I. T. A. Nos. 2768 and 2706/Del/2012

G. D. Agrawal (Vice-President) And A. T. Varkey (Judicial Member)

B. R. R. Kumar For the Petitioner :
Salil Kapoor, Sanat Kapoor For the Respondent :

ORDER

The order of the Bench was delivered by

A. T. Varkey (Judicial Member)- These cross-appeals, at the instance of the Revenue and the assessee, are filed against the order of the Commissioner of Income-tax (Appeals)-XI, New Delhi dated March 14, 2012, for the assessment year 2008-09.

2. First we take up the Revenue's appeal being I. T. A. No. 2768/Del/2012.

3. The solitary ground taken by the Revenue is against the deletion of addition of Rs. 1,03,12,934 made by the Assessing Officer under section 2(22)(e) of the Income-tax Act, 1961 (hereinafter "the Act").

4. The assessee is engaged in the business of civil construction. During the year under consideration, the return of income declaring total income of Rs. 35,26,578 was filed on September 30, 2008. The case was processed under section 143(1) of the Act and subsequently, the same was selected for scrutiny. During the course of hearing, the Assessing Officer noticed certain facts and based on that, a show-cause notice along with questionnaire under section 142(1) dated July 8, 2010, was issued. The assessee filed the reply to the said notice. After considering the reply of the assessee, the Assessing Officer found certain claims of the assessee not tenable.

5. Out of those certain claims, one of the issues is against the addition of Rs. 1,03,12,934 under section 2(22)(e) of the Act, which is the dispute in the present appeal. The facts relating to this issue are as follows.

6. The Assessing Officer vide show-cause notice dated December 9, 2010, asked the assessee to explain as to why loan of Rs. 1,03,12,934 taken from M/s. Sindhu Trade Links Ltd. (hereinafter "STLL") be not treated as deemed dividend in view of the facts that directors of the assessee- company are substantially interested in the said companies and also some of the shareholders are common in both the companies. In response, the assessee furnished the facts stating that section 2(22)(e) is not applicable to the assessee-company, which are reproduced hereunder :

(i) M/s. STLL is a NBFC registered with the RBI (proof of being NBFC is enclosed herewith). Section 2(22)(e) of the Income-tax Act, 1961, is not applicable to loan or advance given by a company having primary business as lending business.

(ii) M/s. STLL is a listed company on the Delhi stock exchange and Jaipur stock exchange. Proof of being listed is enclosed herewith. Section 2(22)(e) of the Income-tax Act, 1961, is applicable only in respect of closely held companies.

(iii) M/s. Sindhu Realtor Pvt. Ltd. is not holding more than 10 per cent. shares in M/s. STLL. (copy of shareholding of M/s. Sindhu Trade Links Ltd. is enclosed herewith). Hence section 2(22)(e) of the Income-tax Act, 1961, is not applicable.

(iv) There is no single shareholder holding more than 10 per cent. in M/s. STLL, hence question that a shareholder holding more than 10 per cent. in M/s. STLL, holding more than 20 per cent. in the assessee-company does not arise. Hence section 2(22)(e) of the Income-tax Act, 1961, is not applicable.

7. The assessee, therefore, submitted before the Assessing Officer that in view of the above, provisions of section 2(22)(e) of the Income-tax Act, 1961, shall not be invoked. Further, as regards the assessee's submission that STLL is a public limited company and is in the category of NBFC, the Assessing Officer observed that it has no merit on the issue because of the following reasons :

(i) "Sindhu Trade Links Ltd." (STLL) is a limited company only because its paid-up share capital base is more than Rs. 5 crores but it is not a widely held public limited company in which the public are substantially interested, as envisaged in section 2(22)(e) of the Income-tax Act, 1961. Provisions of section 2(22)(e) of the Act is being reproduced for better understanding :

(22) "dividend" includes-

(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) (made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being 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) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) 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 ;

(ii) Although the STLL has claimed that the equity shares of the company is listed on Delhi Stock Exchange and Jaipur Stock Exchange, but in para 13 of the director's report itself, it has also been mentioned that these shares were not traded during the year under review.

