Taxation of Mobilization Advance has always been a bone of contention not only in GST but also under Service Tax Regime as well. The moot point of litigation is whether it is nature of advance or loan because if it is in the nature of advance then the liability to pay tax arises on receipt of the amount and if it is treated as a loan then there is no liability to pay tax on the receipt of said amount.
This article is an attempt to analyse the subject in greater detail and put in a perspective and reference from various decisions given under Income Tax, Service Tax and GST Regime.
Substance and real Purport of the Document and Intention of the Parties would override the Nomenclature of the Document
The litigation starts form the point since the name itself contains “advance” and prima facie since nomenclature contains “advance”, it has been treated as “advance” and thus liable to tax by the revenue. However, as has been held in following decisions as narrated below that it’s the substance of the document and intention of the parties which would override the nomenclature of the document.
a) The Supreme Court in the matter of M/S. Super Poly Fabriks Ltd vs Commissioner Of Central Excise, … on 24 April, 2008 observed that
There cannot be any doubt whatsoever that a document has to be read as a whole. The purport and object with which the parties thereto entered into a contract ought to be ascertained only from the terms and conditions thereof. Neither the nomenclature of the document nor any particular activity undertaken by the parties to the contract would be decisive.
Emphasis Supplied
b) The Patna High Court in the matter of of Nilkantha Narayan Singh vs Commr. Of Income-Tax observed that
It is the substance & not the form of the contract that should be regarded. In analysing the transaction, it is not necessary that the documents should be construed from the purely legal aspect. It is open to the High Court not merely to look at the documents but consider the surrounding circumstances so as to conclude what is the real character of the transaction.
Emphasis Supplied
c) The Madras High Court in the matter of R.Ramaiah vs Lakshmamma on 9 March, 2011, the court held that
14. All those decisions would highlight and spotlight the fact that it is not the nomenclature of a document that matters, but the real purport of the document and the intention of the parties concerned are of paramount importance.
The Madras High Court further observed that
18. The terminological inexactitude should not be the decisive factor in deciding a case and both the courts below, appropriately and appositely and that too legally construed the clauses in Ex./Ex.B1 and decided that no loan transaction or mortgage, was found embodied in Ex.A2/Ex.B1.
Emphasis Supplied
Similarly, it is a trite law that mere nomenclature of entry in the books of accounts is not determinative of the true nature of transaction as has been held in the matter of Commissioner of Income Tax Vs. India Discount Co. Ltd. 75 ITR 191 (SC), Commissioner of Income Tax Vs. Provincial Farmers (P) Ltd. 108 ITR 219 (Cal) and KCP Ltd. Vs. CIT, 245 ITR 421.
Therefore, the mere fact that the term “mobilization advance” contains the term “advance” would have no implication and the real purport and intention of the parties would have to be ascertained from the document.
Ordinary Meaning of “Loan””
a) The Bombay High Court in the matter of Dr. Fredie Ardeshir Mehta And … vs Union Of India And Others on 3 August, 1989 Equivalent citations: 1989 (3) BomCR 656, 1991 70 CompCas 210 Bom observed the ordinary meaning of loan as follows:
6. The principal and an interesting question is : What is a loan ? A loan is defined by the Oxford English Dictionary as ” a thing lent; something the use of which is allowed for a time, on the understanding that it shall be returned or an equivalent given ; esp., a sum of money lent on these conditions and usually with interest.”
It was further observed by the Bombay High Court that
9. The essential requirement of a loan is the advance of money (or of some article) upon the understanding that it shall be returned, and it may or may not carry interest.
Emphasis Supplied
The Bombay High Court provided that normal attributes of loan contain that there is an advance of money, there may or may not be interest and there is an obligation of re-payment.
Distinction between a “Loan” and “Advance”
a) The distinction between a “loan” and “advance” has been highlighted by The Delhi High Court in the matter of Commissioner of Income Tax vs Shri Raj Kumar on 14 May, 2009 wherein it was held that
“Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of re-payment. On the other hand, in its widest meaning the term advance may or may not include lending. The word advance if not found in the company of or in conjunction with a word loan may or may not include the obligation of repayment. If it does then it would be a loan.”
