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2016 (2) TMI 38 - ITAT PUNE

2016 (2) TMI 38 - ITAT PUNE - TMI - Deemed dividend u/s.2(22)(e) - contention of assessee that it was business advance - Held that:- e, the amount has been advanced as business advance, wherein the amount was advanced to a joint venture company for the purpose of purchasing machinery to carry on the business. The recipient company had purchased the machinery against the money so advanced and the assessee has also placed on record the trail of payments in this regard and in such facts and circums .....

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ete the addition - Decided in favour of assessee - ITA No. 643/PN/2012 - Dated:- 27-1-2016 - Ms. Sushma Chowla, JM And Shri Pradip Kumar Kedia, AM For the Appellant : Shri Pramod Shingte For the Respondent : Shri Dheeraj Kumar Jain ORDER Per Sushma Chowla, JM This appeal filed by the assessee is against the order of CIT(A)-V, Pune, dated 02.03.2012 relating to assessment year 2007-08 against order passed under section 143(3) r.w.s. 147 of the Income-tax Act, 1961 (in short the Act ). 2. The asse .....

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not covered u/s 2(22)(e) of the Income Tax Act, 1961. The appellant craves for to leave, add, alter, modify, delete above ground of appeal before or at the time hearing, in the interest of natural justice. 3. The issue raised in the present appeal is against the addition made of ₹ 51,00,000/- by treating the amount advanced as deemed dividend under section 2(22)(e) of the Act by rejecting the contention of assessee that it was business advance. 4. Briefly, in the facts of the present case, .....

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ny i.e. the assessee before us had more than 10% shareholding in Star and 50% shareholding in Mercury, therefore the payment of advance of ₹ 51,00,000/- by Star would fall within the meaning of deemed dividend under section 2(22)(e) of the Act, which in turn, was taxable in the hands of the assessee being beneficial owner of more than 10% shares in Star and also substantial share / interest in the receiving company i.e. Mercury. Accordingly, notice under section 148 of the Act was issued t .....

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deemed dividend covered under section 2(22)(e) of the Act. The assessee further explained that Printed Circuits Board (in short PCB ) was very important and crucial input of assembly where all other small parts were soldered and mounted as far as principal product of Star. Thus, PCBs were manufactured by M/s. R.D. Electronics, proprietary concern of M/s. Sultane. He was supplying the same to other Electronic Units in this area. Due to his limited capacity of manufacture, the supply was not suff .....

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rocurements and to construct the building on the basis of sanction of Bank proposal from Oriental Bank of Commerce. However, the bank refused to disburse loan till mortgage and other documents were registered in the name of the company. The plot of land was in a Co-operative Industrial Society and bank wanted the name of the company on Record of Rights instead of name of the Society. Thus, the loan proposal was delayed and ultimately there was no disbursement of funds by the bank. To avoid the d .....

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was annexed to the assessment order. In the audited balance sheet submitted along with return of income, Mercury as on 31.03.2007, had shown the said fact i.e. the current liability to the extent of ₹ 50 lakhs as advance against the orders and on asset side under the head current assets i.e. advance for purchase of machinery of ₹ 47 lakhs. The claim of the assessee before the Assessing Officer was that the said amount was not a mere advance or loan, but was a part of commercial / bu .....

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e business, the assessee pointed out that he had taken loan from M/s. Kotak Mahindra for payment to the company towards his shareholding, for which he was paying interest @ 18% per annum for the last three years. The Assessing Officer noted that the company Mercury was incorporated in December, 2006 and had not started production of PCB s till 31.03.2008, in the absence of the building and plant and machinery. The amount advanced of ₹ 51 lakhs was to be utilized for the construction of bui .....

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r had given loan of ₹ 51 lakhs to Mercury, the provisions of section 2(22)(e) of the Act were applicable to the assessee, who was a shareholder having more than 10% of voting power in Star and there was also shareholder in Mercury, in which he had substantial interest. Hence, the amount advanced of ₹ 51 lakhs was treated as deemed dividend under section 2(22)(e) of the Act and was added to the income of the assessee. 5. Before the CIT(A), the contention of the assessee was that the d .....

