TMI Blog2019 (9) TMI 1229X X X X Extracts X X X X X X X X Extracts X X X X ..... om AOPL is 2.4.2014, therefore only the opening balance of the accumulated profits as on 1.4.2014 at ₹ 38.76 crores should have been considered for computing the amount of deemed dividend as per the provisions of section 2(22)(e) Disallowance of ROC expenses and stamp duty incurred for increase in share capital - HELD THAT:- Following the judgments BROOKE BOND INDIA LIMITED VERSUS COMMISSIONER OF INCOME-TAX [ 1997 (2) TMI 11 - SUPREME COURT] as mentioned above we are of the view that Ld. CIT(A) has rightly confirmed the disallowance of ROC fees incurred exclusively for increase in share capital. - ITA No.936/Ind/2018 - - - Dated:- 25-9-2019 - Kul Bharat, Judicial Member And Manish Borad, Accountant Member For the Assessee : S/Shri Sumit Nema, Sr. Adv. And Ayush Gupta, Adv For the Revenue : Smt. Ashima Gupta, CIT ORDER PER MANISH BORAD, AM. The above captioned appeal pertaining to the Assessment Year 2015-16 filed at the instance of the assessee is directed against the order of Ld. CIT(Appeals)-1 (in short CIT(A) ), Bhopal dated 07.12.2018 which is arising out of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date the amount was paid by advantages M/s Advantage overseas Pvt to the Appellant. 8. That there is no justification either in law or on facts for the Ld. CIT(A) to sustain the addition of ₹ 85.551akhs incurred for increase in share capital. The said amount should have been allowed as deduction u/s 35D of the Income-tax Act, 1961 . 2.Brief facts of the case are that the Appellant, Asian Business Connections Private Limited (In short ABCPL ), is a company incorporated under the Companies Act, 1956 and is mainly engaged in the business of making strategic investments. ABCPL is a holding company for group companies which operate in Agri-business, International Trade in commodities, Film Production and Distribution, Multiplex and Film Screening, Restaurant and Food Courts, and Event Management - both domestic as well as overseas. It was with a view to synergizing the operations and enhancing the growth potential of the subsidiaries which catered to varied and diverse fields like Import - export of Agro Commodities, Entertainment, Movies, Music, Multiplex, along with Food Beverages Business, ABCPL was transformed into a holding company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se here. The Ld. AO further noted that on receipt of advance from AOPL, the amount was mainly diverted /transferred to sister concerns and not utilized in any kind of business activity. Further from the balance sheet of the assessee company it was seen that there was no investment of this amount in any kind of business activity. This amount was mainly invested in group companies. 5. When the assessee was confronted it was submitted that it had entered into an Memorandum of Understanding dated 12.10.2012 with the subsidiary company AOPL and as per this agreement AOPL gave the advance to the assessee company for making strategic investments in other concerns and the income there from shall be shared equally subject to the minimum assured return of 12% per annum of the investment made by AOPL. The amount was invested in parts. It was also submitted that these transactions took place as per the Memorandum of Understanding and thereafter advances were received from AOPL and further strategic investment fetching income to the assessee and AOPL are transactions in the regular course of business and are commercial transactions which are out of the purview ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt and not an unsecured loan. As part of this MOU a substantial amount received was invested in shares of a realty company which operated a mall and these shares were subsequently sold in AY 2018-19 for a substantial profit was received which was shared equally between the appellant and its subsidiary. To demonstrate this aspect the IT Return of the appellant company and the audit report for AY 2018-19 is being filed herewith. Also to demonstrate the fact that profits generated from sale of investment were also shared 50:50 between the appellant and its subsidiary from whom the amount was taken for investment, the audit report of the subsidiary (duly filed with the IT return) is also being filed herewith. True Copy of Return of Income for A.Y 2018-19 along with audit report of Appellant Company is Annexure A/1and true copy of the audit report of subsidiary M/s Advantage overseas Pvt Ltd. Is Annexure (Al2) 5. That the aforesaid annexures Al1 Al2 are for AY 2018-19 and are also available online with the IT department and in a true sense are already on the record of the Income-tax department. However since these were filed in 2018- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany and the audit report for AY 18-19 has been filed. In this regard, it is submitted that the return of income filed for AY 18-19 does not have any bearing on the additions made in the hands of the appellant on account of deemed dividend u/s 2(22)(e) of the Act. The ld. CIT(A) in para 41 of CIT(A)-1/BPL/IT-10630/17-18dated 07.12.2018 has held that The appellant has relied upon the MoU between ABC and AOPL, however, it is observed that the MoU is too general and vague in nature as