(iii) As per para 5 of the director's report, the company has not invited or excepted any public deposit within the meaning of sections 58A and 58AA of the Companies Act, 1956 and section 45-I(bb) of the Reserve Bank of India Act, 1934, during the year under review. The company does not hold any public deposit as on date and will not accept the same in future without the prior approval of the Reserve Bank of India in writing.

(iv) The authorised representative vide letter dated December 13, 2010, has furnished shareholding pattern of STLL as on March 31, 2008. It is seen from there that though the authorised representative submitted that the STLL is a public limited company, but has failed to substantiate that it is a public limited company in which public are substantially interested. As per the shareholding pattern filed by the authorised representative it is found that there were in total 279 shareholders of the STLL as on March 31, 2008. There are 5 directors-cum-shareholders/directors of the STLL who are also partners or substantial shareholders or directors in various companies/firms including the assessee-company. These directors/share holders are-

1. Shri Rudra Sen Sindhu
2. Shri Abhimanyu Sindhu
3. Shri Vir Sen Sindhu
4. Shri Dev Suman Sindhu
5. Shri Vrit Pal Sindhu

As regards the assertion of the authorised representative that the company STLL is a public limited company, it is being demonstrated here with that this is not "a company in which public are substantially interested" because-

This is a company in which shares have not been traded by the public at large ;

a. Although the authorised representative has claimed that the STLL is a listed company at Delhi Stock Exchange and Jaipur Stock Exchange but once again it may be pointed out here against the STLL that the onus was on the assessee-company/authorised representative that the STLL continues to be listed at the stock exchanges and it was not delisted or not suspended-it is so because the auditor/directors themselves have stated in the annexures/notes that there was no trading in the shares of the company on stock exchanges.

b. Even though as on March 31, 2008, there were 42,50,000 number of shares of this company and even though, there were 279 share holders of this company, but major quantity of shares were held by Mr. Sindhu and his family members/associates.

8. The Assessing Officer observed that out of five directors, Sindhu and his family members themselves control nearly 59 per cent. shareholdings of the STLL and in this situation, it could not be accepted that the STLL was a public company where public was substantially interested. He further observed that the percentage of shares of other directors and their family members would again go on to prove that it was not a company in which public are substantially interested, rather it was a company which was closely held by the promoter Mr. Sindhu and his family members and therefore the saving clause (ii) of section 2(22) of the Act would not be applicable and come to the rescue of the assessee-company insofar as invoking section 2(22)(e) was concerned. According to the Assessing Officer, the onus was on the assessee to prove that STLL was a widely held public limited company in which the public were substantially interested and the onus was also on the assessee-company that the shares of the STLL were widely traded and its shares were available in the open market for purchase and sale by any common man/person and held that the assessee failed to discharge its onus and the Assessing Officer countered the submissions of the assessee that the STLL was an NBFC and therefore the deeming provision of section 2(22)(e) would not be applicable by giving the following reasons :

"The Income-tax Act provides certain exceptions with respect to the provision of deemed dividend. This has been laid down in saving clause (ii) of section 2(22) of the Income-tax Act, which has been reproduced herewith-

but 'dividend' does not include-

(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.

But so far as this assessee is concerned, it has failed to substantiate that the transactions by the STLL in the form of advances or loans were 'in the ordinary course of its business'. The onus was cast on the assessee-company to substantiate that the loans and advances received by it from the group company or associates company (STLL), in which common directors are beneficial shareholders, were in the ordinary course of business, i.e., advancing of loans and advances on interest of the payer company.

Same is the case of PHDL. The assessee has failed to prove that the advances were given in the normal course of business."

9. Accordingly, relying on various authorities and factual matrix, the Assessing Officer held that the advances/loans received by the assessee were liable to be taxed in the hands of the assessee as deemed dividend as per section 2(22)(e) read with section 56 and section 115-O of the Act and Rs. 1,03,12,934 was added back to the total income of the assessee.

10. Aggrieved, the assessee went in appeal before the learned Commissioner of Income-tax (Appeals) who deleted the addition by observing as under :

"Ground Nos. 4, 5, 6 and 7 : Addition of Rs. 1.03 crores under section 2(22)(e) of the Income-tax Act, 1961, being inter corporate deposit received from company holding NBFC certificate.

