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2016 (3) TMI 649 - ITAT JAIPUR

2016 (3) TMI 649 - ITAT JAIPUR - TMI - Deemed dividend addition u/s 2(22)(e) - Held that:- We find from the record that assessee derives salary income from M/s. Gad Fashions (India) Pvt. Ltd. and remuneration interest income from M/s. Gad Fashions (India) Pvt. Ltd. and M/s. R. Fashions. The transaction is not in the nature of loan or advance but it is only a reimbursement of amount paid by the assessee to M/s. Manpasnd Textile Processors (P) Ltd. on behalf of M/s. Gad Fashions (India) (P) Ltd. I .....

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rcumstances of the, case the orders of the lower authorities are reversed and Ground No. 1 of the assessee is allowed.

We find from the record that when transaction between M/s. GAD Fashions India Pvt. Ltd. and M/s. Ecotune India Ltd. is not in the nature of loan or advance as envisaged u/s 2(22)(e) of the Act then it does not arise to make any further addition in the hands of the assessee. - Decided in favour of assessee - ITA No. 898/JP/2014, ITA No. 899/JP/2014 - Dated:- 12-2-2016 .....

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the amount of ₹ 20,00,000/- received from M/s. GAD Fashions (India) Pvt. Ltd. as deemed dividend u/s 2(22)(e) in the hands of the assessee. 2. The ld. CIT(A) has erred on facts and in law in confirming the addition of ₹ 4,42,800/- by treating the amount of ₹ 20,00,000/- given by M/s. Ecotunes India (P) Ltd. to GAD Fashions (India) Pvt. Ltd. as deemed dividend u/s 2(22)(e) in the hands of the assessee 3.1 The assessee Shri Ashok Singhi in ITA No. 899/JP/2014 has raised followin .....

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hands of the assessee 4.1 The issues raised by the above assessee's are common in respective appeals. However, for the sake of convenience, these appeals are being decided through a common order. 5.1 First of all, we take up the appeal of Shri Nilesh Singh (ITA No. 898/JP/2014) wherein Ground No. 1, the AO observed that the case of the assessee was reopened u/s 148 of the Act. The AO further observed that the assessee derived income from salary from M/s. GAD Fashions (India) Pvt. Ltd. and M .....

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) Pvt. Ltd. advanced ₹ 20.00 lacs during the year under consideration to M/s. Ecotunes India Pvt. Ltd. Both of these transactions are covered under the definition of deemed dividend as defined u/s 2(22)(e) of the I.T. Act, 1961.The AO gave reasonable opportunity of being heard to the assessee. The assessee also furnished the reply vide letter dated 21-01-2013 which has been reproduced at pages 2 to 7 of the assessment order. After considering the reply and case laws on this issue, the AO h .....

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ances by M/s. GAD Fashions (India) Pvt. Ltd. to the assessee and loans by M/s. Ecotunes India (P) Ltd. to M/s. GAD Fashions (India) Pvt. Ltd. as deemed dividend in his hands. The Hon'ble Bombay High Court in the case by following decision of Hon'ble Jurisdictional High Court in the case of M/s. Hotel Hilltop , 313 ITR 116 wherein it has been held that the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of th .....

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AO has treated two transactions to be the deemed dividend u/s. 2(22)(e) of the I.T. Act. The one transaction is that M/s Gad Fashions India Pvt. Ltd. has advanced ₹ 20,00,000/- to the assessee. There is no dispute on the fact that the assessee was having 22.14% share holding in M/s Gad Fashions India Pvt. Ltd. during the assessment year under consideration 208-09 and therefore as per the AO the advancement of loan of ₹ 20,00,000/- was deemed dividend as per provision of section 2(22 .....

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dividend, to be in the hands of the directors having substantial interest in the recipient company. As the assessee was having share holding of 22.14% in M/s Gad Fashions India Pvt. Ltd. therefore as per AO the deemed dividend was to be taxed in the hands of the assessee. The AO further noted that there was three common share holders in M/s Gad Fashions India Pvt. Ltd., therefore the amount of ₹ 20,00,000/- was taxed in the hands of three directors in the ratio of 1.3rd of ₹ 20,00,00 .....

