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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 ..... 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 made of Rs. 51,00,000/- by treating the amount advanced as deemed dividend under section 2(22)(e) of the Act by rejecting the contention of assessee that it was business advance. 4. Briefly, in the facts of the present case, the assessee had furnished the return of income declaring total income of Rs. 47,64,527/-. The return of income was processed under section 143(1) of the Act. During the course of scrutiny assessment of M/s.Star Engineers (India) Pvt. Ltd. (in short 'Star') for assessment year 2007-08, it was found that the said company had given loan / advance of Rs. 51,00,000/- to the sister concern M/s. Mercury Circuits Pvt. Ltd. (in short 'Mercury'). It was further found that the director of the company i.e. the assessee before us had more than 10% shareholding in Star and 50% shareholding in Mercury, therefore the payment of advance of Rs. 51,00,000/- by Star would fall within the meaning of deemed dividend under section 2(22)(e) of the Act, which in turn, was taxable in the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 would not supply to any other party unless scheduled supply to Star, was complied with. The copy of the agreement made in March, 2007 was annexed to the assessment order. In the audited balance sheet submitted along with return of income, Mercury as on 31.03.2007, had shown the said fact i.e. the current liability to the extent of Rs. 50 lakhs as advance against the orders and on asset side under the head current assets i.e. advance for purchase of machinery of Rs. 47 lakhs. The claim of the assessee before the Assessing Officer was that the said amount was not a mere advance or loan, but was a part of commercial / business transaction to enable the company to enhance its production capacity. Reliance was placed on other decisions including the decision of jurisdictional High Court and it was contended that the same would not be within the definition of deemed dividend under section 2(22)(e) of the Act. It was further pointed out by the assessee that till date i.e. up to October, 2010, the situation was status quo i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee further pointed out that, no doubt the assessee fits into the criterion of shareholder with substantial interest in Mercury as well as Star and Star had accumulative profits, however, other parameters could not be fulfilled i.e. it was an advance or loan or such payment had to be on behalf of or for the individual benefit of such shareholder. The CIT(A) held as under:- "10. It is important to note that M/s. Mercury Circuits Pvt. Ltd. was incorporated in December, 2006 and the facilities for production as well as construction of building, acquiring of machinery was yet to take up. Therefore; the claim of the appellant that the advance was received for assured supply of production is just like putting the cart before a horse. It can also be seen that the amount was spent in purchasing capital assets like machinery etc. and there was no likelihood of commencement of production in the near future. This advance was basically utilized for purchase of machinery to set up the facilities of the company which was the responsibility of the shareholder who is the appellant in this case. Therefore, this advance was basically given to M/s. Mercury Circuits Pvt. Ltd. on behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan was subject to the condition of clear title of land. Our attention was further drawn to the funds flow chart placed at pages 76 and 77 of the Paper Book and copies of bills of purchase of machinery at pages 78 onwards. It was clarified by the learned Authorized Representative for the assessee that no contribution was made by Mr. Sultane and only investment was by Star. Our attention was drawn to the balance sheet of Mercury placed at page 14 of the Paper Book and pointed out that the assessee had shown advance for machinery. He further stressed that the provisions of section 2(22)(e) of the Act were not applicable as far as the business advances were concerned. In this regard, he placed reliance on the ratio laid down by the Hon'ble Delhi High Court in CIT Vs. Raj Kumar (2009) 318 ITR 462 (Delhi) and pointed out that trade advances would not fall within the ambit of section 2(22)(e) of the Act. The relevant finding is as under:- "10.7 Importantly, the broad principles which emerge from the judgment of the Supreme Court with regard to the applicability of the said rule of construction are briefly as follows: (i) does the term in issue have more than one meaning attributed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Departmental Representative for the Revenue pointed out that the facts of the said cases were different. Further, reliance was placed on the ratios laid down by the Chandigarh Bench of Tribunal in Smt. Sunita Jindal Vs. DCIT (2014) 45 taxmann.com 29 (Chandigarh - Trib) and the Hon'ble Madras High Court in CIT Vs. P.K. Abubuker (2004) 135 TAXMAN 77 (MAD). 10. The learned Authorized Representative for the assessee in rejoinder pointed out that the reliance on the decision of Chandigarh Bench of Tribunal in Smt. Sunita Jindal Vs. DCIT (supra) is mis-placed as the amount in that case held as loan, but in the facts of the present case, the amounts were not to be repaid, but adjusted in business dealings, hence, the same is not a loan, but business advance. 11. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the applicability of section 2(22)(e) of the Act, which reads as under:- "(22) "dividend" includes- (a) . . . . . . . . . . . . . . . . . . (b) . . . . . . . . . . . . . . . . . . (c) . . . . . . . . . . . . . . . . . . (d) . . . . . . . . . . . . . . . . . . (e) any payment by a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Sultane to form a separate private limited company as part of 'BACKWARD - INTIGRATION' for Star having 50 : 50 shareholding of Sultane Brothers and the family members of the assessee. Accordingly, the company named Mercury was incorporated in December, 2006 exclusively for making the assured supply of quality PCB's to Star for its requirements. The new company Mercury wanted to place the orders for machinery and also to construct building as land was zeroed down by it. A proposal was made to Oriental Bank of Commerce for the release of loan for the purpose, which was refused till the mortgage and other documents of land were