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TMI Blog2016 (2) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... And Shri Pradip Kumar Kedia, AM For the Appellant : Shri Pramod Shingte For the Respondent : Shri Dheeraj Kumar Jain ORDER Per Sushma Chowla, JM This appeal filed by the assessee is against the order of CIT(A)-V, Pune, dated 02.03.2012 relating to assessment year 2007-08 against order passed under section 143(3) r.w.s. 147 of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the lower authorities erred in treating the amount paid a sum of ₹ 51,00,000/- for business / commercial transaction in ordinary course of business as deemed dividend u/s.2(22)(e) of the Income Tax Act, 1961 by rejecting appellant s contention that the said amount was advanced to Mercury Circuits Pvt. Ltd. in ordinary course of business / commercial transaction and as such is not covered u/s 2(22)(e) of the Income Tax Act, 1961. The appellant craves for to leave, add, alter, modify, delete above ground of appeal before or at the time hearing, in the interest of natural justice. 3. The issue raised in the present appeal is against the addition ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 50 shareholding of Sultane Brothers and the assessee s family members. Accordingly, a company M/s. Mercury Circuits Pvt. Ltd. was incorporated in December, 2006 exclusively for making assured supply of quality PCB s to Star for its present and future requirements. The new company Mercury wanted to place the orders for machinery procurements and to construct the building on the basis of sanction of Bank proposal from Oriental Bank of Commerce. However, the bank refused to disburse loan till mortgage and other documents were registered in the name of the company. The plot of land was in a Co-operative Industrial Society and bank wanted the name of the company on Record of Rights instead of name of the Society. Thus, the loan proposal was delayed and ultimately there was no disbursement of funds by the bank. To avoid the del ay and to make supplies to Star, it was agreed that Star would advance ₹ 50,00,000/- as an advance against the supply. Accordingly, the said advance was given to Mercury in February, 2007 for purchase of machinery and completing construction of building on the condition that this would be an advance against the orders for purchase of PCB s and the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest. Hence, the amount advanced of ₹ 51 lakhs was treated as deemed dividend under section 2(22)(e) of the Act and was added to the income of the assessee. 5. Before the CIT(A), the contention of the assessee was that the detailed flow chart reveals the movement of funds transferred from Star to Mercury along with copies of bills of machinery i.e. money was transferred from Star to Mercury and in turn, Mercury made payments to the respective machinery suppliers, who had supplied the machinery. However, due to non -transfer of title in land, Mercury could not start its activities and out of the total machinery purchased, some machinery was sold and some machinery was still lying idle in the possession of Mr. Sultane, who was another shareholder in Mercury. The contention of the assessee before the CIT(A) was that it was business advance and amount was used for purchase of machinery and only because of the defect in title of land till today, the production activity could not be started. The learned Authorized Representative for the assessee further pointed out that, no doubt the assessee fits into the criterion of shareholder with substantial interest in Mercury as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by Star to Mercury, but it was in the form of an advance for the purchase of machinery, which were purchased by Mercury and the same were lying idle. The learned Authorized Representative for the assessee stated that admittedly, the assessee was holding more than 10% shares and there were accumulative profits in the hands of Star. Our attention was drawn to the copy of letter placed at page 9 of the Paper Book, under which Mercury vide letter dated 17.01.2007 had made a request to make the aforesaid advance against the contract for supply of PCB s. It was pointed out in the letter it was mentioned that the company needed funds for short period to make payment of advance for placing orders for machinery and amount would be repaid out of supply bills as soon as the commercial production had commenced. The learned Authorized Representative for the assessee further referred to the sanction letter of credit facilities issued by Oriental Bank of Commerce for Term Loan of ₹ 320.00 lakhs, copy of which is placed at page 17 of the Paper Book. This sanction of loan was subject to the condition of clear title of land. Our attention was further drawn to the funds flow chart placed at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was dismissed by the Hon ble Supreme Court in CIT Vs. Creative Dyeing Printing (P) Ltd. in SLP(C) No.18197 of 2010, judgment dated 07.07.2010. Our attention was drawn to the decision of Hon ble Delhi High Court in CIT Vs. Creative Dyeing Printing (P) Ltd. (2009) 318 ITR 476 (Del), in which there is reference to the decision of Hon ble Bombay High Court in CIT Vs. Nagindas M. Kapadia (1989) 75 CTR (Bom) 161. Further, reliance was placed on the ratio laid down by the Chandigarh Bench of Tribunal in Shalimar Infonet (P.) Ltd. Vs. ITO (2013) 37 taxmann.com 224 (Chandigarh Trib) and in ACIT Vs. Sanjiv Gupta (2011) 14 taxmann.com 153 (Chd.) . 9. The learned Departmental Representative for the Revenue pointed out that in the facts of the present case, it would be clear that the issue is whether loan is hit by section 2(22)(e) of the Act or whether the advances are business advances. He further pointed out that till date no business had started and also the amount was not returned. In respect of various reliances placed upon by the learned Authorized Representative for the assessee, the learned Departmental Representative for the Revenue pointed out that the facts of the said ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be limited to the extent of accumulated profits of the company. The condition to be satisfied for applying the said section is an advance or loan by a company either to a shareholder or to any concern in which such shareholder is a member or partner and the shareholding benefit should be not less than 10% of voting power, then in such circumstances, the said advance or loan would be treated as deemed dividend in the hands of the shareholder to the extent of company s accumulated profits. In the facts of the present case before us, Star is a company, in which public are not substantially interested, hence, the provisions of section 2(22)(e) of the Act would be applicable. Star