TMI Blog2018 (2) TMI 1085X X X X Extracts X X X X X X X X Extracts X X X X ..... for this reason also, the addition made of the deemed dividend to this extent was not justified. Thus the alternate plea of the assessee is allowed. Disallowance u/s 37(1) - assessee had advanced interest free to one Shri Neeraj Kumar, who is son in law of the assessee - Held that:- In this case also, in absence of anything to the contrary, as per the settled legal position, a presumption can be drawn that advance given of ₹ 7,92,300/- to Shri Neeraj Kumar were out of the huge interest free capital of ₹ 40 lacs, which was many times more. In view of this, we do not agree with the observation of the ld. CIT(A) that the appellant failed to substantiate his claim by a fund flow statement. Thereapart, such interest free fund could be utilized by the assessee for any purpose whatsoever as held by the Hon’ble jurisdiction High Court in the case of ACIT v/s Ram Kishan Verma (2012 (5) TMI 417 - ITAT, Jaipur) and in Hero Cycle P. Ltd vs. CIT (2015 (11) TMI 1314 - SUPREME COURT OF INDIA). Hence, the CIT(A) was not justified in confirming the disallowance and the same is directed to be deleted. Thus Ground No. 2 of the assessee is allowed. - ITA No. 783/JP/2016 - - - Dated:- 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regular course of the business dealings, but the AO rejected such contentions. Thus the AO made the addition of ₹ 49,74,429/- u/s 2(22)(2) of the Act in the hands of the assessee by observing as under:- Thus after considering all the facts of the case in its legality, an addition of ₹ 49,74,429/- {Rs. 36,87,000/- which is the reserve available with the company + ₹ 6,58,236/- profit brought forward from previous years + ₹ 6,29,193/- profit earned during the year)(restricted to the extent of accumulated profit of the company) being made to assessee's total income u/s 2(22)(e) of the I.T. Act, 1961 being deemed dividend. 2.2 Being aggrieved, the assessee carried the matter before the ld. CIT(A) who partly confirmed the action of the AO by observing as under:- 4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. It is seen that there is no dispute about the fact that the appellant was the beneficial owner of shares holding not less than 10% of the voting power in M/s Dhanvarsha Oil Mill Pvt. Ltd., during the previous year relevant to A.Y.2013-14. The appellant has contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed strictly. For applicability of this section, following conditions should be satisfied:- ( i) There should be a payment. ( ii) Payment should be of a sum. ( iii) Such payment should be byway of loan or advance. Therefore, unless until all the above conditions are satisfied, deeming fiction would not be attracted. 1.2.2 In view of the object of s. 2(22)(e), the word advance has to be read in conjunction with the word loan - Usually a loan involves positive act of lending coupled with acceptance of money as loan by the other side and there is an obligation of repayment - On the other hand, the term advance in its widest meaning may or may not include lending - Word advance if not found in the company of or in conjunction with the word loan may or may not include the obligation of repayment - Applying the rule of noscitur a sociis, the word advance which appears in the company of the word loan could only mean such advance which carries with it an obligation of repayment - Thus, trade advance which is in the nature of money transacted to give effect to a commercial transaction does not fall within the ambit of the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 account must be rendered by the recipient at some later date. Loan 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. The chief ingredient of s. 2(22)(e) is that one should be shareholder on the date the loan was advanced to him. Where such ingredient is not established, 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 regarded and never to be pressed beyond its true limits. Taking into consideration the entire conspectus of the case, the receipt from H Ltd. was in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween assessee and M/s Dhanvarsha is not in the nature of loans or advances by any stretch of imagination, as evident that in the year under consideration assessee required temporarily more funds for its business and therefore M/s Dhanvarsha as a temporary accommodation provided ₹ 14.48 crores to the company. This amount was paid back by the assessee to