Indoshell Automotive Systems India P Ltd., CHENNAI V. ITO, Coimbatore

ITA 1691/CHNY/2015

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 8281 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 22-07-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAILENDRA MAMIDIPCIT
• Assessee Lawyers: S SRIDHAR
• Keywords: Business income; Deemed dividend

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH : CHENNAI . , ! ' # ' $ . %& , ( * + [BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBE R AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ] ./I.T.A. NO.1691/CHNY/2015. / ASSESSMENT YEAR : 2012-2013. M/S. INDOSHELL AUTOMOTIVE SYSTEMS INDIA P. LTD, SIDCO INDUSTRIAL ESTATE, COIMBATORE 641 021. VS. THE INCOME TAX OFFICER, CORPORATE WARD 2, COIMBATORE ./I.T.A. NO.1973/CHNY/2015. / ASSESSMENT YEAR : 2012-2013. THE INCOME TAX OFFICER, CORPORATE WARD 2, COIMBATORE VS. M/S. INDOSHELL AUTOMOTIVE SYSTEMS INDIA P. LTD, SIDCO INDUSTRIAL ESTATE, COIMBATORE 641 021. [PAN AABCI 3140D] ( ,- / APPELLANT) ( ./,- /RESPONDENT) ASSESSEE BY : SHRI. S. SRIDHAR, ADVOCATE DEPARTMENT BY : SHRI . SAILENDRA MAMIDI, PCIT. /DATE OF HEARING : 05-09-2018 /DATE OF PRONOUNCEMENT : 03-10-2018 0 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE RESPECTIVELY DIRECTED AGAINST AN ORDER DATED 12.06 .2015 OF LD. ITA NOS.1691 & 1973 /2015 :- 2 -: COMMISSIONER OF INCOME TAX (APPEALS)-1, COIMBATORE. BEFORE ADVERTING TO THE GROUNDS TAKEN BY THE RESPECTIVE P ARTIES, IT WILL BE APPOSITE TO CAPTURE THE FACTS, FOR PROPER APPRECIA TION OF THE ISSUES INVOLVED. 2. ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURING R AW CASTINGS AND SUPPLYING IT TO LEADING AUTOMOBILE MAN UFACTURERS LIKE HERO MOTOCORP LIMITED, HONDA MOTOR CYCLE AND SCOOTE RS INDIA PVT LIMITED, TVS MOTORS COMPANY LTD ETC., THROUGH ITS S ISTER CONCERN CALLED M/S. INDO SHELL MOUND LTD (IN SHORT THE ISML), HAD FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR D ISCLOSING INCOME OF D9,97,440/-. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, LD. ASSESSING OFFICER FOUND THAT ASSESSEE HAD RECEIVED MONEY FROM M/S.ISML WHICH WAS CLAIMED AS TRADING ADVANCE. LD. ASSESSING OFFICER EXAMINED THE DETAILS PRODUCED IN THIS REGARD. ACCO RDING TO THE LD. ASSESSING OFFICER, ASSESSEE HAD INVESTED IN THE SH ARES OF M/S. ISML ON 02.12.2011, AND ON 18.01.2012 IT WAS ALLOTTED 2 50000 SHARES IN M/S.ISML. THUS, AS PER THE LD. ASSESSING OFFICER, A SSESSEE WAS A BENEFICIAL OWNER OF THE SHARES IN M/S.ISML WITH A HOLDING IN EXCESS OF 20% OF EQUITY SHARES IN THE LATTER, FROM THAT D ATE. ON EXAMINATION OF THE BALANCE SHEET OF M/S.ISML, LD. ASSESSING OFFICER FOUND THAT IT HAD RESERVE AND SURPLUS OF D50,35,17,860/- AS ON 31.03.2012. LD. ASSESSING OFFICER CALCULATED THE ADVANCES RECEIVED BY THE ASSESSEE ITA NOS.1691 & 1973 /2015 :- 3 -: FROM M/S. ISML AND PEGGED IT AT D35,82,27,603/- F OR THE PERIOD 19.01.2012 TO 31.03.2012. ASSESSEE WAS PUT ON NOTI CE WHY SECTION 2(22) (E) OF THE INCOME TAX ACT, 1961 (IN SHORT T HE ACT) SHOULD NOT BE APPLIED AND WHY THE ADVANCES RECEIVED BY IT FROM M/S.ISML SHOULD NOT BE TREATED AS DEEMED DIVIDEND IN ITS HA NDS. ASSESSEE THEREUPON SUBMITTED TO THE LD. ASSESSING OFFICER TH AT THE MONEY RECEIVED FROM M/S.ISML WAS IN THE NATURE OF TRAD E ADVANCE COULD NOT BE TREATED AS DEEMED DIVIDEND U/S.2(22) (E) OF THE ACT. ASSESSEE ALSO RELIED ON AN AGREEMENT ENTERED BY IT WITH M/ S.ISML ON 10.12.2011, BY VIRTUE OF WHICH IT WAS OBLIGED TO SU PPLY THE ENTER RAW CASTINGS PRODUCED BY IT TO M/S.ISML, WHICH IN TURN, AFTER FURTHER REFINEMENT, SUPPLIED IT TO ITS ULTIMATE CUSTOMERS, WHO WERE PREDOMINANTLY VEHICLE MANUFACTURERS. ACCORDING TO T HE ASSESSEE, M/S.ISML HAD PROVIDED IT AN ADVANCE OF D20 CRORES BASED ON THIS AGREEMENT. 