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(iii) The share holder being a person who is beneficial owner of share with or without a right to participate holding less than 10% of the voting power The issue whether the loan transactions were covered u/s. 2(22)(e) and the above mentioned essential conditions were fulfilled or not is to be examined accordingly. First of all the issue as to whether the loan of ₹ 20,00,000/- made by M/s Gad Fashions India Pvt. Ltd. to the assessee was deemed dividend or not is to be examined. It may be .....

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any in which public are not substantially interested. The above facts will indicate that such payment of ₹ 20,00,000/- was definitely covered under the provisions of section 2(22)(e) of I.T. Act. However, the appellant case is that such transaction of ₹ 20,00,000/- was not exactly the loan and advance transaction but it was a transaction related to the business in as much as M/s Gad Fashions India Pvt. Ltd. was having business relation with M/s. Manpasand Textiles Processors Pvt. Ltd .....

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f M/s Gad Fashions India Pvt. Ltd. The assessee made advances of ₹ 2500000/- to M/s. Manpasand Textiles Processors Pvt. Ltd. Subsequently, M/s Gad Fashions India pvt. Ltd. Returned ₹ 20 lac to the assessee out of ₹ 25,00,000/- advanced to M/s. Manpasand Textiles Processors Pvt. Ltd. As per the assessee such transactions were essential for the business and these should not be treated as deemed dividend within the definition of sec. 2(22)(e) of IT Act. The assessee has also place .....

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of ₹ 25,00,000/- was made by the assessee out of which ₹ 20,00,000/- was repaid by M/s Gad Fashions India Pvt. Ltd. However, as mentioned by the A.O. M/s. Gad Fashions India Pvt. Ltd. Is a cash rich company and there is nothing on record which may indicate that M/s. Gad Fashions India Pvt. Ltd. Was not having adequate money to make advances to M/s. Manpasand Textiles Processors Pvt. Ltd. Similarly there is no evidence on record which may indicate that M/s. Manpasand Textiles Processo .....

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be initially made by the assessee and subsequently M/s Gad Fashions India Pvt. Ltd. Will return the amount to the assessee. Similarly there is nothing on record which may indicate as to how M/s. Gad Fashions India Pvt. Ltd was to be benefited by way of regular printing work from this concern. The above facts will indicate that the loan transactions between assessee and M/s Manpasand Textiles Processors Pvt. Ltd. As also with M/s Gad Fashions India pvt. Ltd. Are prima facie independent and it ca .....

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n submission produced before the ld. CIT(A) that the addition confirmed by the ld. CIT(A) may be deleted. 1. Section 2(22)(e) applies to any payment by a company to a substantial share holder by way of advance or loan. Where payment is made for business consideration, thesame is not covered by deeming fiction of section 2 (22)(e). It being a deeming fiction needs to be construed strictly. For applicability of this section, following conditions should be satisfied:- (i) There should be a payment. .....

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g the Rule of Noscitur a Sociis which means that the words in an Act of Parliament is to be constructed with reference to the words found in immediate connection with them, the word advance has to be read in conjunction with the word loan . Usually attributes of a loan are that (i) it involves a positive act of lending coupled with acceptance by the other side of the money as loan (ii) generally carries an interest (iii) obligation of repayment. Therefore, the word advance which appears in the c .....

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ITR 52, 57 (SC), it was held that a loan of money results in debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources & loan is only one of such source. Every creditor who is entitled to receive a debt can not be regarded as a lender. (iii) In case of ArdeeFinvset (P.) Ltd. Vs. DCIT 79 ITD 547 (Trib.) (Del.) it was held that loan means a lending; delivery by one party to and receipt by another party of sum of moneys upon agreement, express or implie .....

