 and 79 containing details of equity shares held by Dr. Nandini R. Gandhi as on 31-3-1993, pages 86 and 87 containing details of equity shares held by Dr. Ramesh Gandhi as on 31-3-1993, wherein the details of shares held by them in assessee-company was also included, and the affidavit of the Chartered Accountant of the assessee dated 24-8-1995, clarifying the mistake in the Balance Sheet about the description of the amount shown as unsecured loan instead of as share application money.
7. In reply, the learned counsel for the assessee submitted that the ceiling on authorised capital of the company, is no bar to receive the application money towards shares. He submitted that description of a receipt in the books of account is no conclusive proof, and the nature of a receipt has to be determined on the basis of the purpose for which it was received, viz, its content and not on the basis of how it was described in the books of account. Also inviting our attention to the provisions of sections 193 to 195 of the Companies Act on the scope and authenticity of the minutes of the meetings of a Board of Directors, and the provisions of section 373(b) of the Companies Act, he submitted that the lower authorities were not justified in brushing aside the various resolutions of the Board and several other factual aspects as of no consequence or as after-thought, and invoking the provisions of section 2(22)(e) of the Income-tax Act.
8. We have considered the rival submissions and perused the orders of the lower authorities. We have also perused the various papers filed by the learned counsel for the assessee in its paper-book and also the decisions cited before us, and also in his written submissions. It is the description of the amounts totalling to Rs. 50,32,161 received by the assessee from M/s. Hyderabad Chemical Supplies Ltd., as ‘unsecured loan’, which has led the Assessing Officer to invoke the provisions of section 2(22)(e) of the Income-tax Act, 1961, to treat the same as deemed dividend and bring the same to tax. It is when confronted with this proposition, that the assessee came forth with the contention that the description in the balance-sheet is not correct and it in fact represents share application money. In support of its stand in that behalf, it placed reliance on the events that took subsequently, viz., allotment of shares, and the factual background leading to the incorporation of the assessee-company. It also sought to justify the course adopted by the principal company, M/s. Hyderabad Chemical Supplies Ltd., to first pump in funds in the form of unsecured loans, so as to have it adjusted against the allotment of shares of the assessee-company and future supplies of materials, by pointing out the procedural hurdles envisaged by the Companies Act in straightaway floating a subsidiary company. These things in our considered opinion do not come to the aid of the assessee, and the reasoning given by the lower authorities for invoking the provisions of section 2(22)(e) for treating the unsecured loans in question as deemed dividend and bringing the same to tax, is very much sound and valid and we are in complete agreement with the same.
9. The ‘deemed dividend’ comprehended by sub-clause (e) of section 2(22) is not a dividend that arises out of distribution, but is a dividend which arises out of payments. Sub-clause (d) of section 2(22) speaks of distribution, but sub-clause (e) speaks of payment. The distinction between ‘distribution’ and ‘payment’ is that, while ‘distribution’ connotes two acts, (a) a division add (b) a delivery, ‘payment’ connotes something that is given, and it need not have been apportioned and disbursed. The two expressions mentioned above, viz., ‘distribution’ and ‘payment’ connote different things. ‘Distribution’ is a division amongst several persons. In the case of ‘distribution’, the recepients would be more than one while in the case of ‘payment’ such recipients may be a single person.
10. By enacting section 2(22)(e), the Legislature has created a fiction and has made ‘payment’ referred to in sub-clause (e) a ‘dividend’ for the purpose of Income-tax Act. In other words the present one springs out of payment. Dealing with the scope of provisions of section 2(22)(e) of the Act, the Bombay High Court in the case of Walchand & Co. (P.) Ltd. v. CIT [1993] 204 ITR 146 observed as under—
"The Legislature has artificially defined dividend as inclusive of a loan or advance made to the shareholder of the specified type of company. Even where the loan has been fully repaid, the inclusive provision in section 2(6A)(e) of the Indian Income-tax Act, 1922 [section 2(22)(e) of the Act of 1961] would squarely apply. The only relief in such a situation is conferred by the Legislature by the mechanism of the exclusion clause, which excludes certain categories of dividends from the definition. These are specifically enumerated in clauses (i) , (ii) and (iii ). Unless an assessee qualifies for relief by falling within the stipulations contained in any of these clauses, the Legislature intended that no relief was due to the assessee."
For a dividend to arise under this clause, the following conditions should be fulfilled—
(1)The company must be a company, the shares of which are closely held.
(2)Money (not money’s worth) should be paid by the company.
(2)The money must form a part of the assets of the company.
(3)It may be paid either by way of advance or loan or it may be in "any payment".
(5)(i)The payee must be a shareholder of the company having substantial interest in the company, or
(ii)The payee must be a person who is acting on behalf of or for the individual benefit of such shareholder.
11. The expression "person who has substantial interest in the company" is defined in section 2(32) as meaning "a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power". If these conditions are fulfilled, then a dividend would arise to the extent to which the company possesses accumulated profits. In this connection, it is worthnoting that the Supreme Court in Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 held that section 2(22)(e) is attracted at the point of time, when the advance, loan or other payment is made in terms of this clause. From the discussion of facts prevailing in the instant case, it is abundantly clear that all the conditions mentioned above are satisfied and the treatment of the payment as deemed dividend under section 2(22)(e) is perfectly justified.
