DCIT 9(1), MUMBAI V. GHARDA CHEMICALS LTD, MUMBAI

ITA 2012/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 9037 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2004-2005
• Appeal Filed On: 12-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KISHORE PATEL
• Keywords: Deemed dividend
• Section: 143(3)

Judgement Text

I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 1 IN THE INCOME TAX APPELLATE TRIBUNAL, G BENCH, MUMBAI. [ CORAM: PRAMOD KUMAR, AM AND V. DURGA RAO, JM ] I.T.A NO.2012/ MUM/2010 ASSESSMENT YEAR: 2004-05 DY..COMMISSIONER OF INCOME TAX, 9(1) .. APPELLA NT AAYAKAR BHAVAN, M.K. ROAD, MUMBAI VS GHARDA CHEMICALS LTD., . RESPONDENT 5/6, JER MANSION, W.P. VARDE MARG, OFF TURNVER ROAD, BANDRA (W), MUMBAI. PA NO.AAACG 1265 E PRAVAN VED, FOR THE APPELLANT KISHORE PATEL, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HA S CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 17 TH DECEMBER 2009, AND IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 147 OF THE I NCOME TAX ACT, 1961 FOR THE ASSESSMENT YEAR 2004-05 ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE ADDITION OF ` . 22,80,40,000 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DEEMED DIVIDEND U/S.2(22)(E) OF THE I NCOME TAX ACT, 1961 HOLDING THAT THE TRANSACTIONS BETWEEN THE ASSESSEE COMPANY AND M/S. GUJARAT INSECTICIDES LTD (GIL) (A SUBSIDIARY OF THE ASSESSE E COMPANY WHEREIN THE ASSESSEE COMPANY HOLDS 66.66% OF SHARES) WERE NORMA L BUSINESS I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 2 TRANSACTIONS NOT COVERED BY THE PROVISIONS OF SECTI ON 2(22)(E) OF THE INCOME TAX ACT, 1961. 2. WHILE DELETING THE SAID ADDITION, THE LD CIT (A) FAILED TO APPRECIATE THAT LENDING OF MONEY BEING NOT THE BUSINESS OF M/S. GIL , THE SAID TRANSACTIONS ARE NOT COVERED BY THE EXCLUSIONS PROVIDED IN SECTION 2 (22)(E) OF THE INCOME TAX ACT, 1961. 3. THE LD CIT (A) FURTHER FAILED TO APPRECIATE THAT ADVANCE FOR THE PURPOSE OF SECTION 2(22)(E) MAY BE EVEN BY WAY OF TRANSFER OF GOODS AND USE OF THE WORD ANY PAYMENT IN THE CONTEXT OF ADVANCE/LOAN, SIGNI FIES THAT EACH OF THE PAYMENTS MADE WHEN THE PAYEE IS NOT ALREADY A CREDI TOR, CONSTITUTES ADVANCE (MD JINDAL V CIT, 64 ITR 287(CAL) AND HENCE, THE PA YMENTS MADE EVEN IN A RUNNING ACCOUNT WHEN THE PAYEE HAS A DEBIT BALANCE ALL ALONG ARE HIT BY SECTION 2(22)(E)(CIT V. P.K.BADIANI, 76 ITR 369 (BO M).] 2. BRIEFLY STATED THE MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE COMPANY IS ENGAGED IN THE MANUFACTURE AND SALE OF PESTICIDES, INSECTICIDES, ETC. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAD TRANSACTIONS WITH ITS SUBSIDIARY COMPANY M/S. GUJAR AT INSECTICIDES LTD, ANKELSHWAR, GUJARAT, WHEREIN, THE ASSESSEE COMPANY IS HOLDING 5 5.55% SHARES. THE AO FURTHER NOTICED THAT THE ASSESSEE HAD MADE PURCHASES FROM T HE SAID SUBSIDIARY COMPANY AMOUNTING TO ` . 31,53,86,000 DURING THE YEAR UNDER CONSIDERATION AND OBSERVED THAT THE SAID TRANSACTIONS DOES NOT APPEAR TO BE A NORMAL BUSINESS. THE AO WAS OF THE VIEW THAT THE PROVISIONS U/S.2(22)(E) ARE APPLI CABLE IN THIS CASE. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE PAYMENTS MADE IN CASH OR KIND BY M/S. GIL SHOULD NOT BE TREATED AS DEEMED DIVIDEND AS PER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. IN RESPONSE TO THE AOS QUERY, THE ASS ESSEE EXPLAINED THAT THE RAW MATERIALS PURCHASED FROM M/S. GIL TO BE USED IN THE NORMAL COURSE OF BUSINESS. IT WAS ALSO EXPLAINED THAT NO LOANS OR ADVANCE HAD BEE N AVAILED FROM M/S GIL AND THE AMOUNT SHOWN AT ` . 