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o be paid. In the Dictionary of Accounts by Eric L. Kohler (5thEdn.), the expression advance was defined as payment of cash or the transfer of goods for which accountmust be rendered by the recipient at some later date. Loan and advances could only be considered deemed dividend for the purpose of section 2(22)(e). It is, therefore, sine qua non, to ascertain the correct nature of the payments. In this case the assessee company received application money for the allotment of shares. There is noth .....

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hed, the advance could not be taken as deemed dividend under s. 2(22)(e). It is settled rule of interpretation of a fiction that the court should ascertain for what purpose the fiction is created and after ascertaining the purpose, the court has to assume all facts which are incidental to give effect to that fiction. It will not be given a wider meaning than what it purports to do. Law dealing with fiction relates to that breach of jurisprudence which should be narrowly watched, zealously regard .....

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(India) Pvt. Ltd. is a 100% manufacturer export of home furnishing made ups. The manufacturing process of the company products includes printing & dying of fabric which is the very important process. The company was facing continuous problem in getting consistent & good quality in desired quantity printing of fabric to complete its order and hence it made an arrangement with one of the printer processor namely M/s Manpasand Textiles Processors Pvt. Ltd. to install more machinery and mod .....

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of M/s Gad Fashions India Private Limited as the company was not having immediate liquid fund to give advance directly to Manpasand Textile Processors Private Limited with the understanding that as and when assessee require the fund, the same would be paid by it. Copy of the account of M/s Manpasand Textile Processors Private Limited in the books of the assessee is at P.B.2. (iii) In the year under consideration M/s Gad Fashion India Private Limited required temporarly more funds for its busine .....

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pany on 31-03-2008. Copy of the account of assessee in the books of M/s Gad Fashions India Private Limited is at P.B.1 .From this copy of account it can be noted that in A.Y. 2009-10 also assessee gave temporary accommodation of ₹ 50 lacs on 3-11- 2008 which was repaid back by the company on 11-11-2008. (iv) It may be noted Gad fashions India Private Limited have regular transactions with Manpasand Processors Private Limited. In the year under consideration M/s Manpasand Textile Processors .....

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hese facts shows that Gad Fashions India Private Limited in course of business, on occasions, remains short of funds and therefore in business interest assessee provided advance to Manpasad Textile Processors Private Limited and atthe same time Gad Fashions India Private Limited withheld the amount payable to Manpasand Textile Processors Private Limited against the printing Job. 4. In these facts and circumstances of the case, only because on 11-02-2008 assessee has received ₹ 20 lacs from .....

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essee and Gad Fashions India Private Limited is a mutual, open, current and running account which is not a loan or advance as envisaged u/s 2(22)(e). For this reliance is placed on the following cases:- (1) CIT Vs. Creative Dyeing & Printing P. Ltd. 318 ITR 476 (Del.) (HC) (2) Mtar Technologies (P.) Ltd. Vs. ACIT 39 SOT 465 (Trib.) (Hyd.) (2010) (3) CIT Vs. Ambassador Travels (P.) Ltd. 318 ITR 376 (Del.) (HC) (4) DCIT Vs. Lakra Brothers 106 TTJ 250 (Chand.) (Trib.) (5) Sri Satchindananad S. .....

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ailable on record. We find from the record that assessee derives salary income from M/s. Gad Fashions (India) Pvt. Ltd. and remuneration interest income from M/s. Gad Fashions (India) Pvt. Ltd. and M/s. R. Fashions. The assessee holds 22.14% shares of M/s. Gad Fashions (India) Pvt. Ltd. and 26.13% shares of M/s. Ecotunes India (P) Ltd. However, the AO observed during assessment proceedings that advance of ₹ 20.00lacs was given to the assessee by M/s. Gad Fashions (India) Pvt. Ltd. as the a .....