12. In the case of Star Chemicals Pvt. Ltd. v. Commissioner Of Income-Tax. [1993] 203 ITR 11, the Bombay High Court in view of the definition of the term ‘person’ in section 2(31), which includes a company and the definition of ‘a person who has substantial interest in the company’ in section 2(32), and in view of the decision of the Bombay High Court in the case of Sadhana Textile Mills (P.) Ltd. v. CIT [1991] 188 ITR 318 wherein Their Lordships have expressly dealt this very question and held that section 2(22)( e) apply even to a holding company and subsidiary company, upheld the application of provisions of section 2(22)(e) in that case.
13. A payment to a shareholder, in order to attract the charge as "deemed dividend" need not necessarily be a loan or advance to a shareholder. The section includes within its scope and ambit all payments made by the company on behalf or for the individual benefit of the shareholder.
14. This clause of section 2(22) treats sums granted by a closely held company to any of its shareholders in the manner as it treats dividends distributed by it to them. The justification is plain. The company in question is a company in which there is a group of members controlling its affairs, and possessing a block of shares forming majority. Since there are accumulated profits in the company, this group, if it chooses, can have distribution arranged of such profits to its shareholders in which event the shareholders would be liable to pay income-tax. In order to avoid such a tax liability, the company may grant a loan. When such a loan is advanced to a shareholder who has substantial interest in the company, the inference is obvious that the loan is made up affair and there is every reason for treating such loan as dividend.
15. It may be true that the entries in the books of account are not conclusive as to the nature of a transaction, and merely because an amount is mentioned as ‘unsecured loan’ in the balance-sheet it cannot be taken as such rejecting all the contentions of the assessee to the contrary. One has to go by the entries in the books of account, particularly since they are statutorily maintained in the case of the assessee before us, which is a company incorporate since the entries in the books constitute prima facie evidence. But, when the assessee disputes the nature of transactions in relation to such entries in the books, it has to substantiate its contentions in that behalf. In the instant case, the contentions of the assessee that what has come to the assessee from M/s. Hyderabad Chemical Supplies Ltd. is share application money and not unsecured loan as described in the books/balance-sheet are not substantiated, and the evidence adduced by the assessee in that behalf has very correctly been brushed aside by the lower authorities, for sound and valid reasons given in the impugned orders. As correctly pointed out by the Learned Departmental Representative, when the authorised capital of the assessee-company for the previous year relevant to assessment year 1993-94 was barely Rs. 25 lakhs, it cannot claim to have received share-application money running into over Rs. 50 lakhs.
16. Even according to the assessee’s own version, funds were pumped into the assessee-company by M/s. Hyderabad Chemical Supplies Ltd., by making payments to contractors and third parties for the project of the assessee, and by defraying the preliminary expenses for floating the assessee-company, initially as unsecured loans, since there were procedural hurdles in straightaway floating a subsidiary company by M/s. Hyderabad Chemical Supplies Ltd. It was thus a design of M/s. Hyderabad Chemcial Supplies Ltd., to first introduce unsecured loans to the assessee to be adjusted later against shares to be allotted in course of time, to overcome the hassles in the Companies Act. It is thus a design to circumvent and obviate the aims and objects of the Companies Act, in laying down the procedures in that behalf. Such a designed move cannot be approved, by treating the unsecured loans of the year under appeal, as the share-application money considering the overall motives of the assessee in that behalf. In any event, even according to the assessee amounts in spells were spent on behalf of the assessee-company, in the form of preliminary expenses, payments to third parties for the completion of project of the assessee, and till such time they are settled in one form or other, either by repayment or adjustment against shares to be allotted or treating them as advances against future supply of materials, they have to be treated as unsecured loans, as correctly described in the Balance Sheet. Since no adjustments of that order has been done till the end of the year under appeal, the same were correctly described in the Balance-Sheet as unsecured loans, and treated as deemed dividend in terms of section 2(22)(e) of the Act. With the authorised share capital indicated in the balance-sheet at a low figure of Rs. 25,00,000, assessee could not have depicted the unsecured loans in question as share-application money.
17. None of the decisions relied upon by the learned counsel for the assessee either before us or in the written submissions filed before us have any application to the facts of the case on hand. It is considering totality of the design of the assessee’s principal, viz, Hyderabad Chemical Supplies Ltd. in the floating of the assessee’s company to overcome the hurdles in the Companies Act, that the assessee wants us to treat the unsecured loans of the year under appeal as share application money, since it was ultimately treated as such in the subsequent years. But, we are of the firm view that in determining the taxability of an amount, what has to be seen is the nature of the amount in the year under appeal, and not the events that take place in subsequent years changing the character of that amount in those years nor overall plans or designs that prompted the principal to introduce the unsecured loans so as to convert them later into share-capital of the assessee company. The affidavits of Dr. Nandini Gandhi and N. Sukumar have very correctly been rejected by the lower authorities as self-serving evidence. The lower authorities were also very much correct in rejecting rest of the contentions of the assessee. We are in complete agreement with the reasoning given by them in that behalf. We accordingly uphold the action of the lower authorities in invoking the provisions of section 2(22)(e) and treating the unsecured loan Rs. 41,05,122 of the year under appeal as deemed dividend, and charging the same to tax.
18. In the result, assessee’s appeal is hereby dismissed.
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