3. HOWEVER, THE LD. ASSESSING OFFICER WAS NOT IMPRESSE D WITH THE ABOVE REPLY. AS PER THE LD. ASSESSING OFFICER, ADVANCES RECEIVED BY THE ASSESSEE FROM M/S.ISML, SUBSEQUENT TO 18.01 .2012 STOOD COVERED BY SECTION 2(22) (E) OF THE ACT. ACCORDING TO HIM, THIS WAS A DEEMING PROVISION AND HAD TO BE CONSTRUED STRICTLY . AS PER THE LD. ASSESSING OFFICER, BY VIRTUE OF THE JUDGMENT OF HO NBLE APEX COURT IN THE CASE OF KANTILAL MANILAL VS. CIT (1961) 41 ITR 275 AND TARU LATA ITA NOS.1691 & 1973 /2015 :- 4 -: SHYAM VS. CIT (1977) 108 ITR 345 , SECTION 2(22) (E) OF THE ACT STOOD ATTRACTED ON LOANS TAKEN BY A SHAREHOLDER FROM A C ONTROLLED COMPANY, TO THE EXTENT SUCH COMPANY POSSESSED ACCUMULATED PR OFITS. AGGREGATE AMOUNT OF D35,82,27,603/- RECEIVED BY T HE ASSESSEE FROM ISML DURING THE PERIOD 19.01.2012 TO 31.03.2012 WAS CONSIDERED AS DEEMED DIVIDEND IN ASSESSEES HAND AND ASSESSMENT C OMPLETED ACCORDINGLY. 4. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE LD. COMMISSIONER OF INCOME TAX (APPEALS). ARGUMENTS T AKEN BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) COULD BE SUMMA RIZED AS UNDER:- (I) MONEY RECEIVED BY IT FROM M/S. ISML WAS IN THE NATURE OF TRADE ADVANCES AND WOULD NOT COME WITHIN THE PREVI EW OF SECTION 2(22) (E) OF THE ACT. (II) ASSESSEE WAS INCORPORATED IN SEPTEMBER, 2004 S O AS TO CATER TO THE SPECIFIED MANUFACTURING REQUIREMENTS O F M/S. ISML. (III) M/S.ISML WAS THE LEADING MANUFACTURER/SUPPL IER OF CASTINGS TO VARIOUS AUTOMOBILE MANUFACTURERS AND AS SESSEE RECEIVED ORDERS THROUGH M/S.ISML FOR MANUFACTURING ROUGH CASTINGS. (IV) M/S.ISML FURTHER MACHINED THE ROUGH CASTINGS SUPPLIED BY THE ASSESSEE AND SOLD IT TO ITS CUSTOMERS. (V) ASSESSEE WAS A 100% DEDICATED UNIT OF M/S.IS ML MANUFACTURING ROUGH CASTINGS AND SUPPLYING IT ONLY TO ISML. (VI) PRIOR TO 18.01.2012, ASSESSEE WAS A SUBSIDIAR Y OF M/S. ITA NOS.1691 & 1973 /2015 :- 5 -: ISML THOUGH IT CEASED TO BE SO THEREAFTER. (VII) ASSESSEE HAD ACQUIRED 20% STAKE IN M/S.ISML , AND WAS REGISTERED AS ITS SHAREHOLDER ON 23.01.2012. IN OTHER WORDS, ASSESSEE BECAME A SHAREHOLDER HAVING MORE TH AN 20% INTEREST ONLY ON 23.01.2012. (VIII) ASSESSEE HAD AN AGREEMENT DATED 10.12.2011 WITH M/S.ISML, BY VIRTUE OF WHICH ASSESSEE WAS RECEIVING FUNDS FROM M/S.ISML AGAINST SUPPLY OF ROUGH CASTINGS. (IX) CUSTOMERS OF M/S.ISML CONSISTED AMONG OTHERS M /S. HERO HONDA LIMITED AND THE ORDERS WERE SET TO INCREASE MANIFOLD DUE TO THE SPLIT OF HERO HONDA LTD INTO TW O SEPARATE COMPANIES NAMELY HERO MOTOCORP LIMITED AND HONDA MOTORCYCLE AND SCOOTERS INDIA PRIVATE LIMITED . (X) ASSESSEE HAD CONTINUING TRADING RELATIONS WITH M/S.ISML AND THE LEDGER PAGE OF THE ASSESSEE IN THE BOOKS O F THE M/S.ISML REFLECTED SUCH CONTINUING TRANSACTIONS. (XI) SUM OF D20 CRORES OUT OF THE AGGREGATE AMOUNTS RECEIVED BY THE ASSESSEE FROM M/S.ISML WAS BEFORE IT BECAME A SHAREHOLDER OF M/S.ISML ON 