The Assessing Officer made the above addition on account of loans received from two companies, holding them to be associated companies as well as companies in which public are not substantially interested. The Assessing Officer has held that even though the companies were listed companies they were not ones in which the public were substantially interested since the shares were not traded on the stock exchange and/or the number of shareholders are limited. The Assessing Officer seeks to lift the 'corporate veil' to uncover the mechanics of this transaction. The major part of the assessment order deals with this addition, however after a careful perusal, reproducing the same was not found called for since the material issue is whether section 2(22)(e) of the Act is applicable in this case.

b. The appellant has submitted extensive arguments on this issue. Again, the crucial issue is found to be whether the lender companies are ones in which the public are substantially interested.

Section 2(22)(e) : Not applicable to widely held companies :

Section 2(22)(e) uses the words : any payment by a company 'not being a company in which the public are substantially interested' meaning thereby that section is applicable only to companies which are commonly known as closely held companies.

Section 2(18) of the Act reads as under :
'(18) "company in which the public are substantially interested"-A company is said to be a company in which the public are substantially interested-

(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely :

(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ;'

It was vehemently argued that these conditions are fulfilled by the lender companies and hence they are companies in which the public are substantially interested, and hence the deeming provisions of section 2(22)(e) of the Act cannot apply to the loans in question.

c. The issue has been carefully perused, and the Assessing Officer's action in not considering the lender companies as those in which the public are substantially interested is found incorrect. In fact what is relevant to this issue is quoted in the assessment order itself as, 'it will be well to recall the words of Rowlatt J in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 64 at page 71, that : '. . . in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used'. Even while quoting this in the assessment order the Assessing Officer seeks to go beyond the intention of the Act. Especially in deeming provisions, the interpretation cannot be stretched to the disadvantage of the assessees. In this case the Assessing Officer was not required to go beyond the definition in section 2(18) of the Act. Even the plethora of case laws quoted by the Assessing Officer are found wanting on relevance to the present issue. The addition of Rs. 2.70 crores (figures wrongly typed-the exact figure is Rs. 1.03 crores) on account of deemed dividend is therefore deleted. This ground is ruled in favour of the appellant."

11. The Revenue, being aggrieved, is in appeal before us on the aforesaid issue.

12. The learned Departmental representative relied on the order of the Assessing Officer and submitted that loan of Rs. 1.03 crores taken from M/ s. Sindhu Trade Links Ltd. (STLL) was rightly treated as deemed dividend in view of the facts that directors of the assessee-company are substantially interested in the said company and also some of the shareholders are common in both the companies. He further submitted that out of five directors, Sindhu and his family members itself controls nearly 59 per cent. shareholdings of the STLL and in this scenario, it could not be accepted that the STLL was a public company where public was substantially interested. He further submitted that the percentage of shares of other directors and their family members would again go on to prove that it was not a company in which public are substantially interested, rather it was a company which was closely held by the promoter Mr. Sindhu and his family members and therefore the saving clause (ii) of section 2(22) of the Act would not be applicable and come to the rescue of the assessee- company insofar as invoking section 2(22)(e) was concerned. The learned Departmental representative submitted that the assessee failed to prove the onus that STLL was a widely held public limited company in which the public were substantially interested and that the shares of the STLL were widely traded and its shares were available in the open market for purchase and sale by any common man/person. He also submitted that the assessee has failed to prove that the STLL was an NBFC, therefore, the deeming provision of section 2(22)(e) would be applicable. He, therefore, submitted that the loans are nothing but deemed dividend and is liable to be taxed in the hands of the assessee and in this regard, he made reference to the various judicial pronouncements relied upon by the Assessing Officer.

13. The learned authorised representative for the assessee reiterated the submissions made before the learned Commissioner of Income-tax (Appeals) and for the sake of clarity, the same are reproduced hereunder :

"Ground III-Amount involved is Rs. 1,03,12,934
The appellant-company has received inter corporate deposits of Rs. 1.03 crores from M/s. Sindhu Trade Links Ltd. (STLL) during the year under assessment.

