Hon. Pankaj Mithal, J.
1. We have heard Shri Sambhu Chopra, learned counsel appearing for the revenue. Shri S.K. Garg appears for the assessee.
2. In ITA No.1633/Alld/1995 the High Court called for reference by the Income Tax Appellate Tribunal, Allahabad Bench, Allahabad on the following question of law:-
"Whether on the facts and in the circumstances of the case the Hon'ble ITAT was justified in holding that the advance amount of Rs.7,00,000/- received by the assessee from M/s Khan Carpets Pvt. Ltd. cannot be treated to be a deemed dividend u/s.2 (22) sub-clause (e) of the I.T. Act, 1961?"
3. The facts of the case are that in the course of assessment proceedings it was noticed that two Directors of the assessee-company had substantial interest in both the assessee-company and M/s Khan Carpets Pvt. Ltd. within the meaning of Section 2 (32) of the Income-Tax Act, 1961. Further, M/s Khan Carpets Pvt. Ltd. had a sum of Rs.70,40,000/- under the head 'Reserves & Surplus'. The assessee-company received a sum of Rs.7 lakhs from M/s Khan Carpets Export Pvt. Ltd. The A.O. observed that accumulated profits available with the company was atleast Rs.7 lakhs during the year, and the payment was squarely within the meaning of Section 2 (22) (e) of the Income Tax Act, 1961, which is deemed to be dividend, in the hands of the assessee-company. This view was taken despite a claim from the assessee that the sum of Rs.7 lakhs had been received from M/s Khan Carpets Pvt. Ltd. on account of advance for purchase of land. The money was received way back in May, 1991, but the land had not been transferred till January, 1994. The A.O. added the amount of Rs.7 lacks in the assessee's income for the assessment year 1992-93.
4. The CIT (Appeals) observed that although the assessee claimed that the advance was received against the cost of land to be sold by it to the sister company, yet there was nothing on record about such a proposal. The A.O. had correctly invoked the provisions of Section 2 (22) (e) of the Act with regard to interest free advance/ loan of Rs.7 lakhs. The appeal was dismissed.
5. The Income Tax Appellate Tribunal (ITAT) observed that the fact of advance was amply evidenced by document on record. Such an advance could not be treated by an expression 'dividend' used in Section 2 (22) (e) of the Act. The fact that the sale deed was not executed could not be interpreted to mean that the sum was not taken as an advance for the proposed sale of land. Reference was made to the following cases:-
"(1) CIT V. E.K. Badlani (76 ITR 369) (2) 109 ITR 508 (Madras) (3) 56 ITR 52 (SC) (4) 70 Company Cases page 210 (5) 1 Company Law Journal 437 (Bom.)"
6. The ITAT also relied upon meaning of 'loan' in Black's Law Dictionary and Oxford English Dictionary, and took a view that amount of Rs.7 lakhs was neither an advance nor a loan. It was a consideration for the proposed sale of land. It would thus not fall within the mischief of Section 2 (22) (e) of the Act. The Tribunal deleted the addition of Rs.7 lakhs as deemed dividend.
7. Shri Sambhu Chopra appearing for the revenue submits that Shri Mohd. Ali and Smt. Azara Mohd. Ali are shareholders in both the companies with 20% of the voting power to each of them. The public is not substantially interested in the companies. There was nothing on record to establish the proposal of transfer of land to be sold to M/s Khan Carpets Pvt. Ltd. The contention was merely an assertion. The AO and CIT (A) did not commit any error in law in treating Rs.7 lacs in the hands of the assessee within the meaning of Section 2 (22) (e) of the Act.
8. Shri Sambhu Chopra has relied upon a judgment of this Court delivered by a Bench of which one of us (Hon'ble Sunil Ambwani, J.) was a member in Income Tax Appeal No.99 of 2003, Shyama Charan Gupta Vs. Commissioner of Income Tax, Central Kanpur connected with Income Tax Appeal No.126 of 2003, Shyama Charan Gupta Vs. Commissioner of Income Tax Central Kanpur dated 1.4.2011, in which it was held that advances drawn by the assessee, which were not due to him before the accounts were settled, and which the assessee claimed to be his own income were commission of profit from his account.
9. He has also relied upon judgment of the Gujarat High Court in Ravindra D. Amin Vs. Commissioner of Income Tax, 1004 (208) ITR 815. In this case payment was made by the company to a shareholder in the nature of advance of the loan. It was held that there should be no difficulty in treating the payment as dividend in the hands of shareholder and deducting tax therefrom. If at the end of the accounting year, the picture regarding profit and loss appears to be quite different, the company or the shareholder will have other remedies available to it or him. Amount advanced to shareholder to the extent company possesses accumulated profits is assessable as deemed dividend under Section 2 (22) (e).
10. Shri Chopra has relied upon Miss P. Sarada Vs. Commissioner of Income Tax, 1998 (289) ITR 444; CIT Vs. Mysodet (P) Ltd., 1999 (237) ITR 35 and CIT, Kolkata Vs. Mukundray K. Shah, (2007) 4 SCC 327. He submits that in all these cases the Supreme Court held that loan to shareholders, who had substantially interest in the company in which the public were not substantial interested and which had accumulated profits, would amount to, in the accounting year as dividend under Section 2 (22) (e) of the Act. In Miss P. Sarada (Supra) the Supreme Court held that legal fiction will come into play as soon as the monies were paid by the company to the appellant. The assessee must be deemed to have received dividend on the date on which she withdrew the aforesaid amounts of money from the company. The loan or advance taken from the company may have been ultimately repaid or adjusted, but that will not alter the fact that the assessee in the eye of law had received dividend from the company during the relevant accounting period. In CIT Vs. Mysodet (P) Ltd. (Supra) the respondent company was trading company in which public were not substantially interested. The AO found that in the assessment year 1975-76 the company did not distribute any dividend to its shareholders. He initiated proceedings under Section 104 of the Act demanding additional income tax. The Tribunal rejected the appeal and referred the question to the High Court, which held that any loan advanced to a shareholder out of accumulated profits of the company, in which public do not have substantial interest, would amount to payment of dividend and hence Section 104 would not be attracted. The Supreme Court held that if actually the legislature wanted the deeming clause not to be made applicable to the provisions of section 104 of the Act, then it would have said so in categorical terms in the Statute, in the absence of which statutory definition given under section 2 (22) (e) of the Act, will have to be applied to the word 'dividend' as found in Section 104 also.