it does not show any specific investment where the investment was proposed/contemplated by the ABC. Further, the appellant could not show that the investment ultimately made by ABC was made in the joint name of AOPL and ABC, if the same was a genuine strategic investment made in partnership. Further, the appellant count not rebut the finding of the A.O in the remand report by showing genuineness by way of any independent filing that an agreement existed which was subsequently shown as investment agreement. It is observed that even if we consider the investment agreement, the provision of section 2(22)(e) are squarely applicable . Therefore, it is clear that the divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is a purely commercial transaction which does not fit in the category of either a loan or a deposit ? This ground of appeal is against the additions made by the AO under Section 2(22)(e) of the Act. The appellant is engaged in the business of making strategic investments. It performs the role of holding company to a number of subsidiary companies. During the year under consideration, the appellant had received funds from one of its subsidiary company, Advantage Overseas Private Limited (AOPL) towards business purposes. AOPL is an agri-based trading company. It had accumulated surplus over a period of time. In the meantime, in order to efficiently use the existing resources for 5 years and to maximize returns of its stakeholders, AOPL was contemplating to invest these funds in avenues that would generate good returns. The board of AOPL, in their meeting held on 25Th September 2012 (AY 203-14) deliberated on identifying options available for investing the excess funds. If no other opportunity to invest and earn is identifiable, it was decided that the amount will be invested in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venture and not as a loan simplicitor or loan / advance in lieu of dividend. In case of a loan or a deposit the entire amount is left to the disposal of the borrower however in the present case the inflow of funds was followed by immediate strategic investment as per the MOU dated 12th Oct, 2012. It is submitted that the provisions of Section 2(22)(e) are not applicable if: - Contributions given are for commercial purpose, or - The contributor is benefitting from the advance, or - Contributions are utilized for the specified purpose of business as agreed with the contributor by the recipient, or - Contributions given are not in lieu of dividend / avoiding dividend distribution tax, or - Contributions are given for commercial expediency, business necessity and emergency needs resulting in financial accommodation between sister concerns. In the instant case, the contribution given was for commercial purpose, AOPL the contributor is benefitting from the contribution provided, contribution provided is utilized for specified investments by ABC and the contribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be large number of debit and credit transactions between group companies. These accounts would be in the nature of current adjustment accommodation account wherein there is a movement of fund in both ways, on need basis. 3. Reliance may be placed on the ITAT judgement in the case of Ravindra Fotedar v. ACIT [2017] 85 taxmann.com 314 (Mum) and Saamag Developers (P.) Ltd v ACIT [2018] 90 taxmann.com 20 (Delhi - Trib.) wherein it was held that Perusal of the relevant records reveals that they are in the form of current and inter banking accounts and contain both types of entries i.e. giving and taking the amount and appear to be a current account and cannot be considered as loans and advances as contemplated under section 2(22)(e) 4. The appellant has already submitted during the course of assessment proceedings that it has a running account with AOPL. There is no one-way flow of funds. In view of the above, it may be contended that the funds advanced to the appellant by AOPL are not in the nature of loans and advances taxable under the ambit of deemed dividend. In view of the above, it is submitted that the funds advanced by A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with section 12(1B) of the 1922 Act, even if that advance or loan was subsequently repaid in its entirety during the relevant previous year in which it was taken. 3. In the case of the appellant, the transaction does not fall within the ambit of first leg of the definition i.e. any sum by way of advance or loan since the payment made by AOPL to ABC was for a business venture and not a loan per se. Therefore, the question whether the repayment of loan or advance would alter the position does not arise. 4. In view of the above, this decision does not apply to the appellant s case. The AO has wrongly relied on the decision of Supreme Court in the case of P. Sarada vs CIT 1. The Hon ble Supreme Court, in the said case, held that any sum by way of advance or loan shall be deemed to be dividend irrespective of the fact that such advance or loan was subsequently adjusted against future payments or against the credit balance of another shareholder. 2. The relevant para is reproduced below for ready reference. The withdrawals made by the appellant from the company amounted to grant of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance lying with the director and for not withdrawing such funds for the purpose of business. 