registered in the name of company. The said plot of land was in Cooperative Industrial society and the requirement of the bank was that it should be in the name of Mercury. There were certain disputes about the said proposal of transfer of documents in the name of Mercury and there was no disbursement of funds by the bank. Meanwhile, the assessee in order to get the production started, made a request to Star to advance Rs. 50 lakhs for the purchase of machinery. The said advance was to be adjusted against the future supplies to be made to Star. An advance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The transaction between the two i.e. Star and Mercury if looked at in entirety would reflect that Star wanted its joint venture Mercury to start production at the earliest and took part in the establishment of Mercury by giving advance to it for the purchase of machinery. The said machinery was purchased in financial year 2007-08. It is incomprehensible to digest that Star who is 50% joint owner of Mercury would utilize the funds for the purchase of machinery, which was not going to be used for its business. The loan was advanced for the purchase of machinery and not for the purchase of land. Since the loan amount requirements of Mercury were already under finalization, Mercury had applied for sanction of loan from Oriental Bank of Commerce. However, the said loan was not sanctioned since the land was not registered in the name of Mercury. In the above said scenario when Star enters into the field and gives an advance to Mercury in order to start the business of manufacture of PCBs, which in turn, had to be sold to Star, we are unable to comprehend the findings of Assessing Officer and CIT(A) in this regard that the said loan made by Star to Mercury was the loan simplicitor. May b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1970) 75 ITR 191 and where the payment was made as a result of trading transaction between the parties and the amount was not given by way of loan, then the provisions of section 2(22)(e) of the Act would not apply. In another decision by the Hon'ble Delhi High Court in CIT Vs. Ankitech (P) Ltd. (supra) held as under:- "24. The intention behind enacting provisions of section 2(22)(e) is that closely held companies (i.e., companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would become taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) of the Act is to tax dividend in the hands of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple answer to this argument is that such loan or advance, in the first place, is not an income. Such a loan or advance has to be returned by the recipient to the company, which has given the loan or advance. 27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under section 2(22)(e) of the Act. 28. Insofar as reliance upon Circular No. 495, dated 22-9-1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Bench decision in Bhaumik Colour (P.) Ltd.'s case (supra) that such observations are not binding on the Courts. Once it is found that such loan or advance cannot be treated as deemed dividend at the hands of such a concern which is not a shareholder, and that according to us is the correct legal position, such a circular would be of no avail. 29. No doubt, the legal fiction/deemed provision created by the Legislature has to be taken to 'logical conclusion' as held in Andaleeb Sehgal's case (supra). The revenue wants the deeming provision to be extended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said transaction related to the assessee. Thereafter, on reconciliation of statement of accounts, the said amount was repaid by the assessee to the said company and the same does not partake the character of loan as contemplated u/s 2(22)(e) of the Act." 16. The Hon'ble Delhi High Court in CIT Vs. Creative Dyeing & Printing (P) Ltd. (supra) referred to the decision of Hon'ble Bombay High Court in CIT Vs. Nagindas M. Kapadia (supra) and in turn, relied on the ratio laid down in CIT Vs. Raj Kumar (supra), which in turn had dealt with the part of definition of deemed dividend under section 2(22)(e) of the Act, which states that deemed dividend does not include an advance or loan made towards shareholder by a bank in the ordinary course of its business, where the lending of money is a substantial part of business of the company. The proposition of the Revenue in this regard was that where a company was not engaged in the business of lending of money, the payments made by it to the assessee company would therefore, be covered by section 2(22)(e)(ii) of the Act and consequently, the payments even for business transactions would be a deemed dividend. The Hon'ble High Court did not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, the word ' advance' has to be read in conjunction with the word ' loan' . 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 repayment. 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 obli gation of repayment. If it does, then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term ' advance' . The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing ' it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them' and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(22)(e) of the Act. Further, the learned Departmental Representative for the Revenue relied on the ratio laid down by the Chandigarh Bench of Tribunal in Smt. Sunita Jindal Vs. DCIT (supra), in the facts of which the amount was advanced as loan and there was no dispute about the advancing of the loan and hence, the facts in the said case are distinguishable. In respect of reliance placed upon by the learned Departmental Representative for the Revenue on the decision of Hon'ble Madras High Court in CIT Vs. P.K. Abubuker (supra) , we find no merit in view of the decision of jurisdictional High Court in CIT Vs. Nagindas M. Kapadia (supra) and also the various decisions of the Hon'ble Delhi High Court in respect of the business advances. 19. In the facts of the present case, the amount has been advanced as business advance, wherein the amount was advanced to a joint venture company for the purpose of purchasing machinery to carry on the business. The recipient company had purchased the machinery against the money so advanced and the assessee has also placed on record the trail of payments in this regard and in such facts and circumstances, where a business decision was taken ..... X X X X Extracts X X X X X X X X Extracts X X X X
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