9911796707
TMI Blog2025 (2) TMI 391X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of the case and contrary to the provisions of law. 2. The Ld. CIT(A) erred on facts and in law in not allowing the claim of additional deduction of expenditure of Rs. 13,30,291/- as evidenced by the entries of cash outflows in the names of the employees found in the seized material against the gross unaccounted cash receipts from sale of spent solvents and scrap of Rs. 35,29,191/- for arriving at the real income thereon. 3. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in failing to consider the notarized affidavits of the employees and labour contractors furnished as additional evidence which substantiate the additional claim of expenditure towards labour payments by corroborating and supplementing the entries of cash outflows in the names of the employees found in the seized material. 4. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the deduction of expenditure to the extent of Rs. 3,52,920/- only on estimate basis at 10% of the gross unaccounted cash receipts from sale of spent solvents and scrap." 5. In the facts and circumstances of the case, the LD.CIT(A) erred in law in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 142(1) were issued and served on the assessee by the Assessing Officer. After examining the material on record and the information furnished, assessment was completed by the Assessing Officer u/s 153A of the Act, making addition towards sale of spent solvents and scrap of Rs. 35,29,191/-. 3.1. The assessee has filed an appeal against the assessment order passed by the AO for A.Y. 2013-14 and challenged the disallowance of the claim deduction of expenditure of Rs. 35,29,191/- made by the AO towards expenses incurred against unaccounted cash receipts from sale of spent solvents / scrap and also challenged the legal validity of assumption of jurisdiction by the Assessing Officer for issuance of notice u/s 153A of the Act. The LD.CIT(A), for the reasons stated in the appellate order dated 22.08.2024, partly allowed the appeal filed by the assessee wherein the LD.CIT(A) has allowed the deduction of expenditure to the extent of Rs. 3,52,920/- only on estimate basis at 10% of the expenditure incurred against unaccounted receipts from sale of spent solvent / scrap. 4. Aggrieved by the order of LD.CIT(A), the assessee is now in appeal before the Tribunal. 5. The first issue that came ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me are required to be disposed of at the earliest. He further explained that he was given to understand that such waste is sold to local buyers, and some of the employees of the group companies have utilized such money for their own purposes, and the said money has not reached the respective companies. He further explained that the interest of the management in this regard is the quick disposal of such hazardous waste, and the management has not paid much attention to any other aspect. With regard to the sale of scrap, he explained that the same is generated out of dismantling of old building / units purchased by the companies and the proceeds from the disposal of such scrap have never reached the respective companies since the immediate disposal of such scrap for paving the way for further construction or development, is the priority of the management. However, considering the fact that the data was found in the registered office of the appellant company and in order to put a quietus to the issue, he stated that the cash receipts from the sale of spent solvents / scrap of Rs. 35,29,191/- was offered as additional income in the hands of the assessee for the year under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,71,521 - 6,45,63,985 2017-18 4,12,58,374 1,99,12,082 57,87,267 18,43,047 47,61,798 - 7,35,62,568 2018-19 6,77,03,448 1,74,25,120 93,97,572 26,08,388 61,56,891 - 10,32,91,419 2019-20 5,12,80,827 4,51,88,803 1,26,36,584 49,90,673 2,68,95,756 - 14,09,92,643 2020-21 5,12,22,731 3,27,38,075 1,02,22,479 48,55,404 2,67,81,999 - 12,58,20,688 2021-22 5,57,69,012 1,62,07,177 58,57,556 41,70,416 3,24,22,875 9,03,945 11,53,30,981 Total 45,52,39,617 18,45,03,085 4,39,01,458 2,59,09,243 11,32,72,843 9,03,945 82,37,30,191 5.2. During the course of assessment proceedings, in the written submissions furnished to the AO on 21-4-2022 in response to notice under Section 142(1) of the Act, the appellant reiterated the explanation furnished by MSN Reddy, the Managing Director of the appellant company, in the sworn statement dated 27-04-2021 and the affidavit dated 05-07-2021, and contended that the unaccounted cash receipts from the sale of spent solvents / scrap offered as additional income in the return of income filed under Section 153A of the Act do not represent the real income of the assessee, as the said amounts were expended for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplement the entries of cash outflows in the seized material, the appellant furnished notarized affidavits of various employees of the group who were involved in the process of collection of cash towards sale of spent solvents / scrap and disbursement of the same to the concerned workers and the labour contractors who have deployed such workers. 