2. The Income-tax Appellate tribunal, questioning the business expediency of the transaction held that The argument of the assessee that since the entire amount was utilised in the subsequent year, the purpose of creating imprest account with the director/shareholder would not get frustrated merely because this amount was not utilised in the year under consideration, had no force. In the instant case, admittedly, the entire impugned amount created as a sham imprest account with the director/shareholder, was not utilised during the entire year and there was no explanation as to why the entire amount created was not utilised in the relevant year even though there were huge deposits in this account by the assessee. The amount given to the director/shareholder towards the imprest amount, in real sense was, in fact, not an amount given to the director towards the imprest but was a short-term loan because admittedly it was evident from the accounts that, from June 1997 to February 1998, there were huge deposits in the imprest account of the said shareholder/dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, in view of the fact that the contribution by AOPL was for the purposes of a joint business venture, it is possible to contend that the said transaction can be classified as a Trade Advance as Business includes an adventure in the nature of Trade. In view of the above, it is contended that the AO has not considered the submissions made by the appellant and the terms of the agreement entered into by the appellant and consequently, the observations/conclusions by the AO are baseless and fallacious. It is submitted that the AO has failed to appreciate that the said transaction has been accounted in the balance sheet and adequate disclosure is made in the notes to accounts as required under the provisions of Companies Act, 2013 and the applicable accounting standards. Further, it is submitted that the AO has himself accepted that he has jumped into the shoes of the appellant. In this respect, it is once again submitted that various courts have held that commercial decisions are to be taken by the assessee itself and the tax officer are not authorized to make additions / draw conclusions based on such decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely ignored the principles laid down in the other judicial pronouncements mentioned in the submissions. By relying on them, one of principles which emulates is that if the contributor is benefitting from the contribution made, provisions of section 2(22)(e) of the Act does not apply. - Bagmane Constructions [2015] 57 taxmann.com 120 (Karnataka) - Sarat Chand Bhavaraju [2017] 81 taxmann.com 323 (Vishakapatnam ITAT) In the instant case, the contributor, AOPL is benefitting from the investment made. Given this, it is contended that the provisions of Section 2(22)(e) of the Act will not be applicable to the appellant. 2.The AO, based on conjectures, guess work and personal opinion, has concluded that transaction between AOPL and ABC is not a business transaction without considering the submissions of the appellant and facts of the case On page no 6 of the Remand Report, while providing his comments on CIT vs Madurai Chettiar Karthikeyan (2014) (45 taxmann.com 274), the AO has summarily concluded that the transaction between ABC and AOPL is not a normal business transaction without assigning any cogent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 93 Taxman 502 (SC) wherein, the Supreme Court held that It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd., the Income-tax Law does not march step by step in the footprints of the accountancy profession. [Emphasis added] The Hon ble Supreme Court in the case of Taparia Tools Ltd. v. Joint Commissioner of Income-tax [2015] 55 taxmann.com 361 (SC) reiterate that ..because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In respect of mention of the balance amount payable by AOPL to ABC under the head contingent liability , it is submitted that the amount payable by AOPL cannot be classified as contingent liability . As per Accounting Standard (AS) 29 on Provisions, Contingent Liabilities and Contingent Assets, a contingent liability is: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or (ii) a reliable estimate of the amount of the obligation cannot be made. It is submitted that the balance contribution to be made under the agreement do not fall under either of the two scenarios. The balance payments to be made by AOPL to ABC is certain and not subject to occurrence or non-occurrence of future uncertain events. Also, the contributions are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose to remain silent on such major transaction undertaken. Also, whether minutes of meetings as now being presented were reported to the MCA has not yet been clarified [Emphasis added]. As evident from the observation of the AO itself (underlined above), it is submitted that the AO has indulged in complete conjecture and guess work. It is submitted that the AO has ignored the confirmation of the statutory auditor that they have examined the business venture agreement dated 12th October 2012 entered into between ABC and