ORDER
M. K. Chaturvedi, Vice President
1. This appeal by the assessee is directed against the order of the CIT(A)-XXIX, New Delhi, and relates to the asst. yr. 1991-92.
2. The solitary ground raised in this appeal, projects the following grievance :
“That, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the receipt of Rs. 26 lacs as share application money from M/s. Hoovar Services (P) Ltd. as deemed dividend in the hands of the appellant, ignoring the vital facts, submissions and documents on record.”
Briefly the facts :
The assessee-company was engaged in the business of finance and investment. It filed its return of income on 30th November, 1996, declaring therein a loss of Rs. 10,160. The return was processed under s. 143(1)(a) of the IT Act, 1961 (hereinafter called the Act), on 5th November, 1997. Thereafter the case of the assessee was selected for scrutiny. In the course of assessment proceedings it was found that the assessee had reflected receipt of share application money pending allotment amounting to Rs. 4,48,00,000 from four companies. This includes an amount of Rs. 26,00,000 received from Hoovar Services (P) Ltd. (hereinafter called HSPL). It was revealed that HSPL was closely-held company. The money was received in three unequal instalment of Rs. 10,00,000, Rs. 4,00,000 and Rs. 12,00,000 on 29th September, 1995, 25th October, 1995 and 30th October, 1995.
The assessee was required to show that why the amount of Rs. 26,00,000 received from HSPL, be not treated as deemed dividend under the provision of s. 2(22)(e) of the Act. It was explained that the amount was received as share application money. It was not loan or advance. The AO did not accept this explanation. He made an addition of Rs. 26,00,000 by resorting to the provisions of s. 2(22)(e) of the Act. Being aggrieved the assessee preferred appeal thereagainst, before the CIT(A). The appeal of the assessee was dismissed by the CIT(A). Against that order the assessee is in appeal before us.
3. Shri H. K. Chaudhry, learned counsel for the assessee, appeared before us. It was submitted that the assessee-company was incorporated on 4th September, 1995. The authorized capital of the company was Rs. twenty crores. The company was incorporated to take up investment and finance business. The assessee-company received the following amounts as share application money for issuing fully paid-up shares in the capital of the company :
Rs.
(a) Ardee Business Centre (P) Ltd. 1,15,00,000
(b) Ardee Infrastructure (P) Ltd. 1,47,00,000
(c) Gopal Das Estates & Housing (P) Ltd. 1,60,00,000
(d) Hoovar Services (P) Ltd. 26,00,000
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4,48,00,000
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4. All the aforesaid amounts were reflected in the balance sheet as on 31st March, 1996, under the capital of “share application money pending allotment of shares”. As the allotment did not take place upto 31st March, 1996, the amount was reflected in the balance sheet. The AO took the share application money received from HSPL as loan to the assessee-company in terms of s. 2(22)(e) of the Act and considered the same as deemed dividend.
5. From the perusal of the balance sheet of the assessee-company the AO found a balance of Rs. 13,02,000 in the account out of the total share application money received from HSPL. It was explained that against the total payment of Rs. 1,26,00,000, the assessee had allotted shares worth Rs. 1,12,98,000 to HSPL on 25th April, 1996. The balance of Rs. 13,02,000 was also adjusted subsequently. A sum of Rs. 10,00,000 was treated as share application money for buying the shares. The balance amount of Rs. 3,02,000 the shares were allotted to M/s. HSPL on 1st April, 1998. Thus, the entire payment stood adjusted.
6. M/s. HSPL made three applications for acquiring the shares and paid a sum of Rs. 26,00,000 during the year ended 31s March, 1996. The balance sheet was perfectly in accordance with the norms set out under the Companies Act, 1956. These were filed with the Registrar of Companies. This amount by HSPL was the application money. It was adjusted on 25th April, 1996, when the shares were allotted for the amount received. On this factual backdrop, it would be highly improper to consider the amount as loan. By no stretch of imagination if can be treated as deemed dividend in the hands of the assessee-company. M/s. HSPL reflected the whole payment as ‘share application money’ in their balance sheet. The amount received from HSPL was converted into share capital on 25th April, 1996 and 1st April, 1998.