6.2. The LD.CIT(A), after considering the submissions of the assessee and also taken note of the Excel data sheet found on the pen-drive, allowed partial relief towards the additional claim of expenditure against unaccounted cash receipts from sale of spent solvents / scrap to the extent of 10% gross receipts on estimation basis by holding that the expenditure shown in the seized material containing entries of cash inflow towards unaccounted cash receipts from sale of spent solvents / scrap as well as cash outflow entries showing handling the cash to various persons. Since both debit and credit entries are simultaneously recorded in the same seized document, the document should be read as a whole and cherry picking of data according to convenience is not justified. The LD.CIT(A) further observed that it is evident from the sworn statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unaccounted cash receipts and that the cash outflow represents the amounts spent towards various expenditure as expended by the very same seized material but erred in allowing the additional claim of expenditure only to the extent of 10% of the gross cash receipts from sale of spent solvents / scrap on estimate basis by considering only one element of cost involved in the disposal of scrap without considering the other elements of cost like transportation, handling, and disposal of hazardous waste. The LD.CIT(A), referring to seized material found in the form of an Excel sheet, submitted that except few occasions, the amounts received from the sale of spent solvents / scrap have been given back for further disposal of hazardous waste, as additional wages, to employees who were involved in the disposal of said scrap. The AO conveniently ignored one part of the seized document, which contains details of expenditure incurred against unaccounted cash receipts from the sale of spent solvents / scrap, even though the Managing Director of the appellant company claimed that the management did not pay any attention to the financial aspects of the disposal of spent solvents / scrap, but onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount received from the sale of spent solvents / scrap has been utilized for making payments to employees. Although the appellant has obtained a notarized affidavit from the employees, if you go by the seized document, it clearly shows the cash inflow towards unaccounted cash receipts from the sale of spent solvents / scrap and also the cash outflow towards various payments made to MSN Reddy and other Directors of the appellant and other companies. From the above, it is very clear that the LD.CIT(A) has rightly allowed 10% of the receipt as expenditure incurred against unaccounted cash receipts, considering the nature of the material and the risk involved in the disposal of the said hazardous waste. Therefore, CIT-DR submitted that the order of the LD.CIT(A) should be upheld. 10. We have heard both parties, perused the material available on record and gone through the orders of the authorities below. We find that, this issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches, in assessee's own case for A.Y. 2015-16 in ITA No.1069/Hyd/2024 wherein the Tribunal has followed the decision in the case of MSN Pharmachem Private Limited for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee before the LD.CIT(A), including the notarized affidavits from the employees who are involved in the disposal of the said hazardous waste. 10.1. There is no dispute regarding the fact that the Excel sheet in the seized material contains entries of cash inflow represents unaccounted cash receipts from the sale of spent solvents / scrap, as well as cash outflow represents cash payments made in the name of various persons. The AO considered one part of the entries contained in the seized material, which includes cash inflow representing unaccounted cash receipts from sale of spent solvents / scrap, however, he conveniently ignored the other part of the entries contained in the very same incriminating material, which represents cash outflow in the name of various employees. Since the cash inflow and outflow are recorded in the very same incriminating material, in our considered view, the said seized material should be read as a whole for the purpose of assessment instead of cherry-picking of data according to the convenience of the Assessing Officer or the assessee. Therefore, in our considered view, the findings recorded by the LD.CIT(A) on this issue while allowing adhoc d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate that the appellant has incurred certain expenditure for handling and disposal of hazardous waste. This fact is further fortified by the entries in the very same seized material, where the cash outflow represents cash payments made in the name of various employees of the head office, who in turn had clearly admitted in their notarized affidavits that they have disbursed the amounts received out of unaccounted cash receipts from sale of spent solvents / scrap for the purpose of making higher payments to employees, who involved in handling and disbursal of hazardous waste. Therefore, in our considered view, the LD.CIT(A), having noticed the fact that the process involved in handling and disbursal of hazardous waste is cumbersome and also involves a certain amount of expenditure, but erred in allowing deduction of 10% on estimation basis from unaccounted cash receipts from the sale of spent solvents / scrap. 