11. In Commissioner of Income Tax, Calcutta Vs. Mukundray K. Shah (Supra) the Supreme Court held in para 11 of the report that the company having accumulated profits and the companies in which substantial voting power lies in the hands of a person other than public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or not. The declaration of dividends is entirely within the discretion of this group. Therefore, the legislature realised that though funds were available with the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting Section 2 (22) (e) of the Act.
12. Per contra, Shri S.K. Garg, learned counsel appearing for the assessee company supporting the order of the Tribunal submits that the demand of Rs.7 lacs is not within the mischief of Section 2 (22) (e) of the Act, and cannot be treated as deemed dividend, as the advance of the amount for the proposed sale of property was amply evidenced by the documents on record. The fact that the sale deed was not executed cannot be interpreted to mean that the aforesaid sum was not in advance for the proposed sale of land. The expression 'any payment' was interpreted in CIT Vs. P.K. Badiani, (1970) 76 ITR 369 in which it was held that this expression did not connote payment towards a pre-existing liability or by way of an existing obligations. The same view was reiterated in 109 ITR 508 (Madras). For a loan there should be relationship of creditor and debtor between the parties; a lender or borrower, a thing loaned as well as a contract between the parties for a return of the thing loaned. He relies upon 1956 ITR 52 (SC) for the proposition and submits that the word 'loan' means a lending, advance of money with absolute promise to repay; a borrowing with the promise to repay delivery of money. The four elements of loan namely an amount; placing of the amount with another, called borrower; an agreement to repay; and recognition of liability on the part of borrower to return it with or without interest. Shri S.K. Garg submits that balance of sale price due from a Director to whom the company sold its flat is not a loan [vide (1991) 70 Company Cases 210; (1991) 1 Company Law Journal 437 (Bom.)]. Shri S.K. Garg has relied upon CIT Vs. H.K. Mittal, (1996) 219 ITR 420; CIT Vs. Raj Kumar Singh & Co., (2007) 295 ITR 9; Madura Coats P. Ltd., (2005) 274 ITR 609; CIT Vs. Raj Kumar, (2009) 318 ITR 462 (Del); CIT Vs. Creative Dyeing and Printing P. Ltd., (2009) 318 ITR 476; CIT Vs. Hotel Hilltop, (2008) 217 CTR 527; CIT Vs. Shekh Mohammad Arif, (2005) 278 ITR 461 and Patnaik & Co. Ltd. Vs. CIT, (1986) 161 ITR 365.
13. In CIT Vs. H.K. Mittal (Supra) the recipient of the advance was not a shareholder. In CIT Vs. Raj Kumar Singh & Co. (Supra) the assessee was not registered shareholder of the company and thus it was held that advance was not taxable as deemed dividend in the hands of the assessee under Section 2 (22) (e). In Madura Coats P. Ltd. (Supra) the financial company of U.K. was not directly holder of the shares in Indian company but was holding company. The holding company of the U.K. company was holding shares in Indian Company and thus it was held that the deeming provision under Section 2 (22) (e), 32, which has to be construed strictly will not apply. To attract sub-clause (e) shareholder must be a registered shareholder. In CIT Vs. Raj Kumar (Supra) the advance was given as a trade advance. It was held that word 'advance', which appears in the company of the word 'loan' could only mean such advance which carries with it an obligation of repayment. The trade advances, which are 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.
14. In CIT Vs. Creative Dyeing & Printing P. Ltd. (Supra) once again the advance to assessee by sister concern holding 50% share holding in the assessee for modernisation project was to be adjusted against the dues for job work to be done by the assessee. It was treated to be an amount advanced for business transactions and was held not to fall within the definition of deemed dividend under Section 2 (22) (e) of the Act. In CIT Vs. Hotel Hilltop (Supra) the loan to firm vis-a-vis partners, which firm was not a shareholder in the company was held not to be assessed as deemed dividend in the hands of the firm, even though all the partners of the firm were shareholders in the company. It was held to be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the firm. In CIT Vs. Shekh Mohammad Arif (Supra) the assessee was a muslim, who had transferred a particular property to his wife in lieu of mehar. He had handed over the property to his wife as part payment of mehar due to her. Her name was mutated and she was paying tax of the property, which she has let out and was receiving rent. The High Court held that the Tribunal rightly came to the conclusion that the assessee ceased to be owner of the property in question after the approval and his wife became the owner within the meaning of Section 22 of the Income Tax Act. Income from this property was not includible in that of the assessee. The judgment in Patnaik & Co. Ltd. Vs. CIT (Supra) is not relevant to the facts of the present case as in that case the question related to investment in government loans to further sales and to boost business. The case related to question as to whether loans in sale of investment in revenue loss and in capital loss.
15. Section 2 (22) defines dividend and includes in sub-section (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) (by way of advance or loan to a shareholder, being a person who has a substantial interest in the company) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
16. By Finance Act, 1987 an explanation was inserted after Explanation 2 as follows:-
"Explanation 3- For the purposes of this clause-