The appellant-company was show-caused vide notice dated December 9, 2010, during the course of assessment proceedings as follows :

'It is seen from the details filed that the assessee-company has taken loan of Rs. 1,03,12,934 from Sindhu Trade Links. It is also noticed that directors of the assessee-company are substantially interested in both the above named company. It is also noticed that some shareholders are common to both companies. In view of these facts, you are being show caused as to why not provision of section 2(22)(e) of the Act be invoked.'

It was submitted vide letter dated December 13, 2010 (copy enclosed) that STLL is a NBFC certificate holding company and also stock exchange listed company. Proof of being NBFC and listed companies was submitted during the course of assessment proceedings.

It was also pleaded while submitting the shareholding charts of STLL that the appellant-company is not holding shares exceeding 10 per cent. of M/s. Sindhu Trade Links Ltd.'s total shareholding. Also none of the shareholder holding more than 10 per cent. in STLL is holding 20 per cent. shares in the appellant-company. Hence provisions of section 2(22)(e) of the Income-tax Act, 1961, are not applicable.

However the learned Assessing Officer chose to treat the ICD received as deemed dividend in the hands of the appellant-company.

My kind attention has been drawn to section 2(22)(e) of the Income-tax Act, 1961, which is reproduced as under :

2. (22) 'dividend' includes-
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as represent ing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being 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) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (here after in this clause referred to as the said concern) 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 ;

But 'dividend' does not include-
(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;

The assessee-company submitted the interpretation of the section point-wise vis-a-vis observation of the learned Assessing Officer as follows :

1. Section 2(22)(e) : Shareholding conditions not applicable Section 2(22)(e) of the Income-tax Act, 1961, is attracted when a shareholder having shares not less than 10 per cent. receive any advance or loan from such company or any concern receive any advance or loan from such company in which a shareholder holding more than 10 per cent., also holds substantial interest, i.e., 20 per cent. shareholding in the concern who received the loan.

From the balance-sheet as on March 31, 2008-Investment schedule of the assessee-company (copy enclosed) and shareholding charts of STLL and PHDL, it is clear that the assessee-company is not holding any shares in these companies and hence in no way the amounts can be taxed in the hands of assessee-company.

Further note from shareholding charts of STLL that there is no shareholder holding 10 per cent. in these companies, who is further holding 20 per cent. in the assessee-company.

Hence section 2(22)(e) of the Income-tax Act, 1961, is not applicable since shareholding condition, mandatory for applicability of section 2(22)(e) of the Income-tax Act, 1961, are not satisfied.

Section 2(22)(e) applicable in the hands of shareholder :

Neither the appellant-company is shareholder in these companies nor there is a shareholder holding 10 per cent. in these companies, is holding 20 per cent. in the appellant-company. Hence addition made in the hands of appellant-company, should not have been made.

Section 2(22)(e) : Not applicable to widely held companies :

Section 2(22)(e) uses the words : any payment by a company 'not being a company in which the public are substantially interested' meaning thereby that section is applicable only to companies which are commonly known as closely held companies.

Section 2(18) of the Act reads as under :
(18) 'company in which the public are substantially interested'-A company is said to be a company in which the public are substantially interested-

(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely :-

(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder ;

It was submitted before the learned Assessing Officer that STLL is public limited company through following evidences which have been discussed by the learned Assessing Officer at pages 10 to 13 in the assessment order :

(a) Listing evidences of being listed on Delhi Stock Exchange and Jaipur Stock Exchange.
(b) Shareholding pattern as on March 31, 2008, of the assessee- company.
Stand taken by the learned Assessing Officer :

a. The learned Assessing Officer has observed on page 10-paras (ii) and (iii) that for STLL, in the director's report, it has been stated that shares were not traded during the year and also further stated that company has not accepted the public deposits.

b. The learned Assessing Officer observed at page 11 that STLL has claimed that it is a listed company but no evidence has been provided regarding that it continues to be listed at stock exchanges and has not been suspended or de-listed.

c. The learned Assessing Officer observed at page 13 that nearly 59 per cent. shareholding is controlled by its directors, family members.

Hence with the above allegations, the learned Assessing Officer remarked that the STLL is not a company in which 'public is a substantially interested'.