10.3. Having said so, let us come back how to quantify the amount of expenditure incurred by the appellant for earning unaccounted cash receipts from the sale of spent solvents / scrap. Admittedly, the seized material contains cash outflow in the name of various persons, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in this background of said circumstances only that the head office employees have submitted the notarized affidavits stating that the cash handed over to them periodically by the cashier has been fully utilized for making payments to the workers involved in collection and disposal of spent solvents / scrap needs to be accepted. The said notarized affidavits hold evidentiary value. However, the AO, in the remand report, even though not disputing the veracity of the said notarized affidavits or discrediting its contents or bringing any other material on record to disprove the contents of the affidavits, has simply rejected the arguments made by the assessee regarding the expenditure incurred for handling the said scrap. We further noted that the cash outflow represents payments made to various employees are in the name of few employees, and during the course of search, simultaneously search was carried out at the residence of three employees, where no incriminating material has been found in their possession to allege that the cash received by them has been utilized for their personal purposes, including the acquisition of any assets. This fact is further strengthened the arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled by the employees, wherein they claimed that the amount received from the head office has been utilized for making payments and incurring other expenditures. Although there is no direct evidence for incurring 80% of the amount towards expenditure, going by the nature of the material, in our considered view, there needs to be certain amount of expenditure for other expenses like transportation, packing etc. Since there is no direct evidence regarding other expenditures, in our considered view, the only possible way is to estimate a reasonable amount of expenditure against unaccounted receipts from sale of spent solvents / scrap. Therefore, considering the fact that the appellant has already disbursed 80% of the amount received from unaccounted cash receipts in the name of various employees, and also going by the nature of the material, in our considered view, at least 60% of the receipts need to be considered as expenditure against unaccounted receipts from the sale of spent solvents / scrap. Therefore, we direct the AO to deduct 60% of the receipts as expenditure against unaccounted receipts from sale of spent solvents / scrap. In other words, out of the additional income offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer does not bring out the fulfilment of the conditions laid down in 4th proviso to Section 153A(1) of the Act. Further, the Assessing Officer considered the noting in the material found during the course of search which contains unaccounted receipts from sale of spent solvents and scrap, amounts given to the Director of the appellant company and considered that amount given to the directors as 'advances' within the meaning of "asset" as defined in clause (a)(o) of 4th proviso to Section 153A of the Act, but the fact remains that the 'satisfaction note' recorded by the Assessing Officer in light of incriminating material found during the course of search does not bring out the fulfilment of conditions for issuance of notice and thus, notice issued for the assessment years in question is invalid and consequent assessment order passed by the Assessing Officer is bad-in-law and is liable to be quashed. 15. On the other hand, the learned CIT-DR supporting the order of the LD.CIT(A) submitted that the incriminating material found during the course of search clearly shows the details of money advanced to the directors of the appellant company and the appellant company has admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years, then the Assessing Officer shall assume jurisdiction by issuance of notice u/s 153A and assess or re-assess the total income of the assessee. 17. In the present case, going by the 'satisfaction note' recorded by the Assessing Officer for issuance of notice u/s 153A of the Act for assessment year in question, we find that the Assessing Officer recorded satisfaction in light of incriminating material found during the course of search which reveals unaccounted receipts from sale of spent solvents and scrap and also advances given to various directors of the appellant company. Further, based on the said incriminating material, the appellant company has disclosed the additional income for the relevant assessment years and also filed an affidavit confirming the declaration of the additional income for the relevant assessment years. From the above, it is undisputedly clear that the Assessing Officer is having in possession books of accounts or other documents or evidence which reveal that the income represented in the form of "asset", which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idity of the assumption of jurisdiction by the Assessing Officer is hereby rejected. Thus, ground no.5 is dismissed. 