2024 (11) TMI 499 - AT - Income Tax

Additional claim of deduction of expenditure against the unaccounted cash receipts from sale of spent solvents / scrap - assessee submitted that the deduction towards expenditure incurred for handling and disposal of spent solvents / scrap, as per the very same seized material may be allowed as a deduction against the unaccounted cash receipts - HELD THAT - The process of collecting and disposal of spent solvents / scrap requires various other expenditure like transportation, packing, and other necessary items for safe handling of hazardous waste without any environmental impact. If we consider the other expenditure required for the disposal of spent solvents / scrap, in our considered view, the AO needs to consider transportation, packing, and other materials necessary for handling the disposal of spent solvents / scrap. Although there is no direct evidence for incurring these expenditures, the possibility of incurring these expenditures cannot be ruled out. This fact is further strengthened by the disbursal of the cash received from sale of spent solvents / scrap to various employees which accounted for 80% of the total amount received from sales, which is evident from the affidavits filed by the employees, wherein they claimed that the amount received from the head office has been utilized for making payments and incurring other expenditures. Although there is no direct evidence for incurring 80% of the amount towards expenditure, going by the nature of the material, in our considered view, there needs to be certain amount of expenditure for other expenses like transportation, packing etc. Since there is no direct evidence regarding other expenditures, in our considered view, the only possible way is to estimate a reasonable amount of expenditure against unaccounted receipts from sale of spent solvents / scrap. Therefore, considering the fact that the appellant has already disbursed 80% of the amount received from unaccounted cash receipts in the name of various employees, and also going by the nature of the material, in our considered view, at least 60% of the receipts need to be considered as expenditure against unaccounted receipts from the sale of spent solvents / scrap. Thus, out of the additional income offered by the assessee and assessed by the AO towards unaccounted receipts from sale of spent solvents / scrap, the assessee gets relief to the extent of 60%, and the balance amount of 40% of unaccounted cash receipts is hereby sustained for both the assessment years. Addition made on account of deemed dividend u/s 2(22)(e) - consequent dividend distribution tax under Section 115Q - as argued transactions between the appellant company and two other associated concerns are trade advances, which are in the nature of commercial transactions effected in the ordinary course of business and does not fall under loans or advances for the purpose of Section 2(22)(e) - HELD THAT - Having accepted the factum of purchases and payment of trade advances against the purchases, the AO/CIT(A) could not have imposed an imaginary and artificial limit on the quantum of payments that can be regarded as trade advances by sitting in the arm-chair of the businessman - entire amount of payments made against purchases has to be regarded as trade advances without any artificial limitation on the quantum of such trade advances. As a result, the amounts paid to recipient company in excess of 200% of the purchases also have to be regarded as trade advances which are in the nature of commercial transactions only and they cannot be characterized as loans or advance constituting deemed dividend within the meaning of section 2(22)(e). The addition made by the AO and upheld by the CIT(A) towards deemed dividend is therefore wholly untenable and needs to be deleted. Transactions of payments made by the appellant to the recipient companies have arisen due to business exigencies and the said transactions therefore bear commercial character. The appellant company and the recipient companies are associate concerns of the same group with a common Managing Director and substantial shareholder Sri.M.S.N Reddy. The group companies, including the said companies, are engaged in similar line of business of manufacture of Active Pharmaceutical Ingredients (API). As mentioned by the AO himself in the assessment order he business activities of the group companies are inter-related and inter-dependent since each company is making sale of raw materials, engineering materials and intermediates to the other associate companies, in view of the fact that the manufacturing process is fragmented into different stages and different group companies are handling the manufacture at different stages. In view of existence of such inter-dependency among the associate concerns, the said companies provide funds to each other on a need basis as a measure of business expediency as and when there is requirement of funds for the purpose of business in order to provide the required support to the business of the other associate concerns. The business expediency for making huge payments to MSN Laboratories Pvt. Ltd is revealed by this crucial fact also in addition to the explanation furnished in the preceding paragraph. Therefore, the payments made by the appellant to MSN Laboratories Pvt. Ltd which are evidently imbued with business expediency cannot be considered to be falling under the ambit of advance or loans under section 2(22)(e) so as to constitute deemed dividend - addition made by the AO, to the extent upheld by the CIT(A), towards deemed dividend u/s 2(22)(e) in the hands of the appellant for the purpose of levy of dividend distribution tax without the satisfaction of the said basic condition laid down in the section is unwarranted and untenable. Whether current adjustment account transactions do not represent loans or advance for the purpose of deemed dividend? - There is a series of debits and credits in the concerned ledger accounts, which clearly indicate that the transactions were effected in the normal course of business and the concerned group companies have given funds to and received funds from each other as and when required for the purpose of the business of the said group companies. It needs to be borne in mind that such transactions between the group companies cannot be considered to be in the nature of loans or advance to the group companies. An account containing such series of debit and credit entries reflecting movement of funds both ways between the associate/group companies as per their business requirements has to be construed to be in the nature of a Current Adjustment Account unlike the transactions in the nature of loans or advances to a shareholder or to a concern in which the shareholder has substantial interest, the movement of funds in a current adjustment/ accommodation account is in either direction on a need basis. Therefore, transactions which are in the nature of current adjustment account transactions cannot be termed as loans or advances falling within the ambit of deemed dividend u/s 2(22)(e) of the Act. Current account transactions between two group companies cannot be regarded as loans or advances as defined u/s 2(22)(e) of the Income Tax Act, 1961. Therefore, we are of the considered view that the provisions of deemed dividend u/s 2(22)(e) are not applicable to the transactions between the appellant company and recipient companies, as the said transactions bear the character of current adjustment account transactions due to two-way movement of funds on a need basis. Thus, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax to the extent upheld by the LD.CIT(A) is not warranted and therefore, deleted for this reason also. Deemed dividend not attracted when payments to recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder - In view of the said incontrovertible fact and having regard to the decision of Jayant T Kotak 2020 (3) TMI 1203 - GUJARAT HIGH COURT and 2021 (8) TMI 835 - SC ORDER we are of the considered view that the payments made by the appellant company to the recipient companies during the year do not fall under the scope of deemed dividend u/s 2(22)(e) of the Act. Therefore, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax, to the extent upheld by the LD.CIT(A) is not warranted for this reason also and thus, deleted. Thus transactions between appellant Company and two other recipient Companies do not come under the provisions of section 2(22)(e) of the Income tax Act, 1961 and consequently, the AO/CIT(A) is erred in levying dividend distribution tax in the hands of the assessee for both assessment years. We, direct the Assessing Officer to delete addition made u/s 2(22)(e) and consequent levy of Dividend Distribution Tax u/s 115-O r.w.s. 115Q.

