TMI Blog2009 (1) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant. Sameer Sharma for the Respondent. ORDER K.G. Bansal, Accountant Member. - These two appeals of the assessee emanate from a consolidated order passed by the CIT (Appeals)-XXVI, New Delhi, for assessment years 1999-2000 and 2000-01 in Appeal Nos. 19 and 20/2005-06, dated 12-8-2005. Since the appeals emanated from a consolidated order of the CIT (Appeals), they were argued in a consoli- dated manner by the learned counsel for the assessee and the learned DR. In view thereof, we think it fit to pass a consolidated order on these appeals. The assessee has taken an identical ground in both the appeals. The ground for assessment year 1999-2000 is to the effect that on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in confirming the addition of Rs. 25 lakhs as deemed dividend under section 2( 22 )( e ) of the Income-tax Act, 1961, ignoring the fact that the similar addition made earlier in respect of assessment year 2001-02 was deleted. It is also mentioned that the amount was surrendered by the assessee under unusual pressing circumstances without appreciating properly the implications thereof. It may be mentioned here that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship. A copy of the order was filed before the Assessing Officer. It was further explained that the company had stopped the production facility of the material for which the order was received and, therefore, it was decided to outsource the materials from M/s. Delihites, the proprietary concern of the assessee. In view of the order placed with M/s. Delihites, a sum of Rs. 25 lakhs was advanced to it on 25-6-1998. M/s. Delihites imported the components from China, which were inspected by Kaks. However, the material was rejected and the advance was recovered on 23-9-1998. It was also explained that since the order was valid for three years and the company did not want to lose the customer, it again prevailed upon the Delihites to procure better quality components. In view thereof, the assessee again imported the components, for which an advance of Rs. 13 lakhs was given on 15-7-1999. Again, the quality of the components did not match with the specifications of the buyers. The efforts were repeated twice again on 19-11-1999 and 14-2-2000 by making advances of Rs. 3 lakhs and Rs. 13 lakhs. However, since the components were imported from China, which were cheaper but did not match th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was placed before us. Paragraph 5 deals with the issue on merits. The Tribunal mentioned that the sum of Rs. 5 lakhs was advanced by Kaks to the assessee for purchase of zips. This transaction was in the nature of a commercial transaction. However, the transaction did not materialize and the advance was refunded by the assessee to Kaks within a period of two days. Section 2( 22 )( e ) intends to treat any loan or advance to a shareholder as deemed dividend only when such a shareholder intends to derive benefit out of the funds of the company, which is detrimental to the interests of the remaining shareholders. It is further mentioned that although the language of section 2( 22 )( e ) encompasses any payment by way of a loan or advance to any major shareholder and deems it to be dividend, but in our consideration, the intention of the Legislature has to be seen on the facts of the case as to whether the payment actually resulted in any benefit to such a shareholder, which can be classified as dividend. The assessee returned the advance within a period of two days. Therefore, it was held that it is difficult to hold that this payment could be treated as deemed dividend. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to page 5 of the paper book, being the extract of resolution passed by the Board of Directors of Kaks on 11-3-1998, which is to the effect that the Board approved placing of export orders for zips under section 297 with M/s. Delihites, proprietor, Nigam Chawla, director. Our attention was also drawn towards page 37 of the paper book, being the invoice prepared by Kaks on Ronex International for supply of 75 cartons of man-made fabric. This was done to show that M/s. Ronex International was a regular customer of Kaks. Our attention was also drawn to page 42 of the paper book, being the invoice raised by Shanghai East Dragon Ziper Making Ltd. on M/s. Delihites, dated 4-5-1999, for an amount of US$ 30,400. 2.5 In view of the aforesaid evidences, it was the case of the learned counsel that the issue being legal in nature, it cannot be decided merely on the surrender made by the assessee as she may not understand fully the legal implications of a particular transaction. Since the transaction was a business transaction in the course of which advance was received, the amount could not be taxed as deemed dividend under section 2( 22 )( e ) of the Act, as decided in a number of cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had quoted the case of Ardee Finvest (P.) Ltd. v. Dy. CIT [2001] 79 ITD 547 (Delhi). In that case, the assessee had received share application money for allotment of shares. The shares were allotted in accordance with the provisions contained in the Companies Act, 1956. The amounts were initially reflected as advances in the accounts and later on adjusted towards allotment of shares. The accuracy of the accounts was not challenged by the revenue. There was nothing on record to show that the share application money was received with a view to defraud the revenue. The revenue treated the amount as loan and brought to tax the same under section 2( 22 )( e ). The Tribunal pointed out that application of section 2( 22 )( e ) involves consideration of two factors, whether - ( i ) the payment is a loan, and ( ii ) at the date when the payment is made there are accumulated profits to the extent of the loan. The Tribunal finally came to the conclusion that for interpreting a deeming provision, it is necessary to find out the purpose for which the fiction was created. A wider meaning cannot be given than what is stated in the fiction. Coming to the facts of the case, it was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature involving the advance and purchase of material. It was not an advance simplicitor. In such a circumstance, it cannot be said that the advance was made for the benefit of the assessee. Hon ble Bombay High Court had also an occasion to discuss the issue in the case of CIT v. Nagindas M. Kapadia [1989] 177 ITR 393 1 . In that case, the assessee had a running account with Maganlal Chhaganlal Pvt. Ltd., which disclosed cash payments by the company amounting to Rs. 1,31,672 and Rs. 3,86,000 in assessment years 1968-69 and 1969-70 respectively. These amounts were taxed by the ITO as dividend under section 2( 22 )( e ). The Tribunal found that payments other than Rs. 28,500 and Rs. 10,000 in these years were made as advances towards purchases to be made by the company from the assessee and, therefore, only the aforesaid amounts were held to be taxable under section 2( 22 )( e ). The Hon ble Court confirmed the findings of the Tribunal by pointing out that the Tribunal was right in excluding the advances towards purchases to be made by the company from the assessee. We find that the advances made in this case are only for the purchases and the revenue has not shown that any amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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