20. In the result, the appeal of the assessee in ITA No.1067/Hyd/2024 is partly allowed. ITA No.1068/Hyd/2024 for A.Y. 2014-15 21. The first issue that came up for our consideration from ground nos.2 to 4 of assessee's appeal is addition made by the Assessing Officer towards unexplained cash receipts from sale of spent solvents and scrap and partially sustained by the LD.CIT(A). We have considered an identical issue in assessee's own case for A.Y. 2013-14 in ITA No.1067/Hyd/2024. But for figures, the facts considered by us and reasons given in para nos.10 and 11 shall mutatis and mutandis apply to this appeal as well. Therefore, for similar reasons, we direct the Assessing Officer to allow deduction of 60% of cash receipts towards expenditure against income of the assessee and treat balance 40% cash from sale of spent solvents and scrap as income of the assessee. Accordingly, the grounds 2 to 4 of the assessee are partly allowed. 22. The second issue that came up for our consideration from ground no.5 of assessee's appeal is legal validity of assumption of jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty's premises, as long as it pertains to the appellant. The ld.DR further submitted that the reliance on Abhisar Buildwell was misplaced, as the facts of the present case involved specific incriminating material linking the appellant to the undisclosed income. 27. We have heard the rival submissions, perused the material on record and gone through the orders of the authorities below. In the present case, the satisfaction note recorded under Section 153A, though not explicitly mentioning the issue of "on-money" payments but provides the basis for assuming jurisdiction, which is valid under the law. The AO is empowered to assess total income based on incriminating material found during the search, even if the issue is not specifically referenced in the satisfaction note. The material found at the CMD's residence, including the statement admitting undisclosed investments, sufficiently links the appellant to the on-money payment for the Bibinagar land. The case laws relied upon by the learned counsel for the assessee including the decision of Hon'ble Supreme Court in the case of PCIT Vs. Abhisar Buildwell Pvt. Ltd. (supra) is not applicable because in the said case, the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and treat balance 40% cash from sale of spent solvents and scrap as income of the assessee. Accordingly, the grounds 2 to 4 of the assessee are partly allowed. 26. The next issue that came up for our consideration from Ground No.5 to 5.3 of assessee's appeal and ground nos.4 and 5 of Revenue's appeal for A.Y. 2019-20 is the addition made on account of deemed dividend (dividend distribution tax in the hands of the appellant). During the course of search operation at the premises of MSN Group Companies, books of accounts were found and seized vide Annexure A/MSN/Off/HD3. On verification, the AO found that there was a substantial amount of debit balance outstanding from M/s. MSN Laboratories Pvt. Ltd (hereinafter referred to as "MSNL") and M/s. MSN Organics Pvt. Ltd (hereinafter referred to as "MSNO") in the books of the appellant company. The AO further noted that Shri MSN Reddy is a common director in all the three companies and holds more than 10% of the voting share. During the course of search proceedings, summons u/s 131 of the Act, dated 09.04.2021 was issued to the assessee requesting him to produce the information with regard to the purchases and sales made, receipts, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies and subtracting the purchases made and payments received from the recipient companies. Further, the AO, having regard to the Board's Circular No.19/2017 dated 12-6-2017 observed that the transactions between the appellant company and the other two recipient companies are in the nature of commercial transactions would not fall under the ambit of the word "advance" as defined under Section 2(22)(e) of the Act. However, keeping in view the flexibility required in practical business situations, the AO treated the payments made by the assessee company to the above two companies to the extent of 150% of the purchases made from the recipient companies as the payments made in the ordinary course of business, and the payments made in excess of 150% of the purchases as payments having no nexus with business transactions. Accordingly, the AO reduced the additional amount of 50% of the purchases from the excess payments computed by him, and such balance excess payments have been treated as payments made by way of 'advances or loans' on the reasoning that the said excess payments have no relation to the trading transactions between the appellant company and two recipient companies. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the other two companies as loans and advances as defined under Section 2(22)(e) without appreciating the fact that current account transactions between the two groups in the normal course of business of the assessee cannot be treated as 'loans or advances' for the purpose of Section 2(22)(e) of the Act. The assessee further contended that the provisions of Section 2(22)(e) r.w.s. 115Q of the Act do not attract when payments to the recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder. 30. The LD.CIT(A), after considering the relevant submissions of the assessee and also following certain judicial pronouncements and taking into consideration the reasons given by the AO, observed that excess payments to sister concerns in excess of 150% of purchases from the above two companies cannot be treated as normal commercial transactions between two unrelated parties, going by the nature of the payments and purchases. The LD.CIT(A) further observed that the excess payments should be classified under 'loans and advances' that fall within the ambit of Section 2(22)(e) of the Act only, and the treatment by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of business, and excess payments over and above 200% have been treated as loans and advances for the purpose of Section 2(22)(e) of the Act, and directed the Assessing Officer to rework the deemed dividend under Section 2(22)(e) and also compute the dividend distribution tax under Section 115Q of the Act. 32. Aggrieved by the order of the LD.CIT(A), the appellant is in appeal before us. 33. The Learned Counsel for the assessee Shri M.V. Prasad, C.A. submitted that the LD.CIT(A) erred in sustaining additions made by the AO towards deemed dividend under Section 2(22)(e) and the consequent dividend distribution tax under Section 115Q, without appreciating the fact that the transactions between the appellant company and two other associated concerns are trade advances, which are in the nature of commercial transactions effected in the ordinary course of business and does not fall under 'loans or advances' for the purpose of Section 2(22)(e) of the Act. The Learned Counsel for the assessee further submitted that the LD.CIT(A) failed to appreciate that there is a two-way movement of funds between the appellant company and the recipient companies and the said transactions, which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such shareholder. The intention of the Legislature is to tax funds ultimately received by a shareholder holding not less than 10% of voting power in the company, where such funds have been routed through different modes / concerns and used for the benefit of the shareholder. In the present case, the amounts paid by the appellant company to the two associated companies are for their business requirements, including deployment of working capital, purchase of new assets, and financial support in furtherance of their business activities. Therefore, these transactions cannot be considered as loans and advances for the purpose of Section 2(22)(e) of the Act. The Learned Counsel for the assessee further referred to the decision of the Hon'ble Supreme Court in the case of CIT Vs. Mukundray K. Shah reported in (2007) 290 ITR 433 (SC) and submitted that, in order to invoke provisions of Section 2(22)(e), two factors must be considered: whether the payment was a loan or advance and whether on the date of payment there existed accumulated profits. Unless the transactions are in the nature of loans and advances, the provisions of Section 2(22)(e) cannot be invoked. In this regard, he relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le on record and gone through the orders of the authorities below. We find that, the issue on similar facts has already been decided in favour of the assessee by the decision of the ITAT Hyderabad Benches, in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in ITA No.884/Hyd/2024, wherein the Tribunal has directed the Assessing Officer to delete the addition made u/s 2(22)(e) and consequent levy of Dividend Distribution Tax u/s 115-O r.w.s. 115Q of the Income Tax Act, 1961 for A.Ys. 2019-20 and 2020-21 in the hands of the assessee. The relevant findings of the Tribunal are as under: "15. We have heard both parties, perused the materials available on record and gone through the orders of the authorities below. We have also carefully considered the plethora of case laws relied upon by both sides. The addition towards deemed dividend for the purpose of levy of dividend distribution tax has been made by considering the debit balance outstanding in the accounts of two group concerns i.e., M/s MSN Laboratories Pvt. Ltd and M/s MSN Organics Pvt. Ltd, in the books of the appellant company as on 31.03.2019. The appellant company and two group companies MSN Laboratories Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed dividend u/s 2(22)(e) in the hands of Sri. M.S.N.Reddy, who is the common substantial shareholder in the appellant company and the recipient companies. The deemed dividend worked out by the AO amounted to Rs. 241,53,50,035/- in the case of payments made to MSN Laboratories Pvt Ltd and Rs. 1,53,47,177/- in the case of payments made to MSN Organics Pvt Ltd. The aggregate deemed dividend worked out for Asst. Year 2019-20 amounted to Rs. 243,66,97,212/-. Similar working has been made for Asst. Year 2020-21 and worked out deemed dividend of Rs. 266,76,84,647/-. The details of the recipient companies and the payments made to them by the appellant company in excess of 150% of the purchases, which has been treated as deemed dividend u/s 2(22)(e) by the Assessing Officer for the assessment years 2019-20 and 2020-21 under consideration are summarized in the table given below: Particulars A/c of MSN Laboratories Pvt Ltd in the books of the appellant A/c of MSN Organics Pvt Ltd in the books of the appellant Amount (Rs.) Amount (Rs.) Opening debit Balance 57,44,33,690 0 Add: Sales 100,52,08,397 54,74,844 Add: Payments (net of rent) 298,63,99,230 14,79,63,266 Less: Purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or advances" falling within the ambit of deemed dividend u/s 2(22)(e) of the Act. Accordingly, the LD.CIT(A) reduced an additional amount of 50% of the purchases from the excess payments computed by the AO and the balance excess amount has been treated as "advance or loan" constituting deemed dividend. 