TMI Blog2013 (4) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... arties - 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 - ITA No. 923/CHD/2009, ITA No. 970/CHD/2009 - - - Dated:- 18-4-2013 - SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K.SAINI, ACCOUNTANT MEMBER For the Appellant : Shri S.K.Mukhi Shri Jaswinder Singh For the Respondent : Shri Amarveer Singh ORDER PER HARI OM MARATHA,JM These are cross-appeals for A.Y. 2006-07 and are directed against the order of ld. CIT(Appeals) dated 07.07.2009. For the sake of convenience and brevity, these are being decided by a common order. 2. Briefly stated, the facts of the case are that the assessee namely Shri Amrik Singh, who is the proprietor of M/s Nexo Products (India), E-92, Focal Point, Ludhiana, filed his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount 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 received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N 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 falls under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Dies under installation ₹ 3,42,497.12 Total Rs.91,07,979.58 Also during 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as per the profit and loss account is ₹ 7,65,13,928/-. The assessee has also filed the details of party wise sale above ₹ 5 lacs. The total amount of sales made to various parties to whom sales above ₹ 5 Lakh has been made comes out to ₹ 11,00,10,811/- Thus there is a huge discrepancy in the sales figure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. in the list of advances received rather than as a sundry creditor justifying thereby that the entry is nothing but an advance given to the assessee concern 8. The advance received by the assessee concern has not been used for any purchase/sale or manufacturing activity. 9. In fact none of the parties to whom sales have been made has any outstanding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Business compulsion and business expediency/ necessity and not for the personal use/benefit of the assessee and therefore these do not fall under the purview of section 2(22) (e) of the Income Tax Act 1961 and as such cannot be treated as deemed dividend. Further the counsel submitted that it was in pursuance of the agreement (Copy of Agreement enclosed) that M/s Nexo Industries 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and, therefore, needs to be deleted from his hands. Ld. CIT(Appeals), after considering rival stands, has given part relief to the assessee and, therefore, both the parties are aggrieved. 7. The assessee has raised the fol lowing grounds in his appeal : I. On the facts and in the circumstances of the case the CIT(A) has erred both on facts and in law in partially upholding 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.K.Mukhi, ld. Advocate that the appellant is doing job work of M/s Nexo (India) Pvt. Ltd. since its very inception which fal ls in the year 1999. He stated that M/s Nexo (India) Pvt. Ltd. got orders from foreign business concerns, but this company was having its manufacturing unit in a remote area, where problems of labour and scanty electric supply was prominent. Therefore, that company entered into an 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 adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleted. He has stated that by accepting to a greater extent, the submission of the assessee, ld. CIT(Appeals) has already deleted addition to the extent of ₹ 4,87,66,131/- against which the revenue is in appeal. 11. Per contra, ld. CIT-DR has reiterated al l the reasons on the basis of which the AO has made the impugned addition, the reasons given by the AO are incorporated in our earlier part of the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being 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 loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the quality standard of job work done by the assessee and due to other constraints and restrains, the sister concern approached the assessee, with a proposition for doing more job work as the quality of job work done by the assessee was far better than the job work done by others. But the assessee proprietorship concern expressed its inability to take additional load of work with the existing 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for that the assessee even charged 10% less than the market rate, which resulted into a mutual benefit of both the parties. It is found that the quantum of order being more, the assessee was also not able to fulfill the required result. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buying agent in India for a Singapore company. The Singapore Company was purchasing garments from two Indian exporters which were having common shareholders with the assessee company. Since the assessee company was a buying agent, it was making purchases for and behalf of the Singapore company from various companies including the aforesaid Indian exporters. The assessee company had received security deposits from the aforesaid Indian exporters. Not agreeing with the explanation- provided by the assessee, the assessing officer treated the security deposit as deemed dividend and added to the income of the assesse company. The ITAT while 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the arrangement under consideration is neither in nature of a loan nor an advance, as contemplated and required for application of section 2(22)(e) of the Act, nor there was any attempt to evade tax by the company and/or the shareholder rather it was on a principal to principal basis at arms length and was not intended for any personal benefit or enjoyment of the appellant instead the arrangement has worked to the detriment of the appellant therefore, the illegal orders to make perverse additions mechanically and vexatiously cannot be sustained, both on facts and in law. Without prejudice to the above 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 Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quirement and nothing else. As we have already discussed, the fixed assets of the assessee concern have increased substantially during the relevant period. 17. We are also not in agreement with the finding of ld. CIT(Appeals) that only because the assessee repaid a sum of ₹ 1,91,96,490/-, it has to be treated as a loan. In fact, the delay in supply of plant machinery and other incidental expenses was the cost for unutilized advance, which was not immediately required for business purposes for which it was advanced. Therefore, it was temporarily returned to the sister concern. In our considered 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g not providing opportunity before issuance of directions, he has observed that providing of opportunity is a condition precedent before issuing any directions u/s 144A of the Act and if these directions are found to be prejudicial to the interest of the assessee, but he has hastily added that the ACIT issued directions in the nature of line of investigation and not directions for guidance of the AO to enable him to complete the assessment order. Hence, in this scenario, AO was not required to accord any such opportunity to the assessee before passing directions. Regarding jurisdiction of ACIT, ld. CIT(Appeals) has observed that in sub-section 28C of section 2 of the Act, JCIT also means an ACIT u/ss 1 of section 17 of the Act. Accordingly, this contention of the assessee has also been rejected. The assessee has raked up similar arguments by arguing similar objections before us as them. Ld. DR has also taken the same l ine which is taken by ld. CIT(Appeals) in his order 21. To the extent that the AO cannot act as directed u/s 144A. The JCIT/ACIT can only issue line of investigation. If the ACIT has issued line of investigation, it is o.k. otherwise, the AO has to apply his own m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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