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TMI Blog2017 (9) TMI 1459X X X X Extracts X X X X X X X X Extracts X X X X ..... Nutech Pvt. Ltd. The assessee is having 48% share holding in Flamingo Additives & Colourants Pvt. Ltd and 25% share holding in Gnesis Nutech Pvt. Ltd. From the copy of the account, we do agree with the learned AR that there are debit and credit transactions between both the companies. The companies has given and received funds as and when required to and from its associate concern. The account here also appeared to be in the nature of current adjustment accommodation account where there is movement of funds in both ways on need basis. These transactions, as has been held by us in the preceding paragraphs, following the decision of the Hon’ble Gujarat High Court in the case of Schutz Dishman Bio-tech P Ltd (supra), we hold that the sum of can also not be regarded as deemed dividend u/s. 2(22)(e) of the Act. We hold accordingly, and, therefore delete the addition of ₹ 38,60,000/-. Now coming to the sum of ₹ 1,09,785/- paid by Flamingo Additives and Colourants Pvt. Ltd. to Flamingo Polycolours Pvt. Ltd, we, restrict the source to the sum of ₹ 89,774/- and ₹ 1,250/-. We noted from the copy of the account of the submissions made by the assessee the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against credit balance ₹ 1,09,785 iv. Amount paid by Flamingo Polycolours Pvt. Ltd to M/s. Genesis Neutech Pvt Ltd ₹ 3000. In the alternative, the assessee has taken one more ground that in case the amount is treated to be deemed dividend it should be restricted to the extent of accumulated profit amounting to ₹ 78,50,414/-. 2. The brief facts of the case are that the Assessing Officer during the course of assessment proceedings noted that Flamingo Additives Colourants Pvt. Ltd had advanced ₹ 48,50,000/- to Flamingo Polycolours Pvt. Ltd., Flamingo Additives Colourants Pvt. Ltd had advanced ₹ 38,60,000/- to Genesis Nutech Pvt. Ltd., Flamingo Polycolours Pvt. Ltd had advanced ₹ 3000/- to M/s. Genesis Neutech Pvt Ltd. He noted that the assessee had substantial interest in the following companies Name of the Party % of share holding Flamingo Poly Colors Pvt. Ltd 47.3% Genesis Nutech Pvt. Ltd 25% Flamingo Additives and Colourants Pvt Ltd 48% he Assessing Officer was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies as detailed below: Name of the Party % of share holding Flamingo Poly Colors Pvt. Ltd 47.3% Genesis Nutech Pvt. Ltd 25% Flamingo Additives and Colourants Pvt Ltd 48% Before deciding the issue whether the said amount can be treated as deemed dividend u/s. 2(22)(e) of the IT Act or not, in our opinion, it is necessary to look into the provisions of section 2(22)(e), which stipulates as under: (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(32) the expression person who has a substantial interest in the company , in relation to a company, means 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, carrying not less than 20% of the voting power. such shareholder is the shareholder who is a registered and a beneficial holder of shares holding 10% voting power. 4.5 Through this sub-clause, deeming fiction is created whereby the scope and ambit of the word dividend has been enlarged to bring within its cover loans granted by closely held companies to their shareholders. In order to have a check on similar transactions, the legislation widens the scope of the term dividend to include loans granted to shareholder by the closely held companies. The word deemed has not been defined anywhere in the Act. Neither has the word been used in section 2(22)(e). Deemed dividend is therefore a legal fiction created wherein certain payments by companies are deemed to be dividends. This is a settled law in view of the decisions of Apex Court in the case of State of Bombay vs. Pandurang Vinayak Chaphalkar (1953) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section also prescribes an exception to the above rule. Such exception applies where two cumulative conditions are satisfied Firstly, the loan should have been made by the company in the ordinary course of its business, and Secondly, money lending should be a substantial part of the company s business. 4.10 Further, the section also gives relief by providing that any subsequent dividend declared by the company and set-off against the loan or advance, which has been deemed as dividend under sub-clause (e), then to the extent of such set-off, it would not be again treated as dividend. That is to say, if the dividend is not so set off but is paid to the shareholder while the loan remains outstanding, the benefit of sub-cl (iii) cannot be obtained. 4.11 In the Act, the word shareholder is followed by the expression being a person who is the beneficial owner of shares . This expression used in section 2(22)(e) both in the Act, and in the amended provisions with effect from 1st April, 1988 only qualifies the word shareholder and does not in any way alter the position that the shareholder has to be a registered shareholder. This provision also does not reduce the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a member or a partner in the said concern, holding substantial interest in the concern. In case the concern is a company, then he must be the owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than 20% of the voting power. If the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than 20% of the income of such concern. 4.15 Such shareholder is the shareholder who is a registered and a beneficial holder of shares holding 10% voting power. Therefore, the expanded meaning of dividend as applied to payments to even nonshareholder would be applicable if all of the following conditions are fulfilled- (a) The person is a registered shareholder of the company (b) The person is beneficially entitled to 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 of the company; (c) The person is a member or partner in other concern (d) The person has substantial interest in the concern referred to in cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not. In its widest meaning the term advance may or may not include lending, however, since the term advance has been used in conjunction with the term loan , it should also get meaning akin to loan . Therefore, a reasonable interpretation of the term advance could mean such advance which carried with it an obligation of repayment. It is in this regard, the judiciaries have consistently taken a view that trade advances made for procuring/ securing goods or services, it would not attract provisions of Section 2(22)(e). 8. This is settled law in view of the decision of Hon'ble Apex Court in CIT vs. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)that apparent is real. Onus is on the party who alleges apparent is not real. In view of the settled position of various decisions, the trade advance cannot be regarded to be the transaction falling within the meaning of section 2(22)(e) of the Act. Hon'ble Allahabad High Court has taken the similar view in the case of CIT vs. Atul Engineering Udyog [2015] 228 Taxman 295 (All). 9. This view has been taken by Hon ble Delhi High Court in the case of CIT vs. Raj Kumar, 318 ITR 462 (Delhi). Similar view has been taken by the Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015. We noted under para 3 and 4 it has been held as under:, judgment dated 21.12.2015. We noted under para 3 and 4 it has been held as under: 3. The Commissioner (Appeals) however, deleted the order of the Assessing Officer making the following observations: 6. I have carefully considered impugned orders and the submissions of the appellant. I am of the view that the provisions of S.2(22)(e) of the Act are not applicable at all and therefore the question of deduction of tax at source does not arise and therefore the liability u/s.201(1) and 201(A) of the Act also does not arise. For both the years under consideration, I have perused the copies of the ledger accounts placed on record. It can be seen that there are large number of debit and credit transactions. Meaning thereby, the appellant has given and received funds as and when required to and from its associate concern. It is not an account whereby loans and advances have been given to the associate concerns. It is an account which is in the nature of current adjustment accommodation account wherein there is a movement of fund in both ways, on need basis. Unlike transactions of loans and advances, in this kind of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or advances as contemplated in section 2(22)(e) of the Act. On the basis of this judgment, it is apparent that if there are transactions in the form of current accommodation entries, they cannot be regarding to be loans and advances. 11. We have also noted that similar view has been taken by Hon ble Punjab Haryana High Court in the case of CIT vs. Suraj Dev Dada [367 ITR 78], wherein, it has been held as under: 10. From the above, it emerges that the Commissioner of Income-tax (Appeals) and the Tribunal had concurrently recorded that the assessee had running account with the company-M/s. Dada Motors Pvt. Ltd. and had been advancing money to it. It was further observed that the provisions of section 2(22) (e) of the Act were not attracted in the present case; this provision was inserted to stop the misuse by the assessee by taking the funds out of the company by way of loan advances instead of dividend and thereby avoid tax. In the present case, the assessee had in fact advanced money to the company and there was credit for only 55 days for which the provisions of section 2(22)(e) of the Act could not be invoked These findings were not shown to be erroneous or pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s has taken place in a whimsical manner. Therefore, it is rather difficult to say that the transactions are in the nature of 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 before us 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 decision to take rested with either the same group of people or with the same individual. In such circumstances of the case, we hold that the transaction interse between the sister concerns and the assessee can not partake or the nature of either deposit or loan though interest might have been paid on the same. Excepting for the transfer of funds being witnessed in the books of account of the concerned firms, no material is on record to show issue of receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has raised this contention even before the Assessing Officer, which is clear from para 4.3.3 of the assessment order. The Assessing Officer has observed the plea of the assessee that the accounts between these companies should be treated as current account and the transactions are temporary in nature cannot be accepted. On this basis, we reject the plea of the learned DR. No contrary decision was brought to our knowledge. Respectfully, following the decision of Hon ble Gujarat High Court in the case of Schutz Dishman Bio-tech P Ltd (supra), we hold that the sum of ₹ 48,50,000/- cannot be treated as deemed dividend u/s. 2(22)(e) of the Act. 13. Now coming to the sum of ₹ 36,60,000/-, which was paid by Flamingo Additives Colourants Pvt. Ltd to Genesis Nutech Pvt. Ltd. The assessee is having 48% share holding in Flamingo Additives Colourants Pvt. Ltd and 25% share holding in Gnesis Nutech Pvt. Ltd. Again the learned AR before us has taken the same contention as has been taken in respect of the amount paid by Flamingo Additives Colourants Pvt. Ltd to Flamingo Polycolours Pvt. Ltd., and for this our attention was drawn to pages 4 and 5 of the paperbook. Fr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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