Emphasis Supplied
The Delhi High Court clearly provided that normal attributes of loan are
1. It involves positive act of lending;
2. The positive act of lending is coupled with acceptance by the other side of the money as loan;
3. It generally carries an interest;
4. There is an obligation of re-payment.
It was observed that although the term “loan” includes the obligation to repay but in its widest meaning “advance” would never include the obligation to repay and if it does that even the term used might be “advance” but it would be treated as a loan. Therefore, the element of repayment is one of the most important criteria to identify whether the amount being received is an advance or loan. This above description of the term “loan” and “advance” was further relied upon by The Delhi High Court in the matter of CIT vs. Creative Dyeing & b Printing (P) Ltd 201031(I) ITCL 93 (Delhi).
b) In another matter before The Karnataka High Court in the matter of M/S Bagmane Construction Private Limited Vs CIT (ITA No. 474/2013); the distinction between “loans” and advance” was observed as follows:
The attribute of a loan is that it is a positive act of lending money coupled with acceptance by the other side of the money as loan and generally carries interest and there is an obligation of repayment. The word “advance” may or may not include lending. The word “advance” if not found in the company or in conjunction with the word loan may or may not include the obligation of repayment. If it does then it would be a loan.
Emphasis Supplied
The above decision by the Karnataka High Court similar on the line of the Delhi High Court only further emphasize what has been held by the Delhi High Court that if any advance contains the obligation to repay then its in the nature of the Loan and not advance.
Distinction between a loan and a deposit
a) The Delhi High Court discussed the meaning of “Loan” in perspective with the meaning of “deposit” in the matter of Baidya Nath Plastic Industries … vs K.L. Anand, Income Tax Officer on 25 November, 1997 and observed that
The distinction between the loan and the deposit is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement and in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it.
Emphasis Supplied
It was further observed by the Court by making reference to the decision of The Madras High Court in the matter of V. Balakrishnudu vs. Narayanaswamy Chetty 24 IC 842
In popular language commodious 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.
Emphasis Supplied
Therefore, as per the meaning of loan given by the Delhi High Court, in the case of loan it is the duty of the debtor to seek out the creditor and element of repayment is one of the most important criteria to identify whether the amount has been given as a loan.
Distinction between a Debt and a Loan
a) The Bombay High Court in the matter of Dr. Fredie Ardeshir Mehta And … vs Union Of India And Others on 3 August, 1989 Equivalent citations: 1989 (3) BomCR 656, 1991 70 CompCas 210 Bom observed the difference between a “debt” and a “loan” as follows:
7. The concept of a loan has received judicial consideration in India. In Suradindu Sekhar v. Lalit Mohan Mazumdar money was due to the plaintiff and the defedant had executed a bond in respect thereof. The defendat claimed relief under the Bengal Money Lenders Act. The Court said, “leaving the purchase money unpaid is leaving a debt unpaid. Every loan is a debt but every debt is not a loan. The purchase money due to the plaintiff is a debt due to the plaintiff but is not a loan or a transaction which is in substance a loan” This judgment was relied upon in Sujansing Ajitsing Mohota v. Ramachandrarao Krishnarao Singaroo . In Laxmi Co. v. CIT the question arose in the context of the Income-tax Act. The firm of J.K.Kothi was supplying goods to the assessee on credit. Whenever goods were supplied, the account of the assessee with the firm was debited with the price thereof. The amount which was outstanding against the assessee in the books of the firm represented the price of the goods supplied on credit. The amount was held to be a debt due from the assessee to the firm but it was not of the nature created by a loan. Reliance was placed upon the judgment of the Supreme Court in Shree Ram Mills Ltd. v. CEPT , which held that a loan “imports a positive act of lending coupled with an acceptance by the other side of the money as loan.”
Emphasis Supplied
Conclusion-It would be imperative to analyse the mobilization advance from the intent of the parties, real purport of the document and mere nomenclature that the term contains “advance” is not reflective of the fact that the amount received by the contractor is advance. The next part of the article would analyse the various decisions on mobilisation advance given in pre- and post-GST Regime as well the decisions from Income Tax and VAT Regime.