the company. Thereafter, when the company was in need of the fund, the assessee paid sum to the company. Copy of the account of assessee in the books of M/s Dhanvarsha is also submitted (PB 4-11) . From this copy of account it can be noted that in A.Y.2009-10 also company gave temporary accommodation of ₹ 14.48 Crores which was repaid back by the company. All these facts shows that VKM in course of business, on occasions, remained short of funds and therefore, in business interest, Dhanvarsha provided funds to VKM. Thus such receipts were in the ordinary course of business and under business expediency 2.4 In these facts circumstances of the case, only because on various dates assessee has received ₹ 14.48 Crores from Dhanvarsha, the same can t be considered as a loan or advance particularly when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the facts of the present case, where there is a frequent giving (of the amounts) and receiving back how it can be said that the amounts given were meant for the benefit of the recipient shareholders (so as to be treated as deemed dividend) when, the same recipient shareholder had also been giving the amounts to the same company time to time as and when needed. It is not at all a case where the amounts were given to the recipient shareholder for a long period. 2.6.2 The AO was wrong to state in the assessment order that he himself had accepted in principle that Sec. 2(22)(e) if attracted in this case and this allegation was specifically denied before the ld. CIT(A) in his WS (pg 7 pr 4.2) nor it was so in letter dated 28-01-2016 to AO (PBP 14-16) otherwise there is no estoppels. 2.7 On this aspect, also kindly refer our detailed submissions filed before the ld. CIT(A) and reproduced in his order, particularly at page 6 7 2.8 Supporting Case Laws: For this reliance is placed on the following cases:- ( 1) CIT v/s Creative Dyeing Printing P Ltd. 318 ITR 476 (Del HC) it was held that Amount advanced to the assessee company by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n hands of the appellant u/s 2(22)(e) of the Act. 2.9 Other Supporting Case Law: In Krishna Kr. Pathak (HUF) vs. ITO (2004) 90 TTJ 940 (KolTrib) (DPB 15-17) held as under: The assessee(HUF) and the Karta of the assessee(HUF) were maintaining current account with each other and the transactions between them were in the nature of temporary adjustment/accommodation and there was no cash loan or deposit by the Karta of the assessee (HUF). The Department has not disputed the submission of the assessee (HUF) that no interest was paid or payable or received by either side. By passing the journal entry by the Karta of the assessee (HUF) on account of expenditure incurred by him for giving gifts to relatives on behalf of the assessee (HUF) does not amount to loan or deposit within the meaning of s. 269SS and as such, no penalty is leviable under s. 271D. Accordingly, the penalty is cancelled.-Shrepak Enterprises vs. Dy. CIT (1998) 60 TTJ (Ahd) 199 : (1998) 64 ITD 300 (Ahd), Muthoot M. George Bankers vs. Asstt. CIT (1993) 47 TTJ (Coch) 434 : (1993) 46 ITD 10 (Coch), Dillu Cine Enterprises (P) Ltd. vs. Addl. CIT (2002) 80 ITD 484 (Hyd) and Sun Flower Builders (P) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at length hence, the assessee also submitted material in support of its contention that the subjected amount was a capital subsidy and was not revenue in nature which was accepted by the concerned AO after due satisfaction. The said company has never shown the amount of such subsidies as a credit to its Profit Loss a/c in any of the preceding/succeeding/current years meaning thereby the company also treated the same to be of revenue nature. Kindly refer w/s dated 30-01-16 given to the AO by the company (PBP 17) 4.3.1 Another aspect to be considered is that the provisions of The Companies Act, 1956 r/w the relevant rules, the declaration and distribution of the dividend is subjected to certain limitations in as much as it can be declared and distributed only out of the operating profit only but never out of the capital subsidies. In that view of the legal position and restrictions put by the law, there cannot be any presumption of the distribution of dividend much less deeming as dividend which, otherwise is not permissible by the statute. 