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TMI Blog2011 (10) TMI 628X X X X Extracts X X X X X X X X Extracts X X X X ..... nds are cross grounds, therefore, they are disposed off together. 4. The ld. D/R has relied upon the order of AO. However, he has fairly stated that this case is covered by the order of Tribunal for assessment year 2004-05 and 05-06, copies of which are placed at paper book pages 61 to 65. 5. On the other hand, the ld. Counsel of the assessee also stated that this issue is covered by the order of Tribunal for earlier year. 6. After considering the order of Tribunal for earlier year decided in ITA No. 910/JP/2009 vide order dated 07.05.2010, we noted that in earlier year also an addition of ₹ 4 lacs was made on account of packing material. The ld. CIT (A) confirmed the addition of ₹ 1 lac and the Tribunal following the order of earlier year i.e. for assessment year 2004-05 deleted the addition of ₹ 1 lac also which was sustained by ld. CIT (A). The findings of Tribunal have been recorded in para 9 of its order for assessment year 2005-06. Since facts are similar, therefore, we delete the addition of ₹ 1,00,000/- sustained by ld. CIT (A). 7. Ground No. 6 in appeal of the assessee is against confirming the invocation of provisions of section 41(1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act 2001 w.e.f. 01.06.2001. Hence, the order passed by CIT(A) directing the AO to work out the disallowance in accordance with section 14A/Rule 8D/ Court rulings is bad in law. It may be noted that Hon ble Supreme Court in case of CIT Vs. Walfort Share Stock Brokers Pvt. Ltd. 326 ITR 001 in Para 17 has observed that for attraction section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon ble Bombay High Court in Godrej Boyce Manufacturing Co. Ltd Vs. DCIT 328 ITR 81 order dt. 12.08.2010 has held that Rule 8D is applicable from A.Y. 08-09 the same can not be applied for earlier A.Y. s but at the same time observed that AO is duty bound to compute the disallowance by applying a reasonable method having regard to the facts circumstances of the case. After this order of Bombay High Court dt. 12.08.2010 various High Courts the Tribunals have taken the following view in the matter of disallowance u/s 14A. (i) Minda Invsetment Ltd. Vs. DCIT 52 DTR 001 order dt. 13.10.2010 Disallowance under section 14A required finding of incurring of expenditure in relation to exempt income where it was found th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment in shares is made in earlier years out of the interest free funds. In earlier year, no such disallowance was made. Further from the Balance Sheet it can be noted that the assessee company is having share capital and reserve and surplus of ₹ 1190.08 lacs whereas investment in shares is only ₹ 688.45 lacs. Thus, interest free fund is much more than the investment in shares. Hence, in the absence of any proximate relation of borrowed funds with investment in shares, no expenditure can be disallowed u/s 14A as per the decisions relied supra. Without prejudice to above, it is to be noted that Hon ble ITAT Chennai Bench in Siva Industries Holdings Ltd. Vs. ACIT 59 DTR 182 held that Section 14A is applicable when there is income which is taxable under the Act for the relevant A.Y. and there should also be income which does not form part of the total income under the Act during the relevant A.Y. If either one is absent, section 14A has no applicability. An investment which does not give rise to any income deemed to accrue or arise can not form part of total income. Thus, once there is no claim of income which does not form part of total income under the Act, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned in the written submission that the investment made in shares in earlier year out of interest free funds. In earlier year no such disallowance was made. It has been stated that from the Balance Sheet it can be noted that the assessee company is having share capital and reserve and surplus of ₹ 1190.08 lacs whereas investment in shares is only ₹ 688.45 lacs. Thus interest free funds available with the assessee are much more than the investment in shares. This fact could not be controverted by ld. D/R by bring any positive material. Therefore, in our considered view no disallowance under section 14A is possible. However, the AO is free to examine this issue afresh, if in his mind the investment made in shares was not out of interest free funds/reserves available with the assessee. In view of these facts and circumstances, we dispose off the grounds of the assessee and department as above. 14. Ground No. 8 in appeal of assessee is against confirming disallowance of ₹ 13,098/- out of telephone expenses. 15. The AO disallowed telephone expenses @ 10% for extra commercial consideration. The ld. CIT (A) has confirmed the same. 16. After considering the wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P rate was lower than the assessment year 2007-08. 22. After considering the submissions and perusing the material on record, the ld. CIT (A) found that similar additions were made for assessment years 2003-04 to 05-06 and they have been deleted by the Tribunal. The ld. CIT (A) by further observing that AO did not point out any defect in the books of account, stock register, purchase and consumable stock, therefore, he held that there is no justification in making lump sum addition of ₹ 50,00,000/-. Accordingly the same was deleted. 23. After considering the orders of the AO and ld. CIT (A) we find no infirmity in the finding of ld. CIT (A) who has deleted the addition following the order of Tribunal for earlier year where similar additions were made. Therefore, there is no reason to interfere with the finding of ld. CIT (A). Accordingly, we confirm the order of ld. CIT (A) in this respect. 24. Ground no. 2 has already been disposed off. 25. Ground No. 3 relates to deleting the addition of ₹ 25,000/- made on account of withdrawal of depreciation on the Wind Mill claimed. 26. The AO disallowed depreciation on foundation and room @ 80%. He estimated this ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on various case laws which are tabulated at page 13 onwards in the order of ld. CIT (A). Thereafter, the ld. CIT (A) after considering the detailed submissions and perusing other materials on record found that AO was not justified in attracting provisions of section 2(22)(e) of the Act on the facts of the present case and accordingly he deleted the entire addition made by the AO. 31. The ld. D/R while arguing his case, firstly placed reliance on the order of the AO. It was further submitted that the transaction between assessee and various other companies are akin to loan and advances. Further reliance was placed on the decision of Hon ble Madras High Court reported in 259 ITR 507. 32. On the other hand, the ld. Counsel of the assessee placed reliance on the order of ld. CIT (A). Reliance was also placed on the written submissions filed here before the Tribunal. It was submitted that these are similar submissions as were made before ld. CIT (A). It was further explained that one has to see the volume of transaction. The AO has picked up certain transactions in some cases and ignored others. It was a trading account only as transactions related to purchase and sales of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales to M/s Saurabh Agrotech (P.) Ltd. (Dr.) ₹ 585.25 lacs Payment made on purchases trade/debt transactions (Dr.) ₹ 2645.78 lacs Total of debit side ₹ 3231.03 lacs Balance Credit ₹ 89.55 lacs Opening Credit ₹ 3.89 lacs Closing Credit ₹ 93.44 lacs The credit entries in the books of assessee company is in respect of the following transactions with M/s Saurabh Agrotech (P.) Ltd.:- (i) Purchases from M/s Saurabh Agrotech (P.) Ltd. (ii) Realization of sales made to M/s Saurabh Agrotech (P.) Ltd. (iii) Payment received from parties against sales made by M/s Saurabh Agrotech (P.) Ltd. (iv) Trade advances received from M/s Saurabh Agrotech (P.) Ltd. (v) Utilization of cash credit limit of M/s Saurabh Agrotech (P.) Ltd. Similar is the position in respect of the entries in the debit side of the account. From the perusal of ledger account of M/s Saurabh Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a commercial transaction would not fall within the ambit of section 2(22)(e). (ii) The transaction of loan involves lending delivery by one party receipt by another party of sum of money upon express or implied agreement to repay it with or without interest. In case of Bombay Steam Navigation Co. (P.) Ltd. 56 ITR 52, 57 (SC), it was held that a loan of money results in debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources loan is only one of such source. Every creditor who is entitled to receive a debt can not be regarded as a lender. Therefore, M/s Saurabh Agrotech (P.) Ltd. can not be considered to be a lender in the present facts thus credit on certain days in its name in the books of the assessee company would not fall in the ambit of section 2(22)(e). (iii) In case of Ardee Finvset (P.) Ltd. Vs. DCIT 79 ITD 547 (Trib.) (Del.) it was held that loan means a lending; delivery by one party to and receipt by another party of sum of moneys upon agreement, express or implied, to repay with or without interest. For a loan there must be a lender, a borrower, a thing loaned for use, as well as a contract between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.78 lacs therefore he took a view that amount outstanding is due to receipt of cheque not towards the purchase of goods. He ignored the fact that the outstanding balance of ₹ 93.44 lacs represents the purchases made in last two months i.e. February 2006 ₹ 36.22 lacs March 2006 ₹ 57.21 lacs. Further, he has nowhere ascertained that the payment received the payments made are towards payment by way of loans or advances. Hence, simply because there are transactions of cheques received cheques paid in the mutual, open, current, running trade account with the sister concern, the same can not be considered as payment by way of loans or advances so as to attract provisions of section 2(22)(e). It may also be noted that similar transactions have been made in earlier year also but never in past the same has been considered to be transaction attracting section 2(22)(e). In various cases, the nature of such mutual, open, current, running trade account has been analyzed it is held that credit balance in such account are not payment by way of loans or advances therefore section 2(22)(e) is not attracted. The gist of these decisions is as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or loan as such not in any other context. The law does not prohibit business transactions between related concerns therefore payment made in the ordinary course of business can not be treated as loans or advances. Therefore, payments made by a company in the course of carrying on of its regular business through a mutual, open current account to a related party does not come under the purview of section 2(22)(e). Mtar Technologies (P.) Ltd. Vs. ACIT 39 SOT 465 (Trib.) (Hyd.) (2010) Under section 2(22)(e), only the payments made by way of loan or advance to a shareholder alone is to be considered for the purpose of deemed dividend. Payments made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course of business carried on by both the parties could not be treated as deemed dividend for the purpose of section 2(22)(e). The law does not prohibit business transactions between related concerns therefore payment made in the ordinary course of business can not be treated as loans or advances. Therefore, payments made by a company in the course of carrying on of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t attract provisions of section 269SS section 269T. The transactions between the sister concern the assessee are to be examined. There are transfer of funds from and to the sister concerns. There is no evidence to