17. The provisions of section 2(22)e) of the Income Tax Act, 1961 deals with 'Deemed Dividend'. As per the provisions of section 2(22)(e) of the Act, deemed dividend defined to mean, 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 holding not less than 10% of the voting power, or to any Concern in which such shareholder is member or partner and in which he has a substantial interest 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. The term 'Concern' has been defined which includes 'a company' also. Therefore, in the present case, the conditions prescribed for invoking the provisions of Section 2(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and the recipient companies have carried out trading transactions of purchases and sales with each other in the course of the said business. These group companies have made payments in respect of purchases made by them from the other group companies and received payments in respect of sales made by them to other group companies. This is evident from the summary of transactions between the appellant company and the recipient companies, i.e., MSN Laboratories Pvt Ltd and MSN Organics Pvt Ltd for both assessment years. From the above, it is undisputedly proved that these are trade advances, which arises in the course of carrying out purchases in the normal course of the business and which result in closing debit balance in the account of the recipient company in the books of payer company and thus, these trade advances in the ordinary course of business cannot be regarded as payment of 'loans or advances' to the recipient company, since the same are undeniably in the nature of commercial transactions. It is a settled position of law that trade advances given in the normal course of business on account of trading transactions cannot be treated as 'loans or advances' so as to constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14] 51 taxmann.com 569 (Allahabad). This legal position is further fortified from the CBDT Circular No.19/2017 (Pg No.77 of PB-I), where it has been clarified that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) of the Act and that such views have attained finality. The CBDT, therefore, stated that it is a settled position that trade advances, which are in the nature of commercial transactions, would not fall within the ambit of the word 'advance' in section 2(22)(e) of the Act. Though, the Assessing Officer and LD.CIT(A) have taken cognizance of the said circular and applied the same to the appellant's case keeping in view the trading transactions between the appellant company and recipient companies, which resulted in debit balance in the account of the recipient companies at the end of the year, but both authorities have misdirected themselves in holding that payments made to the recipient companies in excess of 150% or 200% of purchases from such company cannot be treated as 'trade advances' in the nature of commercial transactions. The AO has wrongly treated the payments in excess of 150% of the purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt businessman. The said ratio laid down by the Hon'ble Supreme Court in the context of reasonableness of the expenditure laid out for the purpose of business is applicable with equal force in respect of reasonableness of the quantum of trade advances given against purchases. We, therefore, are of the considered view that the action of the AO/CIT(A) in holding that amounts paid upto 150% / 200% of the purchases alone can be considered as reasonable quantum of trade advances in contravention of the binding decision of the Hon'ble Supreme Court cited above and the same is untenable on facts and in law. Having accepted the factum of purchases and payment of trade advances against the purchases, the AO/CIT(A) could not have imposed an imaginary and artificial limit on the quantum of payments that can be regarded as trade advances by sitting in the arm-chair of the businessman. Therefore, we are of the considered view that the entire amount of payments made against purchases has to be regarded as 'trade advances' without any artificial limitation on the quantum of such trade advances. As a result, the amounts paid to recipient company in excess of 200% of the purchases also have to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding the utilization of the funds given by the appellant company to MSN Laboratories Pvt. Ltd (page No.75 of PB-I), where there is utilization of such funds by way of investment in foreign subsidiaries of MSN Laboratories Pvt. Ltd to the extent of Rs. 60 crores during the year, apart from utilization towards working capital and acquisition of fixed assets of the business (for setting up new units/expansion of existing units). The business expediency for making huge payments to MSN Laboratories Pvt. Ltd is revealed by this crucial fact also in addition to the explanation furnished in the preceding paragraph. Therefore, the payments made by the appellant to MSN Laboratories Pvt. Ltd which are evidently imbued with business expediency cannot be considered to be falling under the ambit of "advance or loans" under section 2(22)(e) so as to constitute deemed dividend. Further, the provisions of deemed