7. It was argued that the amount paid was not in the nature of loan or deposit. It was not repayable after a notice or after a period. In the case of the share application money – in the eventuality of full allotment – no amount is repayable. Thus, the share application money does not fall in the category of loan or deposit. Sec. 269SS and s. 269T were referred to explain the meaning of loan and deposit.
8. It was further argued that the balance sheet of the assessee-company was drawn in accordance with proforma set out in Sch. VI of the Companies Act, 1956. The balance sheet was audited by the chartered accountant in conformity with the provisions of the Companies Act, 1956. The balance sheet of HSPL, was also audited by the auditors. It was certified by the auditors that the amount received by the assessee was share application money. There is absolutely nothing on record to indicate that the character of the amount reflected under the caption “share application money” was of a different nature.
9. The learned counsel further argued that the assessee maintained the books in conformity with the norms prescribed under the Companies Act, 1956. As per the books, the amount received from Hoover Services was “share application money”. Reference was made to the decision of Hon’ble Assam High Court rendered in the case of Tola Ram Daga vs. CIT (1966) 59 ITR 632 (Assam). Hon’ble High Court has held that “where the genuineness and regularity of the accounts have not been challenged, the accounts are relevant prima facie proof of the entries and the correctness thereof under that s. 34 ……..” The learned counsel stated that there is absolutely nothing on record to buttress the presumption made by the AO that the amount received in question from HSPL was in the nature of loans and advances given by a company to its shareholder. The AO was, therefore, not correct in treating the said sum as deemed dividend as per the prescription of s. 2(22)(e) of the Act.
10. Reference was also made to the decision of the apex Court rendered in the case of CIT vs. N. S. Getti Chettiar (1971) : 82 ITR 599 (SC). In this case the Hon’ble Supreme Court has held that the words in a section of a statute are not to be interpreted by having those words in one hand and the dictionary the other. In a spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose they are intended to serve.
11. The learned counsel also invited our attention on the provisions of s. 2(b)(ii) of the Companies (Acceptance of Deposit) Rules, 1975. As per prescription of this rule “deposit means any deposit of money which includes any amount borrowed by a company, but does not include …….. (b)(ii) any amount received by way of subscription to any shares, stock/bonds and debentures …….”
12. Alternatively, it was argued that only the payment and advances to the extent of accumulated profits could only be treated as loans or advances within the meaning of s. 2(22)(e) of the Act. As per the balance sheet of the company accumulated profits amounted to Rs. 4,65,168. It was contended that in any case, addition cannot exceed to this amount. Reference was made to the decision of the Hon’ble Bombay High Court rendered in the case of CIT vs. Nagin Dass M. Kapadia (1989) 177 ITR 393 (Bom). Reliance was also placed on the decision of the apex Court rendered in the case of E. D. Sassoon & Co. vs. CIT (1954) 25 ITR 27 (SC).
13. Shri R. K. Rai, the learned Departmental Representative, vehemently argued that the Revenue authorities were correct in treating the amounts of share application money as loan and advance for the purpose of attracting the provisions of s. 2(22)(e) of the Act. It was stated that the amount received comes within the ambit of the definition of “dividend”. Reliance was placed on the decision of the Hon’ble Madras High Court rendered in the case of CIT vs. K. Srinivasan & Ors. (1963) 50 ITR 788 (Mad).
14. It was stated that the expression “advances” means something which is due to a person, but is paid to him ahead of the time. Reference was made to the Dictionary of Accounts by Eric L. Kolher Vth Edn., wherein it is defined as payment of cash or transfer of goods for which accounting must be rendered by the recipient at some later date.
15. It was further submitted that the fact that the amount paid on application was adjusted against the allotment of share will not exonerate the assessee from the liability fastened under s. 2(22)(e). Reliance was placed on the decision of K. M. S. Lakshmana Aiyar vs. ITO (1960) 40 ITR 469 (Mad) wherein it was held that under s. 2(22)(e), the liability to tax attaches to any amount taken as a loan by a shareholder from a closely-held company at the moment the loan is borrowed and it is immaterial whether the loan is repaid before the end of the accounting year or not. The learned Departmental Representative submitted that a benefit connotes anything i.e., advantageous to, or for the good of a person. While “loan” or “advance” is a direct payment to the shareholder, the latter may also be benefit by payment flowing from the company.
