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2016 (2) TMI 497 - ITAT PUNE

2016 (2) TMI 497 - ITAT PUNE - TMI - Addition of u/s.2(22)(e) - Held that:- Since there is continuous and substantial business transaction between PPPL and Shri Chhatrapati Press and considering the fact that the amount of ₹ 2 crores has been adjusted against the bills for printing labour charges, therefore, in view of the decision of Creative Dyeing and Printing Pvt. Ltd. cited (2009 (9) TMI 43 - DELHI HIGH COURT ) the amount of ₹ 2 crores cannot be taxed u/s.2(22)(e) of the I.T. Ac .....

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of grounds have been taken by the assessee they all relate to the order of the CIT(A) in sustaining the addition of ₹ 2 crores made by the AO u/s.2(22)(e) of the I.T. Act. 3. Facts of the case, in brief, are that the assessee is an individual and derives income from share of profit in firm, other sources, capital gain, salary etc. He filed his return of income on 31-03-2010 disclosing total income of ₹ 29,64,790/-. During the course of assessment proceedings the AO noted that the as .....

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f ₹ 2 crores vide eight cheques each of ₹ 25 lakhs on 31/03/2008. On the same day i.e. on 31/03/2008, Shri Chhatrapati Press transferred ₹ 2 crores to the capital account of its four partners viz. Shri G G Jadhav (HUF) (Rs. 75 lakhs), Mrs. G P Jadhav (Rs. 55 lakhs), Shri P G Jadhav (HUF)(Rs. 15 lakhs) and the assessee Shri Yogesh Jadhav (Rs. 55 lakhs). All these four partners held equal share of 25% in Shri Chhatrapati press. Then, as per the ledger of share application money i .....

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bank on 11/06/2008. A show cause notice was issued to the assessee asking to explain why the advance of ₹ 2 crores should not be considered as deemed dividend u/s.2(22)(e) of the I.T. Act in his hands since he holds substantial interest in M/s PPPL as well as Shri Chhatrapati Press and M/s. PPPL has given this amount to Shri Chhatrapati Press. 4. It was explained by the assessee that the amount given to Shri Chhatrapati Press was not in the nature of loan or advance but it was to reimburse .....

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g no sufficient bank balance and these were encashed on 11-06-2008. Therefore, the transaction relates to A.Y. 2009-10 and not current A.Y. 2008-09 and therefore, no addition u/s.2(22)(e) of the Act can be made in this year. 6. However, the AO was not satisfied with the explanation given by the assessee. He analysed the provisions of section 2(22)(e) and was of the opinion that for attracting the provisions of section 2(22)(e) the following conditions should be satisfied : i) Payment should be m .....

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ions mentioned above are satisfied which are as under : i) PPPL, Kolhapur is a private limited company and not a company in which public are substantially interested. ii) The assessee holds 23.95% shares in PPPL, Kolhapur as on the date of the advance, i.e. 31-03-2010. iii) The payment is made to a firm in which the assessee has substantial interest, i.e. his share of profit therein is 25 per cent. iv) The payment is given in the form of advance and as per the entries made in the books of accoun .....

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company as share application money. This clearly shows that the advance amount is not in the nature of business or commercial transaction and there was no business compulsion or business expediency to advance the same. 9. As regards the argument of the assessee that the cheques were encashed after 31-03-2008 and therefore relate to A.Y. 2009-10, the AO noted that it is not the case of the assessee that the cheques issued on 31-03-2008 were cancelled and fresh cheques were issued for encashing o .....

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7; 2 crores was given by PPPL to Shri Chhatrapati Press as advance for future work to be done is not well founded since Shri Chhatrapati Press did not keep this money to be utilized for its business but on the same day cheques were issued and entry was made to credit of the partner s capital account. Then , these partners issued cheques for same amounts to PPPL as share application money. Thus, money advanced by PPPL came back to it in circular transaction without being utilised by Shri Chhatrap .....

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amount was received by Shri Chhatrapati Press to expand its business he noted that during A.Y. 2008-09 ₹ 2 crores has been debited to Shri Chhatrapati press as purported payment for printing work. However, no dates have been mentioned for these transactions. Further, PPL had never made any such advance to Shri Chhatrapati Press in the past and the payments were always made after the amount of labour charges was debited to PPPL by Shri Chhatrapati Press. He accordingly upheld the addition .....

