TMI Blog2018 (2) TMI 1532X X X X Extracts X X X X X X X X Extracts X X X X ..... n - CIT (A) and the ITAT deleted the disallowance holding that the original transaction of advance was genuine and a trading one and furthermore that the commission was paid through payment channels in terms of the tripartite agreements - Held that:- AO’s findings are based upon facts. A significant detail that seems to have escaped the notice of lower appellate authorities, i.e. that after obtaining substantial sums, the assessee even made over a substantial part of it – ₹ 6.14 crores to Adani to whom it paid ₹ 43.5 lakhs as commission for the standing guarantor. The latter payment in the light of the transactions previously discussed strain ones’ credibility and does not accord with prudent commercial practice. For these reasons the Court is of the opinion that the findings of the lower authorities are based upon a mis-appreciation of circumstances and are, therefore, unreasonable, and are premised on an erroneous appreciation of the facts and the law. The disallowance of ₹ 43.5 lakhs was just and warranted. - Decided against assessee. - ITA 637/2004 - - - Dated:- 20-2-2018 - MR. S. RAVINDRA BHAT AND MR. A. K. CHAWLA, JJ. For The Appellant : Sh. Ruchir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be paid 2.5% as guarantee commission by it (the assessee, Prasidh Leasing Ltd). The AO noticed, from the list of closing stock of shares for the Financial year 1994-95 filed with the return of income that the assesse held 17,67,642 shares of Ginza. Therefore, the assessee company was asked to furnish the details of share holdings and whether any share holders and Directors were common. Subsequently, the assessee was asked to furnish particulars set out in a questionnaire. 4. A survey under Section 133A of the Act was conducted at Ginza s office premises at Kolkata, on 06.02.1998. One of the purposes for this survey was to ascertain if the interest free advance of ₹ 17.4 crores given to the assessee company by Ginza was covered under the definition of Deemed Dividend in terms of Section 2(22) of the Act. Summons were later issued to Ginza to furnish further particulars. 5. The AO, by his order brought to tax certain amounts. He held that the amount paid by Ginza fell within the description of the term deemed dividend under Section 2 (22) (e) and found as follows: In the case law cited above, it has been held that advances towards purchase are not covered un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s advance from Ginza Industries Ltd. It purchased shares of different companies to the tune of ₹ 8 crores. It gave a loan of 6.4 crores approx. to Adani Finance Investment Corporation Ltd. It also advanced load to another 5-6 persons. Now on one hand the assessee says that the business is such that one needs to make spot or advance payments to block the deal. There is also a provision in the agreement whereby Ginza Industries Ltd. could call back the advance within 3 days. Now, the common sense would fell that all these are not possible at the same time. The money from advance is parked in investments in shares and loans and advances to parties in Ahmedabad (Adani Finance) and Calcutta (e.g. - Easter Housing Udyog, Marygold Estates etc.). The assessee could be required to mobilize these funds within 3 days, if Ginza Industries Ltd. recalled it or within a day if it was required to block deals in purchase of licenses. Would it be possible for the assessee to sell off its shares and call all its advances back in a day or two. The answer is no. the payments from sale of shares could take at least a 'week' depending on settlement period in stock exchanges and it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deal had to be called off. It is like an exporter traveling abroad in search of contracts/orders and just because he fails to secure any contract/ order the travelling expense being called in question. The purpose behind a transaction and the results thereof do not often go hand in hand. If that were not so all human endeavors would lead to success but the story of real life is different. In this case that intention in important and it is very clear form the tripartite agreement and other evidence on record that the purpose for moneys given by M/s Ginza Industries Ltd. to the appellant company was to procure advance licences. Failure to actually clinch any such deal does not in any way detract from the purpose. 2.11(9) Keeping in view the facts and circumstance of the case, as brought out in the preceding sub paragraphs, the contention of the learned AR of the appellant company that the issue is squarely covered in favour of the appellant by the Hon'ble Bombay High Court decision in the case of Nagindas M. Kapadia, 177 ITR 393, deserves to be upheld. In the said judgement is has beheld that advance towards purchases cannot be brought in the ambit of Section 2(22)(e). Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iates were to be paid 2.5% commission of the amount received in advance on account of purchase of import licence for M/s Ginza and accordingly a sum of ₹ 43,50,000/- was payable to M/s Adani Associates. It was further seen by the CIT(Appeals) that M/s Adani has shown this amount as their income. The statement of the parties from whom the import licences were to be purchased for M/s Ginza Industries were also examined and found that the amount was given directly by M/s Ginza Industries to the assessee for purchase of import licenses. M/s Ginza Industries was to bring a public issue and for that a detailed report was prepared. A copy of that was prepared and the same is placed at pages 14 to 32 of the paperbook and in paragraph 32 of the notes at page 23 (Internal page 11 of the report) it has been clearly mentioned that: Loans Advances contains an advance of approx. ₹ 20 crores to Delhi based exporters, who will provide regular advance licenses for duty free import of Polyester Yarn at a concessional rate to the Company. In the event of the deal not materializing, the party is to return the amount with int. @ 21 % p.a. before 28th February, 1995. This deal was e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the detailed reasoning given by the CIT(Appeals) in his order, which could not be controverted by the learned D.R, we are of the considered view that CIT(Appeals) was justified in holding that the transactions entered into by the assessee with M/s Ginza; for business consideration. The findings of the CIT(Appeals) are findings of fact, as the CIT(Appeals) has dealt with each and every objection of the Assessing Officer and then arrived at a conclusion that the transactions entered by assessee with M/s Ginza were', for business consideration. Once it is established that the transactions 16. We have confirmed the finding of the CIT (Appeals) that this was a business transaction. therefore, we are not inclined to consider the alternate submission of both sides in regard to accumulative profits of Mis Ginza Industries for the purpose of section 2(22)(e). 8. The revenue argues that the ITAT failed to notice that no import licences were purchased and sold to Ginza. In fact there was no transaction whatsoever between the assessee and M/s Ginza. It is submitted that the alleged agreement between assessee and M/ s Ginza was vague, ambiguous and did not specify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) to say that similarly loans camouflaged as trading advances fall within the mischief of deemed dividend provision. Lastly, he also relied upon the judgment of this Court in CIT v. Sunil Chopra 242 CTR (Del) 498, where the true nature of a transaction, discerned by the AO was upheld and the ITAT s reasoning set aside. 12. Sh. Ajay Vohra learned senior counsel appearing for the assessee contended that the ITAT and the appellate Commissioner recorded correct findings which do not need to be distributed. It was submitted that the sum of ₹ 6.16 crores was given by Ginza to the assessee for legitimate and genuine purpose, i.e. for procuring import licenses. Though the AO recorded statements made on behalf of Ginza through its officials, the crucial part (omitted by him but considered by the lower appellate authorities) was that the company intended to set-up a manufacturing facility and also intended to trade in import licenses. The assessee had expertise and knowledge in the field of dealing with such licenses. No doubt, the manufacturing facility proposed by Ginza was not set-up in the assessment year or even later but the fact remained that it had geared up all its reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961 reads as follows: 2. In this Act, unless the context otherwise requires,- XXXX XXXX XXXX (22) dividend includes- XXXX XXXX XXXX (e) any payment9 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) 10[made after the 31st day of May, 1987, by way of advance or loan9 to a shareholder9, being a person who is the beneficial owner of shares (not being shares entitled 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 profits11 ; 16. The challenge, to a para materia provision, (i.e. 2(6A) of the repealed Act of 1922) was repelled by the Supreme Court in Navnit (supra). In Navnit (supra), the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee used the amount which Ginza had given it to procure import licenses, by purchasing shares and giving further advances of ₹ 6.4 crores to various entities at 12% per annum. The AO inferred that this circumstance undermined the assessee s contention that Ginza advanced the amount of ₹ 6.16 crores to it in the ordinary course of business and observed as follows: It would be interesting to see how the assessee had used or parked its funds obtained as advance from Ginza Industries Ltd. It purchased shares of different companies to the tune of ₹ 8 crores. It gave a loan of ₹ 6.4 crores approx to Adani Finance Investment Corporation Ltd. It also advanced loan to another 5-6 persons. Now on one hand the assessee says that the business is such that one needs to make spot or advance payments to block the deal. There is also a provision in the agreement whereby Ginza Industries Ltd. could call back the advance within 3 days. Now, the common sense would tell that all these are not possible at the same time. The money from advance is parked in investments in shares and loans and advances to parties in Ahmedabad (Adani Finance) and Calcutta (e.g. Easter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er took off. Ginza was into production of items that needed domestic inputs. It was also held that Ginza MD upon being asked whether materials had been procured: in 1994-95 or subsequently steel, yarns or chemicals against any import licences, his answer was no . In fact the total import of Ginza from FY 1991-92 till FY 1996-97 has only been for a value of ₹ 20 lakhs. All of this goes on to indicate that Ginza was never in a position to procure any import items against licences inhouse. 