16. The learned Departmental Representative invited our attention on the dates when the application was made and shares were allotted. It was submitted that there was inordinate delay in the allotment of shares. The assessee-company kept the money and derived benefit out of that. If an offer is not accepted before a reasonable time, it lapses. Reference was made to the Anson’s Law of Contract wherein it is laid down that an offer is to an acceptance what a lighted match is to a train of gun powder.
17. Apropos the interpretation of s. 2(22)(e). Reliance was placed on the decision of the apex Court rendered in the case of State of Tamil Nadu vs. M. K. Kandaswamy 36 STC 191 (SC) wherein it was held that in interpreting a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to the one which would render it otiose or sterile. In that view of the matter, the Court should not adopt construction which would upset or even impair the purpose in introducing a particular provision in the statute.
18. Reference was made to the decision of the Hon’ble Delhi High Court rendered in the case of Baidya Nath Plastic Industries (P) Ltd. & Ors. vs. K. L. Anand (1998) 230 ITR 522 (Del) at p. 527-528 :
“The word ‘deposit’ as pointed out by the Madras High Court in V. Balakrishnudu vs. Narayanaswamy Chetty (1914) 24 IC 852 is derived from the latin depositum, a technical word used in the Roman law of bailment for a bailment of a specific thing to be kept for the bailor and returned when wanted, as opposed to commodatum where a specific thing is lent to the bailee to be used by him and returned. In popular language commodatum is translated by the word ‘loan’ and the distinction between deposit and loan is this : that a deposit is to be kept by the depositee for the depositor and the loan is to be kept by the borrower for himself. Thus I deposit my hat in the cloak room. My hat is not to be used by the depositee, but is to be kept for me and returned to me on my demand; but I lend my money to a friend and he can do what he likes with it as long as he returns it to me either on demand or at some specified time. It may be, as observed by Sir Walter Schwabe when Chief Justice of the Madras High Court in Kishtappa Chetty vs. Lakshmi Anand AIR 1923 Mad 578 that Art. 145 covers more than the depositum of Roman law, and his Lordship observed that the framers of the Indian Limitation Act ‘meant to use simple and plain language’, but, I take this to mean that the word ‘deposit’ is used in the ordinary sense of the word in the English language, and as far as I am aware the word ‘deposit’ does not cover a transaction of the nature of a loan. The transaction that we have to consider is a loan. The plaintiff lent the defendant these ornaments to be used by the latter in a religious procession. There was no question of trust or quasi-trust. It was a mere loan for the benefit of the borrower and in my opinion Art. 145 has no application.”
19. Adverting to the alternate argument, the learned Departmental Representative submitted that all the amount accrued till date of payment will come within the ambit of accumulated profits. The computation of the amount of deemed dividend is to be made on the basis of company’s accumulated profits on each day a loan or advance to the assessee was made. Reference was made to the decision of the Hon’ble Bombay High Court rendered in the case of CIT vs. Mrs. Maya B. Ram (1987) 162 ITR 460 (Bom).
20. We have heard the rival submissions in the light of material placed before us and precedents relied upon. Sec. 2(22)(e) of the Act contemplates a fiction. By this fiction dividend includes any payment by a closely-held company by way of advance or loan to a shareholder, being a person, who is the beneficial owner of the shares holding not less than 10 per cent of the voting power, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which a company in either case possesses accumulated profits. Applying the parameters laid down in the definition, loan can be deemed to be dividend, to the extent that the company has at the date of the payment “accumulated profits”. The companies to which s. 2(22)(e) of the Act applies includes, inter alia, companies in which majority of the voting power lies in the hands of the persons other than the public. These companies are controlled by group of persons allied together and having the same interest. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. When the legislature realised that though money was reasonably available with the company in the form of profits, those in-charge of the company deliberately refused to distribute it as dividends to the shareholders, but adopted the device of advancing the said accumulated profits by way of loan or advance to one of its shareholders, it was plain that the object of such a loan or advance was to evade the payment of tax on accumulated profits. Sec. 2(22)(e) was enacted for curing this mischief.