23.01.2012. (XII) PAYMENTS RECEIVED WERE SET-OFF AGAINST SUPPL IES MADE TO M/S.ISML. 5. IN SUPPORT OF ITS CONTENTION THAT TRADING ADVANCES WERE OUTSIDE THE PREVIEW OF SECTION 2(22) (E) OF THE ACT , ASSESSEE RELIED ON A NUMBER OF JUDGMENTS OF VARIOUS HIGH COURTS, INTER ALIA INCLUDING THAT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. RAJKUMAR (2009) 318 ITR 462 AND THAT OF HONBLE JURISDICTIONAL HIGH COURT IN T HE CASE OF CIT VS. F. PRAVEEN (2008) 16 DTR 80. ITA NOS.1691 & 1973 /2015 :- 6 -: 6. LD. COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONS IDERING THE SUBMISSIONS AND VERIFYING RECORDS CAME TO A CO NCLUSION THAT ASSESSEE HAD BECOME A BENEFICIAL SHARE HOLDER OF M /S.ISML ONLY ON 23.01.2012, WHEN IT ACQUIRED 13,10,000 SHARES OF TH E SAID COMPANY. LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED T HAT PRIOR TO THE SAID DATE ASSESSEE WAS NOT BENEFICIAL OWNER OF EQU ITY SHARES IN M/S.ISML. FURTHER, AS PER THE LD. COMMISSIONER OF INCOME TAX (APPEALS) AGREEMENTS ENTERED BY THE ASSESSEE WITH M/S.ISML ON 10.12.2011 CLEARLY INDICATED THAT ASSESSEE, SINCE I TS VERY INCORPORATION WAS CATERING TO THE NEEDS OF M/S.ISML AND ITS ENTI RE PRODUCTION CAPACITY WAS MADE AVAILABLE TO THE M/S.ISML. AS P ER THE LD. COMMISSIONER OF INCOME TAX (APPEALS), ASSESSEE HAVI NG UNDERWRITTEN ITS ENTIRE CAPACITY TO M/S.ISML, THE SUM OF D20 CR ORES RECEIVED BY IT FROM THEM WAS NOTHING BUT A TRADE ADVANCE. LD. CO MMISSIONER OF INCOME TAX (APPEALS) ALSO FOUND FROM THE DATA SHEE T SUBMITTED BY THE ASSESSEE THAT OUT OF THE TOTAL SALES EFFECTED B Y M/S.ISML DURING THE RELEVANT PREVIOUS YEAR, CONTRIBUTION OF THE ASS ESSEE CAME TO 99%. ACCORDING TO HIM, ENTIRE QUANTITY OF ROUGH CASTINGS MANUFACTURED BY THE ASSESSEE WERE SUPPLIED TO M/S.ISML ONLY. AS P ER THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ROUGH CASTINGS WERE MANUFACTURED BY THE ASSESSEE AS PER THE REQUIREMENT OF HERO MOTOCORP LIMITED, HONDA MOTOR CYCLE AND SCOOTERS IN DIA PVT LIMITED, ITA NOS.1691 & 1973 /2015 :- 7 -: TVS MOTORS COMPANY LTD ETC., BASED ON PURCHASE ORDE RS OF M/S.ISML AND THERE WAS A CONTINUING SERIES OF RECEIPTS AND S ALES FROM/TO M/S.ISML. LD. COMMISSIONER OF INCOME TAX (APPEALS) RELYING ON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THECAE OF CIT VS. CREATIVE DYEING & PRINTING (P) LTD (2009) 318 ITR 476 HELD THAT THERE BEING REGULAR BUSINESS TRANSACTIONS BETWEEN TWO COMPANIES , ADVANCES RECEIVED COULD NOT BE TREATED AS A LOAN OR AN ADVAN CE IN THE NATURE OF A LOAN. ACCORDING TO LD. COMMISSIONER OF INCOME TAX (APPEALS) ADVANCES RECEIVED DURING ORDINARY COURSE OF BUSINE SS, FOR BUSINESS EXPEDIENCY, WOULD NOT CONSTITUTE LOAN FOR THE PURPO SE OF APPLICATION OF SECTION 2(22) (E) OF THE ACT. 7. ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF KANTILAL MANILAL (SUPRA) RELIED ON BY THE LD. ASSES SING OFFICER FOR FASTENING THE TAX LIABILITY ON THE ASSESSEE, LD. CO MMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT THE SAID CASE WAS ON DI STRIBUTION OF DIVIDEND, OTHER THAN IN THE FORM OF MONEY, LIKE DEL IVERY OF PROPERTY OR RIGHT HAVING MONETARY VALUE. HE ALSO DISTINGUISHE D THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF TARULATA SHYAM (S UPRA) NOTING THAT IN THE SAID CASE BORROWED LOANS WERE REPAID BEFORE THE END OF THE RELEVANT ASSESSMENT YEAR. ITA NOS.1691 & 1973 /2015 :- 8 -: 8. THEREAFTER LD. COMMISSIONER OF INCOME TAX (APPEALS) DID AN EXAMINATION OF THE ACCOUNTS OF THE ASSESSEE IN THE BOOKS OF M/S.ISML AND CAME TO A FINDING THAT THERE WAS AN ADJUSTMENT OF D20,99,81,436/- AGAINST TRADE ADVANCES RECEIVED BY THE ASSESSEE FROM ISML. FURTHER, AS PER THE LD. COMMISSIONER OF INCOM E TAX (APPEALS), AGGREGATE AMOUNT RECEIVED BY THE ASSESSEE FROM M/S . ISML DURING THE PERIOD IT HELD BENEFICIAL OWNERSHIP IN ITS SHAR ES WAS D22,64,11,246/- ONLY. NEVERTHELESS, LD. COMMISSION ER OF INCOME TAX (APPEALS) FOUND THAT A SUM OF D2,69,89,513/- REPRE SENTED MONEY PAID BY M/S.ISML ON BEHALF OF THE ASSESSEE TOWARDS LATT ERS STATUTORY DUTIES, TDS AND WAGES. THUS, ACCORDING TO HIM, OUT OF THE AGGREGATE AMOUNT RECEIVED BY THE ASSESSEE FROM M/S. ISML, BEN EFIT TAKEN BY THE ASSESSEE COMPANY WHICH COULD BE BROUGHT WITHIN THE PREVIEW OF SECTION 2(22) (E) OF THE ACT WAS ONLY D2,69,89,513/ -. HE THUS RESTRICTED THE ADDITION MADE U/S.2(22) (E) OF THE A CT TO D2,69,89,513/- AND DELETED THE BALANCE. 9. NOW BEFORE US, GROUNDS TAKEN BY THE REVENUE ASSAILS THE RELIEF GIVEN TO THE ASSESSEE, WHEREAS ASSESSEE IS A GGRIEVED ON SUSTENANCE OF THE ADDITION OF D2,69,89,513/- U/S.2( 22) (E) OF THE ACT. 10. LD. COUNSEL FOR THE ASSESSEE STARTING HIS ARGUMENTS SUBMITTED THAT PAPER BOOK PAGES NO. 35 TO 136 REFL ECTED THE ACCOUNTS ITA NOS.1691 & 1973 /2015 :- 9 -: OF THE ASSESSEE IN THE BOOKS OF M/S.ISML. ACCORDI NG TO HIM, THIS ACCOUNT CLEARLY ESTABLISHED THAT THE AMOUNTS PAID BY M/S.ISML TO THE ASSESSEE, WERE BEING ADJUSTED AGAINST CONTINUING SU PPLY OF MATERIALS BY THE ASSESSEE. CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT IT WAS PURELY A RUNNING ACCOUNT. ACCORDING TO HIM, A READING OF THE LEDGER PAGES CLEARLY INDICATED ONGOING SUPPLY O F MATERIALS BY THE ASSESSEE TO M/S.ISML. FURTHER, ACCORDING TO HIM, A GREEMENT ENTERED ON 10.12.2011 BY THE WITH M/S.ISML, OBLIGED THE LAT TER TO PAY A SUM OF D20 CRORES TO THE ASSESSEE, FOR CATERING TO THE INC REASED REQUIREMENTS OF M/S.ISML. THIS AS PER THE LD. AUTHORISED REPRESE NTATIVE, WAS A PURE TRADING ADVANCE SINCE ASSESSEE WAS OBLIGED TO SUPPLY ITS ENTIRE PRODUCTION TO M/S.ISML. ACCORDING TO HIM, THERE W AS MASSIVE EXPANSION OF DEMAND FOR CASTINGS DUE TO THE DIVISIO N OF M/S. HERO HONDA LTD TO M/S. HERO MOTOR CORP. LTD AND M/S. HON DA MOTOR CYCLES & SCOOTERS INDIA P. LTD. M/S.ISML BEING THE MAJOR SUPPLIER OF CASTINGS, ACCORDING TO THE LD. AUTHORISED REPRESENT ATIVE, IT HAD TO ENSURE INCREASE IN PRODUCTION CAPACITY OF THE ASSES SEE. AS PER THE LD. AUTHORISED REPRESENTATIVE, SUMS RECEIVED BY THE AS SESSEE FROM M/S.ISML WERE NEITHER A LOAN NOR AN ADVANCE IN THE NATURE OF A LOAN. ACCORDING TO HIM, IT WAS A SIMPLE TRADING ACCOUNT A ND ASSESSEE WAS OBLIGED TO SUPPLY ITS ENTIRE PRODUCTION TO M/S.I SML. LD. AUTHORISED REPRESENTATIVE POINTED OUT THAT 99% OF SALES OF TH E M/S. ISML, WAS ITA NOS.1691 & 1973 /2015 :- 10 -: DONE THROUGH CASTINGS MANUFACTURED BY THE ASSESSEE . THUS, ACCORDING TO HIM, LD. COMMISSIONER OF INCOME TAX (A PPEALS) WAS JUSTIFIED IN COMING TO A CONCLUSION THAT THE MONEY GIVEN BY M/S.ISML TO ASSESSEE WAS NOTHING BUT TRADING ADVANCES AND N OT IN THE NATURE OF A LOAN OR ADVANCE IN THE NATURE OF A LOAN. HOWE VER, ACCORDING TO HIM, LD. COMMISSIONER OF INCOME TAX (APPEALS) FELL IN