Summary

Issues Involved:

1. Additional claim of deduction of expenditure against unaccounted cash receipts from the sale of spent solvents/scrap.
2. Addition made on account of deemed dividend under Section 2(22)(e) of the Income Tax Act and the consequent levy of dividend distribution tax.

Detailed Analysis:

1. Additional Deduction Claim for Expenditure Against Unaccounted Receipts:

The primary issue was whether the assessee could claim additional deductions for expenses against unaccounted cash receipts from the sale of spent solvents and scrap. The assessee argued that these receipts were not actual income as they were used to pay workers handling hazardous waste. The seized material contained both cash inflow and outflow entries, which the assessee claimed represented expenses incurred for business purposes. The CIT(A) allowed a deduction on an estimated basis of 10% of the gross receipts, considering historical salary and wages expenses of the group companies. However, the Tribunal found that the CIT(A) erred by not considering other costs like transportation and handling. It concluded that 60% of the unaccounted receipts should be allowed as a deduction, as the evidence suggested significant expenses were incurred for handling hazardous waste.

2. Deemed Dividend Addition and Dividend Distribution Tax:

The second issue involved the addition made by the AO for deemed dividend under Section 2(22)(e) due to excess payments to group companies, which were treated as loans or advances. The CIT(A) partially upheld this addition but allowed some relief by considering payments up to 200% of purchases as normal commercial transactions. The Tribunal, however, disagreed with the AO and CIT(A), stating that these transactions were trade advances in the ordinary course of business and not loans or advances. It noted that the payments were made due to business exigencies and were used for business purposes by the recipient companies, not for the benefit of the common shareholder. The Tribunal emphasized that current account transactions with two-way fund movements do not fall under deemed dividend provisions. It further relied on judicial precedents, including the Gujarat High Court's decision in Jayesh T Kotak, to conclude that deemed dividend provisions require the benefit to accrue to the shareholder, which was not the case here. Consequently, the Tribunal directed the deletion of the addition made under Section 2(22)(e) and the consequent levy of dividend distribution tax.

Conclusion:

The Tribunal allowed the appeals partly, granting relief on both issues by recognizing significant expenses against unaccounted receipts and dismissing the deemed dividend addition due to the commercial nature of transactions.