19. The AO also held on the other hand the answer of Sh. Setiha, who dealt with licences on behalf of the company was also of an evasive nature and his failure to comply to the queries dated 18.03.1998 to establish existence of employees competent to dealt with licenses, as stated by him, also proves that Ginza did not have any intention or scope by way of knowledge or expertise to deal with the premium market for buying and selling advance licenses. 20. The CIT(A) completely brushed aside the AO s determination/findings and in fact made light of them by stating that whether or not any license was ultimately procured by the assessee for Ginza was not relevant and was in fact mispla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be sham and rightly so, inasmuch as the agreement was executed on 18th September, 2003 and the handing over of the property was to be done before 31st December, 2008. In any case, this property was still being reflected in the balance sheet of the assessee as on 31st March, 2005, even though the agreement was entered on 18th September, 2003. The CIT(A) also disbelieved the claim of the assessee on this count. The Tribunal in this regard has recorded that the assessee was claiming this advance for investment in his books of accounts and the AO has not disputed this. Apparently, this was a perverse recording by the Tribunal inasmuch as it has been seen that AO and CIT(A) have categorically recorded this transaction as colourable device. It is unbelievable that an agreement was executed on 18th September, 2003 and the payment was made, but the possession of the property was to be handed over after more than five years. Even the property continued to be reflected in the balance sheet of the assessee after two years of the agreement. Similarly, in respect of ₹ 27,90,125/- shown as loan/advance from M/s TSM Polymers Pvt. Ltd., the assessee had replied to the AO that this was rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 993-94) were to the tune of ₹ 17.4 crores from 08.09.1994 and approximately ₹ 18.16 crores from 20.09.1994. This finding, in the considered view of this Court is significant; it has remained undisturbed; neither the CIT(A) nor the ITAT have adversely commented on it or even reversed it. 23. The second significant aspect in this Court s opinion is that Ginza was not trading in import licences or even advance licences. Yet it wished to purchase license inter alia stating that it needed them for importing steel, yarn and other equipment necessary to set-up a project. A closer look would reveal that its imports never took place. Ginza s stand was that it wished to trade substantially to the extent of around ₹ 40 crores in import licences and that the assessee had in overall procured licenses at a competitive rate of 10-15 % less than the prevailing market rate. Even if all these facts were assumed to be correct, two important aspects are undeniable first that one of the objects of procuring import license, i.e. self importation of equipment and for self consumption was never fulfilled. No significant imports were made. Secondly, in fact hardly any import licenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee for long periods and never advanced for the purpose of purchase of licenses. The guarantee commission supposed to have been paid was intended to further the object of Section 2(22)(e). The AO concluded as follows: From the above discussion, it has also been clearly established that the tripartite agreement has been created to suit the self interest and the consequent payment of 43.5 lacs has been shown to have been made as a cover up exercise and hence cannot be taken as the payment made for the purposes of business. This issue had also been discussed in the show cause notice dated 23.3.1998 which has been discussed earlier in the order. The claimed payment of 43.5 lacs made to Adani Associates as guarantee commission is therefore being disallowed because the same has not been for the purpose of business not for self serving moreover to create a cover up for escaping the provision of Section 2(22)(e) of the Income Tax Act, 1961, resulting in an addition of ₹ 43.5 lacs. Subsequently the AO proceeded to discuss the issue further and ultimately brought to tax the said amount of ₹ 43.5 lakhs. 27. The CIT (A) and the ITAT deleted the disallowance holding ..... 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