ERROR IN SUSTAINING THE ADDITION TO THE EXTENT OF D2,69,89,5 13/- IGNORING THE CLOSE INTERLACING, INTERDEPENDENCE AND INTERCONNE CTION BETWEEN THE TWO COMPANIES. WHEN THE ENTIRE PRODUCTION CAPACITY OF THE COMPANY WAS TO CATER TO M/S.ISML, AS PER LD. AUTHORISED RE PRESENTATIVE, PAYMENT OF STATUTORY DUTIES, TDS AND WAGES MADE BY M/S.ISML ON BEHALF OF THE ASSESSEE, COULD NOT BE CONSIDERED AS A BENEFIT DERIVED BY THE ASSESSEE COMPANY, COMING WITHIN THE PREVIEW OF SECTION 2(22) (E) OF THE ACT. RELYING ON CBDT CIRCULAR NO.19/2017, DATED 12.06.2017, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT ADVANC ES MADE BY A COMPANY TO SISTER CONCERN AGAINST DUES FOR JOB WORK WOULD NOT FALL WITHIN THE DEFINITION OF DEEMED DIVIDEND U/S.2(22) (E) OF THE ACT. 11. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE ST RONGLY ASSAILING THE ORDER OF THE LD. COMMISSIONER OF INCO ME TAX (APPEALS), ON THE RELIEF GIVEN TO THE ASSESSEE, SUBMITTED THAT ADVANCES RECEIVED BY THE ASSESSEE FROM M/S.ISML WERE MUCH MORE THAN THE VALUE OF RAW MATERIALS SUPPLIED BY THE ASSESSEE TO M/S.ISML . ACCORDING TO ITA NOS.1691 & 1973 /2015 :- 11 -: HIM, ADVANCES RECEIVED WERE NOT COMMENSURATE WITH THE SUPPLY OF RAW MATERIALS AND THIS CLEARLY INDICATED THAT AT LE AST A PART OF THE ADVANCES WERE NOT IN THE NATURE OF TRADING TRANSACT IONS. ACCORDING TO HIM, FOR A SUPPLY OF RAW MATERIAL WORTH D10/-, NOBO DY WOULD HAVE GIVEN AN ADVANCE OF D20/-. AS PER THE LD. DEPARTME NTAL REPRESENTATIVE, ASSESSEE COULD NOT TAKE REFUGE UNDE R CBDT CIRCULAR NO.19/2017, SINCE IT COULD NOT ESTABLISH THAT THE A DVANCES RECEIVED WERE PURELY IN THE NATURE OF TRADING ADVANCE. THUS ACCORDING TO HIM, LD. COMMISSIONER OF INCOME TAX (APPEALS) FELL IN ER ROR WHEN HE HELD THAT SUBSTANTIAL PORTION OF THE ADVANCES RECEIVED B Y THE ASSESSEE DID NOT COME WITHIN THE AMBIT OF SECTION 2(22)(E) OF T HE ACT. 12. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. THE QUESTION RAIS ED IN THIS CASE INVOLVE INTERPRETATION OF SECTION 2(22) (E) OF THE ACT, IN SO FOR AS IT CONCERNS THE TERM LOAN AND ADVANCE USED THER EIN. SECTION 2(22) (E) OF THE ACT IS REPRODUCED HEREUNDER:- 2- IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQU IRES,- (1) ...... (2) ..... (3) ..... (22)..... ITA NOS.1691 & 1973 /2015 :- 12 -: (A)...... (B)...... (C)..... (D)..... (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY I N WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER A S REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFT ER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLD ER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SH ARES 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 P OWER, 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 RE FERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHA LF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFIT S ; BUT 'DIVIDEND' DOES NOT INCLUDE- (I) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLAU SE (C) OR SUB-CLAUSE (D) IN RESPECT OF ANY SHARE ISSUED FOR FULL CASH CO NSIDERATION, WHERE THE HOLDER OF THE SHARE IS NOT ENTITLED IN THE EVENT OF LIQUIDATION TO PARTICIPATE IN THE SURPLUS ASSETS ; (IA) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLA USE (C) OR SUB-CLAUSE (D) IN SO FAR AS SUCH DISTRIBUTION IS ATTRIBUTABLE TO THE CAPITALISED PROFITS