21. Loan means “a lending; delivery by one party to and receipt by another party of sum of moneys upon agreement, express or implied, to repay with or without interest. For a loan there must be a lender, a borrower, a thing loaned for use, as well as a contract between the parties for the return of the thing loaned. A loan contracted no doubt creates a debt, but there may be a debt without contracting a loan. In a loan the mind and intention of the two parties, the lender and the borrower must be ad idem.” The expression “advance” means something which is due to a person, but which is paid to him ahead of time when it is due to be paid. This view was taken in the case of CIT vs. K. Srinivasan (supra). In the Dictionary of Accounts by Eric L. Kohler (5th Edn.), the expression “advance” was defined as payment of cash or the transfer of goods for which accounting must be rendered by the recipient at some later date.
22. Loan and advances could only be considered “deemed dividend” for the purpose of s. 2(22)(e). It is, therefore, sine qua non, to ascertain the correct nature of the payments. In the present case the assessee-company received application money for the allotment of shares. The question arise whether the amount of application money pending allotment could be construed to be loan or advance so as to attract the provisions of s. 2(22)(e) of the Act.
23. Adverting to the facts of the present case, we find that Rs. 26,00,000 was paid towards the “share application money” by M/s. HSPL which was a closely-held company. There is nothing on record to indicate that application money was received or allotment of shares was made contrary to the provisions of Companies Act, 1956. The amount was reflected as such in the balance sheet. Accounts were prepared perfectly in accordance with the norms set out under the Companies Act, 1956. These were filed with the Registrar of Companies. This amount was adjusted on 25th April, 1996, when the shares were allotted. The accuracy of the accounts was not challenged. As such accounts could be taken as, prima facie proof of the entries and the correctness thereof. There is absolutely nothing on record to indicate that the purpose of the assessee in accepting the share application money was to defraud the Revenue. There cannot be any presumption without any basis. Sec. 2(b)(ii) of the Companies (Acceptance of Deposit) Rules, 1975 prescribes that deposit means any deposit of money which includes any amount borrowed by a company, but does not include any amount received by way of subscription to any shares, stock/bonds and debentures.
24. In the case of Baidya Nath Plastic Industries (P) Ltd. (supra). Hon’ble High Court stressed on the aspect of user. How the amount was used. What was the purpose of giving the amount. It is nowhere said that the amount received on share application money can be considered as loan. Department considered the amount as loan, not because it was found to be contained the character of loan, but because of the relation (closely-held company) of the assessee with the applicant. It was deemed as loan. Here the mistake was committed. It is to be ascertained as loan only then it can be deemed as dividend. Deeming provision cannot be applied while ascertaining the true nature of the transaction. But when the transaction is found to be of the nature of loan and advances, deeming provision can be invoked. In other words, s. 2(22)(e) requires the determination of two factors viz., whether the payment is loan, etc. and whether at the date when the payment is made there were “accumulated profits” and that these two factors are to be co-related and the result must be ascertained at the date of each such payment. The chief ingredient of s. 2(22)(e) is that one should be shareholder on the date the loan was advanced to him. Where such ingredient is not established, the advance could not be taken as deemed dividend under s. 2(22)(e) of the Act.
25. It is 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. It will not be given a wider meaning than what it purports to do. Law dealing with fiction relates to that branch of jurisprudence which should be narrowly watched, zealously regarded and never to be pressed beyond its true limits.
26. Taking into consideration the entire conspectus of the case, we are of the opinion that the receipt of Rs. 26,00,000 from M/s. Hoovar Services (P) Ltd. was in the nature of share application money. It cannot be construed loan or advance. As such, the case of the assessee falls beyond the ken of s. 2(22)(e) of the Act.
27. Coming to the alternate plea, we hold that advances to the extent of accumulated profits could only be treated as loan within the meaning of s. 2(22)(e) of the Act. In the present case, accumulated profits amounted to Rs. 4,65,168 only. Since the main question was decided in favour of the assessee, this ground has become infructuous.
28. We therefore, direct the AO to delete the addition.
29. In the result, the appeal of the assessee, stands allowed.