AOPL and the related documents. In respect of filing of minutes of meetings with the MCA, it is submitted that under the provisions of the Companies Act, 2013, the minutes of a board meeting including resolution passed therein are not required to be submitted to any statutory authorities. Once again, it is the personal opinion and view of the AO that it has not been clarified that the minutes of the meeting were submitted to MCA. In view of the above, it is submitted that the AO s observation needs to be ignored. The AO has based on conjectures, guess work and personal opinion, wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is in the business of Agri trade where continuous banking support in the form of LOC issuance is required and any short term dip in the value of investment would have had to be marked as mark-to market loss thereby directly affecting the banking transactions of LOC which are based on credit risk rating. b) It had not investment in its books earlier or in future and had no expertise in strategic investments. Its had only FDR s in its books and nothing else. c) The Appellant had been negotiating with the seller since 2012 and had considerable expertise in strategic investments and to turn over the seller to a completely different buyer does not happen in business negotiations. d) The appellant assumed all the risk in its balance sheet which protected the subsidiary from any adverse outcome of the investment. 11. As regards alternate ground raised by the assessee that the addition u/s 2(22)(e) without prejudice to our contention that the alleged transaction of receiving advance was purely for business purpose, if in case the issue is decided against it then the addition for the accumulated profits may be made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18) 89 Taxmann.com 252 (Kerala) 18. Commissioner of Income Tax, Chennai V Raj Kumar (2009) 181 taxmann.com 156 (Delhi) 19. Commissioner of Income Tax V Arvind Kumar Jain (2012) 18 Taxmann 132 (Delhi) 20. Ishwar Chand Jindal V Assistant Commissioner of Income Tax (2015) 61 Taxmann.com 428 (Delhi-Trib.) 21. Assistant Commissioner of Income Tax-3(1), Indore V Pravin C Pandya (2013) 38 taxmann.com 408 (Indore-Trib.) 13. To demonstrate that the transaction is a business transaction ABCPL filed the following evidences before the lower authorities:- i. Memorandum of Association of ABC. ii. Memorandum of Association of AOPL. iii. AOPL s Board Resolution for the board meeting held on 25th September 2012. iv. AOPL s Board Minutes for the board meeting held on 25th September 2012. v. ABC s Board Resolution for the board meeting held on 3rd October 2012. vi. ABC s Board Minutes for the board meeting held on 3rd October 2012. vii. Business Proposal provided by ABC to AOPL. viii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted that as on date, the Appellant has sold its shares held in CSJ Infrastructure Private Limited on 19th July 2017. As per the terms of the agreement dated 12th October 2012 entered into between the appellant and AOPL, AOPL is eligible to receive 50% of profits earned by the appellant from the investment. Calculation of profit on sale of shares of CSJ Infrastructure Private Limited by the Appellant and share of profit of AOPL thereon was also filed. ii. Further, computation of advance tax of FY 2017-18 of the appellant considering his share of profits as income was also filed before the Ld. CIT(A). In respect of AOPL, the company has, after considering the 50% share of profit on disinvestment, estimated that no advance tax is due for AY 2018-19. iii. Form 26AS of the appellant reflecting the advance tax paid and taxes deducted at source by their payers was also filed iv. On perusal of the above details, it will be observed that the Appellant and AOPL has duly paid taxes on their respective share of profits. Thus in all aspects the transaction is a commercial transaction which does not result in any deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 profits. 21. 'Dividend' in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed. As held by Hon'ble Supreme Court in Bharat Insurance vs Cl'I', 53 ITR 108 (SC), the definition as per this clause is an inclusive one implying that any receipt by a shareholder which is 'dividend' under general law would be taxable as such under this Act, even if it falls outside the purview of this definition or is not attributable to the company's 'accumulated profit'. 22. The concept of deeming certain payments or loans or advances to substantial shareholders as income was introduced with the object of curbing tax evasion. Upto 31-5- 1997 dividend was taxed in the hands of the recip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be repaid during the same accounting year is immaterial. 28. The Delhi High Court, in the case of ClT v. Raj Kumar, 181 taxman 155 has distinguished between a 'loan' and an 'advance'. The relevant extract from the judgment IS reproduced below:- If this purpose is kept in mind then, in our view, the word (advance' has to be read in conjunction with the word 'loan'. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term (advance' mayor may not include lending. The word (advance' if not found in the company of or in conjunction with a word (loan' mayor may not include the obligation of repayment. If it does then it would be a loan .... (p. 166) 29. In this background, the facts of the case are that the appellant received a loan of ₹ 428.50 crore from its subsidiary company AOPL In which it was having 85 shareholding. In the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. However, in the instant case, the holding company i.e. the assessee ABC is entitled to benefits derived from investments made in other companies from the funds received from AOPL @ 50 of profits on such investments. Therefore, the case law is not applicable in the case of the assessee company. 33. The appellant has relied upon the CBDT circular No. 19 of 2017 to contend that contributions given for commercial purpose fall outside preview of section 2(22)(e). The aforesaid circular is reproduced below:- Section 2(22) clause (e) of the Income Tax Act, 1961 (the Act) provides that dividend includes any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, 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 sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34. It is observed that circular covers only 'trade advances' in the nature of commercial transactions. The trade advances have been illustrated in the circular to be advances made by a company to a sister concern and adjusted against the dues for job work done by the sister concern; advance made by a company to its shareholder to install plant and machinery at the shareholder's premises to enable him to do job work for the company so that the company could fulfil an export order; a floating security deposit given by a company to its sister concern against the use of electricity generators belonging to the sister concern etc. It may be seen that the nature of transaction here is entirely different and can in no way be treated as a normal trade advance as the appellant company is not engaged in any trade transactions with AOPL in routine in its normal course of business. From the illustrative transactions given in the circular, it can be inferred that only transactions such as where the subsidiary company was a dealer say of a cement producing holding company and gives some trade advance in its normal course of business, then such transaction would not be covered wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is clear that Sub-clause (e) of Section 2(22) of the Act, which is parimateria with Clause (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 the form of an advance or loan. If this purpose is kept in mind then, in our view, the word advance' has to be read in conjunction with the word loan '. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of re-payment. On the other hand, in its widest meaning the term advance' mayor may not include lending. The word advance' if not found in the company of or in conjunction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sacted to give effect to a commercial transactions would not, in our view, fall within the ambit of the provisions of Section 2(22)(e) of the Act. This interpretation would allow the rule of purposive construction with noscitur a sociis, as was done by the Supreme Court in the case of LIC of India v. Retd. LIC Officers Assn. [2008J 3 SCC 321. 39. The aforesaid judgment clearly establishes the usage of word advance or loan in the context of section 2(22)(e) of the Income Tax Act, 1961. As per the judgment a trade advance is different from a loan which carries an obligation for repayment i.e. a trade advance is normally adjusted against trading transactions. Clearly, this is not the case here as per the undisputed facts the amount was given under an obligation of repayment and in the transaction, the appellant ABC was clearly a beneficiary. 40. In any case, even if the argument of the assessee is considered for argument sake that some investment agreement indeed happened, which remained to be accounted for in the balance sheet and notes to accounts; from the judgment of Hon'ble High Court of Delhi in Arvind Jain case (supra), it is clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etained the entire profit on the investment. The argument that the assessee company was having expertise in making strategic investments is to no avail as in a normal transaction, the AOPL could have easily obtained professional services of ABC, being both holding and subsidiary company, and if required, for some payment. In this case, it was purely a transaction of giving loan/ advance to ABC which is clearly hit vi] s 2(22)(e) of the Act. 43. The appellant has relied upon the MoU between ABC and AOPL, however, it is observed that the MoU is too general and vague in nature as it does not show any specific investment where the investment was proposed/ contemplated by the ABC. Further, the appellant could not show that the investment ultimately made by ABC was made in the joint name of AOPL and ABC, if the same was a genuine strategic investment made in partnership. Further, the appellant could not rebut the finding of A.O. in the remand report by showing genuineness by way of any independent filing that an agreement existed which was subsequently shown as investment agreement. It is observed that even if we consider the investment agreement, the provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been taken as on the date of receiving the amount from subsidiary company. In Ground No.8 assessee has challenged the finding of Ld. CIT(A) sustaining the addition of disallowance of registry fees of ₹ 85.55 lakhs incurred for increase in share capital. 