OF THE COMPANY REPRESENTING BONUS SHARES ALLOTTED TO I TS EQUITY SHAREHOLDERS AFTER THE 31ST DAY OF MARCH, 1964, AND BEFORE THE 1ST DAY OF APRIL, 1965 ; (II) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER OR T HE SAID CONCERN BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, WHE RE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY ; (III) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET O FF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PREVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB-CLA USE (E), TO THE EXTENT TO WHICH IT IS SO SET OFF ; (IV) ANY PAYMENT MADE BY A COMPANY ON PURCHASE OF I TS OWN SHARES FROM A SHAREHOLDER IN ACCORDANCE WITH THE PROVISION S OF SECTION 77A OF THE COMPANIES ACT, 1956 (1 OF 1956) ; ITA NOS.1691 & 1973 /2015 :- 13 -: (V) ANY DISTRIBUTION OF SHARES PURSUANT TO A DEMERG ER BY THE RESULTING COMPANY TO THE SHAREHOLDERS OF THE DEMERGED COMPANY (WHETHER OR NOT THERE IS A REDUCTION OF CAPITAL IN THE DEMERGED COM PANY). 13. MEANING OF TERM ADVANCE AS IT APPEAR IN THE ABO VE SECTION WAS A MATTER OF INTERPRETATION CONSIDERED BY HONBL E DELHI HIGH COURT IN THE CASE OF RAJ KUMAR(SUPRA). THEIR LORDSHIPS A PPLIED THE PRINCIPLE OF NOSCITUR A SOCIIS AND HELD THAT FOR AN ADV ANCE TO COME WITHIN THE PURVIEW OF SECTION 2(22) (E) OF THE ACT, IT SHOULD HAVE THE TRAPPINGS OF A LOAN. ACCORDING TO THEIR LORDSHIPS, UNLESS ADVA NCES RECEIVED BY AN ASSESSEE CARRIED WITH IT AN OBLIGATION OF REPAYMEN T, IT WOULD NOT COME WITHIN THE PREVIEW OF SECTION 2(22) (E) OF THE ACT. IN OTHER WORDS, AS PER HONBLE DELHI HIGH COURT, TRADE ADVANCES WHIC H WAS TO GIVE EFFECT TO A COMMERCIAL TRANSACTION WOULD NOT FALL W ITHIN THE AMBIT OF SECTION 2(22) (E) OF THE ACT. THEIR LORDSHIPS HAD CONSIDERED THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF KANT ILAL MANILAL (SUPRA) AS WELL AS TARULATA SHYAM (SUPRA) WHILE REACHING T HE ABOVE CONCLUSION. 14. LAW AS ELUCIDATED BY HONBLE DELHI HIGH COURT WIT H REGARD TO INTERPRETATION OF SECTION 2(22) (E) OF THE ACT F OUND ACCEPTANCE OF THE REVENUE THOUGH CBDT CIRCULAR NO.19/2017, DATED 12.06.2017. THE SAID CIRCULAR IS REPRODUCED HEREUNDER:- ITA NOS.1691 & 1973 /2015 :- 14 -: SECTION 2(22) CLAUSE (E) OF THE INCOME TAX ACT, 1 961 (THE ACT) PROVIDES THAT 'DIVIDEND' INCLUDES ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIAL LY INTERESTED, OF ANY SUM BY WAY OF ADVANCE OR LOAN TO A SHAREHOLD ER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT B EING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH O R WITHOUT A RIGHT TO PARTICIPATE IN PROFITS HOLDING NOT LESS THAN TEN PE R 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 INTE REST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEF IT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS. 2. THE BOARD HAS OBSERVED THAT SOME COURTS IN THE RECENT PAST HAVE HELD THAT TRADE ADVANCES IN THE NATURE OF COMM ERCIAL TRANSACTIONS WOULD NOT FALL WITHIN THE AMBIT OF THE PROVISIONS OF SECTION 2(22) (E) OF THE ACT. SUCH VIEWS HAVE ATTAI NED FINALITY. 