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e, who was another shareholder in Mercury. The contention of the assessee before the CIT(A) was that it was business advance and amount was used for purchase of machinery and only because of the defect in title of land till today, the production activity could not be started. The learned Authorized Representative for the assessee further pointed out that, no doubt the assessee fits into the criterion of shareholder with substantial interest in Mercury as well as Star and Star had accumulative pr .....

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pply of production is just like putting the cart before a horse. It can also be seen that the amount was spent in purchasing capital assets like machinery etc. and there was no likelihood of commencement of production in the near future. This advance was basically utilized for purchase of machinery to set up the facilities of the company which was the responsibility of the shareholder who is the appellant in this case. Therefore, this advance was basically given to M/s. Mercury Circuits Pvt. Ltd .....

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ities could not have obtained such advance from the 3rd party. Therefore, this advance cannot be treated as advance in a normal course of business. Therefore, on the facts of the case, it is proved beyond doubt that the advance was made on behalf of the appellant to help set up the manufacturing facilities of the company i.e. M/s. Mercury Circuits Pvt. Ltd. and therefore, this advance is hit by the mischief of sec.2(22)(e) of the I.T. Act and therefore, the Assessing Officer has righty treated t .....

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idle. The learned Authorized Representative for the assessee stated that admittedly, the assessee was holding more than 10% shares and there were accumulative profits in the hands of Star. Our attention was drawn to the copy of letter placed at page 9 of the Paper Book, under which Mercury vide letter dated 17.01.2007 had made a request to make the aforesaid advance against the contract for supply of PCB s. It was pointed out in the letter it was mentioned that the company needed funds for short .....

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was further drawn to the funds flow chart placed at pages 76 and 77 of the Paper Book and copies of bills of purchase of machinery at pages 78 onwards. It was clarified by the learned Authorized Representative for the assessee that no contribution was made by Mr. Sultane and only investment was by Star. Our attention was drawn to the balance sheet of Mercury placed at page 14 of the Paper Book and pointed out that the assessee had shown advance for machinery. He further stressed that the provis .....

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of the said rule of construction are briefly as follows: (i) does the term in issue have more than one meaning attributed to it i.e., based on the setting or the context one could apply the narrower or wider meaning; (ii) are words or terms used found in a group totally dissimilar or is there a common thread running through them; (iii) the purpose behind insertion of the term. 10.8 Let s examine as to whether based on the aforesaid tests the said rule of construction noscitur a socils ought to .....

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ers. 8. Further, reliance was placed on the other decisions of Hon ble Delhi High Court in CIT Vs. Arvind Kumar Jain in ITA No.589 of 2011, judgment dated 30.09.2011 and in CIT Vs. Ankitech (P) Ltd. (2011) 199 TAXMAN 341 (Delhi). The learned Authorized Representative for the assessee pointed out that SLP filed by the Revenue on similar issue against the decision of Hon ble Delhi High Court was dismissed by the Hon ble Supreme Court in CIT Vs. Creative Dyeing & Printing (P) Ltd. in SLP(C) No. .....

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Vs. Sanjiv Gupta (2011) 14 taxmann.com 153 (Chd.) . 9. The learned Departmental Representative for the Revenue pointed out that in the facts of the present case, it would be clear that the issue is whether loan is hit by section 2(22)(e) of the Act or whether the advances are business advances. He further pointed out that till date no business had started and also the amount was not returned. In respect of various reliances placed upon by the learned Authorized Representative for the assessee, t .....

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Bench of Tribunal in Smt. Sunita Jindal Vs. DCIT (supra) is mis-placed as the amount in that case held as loan, but in the facts of the present case, the amounts were not to be repaid, but adjusted in business dealings, hence, the same is not a loan, but business advance. 11. We have heard the rival contentions and perused the record. The issue arising in the present appeal is in relation to the applicability of section 2(22)(e) of the Act, which reads as under:- (22) dividend includes- (a) . . .....

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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 referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. 1 .....