Submission before your good self against the learned Assessing Officer's observation :
The assessee-company replied to the observations made by the learned Assessing Officer point-wise :

a. Trading of shares and acceptance of public deposit are no parameters to check whether a company is a widely held company or not. It is section 2(18) definition which should prevail while assessing whether a company is a company, in which public is substantially interested or not.

b. The allegation of the learned Assessing Officer that the appellant- company has failed to evidence that STLL and PHDL continues to be listed at stock exchanges and has not been suspended or de-listed, is not correct.

As an evidence of being listed on Delhi Stock Exchanges, the appellant-company submitted the annual listing fee bills raised by the respective stock exchanges on the STLL. Proof of payment of listing fee for both the stock exchanges were submitted during the course of assessment proceedings vide letter date December 15, 2010. Had the STLL was been suspended or delisted, stock exchanges would not have raised the annual listing fee bills.

Further as per information available in public domain on Delhi Stock Exchange website at http://www.dseindia.org.in/sitepages/list companies.php it can be seen that STLL is a listed company on Delhi Stock Exchange. Since the list involve 2830 companies, the assessee- company submitted the relevant extract showing evidence in regard to STLL only.

Further submitted that there was no adverse material on record or brought on record by the learned Assessing Officer to support her contentions regarding STLL. Hence the allegations made by the learned Assessing Officer is baseless, arbitrary and made in a reckless manner.

c. Controlling 59 per cent. shareholding in a company by promoter group does not mean that the company is a closely held company. If it is so then almost 95 per cent. of the NSE or BSE listed companies would be treated as closely held companies. For your ready reference, shareholding pattern of NSE/BSE listed reputed companies for DLF Ltd., TATA Consultancy Services Ltd., Reliance Ltd. as on March 31, 2008 have been placed on record. The same is available in public domain on the websites of NSE and BSE.

The assessee-company submitted that from the shareholding pattern of these companies, it can be seen that promoter shareholding for these companies is much more that what is for the assessee- company. Somewhere it is hovering around 88 per cent. Still they are regarded as listed and widely held companies. So the same parameter shall be used for assessee-company also.

Further as per Securities Contracts (Regulation) Rules, 1957, rule 19(2)(b) provides following with respect to public shareholding for a listed company :

'19. Requirements with respect to the listing of securities on a recognised stock exchange.
(2) Apart from complying with such other terms and conditions as may be laid down by a recognised stock exchange, an applicant company shall satisfy the stock exchange that :

(b) At least 10 per cent. of each class or kind of securities issued by a company was offered to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted subject to the following conditions :
(a) minimum 20 lakhs securities (excluding reservations, firm allotment and promoters contribution) was offered to the public ;

Provided that if a company does not fulfil the conditions, it shall offer at least 25 per cent. of each class or kind of securities to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted.'

Since the assessee-company is in compliance of this rule, allegation that controlling 59 per cent. of the shareholding in the assessee- company would take away the benefit of listing, is purely baseless.
Section 2(22)(e) : Not applicable on inter corporate deposits

Provisions of section 2(22)(e) of the Income-tax Act, 1961, are not applicable to inter corporate deposits. They are applicable to payments by way of advance or loans only. Reliance in this regard has been placed on Bombay Oil Industries Ltd. v. Deputy CIT [2009] 28 SOT 383 (Mumbai) (copy placed on record) wherein the hon'ble Income-tax Appellate Tribunal, Mumbai, has held that since there is a clear distinction between the words advance or loan and inter corporate deposits and hence deeming provisions of section 2(22)(e) of the Income-tax Act, 1961, cannot be applied to inter corporate deposits.

Section 2(22)(e) : Not applicable to loan or advance by non-banking finance companies

Section 2(22) of the Income-tax Act, 1961, has an exclusion clause that dividend does not include where advance or loan has been given to shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.

The assessee-company submitted that the appellant-company is not a shareholder in the STLL, further note that the STLL is a non- banking finance company and registered with the Reserve Bank of India since 1998 in category of loan investment company and engaged in activities of shares sale, financial activities, loan syndication activities and hypothecation activities. Proof of being NBFC companies was submitted during the course of assessment proceedings vide letter dated December 13, 2010.