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bour charges raised by Shri Chhatrapati Press against PPPL are substantial, i.e. ₹ 3.50 crores for F.Y. 2005-06, ₹ 4.12 crores for A.Y. 2006-07, ₹ 4.38 crores for F.Y. 2007-08, ₹ 4.76 crores for A.Y. 2008-09 and ₹ 5.28 crores for F.Y. 2009-10. He submitted that the payment of ₹ 2 Crore was made on 31-03-2008 by 8 cheques which were encashed on 11-06-2008. There is no repayment of the amount by Shri Chhatrapati Pres but the same was adjusted against the bills r .....

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an in section 2(22)(e) could only mean such advance which carries with it an obligation of repayment. Trade advance which is in the nature of money transacted to give effect to a commercial transaction does not fall within the ambit of provisions of section 2(22)(e) of the I.T. Act. Since in the instant case there is no liability to repay, therefore, in view of the above decision the provisions of section 2(22)(e) of the Act are not applicable. 15.1 Referring to the decision of the Hon ble Delhi .....

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o the decision of Hon ble Delhi High Court in the case of CIT Vs. Creative Dyeing and Printing Pvt. Ltd. reported in 318 ITR 476 he submitted that the Hon ble High Court in the said decision has held that advance to be adjusted against dues for job work to be done by assessee is a business transaction and therefore advance is not assessable as deemed dividend u/s.2(22)(e) of the I.T. Act. 17. Referring to the decision of the Chandigarh Bench of the Tribunal in the case of Amrik Singh, Prop. Vs. .....

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3 order dated 02-08-2011. 18. The Ld. Counsel for the assessee submitted that the cheques were encashed on 11-06-2008, therefore, deemed dividend, if any, relates to A.Y. 2009-10. He submitted that a cheque constitutes payment when it is encashed. Since the cheques were encashed only in F.Y. 2008-09, therefore, addition, if any, can be made only in A.Y. 2009-10 and not in the impugned assessment year. 19. The Ld. Counsel for the assessee further submitted that the company wanted to increase the .....

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of PPPL for the year ended 31-03- 2008 was ₹ 4.29 crores. There was a revaluation reserve on account of Vashi premises amounting to ₹ 7.71 crores. Thus, due to increase in share capital for obtaining of loan from the bank the company has gained substantially. 20. In his alternate contention the Ld. Counsel for the assessee drew the attention of the Bench to the details of shareholding percentage and proportionate free reserves as on 31-03-2008 which is as under : 21. He submitted tha .....

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question. 22. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). He submitted that since the company has given loan/advance within the meaning of section 2(22)(e) to Shri Chhatrapati Press, which in turn has given the same to the partners and the partners have invested the amount in the share application money of the company PPPL, therefore, the provision of section 2(22)(e) are clearly attracted. He also relied on the decision of the Chandigarh Benc .....

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rned, there was no business transaction whereas in the instant case there is substantial business transaction. In the case of the decision of the Mumbai Tribunal relied on by Ld. Departmental Representative, there also, the loan was simply given and there was no commercial expediency. In the instant case no money has been given as loan and the transaction is a commercial one. Therefore, both the decisions relied on by the Ld. Departmental Representation are distinguishable and not applicable to .....

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3.92% of the shares. Similarly, the assessee is also a partner in the firm Shri Chhatrapati Press with 25% share of profit or loss. Since the amount of ₹ 2 crores was received by Shri Chhatrapati Press from the company PPPL and in turn has been transferred to the capital account of the partners on the same day, therefore, the AO, applying the provisions of section 2(22)(e) of the Act made addition of ₹ 2 croees in the hands of the assessee. The arguments of the assessee that it is a .....

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ng labour charges and the money has never been returned. Therefore, the same is neither a loan nor an advance within the meaning of provisions of section 2(22)(e) of the I.T. Act. Further, the transaction relates to A.Y. 2009-10. It is also the submission of the Ld. Counsel for the assessee that although the cheques were issued on 31-03- 2008, however, the said cheques were encashed on 11-06-2008. According to him, a cheque constitutes payment only when the same is encashed. Since in the instant .....