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of the company. The condition to be satisfied for applying the said section is an advance or loan by a company either to a shareholder or to any concern in which such shareholder is a member or partner and the shareholding benefit should be not less than 10% of voting power, then in such circumstances, the said advance or loan would be treated as deemed dividend in the hands of the shareholder to the extent of company s accumulated profits. In the facts of the present case before us, Star is a c .....

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ltane, supply to the assessee was not sufficient. He made a proposal to Mr. Sultane to form a separate private limited company as part of BACKWARD - INTIGRATION for Star having 50 : 50 shareholding of Sultane Brothers and the family members of the assessee. Accordingly, the company named Mercury was incorporated in December, 2006 exclusively for making the assured supply of quality PCB s to Star for its requirements. The new company Mercury wanted to place the orders for machinery and also to co .....

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bursement of funds by the bank. Meanwhile, the assessee in order to get the production started, made a request to Star to advance ₹ 50 lakhs for the purchase of machinery. The said advance was to be adjusted against the future supplies to be made to Star. An advance of ₹ 50 lakhs was given by Star to Mercury in February, 2007 for the purchase of machinery and completing the construction work on the condition that the manufacturing items would be supplied to it and no other supplies s .....

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nture company, in order to feed the requirement of Star, who in its manufacturing activity uses PCB as the basic tool. In such scenario, Star agreed to advance ₹ 50 lakhs to Mercury, which in turn was to be utilized for making payment for the purchase of machineries for PCB manufacturing plants. As part of the terms agreed upon, it was agreed that the said advance of ₹ 50 lakhs would be adjusted against the supplies made by Mercury and it was also agreed that Mercury would not undert .....

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statement, in which it is pointed out that the loan was received in financial year 2006-07 and the amount was utilized thereafter in financial year 2007-08 itself by Mercury for purchasing machinery of ₹ 53.74 lakhs. Since the title of the land was not clear, the building could not be constructed by Mercury and hence, machinery was kept idle. However, some machinery were sold in financial year 2008-09 and the balance machinery were lying idle in possession of Mr. Sultane, who is the other .....

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in financial year 2007-08. It is incomprehensible to digest that Star who is 50% joint owner of Mercury would utilize the funds for the purchase of machinery, which was not going to be used for its business. The loan was advanced for the purchase of machinery and not for the purchase of land. Since the loan amount requirements of Mercury were already under finalization, Mercury had applied for sanction of loan from Oriental Bank of Commerce. However, the said loan was not sanctioned since the l .....

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e joint holder and the other person Mr. Sultane, who was the owner of other 50% had not advanced any amount, but merely because loan may carry some interest, would not make it a loan simplicitor. The transaction between the parties was purely a business transaction and the intention to advance amount to Mercury was to start the business. It is joint venture and the decision taken to advance sum of ₹ 50 lakhs was definitely a business decision and cannot be held to be a loan carrying intere .....

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urts. The first decision is jurisdictional High Court in CIT Vs. Nagindas M. Kapadia (supra). The Hon ble Bombay High Court in CIT Vs. Nagindas M. Kapadia (supra) held that where payments were made as advance towards purchases to be made by the company from the assessee, the same would not be covered as deemed dividend within the meaning of section 2(22)(e) of the Act. Further, the Hon ble Delhi High Court in CIT Vs. Raj Kumar (supra) had laid down the proposition that the word advance had to be .....

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s. Arvind Kumar Jain (supra) and it was further held that mere nomenclature of entry in the books of account was not determinative of true nature of transaction. In this regard, reliance was placed on the ratio laid down by the Hon ble Supreme Court in CIT Vs. India Discounts Company Ltd. (1970) 75 ITR 191 and where the payment was made as a result of trading transaction between the parties and the amount was not given by way of loan, then the provisions of section 2(22)(e) of the Act would not .....

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shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions, such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) of the Act is to tax dividend in the hands of shareholders. The .....

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created under section 2(22)(e) of the Act. We have to keep in mind that this legal provision relates to 'dividend'. Thus, by a deeming provision, it is the definition of dividend which is enlarged. Legal fiction does not extend to 'shareholder'. When we keep in mind this aspect, the conclusion would be obvious, viz., loan or advance given under the conditions specified under section 2(22)(e) of the Act would also be treated as dividend. The fiction has to stop here and is not to .....