17. We will first take up Ground No. 1 to 6 challenging the addition made u/s 2(22)(e) of the Act for alleged deemed dividend of ₹ 2,97,74,68,364/-. We observe that the assessee is having substantial interest by way of 85% share holding in AOPL which was further increased to 99.9% during the year under appeal. AOPL is having huge turnover and is a profit making company. In pursuance of the Memorandum of Understanding entered into between the assessee and AOPL for making strategic investment and sharing profits in equal ratio subject to the minimum return of 12% per annum to AOPL, assessee received amounts on various dates during the year totalling to ₹ 428.51 crores (approx). Since the assessee company was holding more than 10% of voting power of AOPL, Ld. A.O made addition for deemed dividend u/s 2(22)(e) of the Act of accumulated profits at the year end at ₹ 297.75 crores (approx.). Whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company; (b) any distribution to its shareholders by a company of debentures, debenture- stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933 , whether such accumulated profits have been capitalised or not; (e) any payment by a company, not being a company in which the public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company up to the. date of liquidation, 4 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]. 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;] 21. The above provisions deals with dividend and includes various types of payments in cash or otherwise to the share holders of the company. In the instant appeal revenue authorities have invoked provisions of Section 2(22)(e) of the Act which provides that dividend includes any payment made by the company not being th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholder i.e. ABCPL is in the ordinary course of business. 23. Now our adjudication will be centered on the point that whether the amount given by AOPL to ABCPL is an advance or loan given in the ordinary course of business . 24. As far as the contention of Ld. Departmental Representative the alleged amount has been shown as unsecured loan by the assessee company, we observe that the Hon ble Apex court in the case of Tapadia Tools Ltd V/s JCIT (2015) 55 taxmann.com 361 (SC) held that because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by the courts that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touch stone of the provisions contained in the Act [emphasis added].Therefore mere depicting the amount received under a particular head will not be conclusive to hold that the amount is an unsecured loan only. It has to be examined in the light of the facts of a particular case. In the financial statements the alleged amount received by ABCPL f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year 2014-15 has risen to 297.75 crores (approximate). So AOPL has accumulated reserve and surplus which is the profit after tax available with the company which can distributed as dividend to the shareholders or can be reinvested for the business purpose to earn more profits. As per the Memorandum of Association placed at page 191 to page 206 of the paper book, AOPL is authorised to carry out the business to achieve its main objects and the objects incidental or ancillary to the attainment of main object of the company. As per the other objects No.2, AOPL is authorised to invest money of the company not immediately required in such manner as may from time to time determined by the company in assets, properties, shares, bullion and sell or vary such investments and to execute all transfers, agreements, receipts that may be necessary in that behalf. On 25.5.2012 in the meeting of Board of Directors of AOPL placed at page 208 of the paper book, it was resolved that company can find investment opportunities for investing its idle fund and utilise it in accordance with the provisions of companies Act 1956 and other rules made t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing liquid funds. During financial year 2014-15 i.e. the year under appeal, amount in the shape of trade advance/loan was given by AOPL to ABCPL as per the terms and conditions of the Memorandum of Understanding dated 2.10.2012. Against the agreed amount of investment of ₹ 850 crores, only amount of ₹ 428 crores was advanced and that too not in lumpsum rather as and when investment was needed. In the ledger account of AOPL in the books of ABCPL, amount was received from AOPL on around 51 occasions during the year. The receipt of funds from subsidiary was immediately followed by investments so that no fund is kept idle in the hands of ABCPL. The amount received by ABCPL was not at its disposal but it was applied for the agreed strategic investment as per the memorandum of understanding dated 12.10.2012. As regards the application of fund received for strategic investment is concerned in the audited financial statement of ABCPL for financial year 2014-15 in Schedule-VIII under the head investment placed at page 