was engaged in the business of manufacturing of electrical machines and one of the important raw material is Printed Circuits Board (PCB). Star was purchasing the said PCB s from M/s. R.D. Electronics, a proprietary concern of Mr. Sultane, who was supplying the same to other electronic units in this area also. Due to the limited manufacturing capacity of Mr. Sultane, supply to the assessee was not sufficient. He made a proposal to Mr. Sultane to form a separate private limited company as part of BACKWARD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplete requirements by Star. The copy of the said letter is placed at page 9 of the Paper Book. Pursuant to the said terms agreed upon between Star and the company floated by it i.e. Mercury, sum of ₹ 50 lakhs was advanced by Star, which was utilized for the purchase of machinery. The assessee has placed the copies of the purchase bills of machinery at pages 78 onwards. The first bill is dated 13.04.2007. The assessee has also filed funds flow statement, in which it is pointed out that the loan was received in financial year 2006-07 and the amount was utilized thereafter in financial year 2007-08 itself by Mercury for purchasing machinery of ₹ 53.74 lakhs. Since the title of the land was not clear, the building could not be constructed by Mercury and hence, machinery was kept idle. However, some machinery were sold in financial year 2008-09 and the balance machinery were lying idle in possession of Mr. Sultane, who is the other shareholder in Mercury. 13. In the above said facts and circumstances, the issue to be considered is whether the advance made by Star to Mercury was a loan simplicitor or was a business advance. The transaction between the two i.e. Star and M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndas M. Kapadia (supra) held that where payments were made as advance towards purchases to be made by the company from the assessee, the same would not be covered as deemed dividend within the meaning of section 2(22)(e) of the Act. Further, the Hon ble Delhi High Court in CIT Vs. Raj Kumar (supra) had laid down the proposition that the word advance had to be read in conjunction with the word loan and the word advance which appears in the company of the word loan could only mean such advance which carries with it an obligation of repayment. The Hon ble High Court further held that trade advance which is in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of provisions of section 2(22)(e) of the Act. The said proposition was applied by the Hon ble Delhi High Court in another decision i.e. CIT Vs. Arvind Kumar Jain (supra) and it was further held that mere nomenclature of entry in the books of account was not determinative of true nature of transaction. In this regard, reliance was placed on the ratio laid down by the Hon ble Supreme Court in CIT Vs. India Discounts Company Ltd. (1970) 75 ITR 191 and where the payment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch dividend cannot be given to non-members. The second category specified under section 2(22)(e) of the Act, viz., a concern (like the assessee herein), which is given the loan or advance is admittedly not a shareholder/member of the payer company. Therefore, under no circumstance, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of 'deeming shareholder', then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be a shareholder by way of deeming provision. It is not correct on the part of the revenue to argue that if this position is taken, then the income 'is not taxed at the hands of the recipient'. Such an argument based on the scheme of the Act as projected by the learned counsels for the revenue on the basis of sections 4, 5, 8, 14 and 56 of the Act would be of no avail. Simple answer to this argument is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hird limb i.e. payment on behalf or for the individual benefit of the shareholder. Admittedly, the payment in the case has been made within the extent of the accumulated profits of the company. However, the alternate limb of the argument of the assessee was that the entries were passed in the normal course of carrying on of the business. 14. We find that the Chandigarh Bench of Tribunal in Lakra Brothers case (supra) had laid down the principle that loan is something different from sale and every sale of goods on credit does not mean to be transaction of loan. In the facts of the case before the Chandigarh Tribunal, there was a debit balance on account of advance paid by AEPL which was held to be purely advance during the course of business and it was held that such payment do not constitute loan for the purpose of Section 2(22)(e) of the Act. We are of the view that in the facts of the present case, the transaction in question is relatable to the carrying on of business by the assessee. The aforesaid payment was made by M/s Pee Jay Fabrics Ltd. as the demand was raised by the consignor M/s Raymonds Ltd. after debiting the account of the said company, though the said transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing the Finance Bill. Ultimately, this court in the said judgment held as under (page 473) : A bare reading of the recommendations of the Commission and the speech of the then Finance Minister would show that the purpose of the insertion of sub-clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. Therefore, if the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is in parimateria with sub-clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. If this purpose is kept in mind then, in our view, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retation of the main provision of section 2(22)(e) of the Act and once it is held that the business transactions do not fall within section 2(22)(e) of the Act, there is no need to go further to section 2(22)(e)(ii) of the Act. The provision of section 2(22)(e)(ii) of the Act gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that s all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e) of the Act. This interpretation is in accordance with the legislative intention of introducing section 2(22)(e) of the Act. 18. Now, coming to the reliance placed upon by the learned Departmental Representative for the Revenue on the ratio laid down by the Hon ble Madras High Court in CIT Vs. P.K. Abubuker (supra), wherein it was held that the amount advanced is to be treated as deemed dividend within the meaning of section 2(22)(e) of the Act, where advance was paid to the assessee, which in turn had to be set off against future rent. The said amount was held to be dividend from the company during the accounting year and was includable as deemed dividend unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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