dividend are not attracted in the facts of the case for the instant assessment years as the basic ingredient to invoke the said provisions that payments by way of 'advance or loans' have been made by the appellant company to the recipient companies in which Sri. M.S.N.Reddy is the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.100-101 of PB-I), the Hon'ble Gujarat High Court held that where there is movement of funds on a need basis, unlike transactions in the nature of loans or advances which are usually few in number, such transactions are in the form of current adjustment accommodation entries. The Hon'ble Court held that when the CIT(A) and Tribunal have concurrently held that the amounts are not in the nature of loan or deposit but merely adjustments based on large number of adjustment entries occurring in the accounts between the entities, application of section 2(22)(e) would not arise. Similarly, Hon'ble Calcutta High Court in the case of CIT Vs. Gayatri Chakraborti [2018] 407 ITR 730 (Calcutta) (Pg No.102-104 of PB-I) held that the transactions between the shareholder and the company were in the nature of current account and the provisions of section 2(22)(e) would not be applicable, where there were transactions of giving money by the company to the shareholder and vice versa in the account. Further, the ITAT, Mumbai held in the case of Ravindra R Fotedar Vs. ACIT [2017] 85 taxmann.com 314 (Mumbai) (Pg No.105-111 of PB-I) that where the movement of funds is in both ways on need basis betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of the common substantial shareholder. In this regard, we find that the payments made by the appellant company to the two recipient companies during the year do not come under the ambit of deemed dividend u/s 2(22)(e), as the said funds have been used by the recipient companies for the purpose of their business and they have not been diverted to or utilised in any manner for the benefit of the common substantial shareholder. The business expediency/exigencies in making the said payments to the recipient companies had already been explained in earlier part of this order. The funds received from appellant company have been wholly used by the recipient companies for meeting the working capital requirements of the business, financing the acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). The funds have not been diverted to the common substantial shareholder or were not utilised for the benefit of said shareholder. The details of the utilisation of the funds by the two recipient companies are submitted at Pg No.75-76 of PB-I, which were submitted to the LD.CIT(A) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Hon'ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT [2020] 425 ITR 435 (Gujarat) (Pg No.140-146 of PB-I), wherein it was held in the light of the decision of the Hon'ble Supreme Court in the case of CIT Vs. Mukundray K. Shah [2007] 290 ITR 433 (SC) that any payment made by a company in which a shareholder has shareholding exceeding 10% of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The Hon'ble High Court held that the intention of the legislature is to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed through different modes/concerns. The Hon'ble High Court held that what needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. The relevant portion of the said decision is extracted below: "7.11 Examining the facts of the case in the light of the above legal and statutory position, this case relates to the second mode of payment envisaged under clause (e) of section 2(22) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholder has shareholding exceeding 10 per cent of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the legislature is to tax funds ultimately received by a shareholder holding more than 10% voting power in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions." 26. Further, the SLP filed by the Revenue against the said decision of the Hon'ble Gujarat High Court has been dismissed by the Hon'ble Supreme Court by stating that it does not find any ground to interfere with the impugned order passed by the High Court, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the said decision is squarely applicable to the facts of the appellant's case where the transactions forming the subject matter of examination of the applicability of provisions of deemed dividend in the assessment order are the payments made by the appellant company to the recipient company in which the appellant holds not less than 10% and 20% of the voting power respectively. In the case of the appellant, it is undisputed that the payments made by the appellant company have been used for the business purposes of the recipient companies as already discussed above. The relevant funds have not been utilized by the recipient companies for the benefit of the common substantial shareholder. In view of the said incontrovertible fact and having regard to the decisions of the Hon'ble Gujarat High Court and Hon'ble Supreme Court in the case of Jayant T Kotak (supra), we are of the considered view that the payments made by the appellant company to the recipient companies during the year do not fall under the scope of deemed dividend u/s 2(22)(e) of the Act. Therefore, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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