139, following major new investments were made; (a) Equity share in AOPL ₹ 0.50 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship firm the profits earned during the year or accumulated profits are either taken by the sole proprietor or by the partners as per the share of profit n the proprietorship. In the case of company the profit is divided on the basis of equity shares held by the shareholders. Dividend is the payment made by the corporate to its shareholders usually as distribution of profits. Company can either reinvest the profits in the business for earning more profits or it can distribute the profit as dividend to the shareholders. The dividend is allocated as a focused amount per share. Shareholders receives the dividend in proportion to the shareholdings. In some cases where there are large number of shareholders and the company is not interested to distribute the dividend to all the shareholders but want to part away with the retained earnings by way of giving loan or advances to the shareholders having substantial interest in the company who are normally at the helm of affairs of the company. Such diversion of the accumulated reserves/ earnings to few of the substantial interested shareholders which are actually in the nature of dividend but this action restricts the other shareholders fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant case the assessee company is the head of group of companies having various business projects running under the name of subsidiary companies. AOPL is having regular source of income from sale of goods and was having idle funds which can be diverted to other lucrative investment fetching more income to the company. Board of Directors of the holding company as well as subsidiary companies certainly have the authority to carry out their business plans as per their wish within the permissible four corners of law with an object of maximising the returns. Memorandum of Association and Articles of Association of the company registered with Registrar of Companies authorises the Directors to run the business. It is not the case before us that AOPL has given interest free loan to ABCPL with no condition or the time limit of receiving back the amount from ABCPL. It is also not the case before us that there are various shareholders of AOPL which were deprived of the dividend from the accumulated reserve and surplus. The case before us is that the amount was advanced to AOPL under a documented business plan with Memorandum of Understanding. Amount has actually used for the purpose of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest. There is no legal bar in having such transaction. What is to be ascertained is what is the purpose of such advance. If the amount is given as an advance simplicitor or as such per se without any further application, receiving such advance may be treated as deemed dividend but if it is otherwise, the amount given cannot be branded as advance within the meaning of deemed dividend u/s 2(22)(e). By granting advance if the business purpose of the company is served and which is not the sum, which it otherwise would have distributed as dividend, cannot be brought within the deeming provision of treating such Advance as deemed dividend . 37. Hon ble Kolkata High Court in the case of CIT V/s Gayatri Chakraborty (2018) 94 Taxman.com 244, Kolkata (SC) has held that law on this point is clear in the event transaction between a shareholder and a company in which the public were not substantially interested and the former had substantial stake, create mutual benefits and obligations, then the provision of treating any sum received by the shareholder out of accumulated profits as deemed dividend would not apply . 38. Co-ordinate Bench, Vishakapatnam i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced have been duly invested majorly in the companies not coming under the list of subsidiary companies which have been finally sold giving returns during financial year 2017-18. The total transaction is commercial in nature and in our considered view have been entered in the ordinary course of business by AOPL as duly authorised in the other objects of the Memorandum of Association of the Company, in order to maximise its profits and there is no iota of evidence which proves that there was an intention of avoidance of dividend distribution tax which can attract the provision of deemed dividend. Therefore making the addition u/s 2(22)(e) of the Act for deemed dividend is uncalled for since the transaction falls in the list of payments which are not considered as dividend as provided under Sub Clause (ii) to section 2(22)(e) of the Act. We therefore set aside the findings of Ld. CIT(A) and allow Ground No. 1 to 6 of the assessee s appeal and delete the addition for deemed dividend at ₹ 297.75 crores (approx.) made by the Ld. A.O u/s 2(22)(e) of the Act. 41. Apropos to Ground No.7 which is an alternate ground raised without prejudice to Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Bombay High Court in the case of CIT v. Mrs. Maya B. Ramchand [1986] 162 ITR 460/ 25 Taxman 232 (Bom.) where it was held that for purposes of section 2(22)(e), the accumulated profits are to be calculated up to the date of payment of each loan. Reference to the decision of