2.1 SOME ILLUSTRATIONS/EXAMPLES OF TRADE ADVANCES/C OMMERCIAL TRANSACTIONS HELD TO BE NOT COVERED UNDER SECTION 2 (22) (E) OF THE ACT ARE AS FOLLOWS: I. ADVANCES WERE MADE BY A COMPANY TO A SISTER CON CERN AND ADJUSTED AGAINST THE DUES FOR JOB WORK DONE BY THE SISTER CONCERN. IT WAS HELD THAT AMOUNTS ADVANCED F OR BUSINESS TRANSACTIONS DO NOT TO FALL WITHIN THE DEF INITION OF DEEMED DIVIDEND UNDER SECTION 2(22) (E) OF THE ACT. (CIT VS. CREATIVE DYEING & PRINTING PVT. LTD. L , DELHI HIGH COURT). II. ADVANCE WAS MADE BY A COMPANY TO ITS SHAREHOLDE R TO INSTALL PLANT AND MACHINERY AT THE SHAREHOLDER'S PR EMISES TO ENABLE HIM TO DO JOB WORK FOR THE COMPANY SO THAT T HE COMPANY COULD FULFIL AN EXPORT ORDER. IT WAS HELD T HAT AS THE ASSESSEE PROVED BUSINESS EXPEDIENCY, THE ADVANCE WA S NOT COVERED BY SECTION 2(22)(E) OF THE ACT. (CIT VS AMRIK SINGH, P&H HIGH COURT). III. A FLOATING SECURITY DEPOSIT WAS GIVEN BY A CO MPANY TO ITS SISTER CONCERN AGAINST THE USE OF ELECTRICITY GENER ATORS BELONGING TO THE SISTER CONCERN. THE COMPANY UTILIS ED GAS AVAILABLE TO IT FROM GAIL TO GENERATE ELECTRICITY A ND SUPPLIED IT TO THE SISTER CONCERN AT CONCESSIONAL RATES. IT WAS HELD THAT THE SECURITY DEPOSIT MADE BY THE COMPANY TO IT S SISTER CONCERN WAS A BUSINESS TRANSACTION ARISING IN THE N ORMAL COURSE OF BUSINESS BETWEEN TWO CONCERNS AND THE TRANSACTION DID NOT ATTRACT SECTION 2(22) (E) OF TH E ACT. (CIT, AGRA VS ATUL ENGINEERING UDYOG, ALLAHABAD HIGH COUR T) ITA NOS.1691 & 1973 /2015 :- 15 -: 3. IN VIEW OF THE ABOVE 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. ACCORDINGLY, HENCEFORTH, APPEALS MAY NOT BE FI LED ON THIS GROUND BY OFFICERS OF THE DEPARTMENT AND THOSE ALRE ADY FILED, IN COURTS/TRIBUNALS MAY BE WITHDRAWN/NOT PRESSED UPON . THE BOARD HAS OBSERVED CLEARLY THAT TRADING ADVANCE S WHICH WERE IN THE NATURE OF COMMERCIAL TRANSACTIONS WOULD NOT COM E WITHIN THE PREVIEW OF SECTION OF 2(22) (E) OF THE ACT AND SUCH VIEW HAD ATTAINED FINALITY. 15. IN THE ABOVE BACKDROP OF LAW, WE HAVE TO EXAMINE T HE TRANSACTIONS BETWEEN M/S.ISML AND ASSESSEE, IN SO FAR AS APPLICATION OF SECTION2(22) ( E) OF THE ACT IS CONCERNED. THER E IS NO DISPUTE THAT A SUM OF D20 CRORES WAS RECEIVED BY THE ASSESSEE FR OM M/S.ISML BY VIRTUE OF ITS AGREEMENT ENTERED BY THE ASSESSEE WIT H M/S.ISML ON 10.12.2011. IT IS ALSO NOT DISPUTED THAT ASSESSEE HAD MADE AVAILABLE ITS ENTIRE CAPACITY FOR MANUFACTURING ROUGH CASTING S ON CAPTIVE BASIS TO M/S.ISML ON A REGULAR BASIS. ASSESSEE HAD ALS O UNDERTAKEN NOT TO UTILIZE ITS MANUFACTURING CAPACITY FOR ANY OTHER PA RTY. IT IS OBVIOUS IN OUR OPINION, THAT THE SUM TO THE EXTENT OF D20 CR ORES RECEIVED BY THE ASSESSEE BASED ON THE ABOVE AGREEMENT, THROUGH WHIC H IT GAVE AWAY ALL ITS MANUFACTURING CAPACITY, WAS NOTHING BUT A C OMMERCIAL TRANSACTION. ITA NOS.1691 & 1973 /2015 :- 16 -: 16. NOW COMING TO THE ADVANCES RECEIVED BY THE ASSESSEE FROM M/S.ISML DURING THE PERIOD 23.01.2012 TO 31.03.201 2, THE STATEMENT OF ACCOUNT OF THE ASSESSEE IN THE BOOKS OF M/S.IS ML, HAS BEEN PLACED BEFORE US AT PAPER BOOK PAGES 35 TO 136. DA TE 23.01.2012 IS IMPORTANT SINCE PRIOR TO THAT ASSESSEE WAS NOT HAVI NG SHAREHOLDING IN EXCESS OF 20% IN M/S.ISML AND THIS HAS NOT BEEN DI SPUTED BY THE REVENUE. WHAT WE FIND IS THAT AGAINST THE ADVANCES RECEIVED BY THE ASSESSEE THERE WERE CONTINUING SUPPLY OF MATERIALS BY THE ASSESSEE TO M/S.ISML. IT IS NOT AS THOUGH ASSESSEE WAS ALWAYS A DEBTOR TO M/S.ISML. THOUGH PRIOR TO 23.01.2012, ON A NUMBER OF DAYS, FOR EXAMPLE 4.5.2011, 6.5.2011, 9.5.2011, 11.05.2011 TO 26.05.2011, 31.5.2011, 13.6.2011, 