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TMI Blog2019 (9) TMI 370X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the addition becomes an exercise in futility because nothing can be added under section 2(22)(e). Person both as registered and beneficial owner, he is not covered by the provisions of section 2(22)(e). Addition made is deleted on this ground as not sustainable. - Decided against revenue Unaccounted sales - unaccounted purchase by the assessee-company; and that similarly, the same amount of difference was found as unexplained sales - HELD THAT:- As observed by the CIT(A), it is a settled accounting practice that in a customer's account, the amount of sale is debited inclusive of the amount of VAT Excise. However, for purchase, the customer s account is the net of excise VAT, as the aforesaid taxes are available to the customer as Cenvat/ Input Vat against Excise duty payable/output Vat payable. Through the reconciled account statements filed befoe the ld. CIT(A), both in the books of SCPL and M/s Synthetic Silica Products M/s Chhavi Microfine together with Tax Audit report of SCPL, the assessee established that there were no difference in the books of the two accounts. Therefore, we find that the ld. CIT(A) has decided the issue in correct perspective and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The Ld. Commissioner of Income Tax (Appeals)-I, Kanpur has erred in law by deleting the addition made on account of deemed dividend when the loan/advance was given to the Director in his saving bank account in his individual capacity and moneys were siphoned from company to share holder to the tune of 10.47 crores. 5. The Ld. CIT(A) has relied heavily on distribution of income but has not considered the voting power requirement of section 2(22)(e) of the I.T. Act, 1961 for the purpose as per Hon'ble Supreme Court order of 4.01.2017, the Hon'ble Court has held as per para 17- Judgment in C P Mudalir, relied upon by the Ld. Counsel for the appellant will have no application. That was a judgment rendered in the context of section 2(6-A)(e) of Income Tax Act, 1922, wherein there was no provision like explanation 3 . Inspite of this the Ld. CIT(A) had relied on the orders prior to this period. 6. The Ld. Commissioner of income Tax (Appeals)-1, Kanpur has erred in law by deleting the addition of ₹ 1,04,86,510/- on account of unaccounted sales when the assessee had not proved beyond doubt the reason for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance was given to the Director in his saving bank account in his individual capacity and moneys were siphoned from company to the shareholder to the tune of ₹ 10.47 crores; that the Ld. CIT(A) has relied heavily on the distribution of income, but has not considered the voting power requirement of section 2(22)(e) of the Act; and that the reliance placed by the assessee on the decision of the Hon'ble Supreme Court, order dated 4.01.2017 in C.P. Mudalir was not considered by the ld. CIT(A), whereas he has placed reliance on the orders prior to this period. 4. The ld. counsel for the assessee, on the other hand, has placed reliance on the impugned order. 5. Heard. We find that the assessee is a shareholder in M/s Sumit Chemical Pvt. Ltd., a closely held company. During the year under consideration, the Assessing Officer found that the assessee had shown transaction of ₹ 1045.07 lakhs with the related company, i.e., M/s Sumit Chemical Pvt. Ltd., in which he was a shareholder. The assessee was asked to explain the applicability of section 2(22)(e) of the Act, on the transactions entered into by him with the closely held private company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, a show cause dated 30/01/2015 was issued to the assessee along with notice u/s 142(1) of the I.T Act, 1961. 4.3 Vide reply dated 06/02/2015 assessee submitted the reply on above issue. Assessee has replied, As regards to the applicability of provisions of sec 2(22)(e)of the I.T Act, it is submitted that the assessee is neither a director nor having shareholding /voting power holding more than 10% of total shares in this company. The assessee is holding 25911 equity shares in the income, representing 8.82% shares. Further assessee has submitted, In Point No.4 of the show cause notice, your honour has asked to show cause as to why the shareholding of K M Agarwal HUF be not clubbed together with individual as Karta of HUF is representing before the company for voting, ACM and all practical purposes is the same person. The contention of your honour in this regard is erroneous and is not sustainable in law as KM Agarwal HUF is separate entity and is assessed to tax separately. It is HUF of KM Agarwal and have separate sources of income and ha ve separate funds in its capital account which belongs to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it Chemicals Pvt. Ltd. for the A.Y 2012-13. Also the sales tax detail of the company were procured from the Sales Tax Site. The following facts have emerged from perusal of the above documents- M/s Sumit Chemicals Pvt. Ltd. was a closely held company in which the directors and relatives of directors were shareholders. The company had not allotted shares to any outside members. There were two HUFs K.M Agarwal (HUF) and Ram Kumar Agarwal (HUF) which were also in the list of shareholders. Again, the family members were only allottees of shares in both the HUFs and were registered and beneficial owner of the shares. As per the ROC return filed in Form 20B by M/s Sumit Chemicals Pvt. Ltd on 31/08/2012, the company had inducted an outside member Sri Jay Narain Yadav as one of the directors. He was appointed on 30/11/2011. No shares were allotted to him though and had no voting power. The previous director was Sri K.M Agarwal who was director since 1988 and had resigned on 30/11/2011.Form 32 filed with ROC dated 24/01/2012 is on record. His shareholding however, in individual capacity had remained intact. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor of the company. .. It was only after confrontation to the assessee of the return filed with ROC, the assessee had submitted to the correct facts. The assessee tried to put up a case where he was a passive shareholder during the relevant period. Wherein, all the key affairs of the company were managed by Sri Sumit Agarwal and Sri Jay Narain Yadav as directors of the company Regarding the issue of clubbing of shareholding, assessee had relied upon the case law: regarding 'clubbing of income , which had no relevance with the present facts of the case. The assessee's shareholding as individual and Karta of HUF needs to be clubbed as he was the director, registered shareholder of the shares and beneficial owner of the shares during the relevant previous year in the company. The section requires that the total shareholding of a particular shareholder needs to be seen in all the capacities in the company which should not be less than 10%. The judgement of Hon'ble Delhi High Court in the case of CIT vs. National Travel Services is important to mention here. In this case the court has held that it is accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concern in which such shareholders have substantial interest, or make any payment on behalf of, or for the individual benefit of, such shareholder; that in such an event, by the deeming provisions, such payment by the company is treated as dividend; that the intention behind the provisions of section 2(22) (e) of the Act is to tax dividend in the hands of the shareholders; and that the deeming provision, as it applies to the case of loans or advances by a company to a concern, in which its shareholder, has substantial interest, is based on the presumption that the loans or advances would ultimately be made available to the shareholders of the company giving the loans or advances. 8. The ld. CIT(A) discussed the following case laws: (1) ACIT vs. Bhaumik Colour (P) Ltd., 119 ITD 1 (Mum.) (SB). (2) CIT vs. Krupeshbhai N Patel, 34 Taxmann.com 245 (Gujrat). (3) CIT vs. Navibhai N Patel, 35 Taxmann.com 354 (Gujrat). (4) CIT vs. C. P. Sarathy Mudaliar, order dated 12/10/1971 of Hon ble Apex Court. (5) CIT vs. C.P. Sarathy Mudaliar, 83 ITR 170 (SC). (6) Rameshwarlal San ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscuss the issue the shareholding of K.M. Agarwal individual and K.M. Agarwal as Karta of HUF on 10.10.2016 and subsequently remand report dated 18.01.2016 was received on the same issue whether the share of Karta of HUF and Individual can be clubbed together for the purposes of section 2(22)(e) as under:- However, I would like to rely on some additional facts and case laws in this regard. A book named A Step Ahead is published by the committee of departmental officers headed by CCIT(CCA), Gujrat in Gujrat region on controversial issues in assessment. The interpretation of section 2(22)(e) with regard to clubbing of shareholding rights was taken from there. Moreover, Delhi High Court in the case of National Travels Services (supra) elaborately analyzed this issue and concluded that in case it is accepted that firm not being a legal entity cannot become a shareholder of a company and in case loan has been advanced to a firm whose partners are shareholders, then it would frustrate the provisions of Section 2(22)(e), and will lead to absurd results. Therefore, loan received by a firm, whose partners are registered shareholders of the company which advanced the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and therefore this stand cannot be upheld. The Assessing Officer in her order has carried an elaborate and a detailed description of calculating accumulated profits as well as calculating the amount given as loan. However as the primary condition of 10% beneficial shareholding of Mr. K.M Aggarwal is not established the remaining amount/ part of the addition becomes an exercise in futility because nothing can be added under section 2(22)(e). Therefore no comments are offered on the same. As Shri K.M. Agarwal holds 8.82% shares in closely held private company M/s Sumit Chemicals Pvt. Ltd., both as registered and beneficial owner, he is not covered by the provisions of section 2(22)(e). Addition made is deleted on this ground as not sustainable. Result: Addition made is deleted on this ground as not sustainable. Appeal is allowed. 12. Having considered the rival contentions in the light of the material placed on record, we find no error whatsoever in the order under appeal. In CIT vs. National Travel Service (supra), as noted by the ld. CIT(A), the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d HUF in the register of shareholders of the company. The loans were advanced by the company to three concerns which were owned by the assessee/HUF. The Court held that conditions stipulated in Section 2 (6A) (e) of the Income Tax Act, 1922 (which is akin to Section 2 (22)(e) of the present mischief of this Section as the HUF was not the shareholder even when it was beneficial owner of the shares. It is dear there from that both the conditions have to be satisfied. This view has been followed by the Rajasthan High Court in the case of Harish Chand Golecha Vs. CIT, 132 LTR 30 while dealing with the present provision contained in the Income Tax Act, 1961. The expression - being a person as a beneficial owner of shares, qualifies the word shareholder . Thus to attract the provisions of Section 2(22)(e) of the Act, the person to whom the loan or advance is made should be a shareholder as well as beneficial owner. This brings us to the more important issue viz. whether the 'assessee firm' can be treated as a shareholder having purchased shares through its partners in the company which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(22) (e) shareholding of individual HUF can be clubbed is not valid and therefore this stand cannot be upheld. The Assessing Officer in her order has carried an elaborate and a detailed description of calculating accumulated profits as well as calculating the amount given as loan. However as the primary condition of 10% beneficial shareholding of Mr. K.M Aggarwal is not established the remaining amount/ part of the addition becomes an exercise in futility because nothing can be added under section 2(22)(e). Therefore no comments are offered on the same. As Shri K.M. Agarwal holds 8.82% shares in closely held private company M/s Sumit Chemicals Pvt. Ltd., both as registered and beneficial owner, He is not covered by the provisions of section 2(22)(e). Addition made Is deleted on this ground as not sustainable. Result: Addition made is deleted on this ground as not sustainable. Appeal is allowed. 15. No decision contrary to CIT vs. National Travel Service (supra) has been cited before us. There is also no contra decision to the following d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexplained sales in the hands of Shri K.M. Agarwal. Accordingly, the Assessing Officer applied the gross profit rate of 16.25% on the amount of ₹ 1,04,86,509/-, being the difference amount of concealed income, which comes to ₹ 17,04,060/-, and the same was treated as concealed income of the assessee. The Assessing Officer further observed that the sales and purchase were out of books; that the assessee had failed to give the correct position of sales and purchases, despite providing to him various opportunities. By applying the formula of cost price = sale price gross profit, the amount of purchase was calculated by the Assessing Officer at ₹ 87,82,450/- and this amount was treated as unaccounted investment made by the assessee in purchase of raw material. He accordingly, added ₹ 1,04,86,510/- (₹ 17,04,060 + 87,82,450), to the total income of the assessee as unaccounted sales. 20. Aggrieved, the assessee preferred an appeal before the ld. CIT(A), who, after considering the remand report of the Assessing Officer, deleted the addition, observing as under: It is settled accounting practice that in a customer's acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence in sale/purchase after giving credit of VAT/Excise duty; and that the differences in the Audit Report and ledgers were not reconciled by explaining as to why no addition he made for the omission on the part of assessee to disclose the entries in the Audit Report. 22. The ld. counsel for the assessee, on the other hand, has placed reliance on the order of the ld. CIT(A). 23. Heard. As observed by the ld. CIT(A), it is a settled accounting practice that in a customer's account, the amount of sale is debited inclusive of the amount of VAT Excise. However, for purchase, the customer s account is the net of excise VAT, as the aforesaid taxes are available to the customer as Cenvat/ Input Vat against Excise duty payable/output Vat payable. Through the reconciled account statements filed befoe the ld. CIT(A), both in the books of SCPL and M/s Synthetic Silica Products M/s Chhavi Microfine together with Tax Audit report of SCPL, the assessee established that there were no difference in the books of the two accounts. Therefore, we find that the ld. CIT(A) has decided the issue in correct perspective and no interference is called for in his o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure. While explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word commercial expediency . By using this phrase Hon'ble Supreme Court has given a new dimension and clarified the concept further. In the judgment the Supreme Court has defined commercial expediency as an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency . The burden of proving, that the moneys borrowed has not been utilized for non-business purpose and the lending has all' ingredients of commercial expediency , is on the assessee. There are various case laws which supports this contention viz. CIT Vs. Coimbatore Salem Transport P. Ltd. 61 ITR 480 (Mad) Indian Metals Ferro Alloys Ltd. Vs. CIT, 193 ITR 344 (Ori) CIT Vs. Abhishek Ind (P H) 286 ITR 1. In the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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