show that the money was loaned or kept deposited for a fixed period or repayable on demand. Further, the sister concerns and the assessee are owned by the same family group with a common managing partner with centralized accounts under the same roof. Transfer of funds has taken place in a whimsical manner. Therefore, it is rather difficult to say that the transactions are in the nature of the deposits or loans with certain conditions attached to them, either as regards the period of such deposits or loans or with regard to their repayments. From the copies of the accounts furnished all that can be gathered is that funds have been transferred from and to the sister concerns as and when required and since the managing partner is common to all the sister concerns, the decision to transfer the funds from one concern to another concern or to repay the funds could be said to have been largely influenced by the same individual. In other words, the decision to give and the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2(22)(e) is a deeming provision on the basis of a legal fiction. In constructing a legal fiction, it will be proper necessary to assume all those facts on which alone the fiction can operate as held by Apex Court in case of Mancheri Puthusseri Ahmed Vs. Kuthiravattam Estate Receiver AIR 1997 SC 208, in so constructing the fiction, it is not to be extended beyond the purpose for which it is created or beyond the language of the section by which it is created. By enacting section 2(22)(e), the legislature has created a fiction has made the payments referred to therein dividend for the purpose of income tax, but the fiction cannot be extended further or so interpreted as to go beyond the legislature s intention in creating the fiction. CIT Vs. Creative Dyeing Printing P. Ltd. 318 ITR 476 (Del.) (HC) The assessee-company was engaged in the business of dyeing and printing of cloth and was an ancillary unit of P. Both the assessee company and P had common shareholders and directors, two of whom held more than 20% of the shares in both companies and P held 50% of the shares in the assessee-company. P, in order to increase its export business and to compete wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action are being transacted through. The transaction entered into the account are transaction of purchase, sale, payment received and given from/to third parties, which have been accounted for in the account of Saurabh Agrotech (P) Ltd and also the payment received and payments made to Saurabh Agrotech (P) Ltd . Balance in the account have alternated between debit and credit. This fact have also been accepted by the Assessing Officer in his assessment order on page number 14 in para number (v) that at some point of time, the balance was debit and at some point of time the balance was credit. A list of instance wherein such balances are in debit have also been given by the appellant and mentioned in the order (supra). Under this scenario, it is imperative to determine the nature of such entries whether; these are the loan or advances or business transaction. The provision of section 2 (22)(e) of the Income-Tax Act' 1961 are attracted only under the circumstances, when the transactions are in the nature of loans or advances and not otherwise. It is also seen that the nature of the business of the assessee company and Saurabh Agrotech (P) Ltd are the same. Both the companies are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the decision of P.K.Badiani, M.B.Stock Holding and Wal Chand Company, (Supra), have held that payments made by a company in the course of carrying on of its regular business through a mutual, open and current account to a related party do not come under purview of section 2(22)(e) of the Act. Therefore by following the above decision, I have no hesitation to come to the conclusion that the transaction entered into between the assessee company and the Saurabh Agrotech (P) Ltd , which have been considered by the Assessing Officer are in the nature of business and trade transaction entered into the regular and normal course of business and are not in the nature of loans or advances, therefore the provision of section 2(22)(e) of the Income-Tax Act' 1961 are not applicable upon such transaction and the Assessing Officer has erroneously considered the same to be covered u/s 2(22)(e) of the Income-Tax Act' 1961. While arriving at this conclusion, reference is also made to the decision of jurisdictional High Court in the case of Commissioner of Income-Tax v/s Maheswari Nirman Udyog 302 ITR 201 (Rajasthan) wherein it has been held that the transaction inter se between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be attracted. The nature of transaction of both the companies is trading and manufacturing of mustard oil and oil cake. In the course of business, both these companies had entered into a series of trade transactions of purchase, sale, making payment and receiving payment. The respective entries are made in their respective books of accounts in single consolidated account. The brief of the transactions have been explained at page 8 of the written submission which are reproduced somewhere above in this order also. On perusal of ledger account of M/s. Saaurabh Agrotech Pvt. Ltd. in the books of the assessee company, it is noticed that the nature of transaction between them are business transaction. In case of CIT vs. Raj Kumar, 318 ITR 462 (Del.), the Hon ble Delhi High Court has held that applying the rule of Noscitur a Sociis lwhich means that the word in an Act opf Parliament is to be constructed with reference to the words found in immediate connection with them, the word advance has to be read in conjunction with the word loan . Usually attributes of a loan are that (i) it involves a positive act of lending coupled with acceptance by the other side of the money as loan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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