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It is an admitted fact that Shri Chhatrapati Press raises bills for printing labour charges against PPPL. It has raised bills for printing labour charges amounting to ₹ 3,49,72,854/- during F.Y. 2005-06, ₹ 4,12,22,425/- for F.Y. 2006-07, ₹ 4,38,33,311/- for F.Y. 2007-08, ₹ 4,76,44,924/- during F.Y. 2008-09 and ₹ 5,27,74,740/- for F.Y. 2009-10. It has also received building rent from PPPL amounting to ₹ 5,40,000/- per year during F.Y. 2005-06 to 2009-10. The a .....

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Ltd.(Supra) In that case the assessee company was engaged in the business of dyeing and printing of cloth and was an ancillary unit of P. Both the assessee company and P had common shareholders and directors, two of whom held more than 20% of the shares in both companies and P held 50% of the shares in the assessee company. P, in order to increase its export business and to compete with the international standards in garments exports proposed modernization and expansion of the plant and machine .....

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eemed dividend u/s.2(22)(e) of the I.T. Act, 1961. The Tribunal held that it was an advance for a commercial purpose to the assessee company by its sister concern P and not a deemed dividend u/s.2(22)(e) of the Act. On further appeal by the Revenue the Hon ble High Court dismissed the appeal filed by the Revenue by observing as under : We find that the Tribunal in the present case has very extensively dealt with the legislative intention of introducing section 2(22)(e) and has referred to such l .....

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east 75 per cent. of the voting power lies in the hands of other than the public, and that means that the companies are controlled by a group of persons allied together and having the same interest. In the case of such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits within the limits of the Companies Act. It is for this group to determine whether the profits made by the company should be distributed as dividends or not. The de .....

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umulated profits under section 23A. It will be remembered that an advance or loan which falls within the mischief of the impugned section is advance or loan made by a company which does not normally deal in money-lending, and it is made with the full knowledge of the provisions contained in the impugned section. The object of keeping accumulated profits without distributing them obviously is to take the benefit of the lower rate of super-tax prescribed for companies. This object was defeated by .....

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eived the said loan by way of dividend. It is clear that, when such a device is adopted by a controlled company, the controlling group consisting of shareholders have deliberately, decided to adopt the device of making a loan or advance. Such an arrangement is intended to evade the application of section 23A. The loan may carry interest and the said interest may be received by the company ; but the main object underlying the loan is to avoid payment of tax" . The Tribunal has also referred .....

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the business transactions and which finding was upheld by the High Court. In the present case, the Tribunal on considering decisions in various cases held as under : " From the ratio laid down in the above cases and on the basis of judicial interpretation of the words, loans' or advances' , it can be held that section 2(22)(e) can be applied to loans' or advances' simpliciter and not to those transactions carried out in the course of business as such. In the course of carry .....

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meaning of deemed dividend under section 2(22)(e). Just as per clause (ii) of section 2(22)(e), dividend is not to include advance or loan made by a company in the ordinary course of business where the lending of money is a substantial part of the business of the company, advance in the ordinary course of carrying on business cannot be considered as dividend' within the meaning of section 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, .....

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conceded that the amount is in fact not a loan but only an advance because the amount paid to the assessee-company would be adjusted against the entitlement of moneys of the assessee-company payable by M/s. Pee Empro Exports Pvt. Ltd. in the subsequent years. The counsel for the appellant has very strenuously urged that neither the Tribunal nor the judgment of this court in Rajkumar' s case [2009] 318 ITR 462 (Delhi) ; [2009] 181 Taxman 155 deals with that part of the definition of deemed di .....

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vt. Ltd. is not into the business of lending of money, the payments made by it to the assessee-company would, therefore, be covered by section 2(22)(e)(ii) and consequently payments even for the business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of section 2(22)(e)(ii) is basically in the nature of an explanation. That cannot, however, have a bearing on interpretation of the main provision of s .....

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e with the legislative intention of introducing section 2(22)(e) and which has been extensively dealt with by this court in the judgment in Rajkumar' s case [2009] 318 ITR 462 (Delhi) ; [2009] 181 Taxman 155. This court in Raj Kumar' s case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this court in the said judgment held as under (page 473) : " A bare .....

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use (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in .....

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und in the company of or in conjunction with a word loan' may or may not include the obligation of repayment. If it does, then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term advance' . The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing it is a legitimate rule of construc .....

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