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nt paid by the assessee to M/s. Manpasnd Textile Processors (P) Ltd. on behalf of M/s. Gad Fashions (India) (P) Ltd. It is further observed that the amount of ₹ 20.00 lacs so received by the assessee from M/s. Gad Fashions India Pvt. Ltd. was with reference to the advance given by the assessee to M/s. Manpasad Textile Processors (P) Ltd. considering the business interest. It is further observed that the transaction between assessee and M/s. Gad Fashions India Pvt. Ltd. is a mutual, open, c .....

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of the case that it will be just and sensible if the amount of deemed dividend be distributed 1/3rd of the total amount of loan or advance i.e. ₹ 20.00 lacs in the hands of each of such directors which resulted an addition of ₹ 6,66,666/- to the total income of the assessee for the year under consideration. 6.2 Aggrieved, the assessee preferred first appeal before the ld. CIT(A) who has partly allowed this ground of the assessee by observing as under: As regards another transaction .....

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. were in the nature of current and running account being of temporary nature. However, such submission is also devoid of any merit in as much as the transaction was prima facie covered under the definition sec. 2(22)(e) of IT Act. It is also fact that total loan of ₹ 2000000/- has been advanced by M/s. Ecotunes India Ltd. to M/s. Gad Fashions India Pvt. Ltd. therefore the total amount of ₹ 2000000/- is to be treated as deemed dividend and not the net amount of ₹ 1000000/-. It .....

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Accordingly addition to the extent of ₹ 442800/- is confirmed out of total addition of ₹ 666666/-. The appellant gets relief of ₹ 223866/- 6.3 Now the assessee is before us praying with following written submission produced before the ld. CIT(A) that the addition amounting to ₹ 4,42,800/- partly confirmed by the ld. CIT(A) may be deleted. Copy of the account of the assessee in the books of M/s Ecotunes Private Limited is at P.B.11. From the copy of the account it can be .....

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is not attracted to such transaction. It is pointed out that during the year only a net amount of ₹ 10,00,000/- was provided by Ecotune India Private Limited to Gad Fashions India Private Limited as evident from the copy of the account enclosed above. Therefore addition made by the AO considering the amount of deemed divided at ₹ 20 lacs is incorrect. 6.4 The ld. DR relied on the order of the ld. CIT(A) 6.5 We have heard the rival contentions and perused the materials available on re .....

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ghi wherein following grounds are raised. 1. The ld. CIT(A) has erred on facts and in law in confirming the action of AO in treating the amount of ₹ 20,00,000/- received from M/s. GAD Fashions (India) Pvt. Ltd. as deemed dividend u/s 2(22)(e) in the hands of the assessee. 2. The ld. CIT(A) has erred on facts and in law in confirming the addition of ₹ 4,43,200/- by treating the amount of ₹ 20,00,000/- given by M/s. Ecotunes India (P) Ltd. to GAD Fashions (India) Pvt. Ltd. as dee .....

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d. on behalf of M/s. GAD Fashions (India) Pvt. Ltd. for which printing work had been done by M/s. Manpasad Textile Processors (P) Ltd. M/s. GAD Fashions (India) Pvt. Ltd. had repaid ₹ 25.00 lacs to the assessee who is also shareholder in both the companies. The ld. CIT(A) was not justified in holding that M/s. GAD Fashions (India) Pvt. Ltd. was cash rich company as the assessee paid ₹ 20.00 lacs to M/s. Manpasad Textile Processors (P) Ltd. It is the business decision of M/s. GAD Fash .....

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transactions were business in nature and commercial expediency of the assessee and it does not cover u/s 2(22)(e) of the Act. Similarly the payment made by M/s. Ecotunes India (P) Ltd. to M/s. GAD Fashions (India) Pvt. Ltd. were business receipts as M/s. Accent Corporation had sent this amount in the name of M/s. Ecotunes India (P) Ltd. instead of M/s. GAD Fashions (India) Pvt. Ltd. Accordingly M/s. Ecotunes India (P) Ltd. had transferred this amount to M/s. GAD Fashions (India) Pvt. Ltd. which .....

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