9911796707
TMI Blog2013 (4) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee even charged 10% less than the market rate for job work, which resulted into a mutual benefit of both the parties - The assessee was not allowed to adjust advances against the job work done by it as per the terms of the agreement. As a result, the sister-concern took over the entire business of the assessee - there is no personal benefit to the assessee from this arrangement but the assessee has suffered therefrom - Hence the security deposit cannot be construed as a loan - Reliance is placed on the decision of Delhi High Court in (2000) [161 CTR (Del) 432 : (2000) 244 ITR 358] - Decided in favor of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... The complete copy of account on M/s Nexo Indus. Pvt. Ltd., in the books of account of M/s Nexo Product (India) was also filed during the course of hearing, which is on record. The copy of account reveals that huge amount of money has been advanced to the proprietorship concern of the assessee M/s Nexo Product (India) by the Pvt. limited company, namely M/s Nexo Inds. Pvt. Ltd. The opening balance as on 01.04.2005 is ₹ 67,77,042.79 and the closing balance as on 31.03.2006 is ₹ 4,04,77,625.93. There is always a huge credit balance in the account and there is no debit balance on any date, during the previous year under consideration. The maximum credit balance in the account is dated 14.12.2005 amounting to ₹ 6,79,62,621.93. 2.2 A study of the copy of account further reveals that these are basically entries of loan/advance taken or given. Some paltry amount of sales has also been debited in the account of M/s Nexo Inds. Pvt. Ltd., to give it a colour that there are business transactions of purchase and sale. But the amount of sales made by the assessee to M/s Nexo Inds. Pvt. Ltd. as reflected, in the copy of account are negligible, when compared with the advances re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mrik Singh (PAN AFRPS2729E) is a director in the private limited company and is a beneficial owner 34.71% of the shares. Thus it is clear that Sh. Amrik Singh is a beneficial owner holding shares not less then 10% of the voting power, as required u/s 2(22) (e). The perusal of the assessment record of M/s Nexo Inds. Pvt. Ltd. also reveals that M/s Nexo Inds. Pvt. Ltd., is a closely held company and the public is not substantially interested. The other major share holding in M/s Nexo Inds. Pvt. Ltd., is of another director Sh. Rajinder Singh, who is holding 54.97% of the share. 2.6 For the purposes of section 2(22) (e), another condition for deemed dividend is that the company should possess accumulated profits to the extent of the advance or loan given. A perusal of the balance sheet of M/s Nexo Inds. Pvt. Ltd filed alongwith the e-return of income for the A.Y. 2006-07 reveals that there is 'Reserve and Surplus' of ₹ 22,62,61,742/~ as on 31.03.2006. 2.7 Thus, all the conditions as laid down in section 22(2)'(e) are fulfilled and the advance given by M/s Nexo Inds. Pvt. Ltd. to M/s Nexo Products'India a proprietorship concern of the assessee, Sh. Amrik Singh f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration a large amount of assets have been capitalized. The details of which is as underv5 1. Machinery under installation capitalized ₹ 64,67,459.20 2. Machinery capitalized ₹ 2,4 7,44,703.32 3. Building capitalized ₹ 2,08,158.50 Total ₹ 3,14,20,321.02 Thus, assets worth ₹ 3,14,20,321.02 have been capitalized during the year under consideration and assets worth ₹ 91,07,979.58 are still under installation. 3.2 The secured loans raised during the year have been utilized for raising these assets and the interest paid relating Jo the creation affixed assets and assets under installation is a capital expenditure and is to be capitalized under the respective heads of the assets. According to the assessee 's own submissions, 12% interest is being paid on the various secured loans. Besides the secured loans, there are unsecured loans worth ₹ 43,43,329/- outstanding as on 31.03.2006. Thus, the A.O. is directed to calculate the interest to be capitalized on account of fixed assets additions during the year worth ₹ 3,14,20,321.02 and also the capital work in progress worth ₹ 91,07,979.58. 3.3 The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igure credited in the profit and loss account and the party wise sale given by the assessee during the proceedings. The A.O. is directed to investigate this point in detail and get the figures reconciled from the assessee and in case of discrepancy take appropriate action. 8. Information has been called u/s 133(6) of the I.T. Act, 1961 from M/s MukandLtd. Ludhiana, during the course of the assessment proceedings. As per the information furnished by M/s MukandLtd. the total sale made by them to the assessee during the current year is ₹ 1,75,50,663/-. However, the detail of party wise purchase above ₹ 5 lacs reveals that from M/s Mukand Ltd. purchases worth ₹ 17917245/- has been made. The A.O. is directed to take appropriate action on the discrepancy of ₹ 3,66,582/- in the purchase account. 9. The assessee has reflected 'Labour Income' ofRs. 1,71,27,281/-from one of the sister concern namely M/s Nexo Inds. Ltd. The assessee besides doing job work of wire rod for its sister concern is also engaged in the mfg. of fasteners. TheA.O. should ask the assessee to furnish separate trading accounts for the labour income and for the mfg. activity. After the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng advance as on 31.3.2006 except M/s Nexo Industries Pvt. Ltd. clearing the issue that in the trade of assessee concern the receipt of huge advances is not a prerequisite for selling of goods. 