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ce, it could be treated as shareholder/member receiving dividend. If the intention of the Legislature was to tax such loan or advance as deemed dividend at the hands of 'deeming shareholder', then the Legislature would have inserted deeming provision in respect of shareholder as well, that has not happened. Most of the arguments of the learned counsels for the revenue would stand answered, once we look into the matter from this perspective. 26. In a case like this, the recipient would be .....

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has to be returned by the recipient to the company, which has given the loan or advance. 27. Precisely, for this very reason, the Courts have held that if the amounts advanced are for business transactions between the parties, such payment would not fall within the deeming dividend under section 2(22)(e) of the Act. 28. Insofar as reliance upon Circular No. 495, dated 22-9-1997 issued by Central Board of Direct Taxes is concerned, we are inclined to agree with the observations of the Mumbai Benc .....

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s case (supra). The revenue wants the deeming provision to be extended which is illogical and attempt is to create a real legal fiction, which is not created by the Legislature. We say at the cost of repetition that the definition of shareholder is not enlarged by any fiction. 15. In another decision, the Chandigarh Bench of Tribunal in ACIT Vs. Sanjiv Gupta (2011) 14 taxman.com 153 (Chd.) has held as under:- 13. The provisions of Section 2(22)(e) of the Act are applicable under different circum .....

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ent case, M/s Pee Jay Fabrics Pvt.Ltd. had made the said payments to M/s Raymonds Ltd. which was relatable to the assessee before us. The plea of the assessee that no direct payment was made by the company to the assessee has no relevance as the case of the assessee falls within the third limb i.e. payment on behalf or for the individual benefit of the shareholder. Admittedly, the payment in the case has been made within the extent of the accumulated profits of the company. However, the alternat .....

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vance during the course of business and it was held that such payment do not constitute loan for the purpose of Section 2(22)(e) of the Act. We are of the view that in the facts of the present case, the transaction in question is relatable to the carrying on of business by the assessee. The aforesaid payment was made by M/s Pee Jay Fabrics Ltd. as the demand was raised by the consignor M/s Raymonds Ltd. after debiting the account of the said company, though the said transaction related to the as .....

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t with the part of definition of deemed dividend under section 2(22)(e) of the Act, which states that deemed dividend does not include an advance or loan made towards shareholder by a bank in the ordinary course of its business, where the lending of money is a substantial part of business of the company. The proposition of the Revenue in this regard was that where a company was not engaged in the business of lending of money, the payments made by it to the assessee company would therefore, be co .....

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nce it is held that the business transactions do not fall within section 2(22)(e), we need not go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that is all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e). We feel that this interpretation of ours is in accordance with the legislativ .....

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mendations of the Commission and the speech of the then Finance Minister would show that the purpose of the insertion of sub-clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. Therefore, if the said background is kept in mind, it is clear that sub-clause (e) of section 2(22) of the Act, which is in parimateria with sub-clause (e) of section 2( .....

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e or loan. If this purpose is kept in mind then, in our view, the word ' advance' has to be read in conjunction with the word ' loan' . Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan : it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term ' advance' may or may not include lending. The word ' advance' if not .....

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imate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them' and our Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610." 13. Therefore, we hold that the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assesseecompany and M/s. Pe .....

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id to the assessee company would be adjusted against the entitlement to moneys payable by the assessee company in the subsequent years, the amount advanced for business transaction was not such to fall within the definition of deemed dividend under section 2(22)(e) of the Act. The Hon ble Supreme Court further held that the provision of section 2(22)(e)(ii) of the Act is basically in the nature of an explanation. That cannot, however, have bearing on interpretation of the main provision of secti .....

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. This interpretation is in accordance with the legislative intention of introducing section 2(22)(e) of the Act. 18. Now, coming to the reliance placed upon by the learned Departmental Representative for the Revenue on the ratio laid down by the Hon ble Madras High Court in CIT Vs. P.K. Abubuker (supra), wherein it was held that the amount advanced is to be treated as deemed dividend within the meaning of section 2(22)(e) of the Act, where advance was paid to the assessee, which in turn had to .....

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