the Supreme Court in the case of Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) which affirms the decision of the Calcutta High Court in the case of Tarulata Shyam v. CIT [1971] 82 ITR 485 is also pertinent. In the aforementioned cases it was held that for purposes of section 2(22)(e), the accumulated profits are to be seen as on the date of payment and any repayment during the same year after the advancement of the loan will not affect the working of the accumulated profits on the date of loan. In other words the repayment of loan during the year of advancement of loan is not to be deducted from the accumulated profits. The Supreme Court in the case of CIT v. Asokbhai Chimanbhai [1965] 56 ITR 42 held that the profits do not accrue from day to day or even from month to month and have to be ascertained by comparison of assets of two stated points. Unless the right to profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up to the date of payment of the loan in working out the accumulated profit. The Supreme Court in the case of Navnitlal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 having held that the business profits accrue only at the end of the year, it is inconceivable that for purposes of application of section 2(22)(e), an exercise shall have to be taken to work out the business profits of the company on each day the loan is advanced. Working out the profits in the middle of the year is a complicated affair in contrast to working out the accumulated profits on the date of loan with reference to the accumulated profits of the preceding year with certain adjustment. On analysis of the aforementioned discussion, the following principles emerge : (i )That for purposes of section 2(22)(e), the accumulated profits are to be worked out up to the date of each payment/advancement of the loan. (ii )That there is a distinction between the accumulated profits of business and the current year s profits of business. (iii )That the profits of business accrue at the end of the previous year. (iv )That loan or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment plan. Therefore in case of the assessee it will not be practicable to compute the accumulated profits on 50 days during the year since at some point of time there may be addition to the accumulated profit and at some time there may be reduction in the accumulated profits. Therefore without giving a general finding for the adoption of accumulated profits as on date of payment, in the instant case since the first day of receiving the fund from AOPL is 2.4.2014, therefore only the opening balance of the accumulated profits as on 1.4.2014 at ₹ 38.76 crores should have been considered for computing the amount of deemed dividend as per the provisions of section 2(22)(e) of the Act. This alternate ground No.7 of the assessee s appeal which we have adjudicated only for academic purpose is thus allowed. 46. Apropos to Ground No.8 relating to disallowance of ROC expenses and stamp duty incurred for increase in share capital. At the outset Ld. Senior Counsel for the assessee submitted that only a proportionate disallowance of 37% is called for since against the increase in authorised capital from ₹ 5 to 100 crores only fresh capital of ₹ 37 crores was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted the ledger account evidencing the expenses incurred amounting to ₹ 85,53,900, the challans for stamp duty and others fees paid and the form SH -7 filed with the Ministry of Corporate Affairs. The AO, vide its assessment order, disallowed the expenditure incurred on the basis that the same are capital in nature. The provisions of section 35D of the Act specifically deals with expenditure incurred in connection with issue of shares. The extract of provisions of section 35D are reproduced below: The expenditure referred to in sub-section (1) shall be the expenditure specified in anyone or more of the following clauses, namely a) b) c) where the assessee is a company, also expenditure i. ii. iii. iv. in connection with the issue, for public subscription, gf shares In or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus Since expenses relating to issue of shares are eligible for deduction under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidently that would certainly help in the business of the company and may also help in profit-making, it still retained the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. Therefore, the amount paid to the ROC, as filing fee for enhancement of capital, was not a revenue expenditure. 53. In CIT vs Kodak India Ltd., [2002] 120 Taxman 498 (se), the Supreme Court reiterated its view that whether where object of assessee was to increase its share capital, either to continue to do business after RBI directive or otherwise, expenditure incurred for public issue of shares was capital expenditure. The head note is as follows:- Facts According to the assessee, it had acted to increase its share capital on the directions of the RBI because it had to reduce its non-residential holding to 40 per cent. It was submitted that the only way in which the assessee could do business after the RBI directive was to issue share ..... X X X X Extracts X X X X X X X X Extracts X X X X
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