2018 (10) TMI 286 - AT - Income Tax

Deemed dividend addition u/s 2(22)(e) - commercial transaction - interpretation of Section 2(22) (e) of the Act, in so for as it concerns the term loan and advance used therein - Held that - Trading advances which were in the nature of commercial transactions would not come within the preview of Section of 2(22) (e) of the Act and such view had attained finality. As examine the transactions between M/s.ISML and assessee, in so far as application of Section2(22) ( e) of the Act is concerned there is no dispute that a sum of D20 Crores was received by the assessee from M/s.ISML by virtue of its agreement entered by the assessee with M/s.ISML on 10.12.2011. It is also not disputed that assessee had made available its entire capacity for manufacturing rough castings on captive basis to M/s.ISML on a regular basis. Assessee had also undertaken not to utilize its manufacturing capacity for any other party. It is obvious in our opinion, that the sum to the extent of D20 Crores received by the assessee based on the above agreement, through which it gave away all its manufacturing capacity, was nothing but a commercial transaction. Transactions between assessee and ISML had started much earlier to 20.12.2011 and we have already pointed a large number of instances when the balance in the name of the assessee was negative. In our opinion, ld. Assessing Officer fell in error in taking an isolated view and considering only a part of the transactions ignoring the transactions prior to 23.01.2012, which together clearly indicated that account was in the nature of a running trade account. Coming to the addition of D2,69,89,513/- sustained by the ld. Commissioner of Income Tax (Appeals), there is a clear finding by the ld. Commissioner of Income Tax (Appeals) that M/s.ISML had paid such sum towards statutory duties, TDS and wages of the assessee. Nevertheless, in our opinion, such payments would not take the transaction out of preview of a commercial transaction. Assessee had given its entire capacity to M/s.ISML and if M/s.ISML paid part of the statutory duties, TDS and wages of the assessee directly, in our opinion, such payments cannot be considered as loans or advances coming within the ambit of Section 2(22) (e) of the Act. We cannot say that assessee received any benefit since there was a quid-pro-quo in the nature of surrendering its entire production capacity to M/s. ISML. Thus in our opinion sums received by the assessee from M/s. ISML would not come within the preview of advances/ loans mentioned in Section 2(22)(e)- Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the advances received by the assessee from M/s. ISML should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961.
2. Whether the sum of D2,69,89,513/- paid by M/s. ISML on behalf of the assessee towards statutory duties, TDS, and wages should be considered as a benefit derived by the assessee and thus fall under Section 2(22)(e).

Issue-wise Detailed Analysis:

1. Advances as Deemed Dividend under Section 2(22)(e):

The assessee, engaged in manufacturing raw castings and supplying them to leading automobile manufacturers through its sister concern M/s. ISML, received substantial advances from M/s. ISML. The Assessing Officer (AO) deemed these advances as dividends under Section 2(22)(e) of the Income Tax Act, 1961, citing the assessee's beneficial ownership of more than 20% in M/s. ISML and the presence of accumulated profits in M/s. ISML’s balance sheet.

The assessee contended that the money received was trade advances, not loans, and thus should not be treated as deemed dividends. The Commissioner of Income Tax (Appeals) (CIT(A)) supported the assessee's stance, noting that the advances were part of a commercial transaction based on an agreement dated 10.12.2011, where the assessee was to supply all its production to M/s. ISML. The CIT(A) found that the assessee became a beneficial shareholder only on 23.01.2012 and thus, the sum of D20 Crores received before this date was a trade advance.

The Tribunal upheld the CIT(A)’s view, emphasizing that the transactions were commercial in nature and the advances did not have the trappings of a loan. The Tribunal referenced the Delhi High Court’s judgment in CIT vs. Rajkumar (2009) 318 ITR 462 and CBDT Circular No.19/2017, which clarified that trade advances in the nature of commercial transactions do not fall within the ambit of Section 2(22)(e).

2. Sum of D2,69,89,513/- as Deemed Dividend:

The AO included the sum of D2,69,89,513/- paid by M/s. ISML on behalf of the assessee towards statutory duties, TDS, and wages as deemed dividends. The CIT(A) restricted the addition under Section 2(22)(e) to this amount but the assessee contested this as well.

The Tribunal found that these payments were part of the commercial transactions between the two companies. Given that the assessee had dedicated its entire production capacity to M/s. ISML, the payments made by M/s. ISML on behalf of the assessee were not loans or advances but part of the business arrangement. The Tribunal concluded that such payments did not confer any additional benefit to the assessee beyond the commercial transactions and thus should not be treated as deemed dividends under Section 2(22)(e).

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, concluding that the advances received from M/s. ISML were commercial transactions and not loans or advances in the nature of loans. Consequently, these amounts did not fall under the purview of Section 2(22)(e) of the Income Tax Act, 1961. The Tribunal also deleted the addition of D2,69,89,513/- made by the AO, affirming that the payments made by M/s. ISML on behalf of the assessee were part of the commercial transactions and not deemed dividends.