Further the profit and loss account of the STLL as on March 31, 2008 (copies of balance-sheet and profit and loss account are enclosed herewith) shows that STLL has earned following income out of NBFC activities :

The above details shows that STLL is perusing NBFC activities and inter corporate deposit has also been advanced in the ordinary course of activities."

14. We have heard both sides and perused the material on record. The only dispute is whether the lender companies which has made deposits (inter corporate deposits (ICD)) will fall under the deeming provision under section 2(22)(e) of the Act or not. We find that section 2(22)(e) excludes public company "not being a company in which the public are substantially interested". Section 2(18) of the Act defines companies in which the public are substantially interested. As per the said definition, a company is said to be a company in which the public are substantially interested, if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956) and the conditions specified either in Item (A) or in item (B) are fulfilled, namely :

"(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder."

15. We find that the assessee before the Assessing Officer and the learned Commissioner of Income-tax (Appeals) has submitted that both these companies are public limited companies and they have produced evidences to substantiate that the STLL is a listed company at the Delhi Stock Exchange and Jaipur Stock Exchange and also the shareholding pattern as on March 31, 2008. And that section 2(22)(e) is not applicable to loans or advances by non-banking finance companies (NBFC). In order to substantiate that STLL is NBFC, it was submitted that they are registered with the Reserve Bank of India since 1998 in category of loan investment company and engaged in the activities of shares sale, financing activities, loan syndication activities and hypothecation activities. It is a well-settled principle of law that deeming provision has to be interpreted strictly and it cannot be stretched to more than that for which the deeming provision can be literally interpreted. Nothing can be added or implied while interpreting a deeming provision. One can only look at the language used. Therefore, we concur with the learned Commissioner of Income-tax (Appeals) that the lender company, i.e., M/s. STLL is a public limited company and so the loan/advance/ICD given to the assessee does not fall in the ken of section 2(22)(e) and moreover, the lender company is a NBFC which is also excluded from the said deeming provision, therefore, we do not find any merit in this ground of appeal and we uphold the learned Commissioner of Income-tax (Appeals)'s order and dismiss this ground.

16. In the result, the appeal filed by the Revenue is dismissed.

17. Now, we take up the assessee's appeal being I. T. A. No. 2706/Del/2012. The effective ground taken by the assessee is against confirming the disallowance of total interest debited to profit and loss account of Rs. 16,15,903 in view of the fact that the assessee has given share application money of Rs. 9.86 crores which is not earning any interest income and the assessee has no surplus funds without appreciating that the assessee-company is available with interest-free shareholder funds of Rs. 34.46 crores.

18. The Assessing Officer observed that as per the Schedule "E" of the balance-sheet which refers for current assets, loans and advances, the assessee had shown an amount of Rs. 14,03,24,434. According to the Assessing Officer, a perusal of the bifurcation of this amount showed that the assessee had given advance of Rs. 9,86,87,800 in the garb of share application money to various entities. He asked the assessee to provide details of the same and to confirm whether shares had been allotted in its name or not and he further show caused as to in the case of non-allotment of such shares why not an appropriate rate of interest be charged thereupon in view of the facts that it is bearing an interest burden of Rs. 16,15,903 apart from bank charges of Rs. 47,906. He further observed that the assessee had made a veiled attempt to show that it was not bearing any interest burden due to amount paid as share application money. After observing the assessee's contention and the details furnished, the Assessing Officer found that the assessee had given loans and advances of Rs. 14,03,24,434 and out of which, an amount of Rs. 9,86,87,800 had been expressly shown as loans and advances in the balance-sheet although in the latter details the assessee had shown it in the garb of share application money but it had failed to discharge its onus that these advances were in the ordinary course of business of the assessee-company. The Assessing Officer observed that since the assessee was not in the business of finance and it was also not a NBFC company it could not be said that it had advanced this much huge amount in the ordinary course of business. He further opined that the assessee was in the business of civil construction where money was very much required and further, the assessee had not proved that the money which it advanced in the form of/in the garb of share application money were actually allotted to the assessee. He held that the assessee had failed to substantiate as to whether the money advanced in the garb of share application money would give any income to the assessee in the ordinary course of business or not. He further observed that this transaction was directly in the nature of loans and advances and the appellant-company had not shown any return of income/interest on this amount. Further, as per the profit and loss account, the assessee had debited an amount of Rs. 16,15,903 as interest on loans and Rs. 47,906 as bank charges. The Assessing Officer, however, observed that keeping in line with the various hon'ble courts, interest could be disallowed from the profit and loss account to the extent of quantum of fund diverted by the assessee to other persons and where no interest was charged or interest was charged at lower rate of interest. Accordingly, the Assessing Officer was of the opinion that interest was disallowable for diversion of fund of Rs. 9,86,87,800 and if the same was calculated at the rate of 18 per cent. per annum that would come to Rs. 1,77,63,804. But, the Assessing Officer opined that since the assessee was bearing interest burden of Rs. 16,15,903 only, the disallowance could not be made more than that. He also declined the submission of the assessee that it was not bearing any interest burden due to the amount paid as share application money because the fact remained that the appellant had borrowed interest bearing loans and had debited Rs. 16,15,903 in the profit and loss account. Accordingly, the Assessing Officer ordered to disallow the interest debited to the profit and loss account and made an addition of Rs. 16,15,903 to the income of the assessee.

19. Aggrieved, the assessee went in appeal before the learned Commissioner of Income-tax (Appeals) who confirmed the action of the Assessing Officer on this issue.

20. The learned authorised representative reiterated the submissions made before the learned Commissioner of Income-tax (Appeals) and the relevant submissions made are reproduced below for the sake of clarity :

"The assessee-company submitted that the learned Assessing Officer has made the following allegations :

Allegation No. 1 :
The assessee-company has failed to discharge its onus that advances were in ordinary course of business of the assessee- company. (page 3 of the assessment order)

Reply to allegation :
Being private limited company, there is no bar on to it that it cannot give advances in the form of share application money or advances to other parties to pursue to strategic goals by making investments in other companies.

Allegation No. 2
The assessee-company has failed to substantiate as to whether the money advanced in the garb of share application money will give any income to the assessee-company in the ordinary course of business. The assessee-company has not shown any return on income/interest on these amounts. (page 3 of the assessment order).

Reply to allegation :

The investment are generally made to gain in strategic manner in long term, out of which capital gain will accrue and will be taxed at prevailing rates of that particular time. Investments are not like advances which will start earning interest from the day one. Each and every financial product has its own standing in terms of return on it. All over the world, people make investments in equities (be it quoted one or unquoted share) to gain in longer term or to earn dividends. Also they are considered as the best financial vehicle for earning of people who has long-term horizon for making investments.
Though in the case of appellant-company, no allotment was made but this is purely normal. Even in the caseof IPDs, people do get back their money back due to non-allotment of shares.

Also there is no binding provision in SEBI or Companies Acts for non-listed companies to pay interest if no share allotment has been made in reasonable time. Merely the fact that no income has accrued, is that mean that transaction was for non-business purposes ?

Hence the allegations of learned AD are purely baseless and arbitrary that money invested was not in ordinary course of business and has not earned income for the year.

Allegation No. 3
The other allegation made by the learned AD is of diversion of funds made hence he has disallowed interest at 18 per cent. of Rs. 9,86,87,800 though restricted to Rs. 16,15,903.

Reply to the allegation :
As per the above submission which were submitted before the learned Assessing Officer in the course of assessment proceedings also, it is pretty clear that the appellant-company has sufficient free funds and it is free to use them at his own discretion according to needs.

It is not open to the learned Assessing Officer to assess what the need of the appellant-company is ? It is a decision which is normally entrusted by the shareholders of the company to its faithful management who take the decisions depending upon the financial needs, aspirations, goals or objects set for the company. Nobody can dictate terms to a appellant as to how to conduct the affairs.

Allegation No. 4
Another allegation made by the learned AD was that since the assessee-company has borrowed interest bearing loans and has debited interest amount of Rs. 16,15,903 to the profit and loss account, this fact in itself is a testimony that the assessee-company had no surplus fund in so far as to advance non-interest bearing funds to other companies.

Reply to the allegation
The shareholder fund position as furnished above evidence the fact that the appellant-company was available with more than sufficient free funds for use at its own discretion.