10. Sh.Amrik Singh is also a Director in M/s Nexo Industries Pvt. Ltd. holding 34.71% of the shares of the company. The company i.e. M/s Nexo Industries Pvt. Ltd. has also reserves and surplus of ₹ 22,62,61,742/- as on 31.3.2006." Against the proposed holding, the amount of advances received by the assessee from the sister-company as deemed dividend under the provisions of section 2(22) (e) of the Act in the hands of the assessee, it was repl ied as under: "1. That as regards your query regarding the nature of advances by Nexo Inds. Pvt. Ltd. to the under mentioned assessee, it is respectfully submitted that the assessee is doing job work of annealing, drawing and forging for Nexo Inds. Pvt. Ltd. The assessee had been doing job work for many years of Nexo Industries Pvt. Ltd. and Nexo Industries Pvt. Ltd. was quite satisfied with the quality of job work and delivery schedule, which is very important for the units dealing in Exports and Government Departments under Tender system. Due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustries gave to M/s Nexo Products (India) the machinery imported from out of India along with custom duty, freight and other incidental charges, besides some local manufactured machinery, the details of which are given on separate annexure which is attached herewith. Most of the credit entries in the account of M/s Nexo Industries Pvt. Ltd. in my books of account relate to the above mentioned machinery. The other payments are against job work done and sale. Moreover as the assessee failed to comply with all the terms and conditions of the agreement, M/s Nexo Industries Pvt. Ltd. took over the entire machinery of the assessee on 01.08.2007. As these transactions are in the ordinary course of business so these do not come under the purview of section 2(22) (e). " 1.5 Further the counsel has submitted that large amounts of payments have been made directly by M/s Nexo Industries Pvt. Ltd. to seller of plant and machinery which has been installed in the unit of the assessee i.e. M/s Nexo Products. 1.6 In light of the assessee's reply let us first examine the provision of section 2(22)(e)." 5. After considering the repl ies of the assessee and after discussing relevant prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the illegal order of assessment made by the respondent based on the illegal orders and directions issued by the Additional Commissioner without even grafting effective hearing to the appellant and the directions of the higher officers cannot form the basis for the A.O. to make assessment under section 143(3) of the Income Tax Act and therefore the illegal order of the Assistant Commissioner ought to have bee vacated. II. The CIT(A) has also erred both on facts and in law in upholding the illegal addition of alleged deemed dividend made! section 2(22)(e) of the Income Tax Act to the extent of ₹ 19196490/- and the." addition illegally made by the A.O. ought to have been deleted as being unsustainable and unwarranted both on facts and in law. III. The CIT (A) has also erred in upholding fee illegal order- of assessment as well as the consequent illegal demand of tax, interest and penal action against the appellant and the failure to vacate the whole order and delete all the additions had resulted in miscarriage of justice to the. appellant which needs to be redressed by the tribunal in this appeal. IV. The CIT (A) also erred in not deciding the first ground of appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agreement with the assessee whereby that company agreed to install plant & machinery at assessee's premises who would do job work exclusively for that company. He has invited our attention towards a copy of the agreement dated 01.08.2003 which is placed at pages 56-58 of his Paper Book. This fact has not been doubted or denied by the AO. According to him, the most of the advances to assessee's proprietory concern (firm) was on account of cost of plant & machinery. To substantiate this contention, ld. AR has referred to a copy of account of the company in the books of the assessee which is enclosed at pages 19-43 of the assessee's Paper Book. 10. In the back-drop of the above submissions, ld. AR has argued that there through various commercial expediencies, this advance was taken in the manner stated above and no amount was used or utilized or taken by the assessee for his personal usage and it was utilized and used only towards job work and for mutual benefit of both the parties. To further buttress his arguments, he has stated that the assessee as proprietor, had pledged his own properties, enabling the company to raise loans to the extent of ₹ 26 crores. To s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order. The ld. CIT-DR has supported the sustained addition but has challenged the deleted amount by stating that the entire advance received by the assessee is, infact, a deemed dividend which falls under the definition of section 2(22) (e) of the Act and deserves to be added in assessee's hands. 12. We have given our anxious consideration to the rival submissions. Before proceeding further, let us examine what is the intention of the legislation in enacting provisions of section 2(22) (e) of the Act. Section 2(22) (e) of the Act reads as under : "2(22)(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. 4[Explanation 3.