26.06.2011 TO 29.06.2011 THER E WERE DEBIT BALANCE IN ASSESSEES ACCOUNT WITH M/S.ISML. OR IN OTHER WORDS, AMOUNTS WERE DUE TO THE ASSESSEE FROM M/S. ISML AND NOT VICE-VERSA. THUS AT SOME POINT OF TIME, THERE WERE A CREDIT BAL ANCES AND AT SOME OTHER POINT OF TIME THERE WERE DEBIT BALANCE. THE LEDGER ACCOUNT, IN OUR OPINION, CLEARLY INDICATE THAT IT WAS A TRADING ACCOUNT AND THE TRANSACTIONS WERE PURELY COMMERCIAL IN NATURE. MO NEY RECEIVED BY THE ASSESSEE FROM M/S.ISML WAS NOT IN THE NATURE OF ANY ADVANCE WHICH HAD THE TRAPPINGS OF A LOAN, WHICH ALONE COULD BRING IT WITHIN THE AMBIT OF SECTION 2(22) (E) OF THE ACT. LD. ASSE SSING OFFICER HAD ONLY CONSIDERED THE AMOUNTS GIVEN BY M/S. ISML TO THE ASSESSEE AND ITA NOS.1691 & 1973 /2015 :- 17 -: OMITTED TO CONSIDER THE ENTRIES RELATING TO THE VAL UE OF MATERIALS SUPPLIED BY THE ASSESSEE TO M/S.ISML AND THE REA L NATURE OF THE TRANSACTIONS ASSESSEE HAD WITH M/S.ISML. IT MAY BE TRUE THAT DURING THE PERIOD 23.01.2012 TO 31.03.2012 ADVANCES RECEI VED BY THE ASSESSEE WAS IN EXCESS OF THE VALUE OF THE MATERIA LS SUPPLIED BY IT. BUT TRANSACTIONS BETWEEN ASSESSEE AND ISML HAD STARTED MUCH EARLIER TO 20.12.2011 AND WE HAVE ALREADY POINTED A LARGE NUMBER OF INSTANCES WHEN THE BALANCE IN THE NAME OF THE ASSE SSEE WAS NEGATIVE. IN OUR OPINION, LD. ASSESSING OFFICER FE LL IN ERROR IN TAKING AN ISOLATED VIEW AND CONSIDERING ONLY A PART OF THE T RANSACTIONS IGNORING THE TRANSACTIONS PRIOR TO 23.01.2012, WHICH TOGETHE R CLEARLY INDICATED THAT ACCOUNT WAS IN THE NATURE OF A RUNNING TRADE A CCOUNT. 17. COMING TO THE ADDITION OF D2,69,89,513/- SUSTAINED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS), THERE IS A CL EAR FINDING BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) THAT M/S. ISML HAD PAID SUCH SUM TOWARDS STATUTORY DUTIES, TDS AND WAGES OF THE ASSESSEE. NEVERTHELESS, IN OUR OPINION, SUCH PAYMENTS WOULD N OT TAKE THE TRANSACTION OUT OF PREVIEW OF A COMMERCIAL TRANSACT ION. ASSESSEE HAD GIVEN ITS ENTIRE CAPACITY TO M/S.ISML AND IF M/S. ISML PAID PART OF THE STATUTORY DUTIES, TDS AND WAGES OF THE ASSESSEE DI RECTLY, IN OUR OPINION, SUCH PAYMENTS CANNOT BE CONSIDERED AS LOA NS OR ADVANCES COMING WITHIN THE AMBIT OF SECTION 2(22) (E) OF THE ACT. WE CANNOT ITA NOS.1691 & 1973 /2015 :- 18 -: SAY THAT ASSESSEE RECEIVED ANY BENEFIT SINCE THERE WAS A QUID-PRO-QUO IN THE NATURE OF SURRENDERING ITS ENTIRE PRODUCTIO N CAPACITY TO M/S. ISML. THUS IN OUR OPINION SUMS RECEIVED BY THE AS SESSEE FROM M/S. ISML WOULD NOT COME WITHIN THE PREVIEW OF ADVANCES / LOANS MENTIONED IN SECTION 2(22) (E) OF THE ACT. WE ARE OF THE OPINION THAT LD. COMMISSIONER OF INCOME TAX (APPEALS) WAS NOT JU STIFIED IN SUSTAINING THE ADDITION TO THE EXTENT OF D2,69,89,5 13/-. WE DO NOT HAVE ANY HESITATION IN DELETING THE WHOLE OF THE AD DITION MADE U/S.2(22) (E) OF THE ACT. 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMIS SED WHEREAS THAT OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 3RD DAY OF OCT OBER, 2018, AT CHENNAI. SD/- SD/- ( ' # ' $ . %& ) ( DUVVURU RL REDDY ) ( / JUDICIAL MEMBER ( . ) (ABRAHAM P. GEORGE) / ACCOUNTANT MEMBER / CHENNAI / DATED:03 OCTOBER, 2018. KV ! ' #$ %$ / COPY TO: 1 . &' / APPELLANT 3. ( () / CIT(A) 5. $+, ' - / DR 2. '.&' / RESPONDENT 4. ( / CIT 6. ,/ 0 / GF ITA NOS.1691 & 1973 /2015 :- 19 -: