The main legal point established in the judgment is the requirement for the revenue to establish a direct nexus between the funds of the company and the loan advanced to the shareholder to invoke the provisions of Section 2(22)(e) of the Income Tax Act, 1961.

S. Ravindra Bhat, J. (Open Court):

1. The question of law urged by the revenue in this appeal (and the writ petition) is:

“Whether the amount of Rs.1,84,19,305 was deemed dividend in the hands of the assessee under the provisions of Section 2 (22) (e) of the Income Tax Act, 1961?”

2. The assesse was managing director of Sahara India Savings and Investment Corporation Ltd. (hereafter "SISICOL") during assessment year (AY) 1992-93; he was also a partner of M/s. Sahara India (hereafter referred to as "the firm"). In terms of an agreement dated August 17, 1987, the firm was to act as an agent to promote, conduct, introduce and secure business under SISICOL’s schemes. The firm -in tune with its contractual obligations, had to remit Rs.26,24,12,222/- on 31-03-1992, which it had collected and was payable to SISICOL. Between 01-04-1991, and 31-03-1992, the firm advanced Rs.1,88,96,202/- to the assessee. The Assessing Officer (AO) held that the amount was a loan from SISICOL to the assessee through the use of the company's agent, the firm, which was a “conduit” and a device adopted to bypass application of Section 2(22)(e) of the Income-tax Act, 1961 (hereinafter, referred to as “the Act”). The amount of Rs.1,88,96,202/- being a loan out of SISICOL’s accumulated profits to the assessee-shareholder was treated as "deemed dividend" under section 2(22)(e) of the Income-tax Act (“the Act”) and added to the assessee’s income.

3. On appeal, the learned Commissioner of Income-tax (Appeals) – hereafter “CIT (A)” held that SISICOL had advanced sums to a concern (the firm) in which the assessee had a substantial interest. Taking note that Section 2(22)(e) as applicable after its amendment w.e.f. from 31-05-1987, for AY year 1988-89, included concerns in which shareholder is a member or partner, the CIT (A) upheld the addition made.

4. The assessee carried the matter in appeal to the ITAT. There was a divergence of views of the two members who originally heard the appeal; the Judicial Member held that Section 2(22)(e) was inapplicable; the Administrative Member held to the contrary and that the provision was attracted to the circumstances of the case.

5. The Judicial member noted that the assessee was managing director of SISICOL, which had many deposit schemes and 290 units or branches to aid its operations. He was also a partner of the firm, which entered into an understanding with SISICOL on 17.8.1987, to conduct, promote, introduce and secure business through various schemes for the company. The firm also collected amounts through several schemes of SISICOL. Referring to the schemes, and the terms of the 1987 agreement, it was noted that there was no time limit stipulated for remittance of amounts collected by the firm on behalf of SISICOL to it. The amounts were to be collected in the ordinary course of business. The affidavit of Shri O. P. Srivastava dated 06.07.1996 was also relied on; it stated that such sums collected and retained before remission by firm to the company, SISICOL, constitute neither “loan” nor “advance”.

6. The Judicial Member then considered the question whether credit balances lying with the firm could be treated as loan or advance from the company. It was held that, in facts and circumstances of the case, the amount required to be remitted by the firm could be branded as a trade debt and not as loan or advance. Reference was made to the Chamber’s Dictionary meaning of the term “loan”. The observations of the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 were relied upon to say that a loan of money undoubtedly results in a debt but every debt does not involve a loan. The distinction between a loan and a debt and the pre-requisite for a loan – being the existence of a lender, a borrower, a thing loaned for use and a contract between the parties for return of the thing loaned was also noticed. It was held that the dictionary meaning of term ”advance” was premised on an outgoin