-For the purposes of this clause,- (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ; (b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;]" 13. The macroscopical reading of the above provision makes is evidently clear that the law-makers wanted to bring to tax monies paid by closely held companies to their principal shareholders, in the guise of loans and advances to avoid payment of tax. The Hon'ble Supreme Court also held in the case of Navneet Lal C.Jhaveri V K.K.Sen (1965) 56 ITR 198 (S.C) that the provisions of section 2(22) (e) of the Act must be made applicable where dividend disguised as loan is paid by a company. But, they have also held that this concept should not be stretched too far to involve any absurdities. This section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng infrastructure and machinery. Therefore, to come out of that angle, the sister-company proposed to provide support to the assessee with additional machinery and incidental requirements for enhancement of its job work capacity. Thus, we have found it for a fact that only due to business necessity and expediency, the parties agreed to entered into an agreement where-under, the assessee was to import the specified machinery and the sister-company would advance monies to it for making payments towards the cost of those machineries as well as incidental charges, like Custom Duty, freight etc. The agreement executed between them on 01.08.2007 is the reason for receiving advances towards purchase of machinery etc. We have also gone through the relevant portion of the agreement, which is being incorporated hereunder below for ready reference : "That the party of the second part shall do the job work exclusively of the party of the first part and in case of breach of this condition, it will have to pay damages to the party of first part, to the extent the party of second part does job work of any third party. That the party of the first part has agreed to make payments for the purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the assessee on 01.08.2007 to liquidate its outstanding advances. These undeniable facts go to prove that this arrangement was the result of business expediencies of both the parties. The sister concern was to be benefited with quantity and quality of job work done at a lower price than that prevailing in the market and the assessee was confident of getting regular job work, in addition to sponsored cost of additional machinery. It is revealed from the above facts that the assessee was not at al l personally benefited out of this arrangement. The assessee, even was put to some loss by taking over of its plant & machinery by the sister-concern to liquidate its outstanding advances when the assessee could not satisfy the conditions set-out in the agreement between them. The following chart shows the business expediency which, when analyzed, reveals increase in the job work figures of the assessee and sale figures of the sister-concern. This chart is as under : "Particulars NPI NIPL Job work done Sales 2004-05 year in which The parties entered into Agreement 42,90,726 55,13,20,606/ - 2006-07, year in question 1,71,27,281 84,82,81,498/ -" 15. It was also found that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile ruling in favour of the assessee made certain important comments and observations. With regard to the applicability of section 2(22)(e) the ITAT penned its observations which are reproduced herein under: Sec! 2(22)(e) enacted a deeming fiction whereby the scope and ambit of the word "dividend" has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in S. 2(22)(e). It is a settled-rule of interpretation of a fiction that the Court should ascertain for what purpose the fiction is created and after ascertaining the purpose, the Court has to assume all facts which are incidental to the giving effect to that fiction. Such a deeming fiction would not be given a wider meaning than what it purports to do. The provision would necessarily be accorded, strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. Sec. 2(22)(a) has not been enacted to stifle normal business transaction carried out during the course of business. It not obviously bring within its limited purview security deposit or performance guarantees secured by a buying agent from a seller so as to ensure adherence to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove stated fact that the arrangement was a genuine business transaction as a result of arm's length negotiations between NPI and NIPL, the Learned Assessing Officer failed to recognize the fact that there was an opening credit balance of ₹ 6777043/- on 01.04.2005 and in addition to that there were unrealized cheques of ₹ 6120000/- & ₹ 800000/- debited in the books of accounts which related to the year ending 31.03.2005 which should have been deducted out of the closing balance of ₹ 40477626/- to arrive at the deemed dividend amount i.e. ₹ 26780583 Whereas the Learned Assessing Officer has treated the peak amount of ₹ 6796262IIoutstanding during the relevant previous year as deemed dividend without deducting opening balance of ₹ 67,77,0437- on 01.04.2005 and unrealized cheques of ₹ 61,20,0007- and ₹ 8,00,0007- which on the face of it is against law and facts of the case. It is hence prayed that if any addition is made during the re-assessment u/s 143(2) under the direction of CIT u/s 263, in previous assessment years, the set off of additions made on this ground may given in this assessment year to avoid double taxation if y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, the facts of the case are on entirely different footing and the temporary return of the amount would not make it a loan. This amount would be considered in the line of partial intention which is to determine the nature of the transaction. The temporary repayment of the un-utilized business advance, in fact, proves bonafide of the transactions and intention of the parties, which establishes, beyond doubt, that the impugned advances were business advances and not for any other consideration for personal usage. The assessee had also mortgaged his personal properties for the company and has raised loans of ₹ 26 Crores. This facts stands proved on record. Therefore, the decision of the case in Pradeep Kumar Malhotra V CIT reported in 338 ITR 538 (Cal ) helps the case of the assessee. Thus, under any circumstances, the provisions of section 2(22) (e) of the Act are not applicable to the present case. The following decisions also support our above conclusion : "1. CIT V Creative Dyeing & Printing P.Ltd. 318 ITR 476 (Del ) . 2. CIT V Raj Kumar 318ITR 462 (Del ) 3. DCIT V Lakra Brothers 106 TTJ 250 (Chd Trib) . 18. The Hon'ble Delhi High Court in the case of CIT V Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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