4.3.2 It is useful to refer to the definition of the expressions accumulated profits , as provided in Explanation 1 2 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the name of assessee in the books of S Ltd., under the head 'loans and advances had to be treated as advance/loan to shareholder as envisaged under s. 2(22)(e)-In the absence of production of books of account or any other reconciliation, the contention that the amount was paid for expenses cannot be accepted-Expln. 2 to s. 2(22) clarifies that the words accumulated profits also include current profits of the company upto the date of distribution or payment referred in s. 2(22)(e)-Unabsorbed depreciation and losses as per IT Act cannot be allowed to be set off against the accumulated profits arrived at after making provision of depreciation and charging expenses-Further, capital receipts cannot be said to be earned profits available for distribution- Capital reserve on account of state capital investment subsidy, lab equipment subsidy and ISI subsidy provided by the State Government cannot be included in accumulated profits - Since the Revenue has not treated the amount of subsidy as revenue receipt nor the amount has been credited as profits in the accounts of S Ltd. in any of the earlier years, the contention that the amounts of subsidy were capital receipts has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Capital Reserve Subsidy Amount Amount ₹ 36,87,000/- 2. Surplus (Profit and Loss A/c) Balance brought forward from previous ₹ 6,58,236/- Year Add: Profit for the period Rs. 6,29,193/- ₹ 12,87,429/- Total ₹ 49,74,429/- It is noticed that the Ministry of Food Processing Industries, New Delhi vide their letter dated 09.09.2008 (A.Y.2009-10)(copy placed at PB 104) sanctioned a grant-in-aid of ₹ 18,43,500/- to the assessee for setting up of edible oil plant as mentioned in the enclosed this (annexure I) as grantin- aid under the scheme of setting up/modernization/explanation/technology up gradation . Further such grant-in-aid was subject to various terms conditions as were mentioned in annexure II. Thereafter, the said Ministry again vide their letter dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Pg 31-40 of the decision paper book) wherein, a similar controversy was involved and it was held that .... Further, capital receipts cannot be said to be earned profits available for distribution- Capital reserve on account of state capital investment subsidy, lab equipment subsidy and ISI subsidy provided by the State Government cannot be included in accumulated profits - Since the Revenue has not treated the amount of subsidy as revenue receipt nor the amount has been credited as profits in the accounts of S Ltd. in any of the earlier years, the contention that the amounts of subsidy were capital receipts has to be accepted -Thus, the subsidy amount cannot be termed as capitalized profits of the company-Only the current year s profit could be treated as deemed dividend on the facts of the case In our considered opinion, the amount of capital subsidy of ₹ 36.87 lakh could not be considered as a accumulated profit and is out of the preview of the S. 2(22)(e) of the Act. Accordingly, the ld. CIT(A) was not justified in holding that the amount of capital subsidy was a part of accumulated profited to be considered as deemed dividend under S. 2(22)(e) of the Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . During the course of hearing, the ld.AR of the assessee submitted detailed written submission and relied upon case laws. He submitted that the assessee is having interest free funds much larger than the interest free advances. Hence, a presumption would arise that interest free loans advances were be only out of interest free funds and not out of interest bearing borrowings. The AO has not denied the facts that the assessee was having interest free funds being capital more than ₹ 40 lacs and loans to the extent of ₹ 95,71,170/-, as against which the alleged interest free loan was of ₹ 7,92,300/- only which is much lower than the interest free funds. This Hon ble Bench has also been taking a consistent view to this effect and replied upon ACIT v/s Ram Kishan Verma (2012) 143 TTJ 1 (Jp), which was affirmed by the Hon ble Rajasthan High Court vide para 12 14 in the case of CIT v/s Ram Kishan Verma (2016) 132 Taxman 107 (Raj.) (DPB 18-25). He further submitted that a comparatively recent decision in the case of Hero Cycle P. Ltd vs. CIT (2015) 128 DTR 1/379 ITR 347 (SC) also directly supports the case of the assessee and similar view has been taken recently, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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