Reliance is placed on CIT v. Hotel Savera [1999] 239 ITR 795 (Mad), wherein the hon'ble Madras High Court has held that once it is established that the assessee-company is having sufficient free funds, presumption would always be made that advances to third parties have been made out of own free funds.

Further the assessee-company submitted that where there are both borrowed funds as also interest-free funds, discretion lies in the hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal). It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC).

Further reliance in this regard is placed on CIT v. Reliance Utilities and Power Ltd., I. T. A. No. 1398 of 2008 (Mumbai High Court) pronounced on January 9, 2009 [2009] 313 ITR 340 (Bom). (Copy of judgment placed on record).

Hence the assessee-company pleaded disallowance made of interest shall be deleted since the appellant-company has utilised borrowed money for the purposes of earning income and interest-free funds of Rs. 34.46 crores means they are in abundance considering the amount of share application money of Rs. 9,86,87,800 paid by the appellant- company."

21. In view of these submissions, the learned authorised representative pleaded that the orders of the authorities below be set aside on this issue and the appeal of the assessee be allowed.

22. On the other hand, the learned Departmental representative relied on the orders of the authorities below.

23. We have heard both parties and perused the record. We find that the Assessing Officer has disallowed the interest debited to profit and loss account of Rs. 16,15,903 for the reason that the assessee-company has given advance/share application money of Rs. 9.86 crores which is not yielding any interest income and made a finding also that the assessee- company has no surplus fund since it has also borrowed funds which is bearing an interest burden of Rs. 16,15,903 apart from bank charges of Rs. 47,906. So, according to the Assessing Officer, since share certificates have not been allotted to the assessee-company, the money has been advanced in the garb of share application money and will not yield any income to the assessee in the ordinary course of business and since the company failed to show that it has yielded any interest on this amount, he was of the opinion that 18 per cent. of those diverted fund of Rs. 9,86,87,800 need to yield interest at 18 per cent. per annum which works out to Rs. 1,77,63,804. However, since the assessee is bearing interest burden of Rs. 16,15,903 only he made the disallowance only to that extent. He also noted that the fact that the assessee had taken interest bearing loans shows that the assessee does not have any surplus funds. During the appellate proceedings, the assessee's claim that it had sufficient surplus fund which is to the tune of Rs. 34.46 crores and the amount of share application money/advances paid is only Rs. 9.86 crores that works out to 28.63 per cent. of the total shareholder funds has not been taken into consideration by the learned Commissioner of Income-tax (Appeals) who has confirmed the disallowance by merely stating that till date, the shares have not been allotted to the assessee-company where the share application money has been invested as claimed by the assessee. According to the learned Commissioner of Income-tax (Appeals), the assessee has not taken any steps to get back this amount which has been invested in the assessment years 2007-08 and 2008-09 and held that it was a blatant diversion of funds under the guise of share application money. Before us, the learned authorised representative took our attention to the following facts which are revealed by perusal of balance-sheet as on March 31, 2008, which is as below :

Following is the shareholders fund position of the appellant-company as on March 31, 2008 :

24. A perusal of the above reveals that the assessee-company had sufficient funds to the tune of more than Rs. 34.46 crores whereas the share application money invested as on March 31, 2008, only at Rs. 9.28 crores which is only 28.63 per cent. of the total shareholder funds. Thus, we note that the assessee-company has sufficient free funds for making advances/investment out of its own shareholder funds without incurring any interest burden. Our attention was brought to the judgment of the hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom), wherein the judgment of the hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC) and the hon'ble Calcutta High Court in Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal) relied on, held as under (page 344 of 313 ITR) :

"16. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 (Cal) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Wool comber's case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal."

25. We find that the assessee-company had sufficient free funds and that the assessee had stated before the Assessing Officer that the borrowed funds have been used for business purposes only and not for the investment, could not be controverted by both the authorities below. The Assessing Officer erred in concluding that since the assessee-company is incurring interest expenditure so no surplus fund is available to the assessee-company is erroneous on the fact that the total shareholder fund without interest burden is to the tune of Rs. 34.46 crores and, therefore, as per the law laid down by the hon'ble apex court as noted above, we have no hesitation to delete the disallowance of Rs. 16,15,903.

26. In the result, the appeal of the assessee is allowed.

The order pronounced in the open court on this 11th day of December, 2015.