31,53,86,000 IS ON ACCOUNT OF REGULAR TRADE TRANS ACTIONS. THE AO REJECTED THE ABOVE SUBMISSIONS, INTER ALIA, HOLD ING THAT ALL THE CONDITIONS AS MENTIONED IN SECTION 2(22)(E) ARE SATISFIED AS THE ASSESSEE IS NOT A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTEREST THAT THE AS SESSEE POSSES ACCUMULATED PROFITS TO THE EXTENT OF THESE TRANSACTIONS, AND THAT AS TH EE IS ALWAYS A HUGE CREDIT BALANCE, I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 3 THESE TRANSACTIONS ARE NOT ORDINARY BUSINESS TRANSA CTIONS. ACCORDINGLY, THE AO BROUGHT TO TAX THE OUTSTANDING SHOWN AS DUE AND PAY ABLE AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. AGGRIEVED, THE ASSESS EE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). 3. THE CIT (A) DELETED THE ADDITION MADE BY THE ASS ESSING OFFICER, INTER ALIA, HOLDING THAT NO LOANS OR ADVANCES WERE GIVEN TO THE ASSESSEE BY IT SUBSIDIARY AND THE AMOUNT REFLECTED IN THE BOOKS OF ACCOUNT AS THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE SUBSIDIARY COMPANY AND ALSO FOLLOW ING THE DECISION OF THE FIRST APPELLATE AUTHORITY FOR THE ASSESSMENT YEAR 2003-04 ON SIMILAR ISSUE. BEING AGGRIEVED, THE ASSESSING OFFICER IS IN APPEAL BEFOR E THE TRIBUNAL. 4. LEARNED COUNSEL FOR THE ASSESSEE PRODUCED BEFORE US A COPY OF DECISION OF A CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE AS SESSMENT YEAR 2002-03 IN ITA NO.916/M/2010 ORDER DATED 3 RD DECEMBER, 2010, WHEREIN, THE TRIBUNAL UPHOLD THE DECISION OF THE CIT(A) DELETING THE ADDITION MADE U NDER SECTION 2(22)(E), INTER ALIA, OBSERVING AS UNDER:- 11. EVEN ON MERITS THERE IS NO CASE FOR THE REVENU E. IN FACT THE CIT(A) HAS ANALYSED THIS ISSUE ELABORATELY AND CAME TO A CONCL USION THAT PROVISIONS OF SECTION 2(22)(E) ARE NOT ATTRACTED IN THE CASE OF N ORMAL BUSINESS TRANSACTIONS. THE SAME PRINCIPLE WAS UPHELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. RAJ KUMAR 318 ITR 462 WHEREI N THIS ISSUE WAS ELABORATELY DISCUSSED AS UNDER: - SECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961, SHOW S THAT A PAYMENT WOULD ACQUIRE THE ATTRIBUTES OF A DIVIDEND WITHIN THE MEA NING OF THE PROVISION IF THE FOLLOWING CONDITIONS ARE FULFILLED : (I) THE COMPAN Y MAKING THE PAYMENT IS ONE IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTER ESTED ; (II) MONEY SHOULD BE PAID BY THE COMPANY TO A SHAREHOLDER HOLDING NOT LESS THAN TEN PER CENT. OF THE VOTING POWER OF THE COMPANY. IT WOULD MAKE N O DIFFERENCE IF THE PAYMENT WAS OUT OF THE ASSETS OF THE COMPANY OR OTH ERWISE ; (III) THE MONEY SHOULD BE PAID EITHER BY WAY OF AN ADVANCE OR LOAN OR IT MAY BE 'ANY PAYMENT' WHICH THE COMPANY MAY MAKE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SHAREHOLDER OR ALSO TO CONCERN IN W HICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE IS SUBSTANTIALL Y INTERESTED ; AND (IV) THE LIMITING FACTOR BEING THAT THESE PAYMENTS MUST BE T O THE EXTENT OF I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 4 ACCUMULATED PROFITS, POSSESSED BY SUCH A COMPANY. T HE IMMEDIATE PRECURSOR TO SECTION 2(22)(E) IS FOUND IN SECTION 2(6A) OF TH E INDIAN INCOME-TAX ACT, 1922. THE PURPOSE OF INSERTION OF SUB-CLAUSE (E) TO SECTION 2(6A) IN THE 1922 ACT WAS TO BRING WITHIN THE TAX NET MONIES PAID BY CLOSELY HELD COMPANIES TO THEIR PRINCIPAL SHAREHOLDERS IN THE GUISE OF LOANS AND ADVANCES TO AVOID PAYMENT OF X. THEREFORE, SUB-CLAUSE (E) OF SECTION 2(22) OF THE 1961 ACT, WHICH IS IN PARI ATERIA WITH SUB-CLAUSE (E) OF SEC TION 2(6A) OF THE 1922 ACT, PLAINLY SEEKS TO BRING WITHIN THE TAX NET, ACCUMULA TED PROFITS WHICH ARE DISTRIBUTED BY CLOSELY HELD COMPANIES TO ITS SHAREH OLDERS IN THE FORM OF LOANS. THE PURPOSE BEING THAT PERSONS WHO MANAGE SU CH CLOSELY HELD COMPANIES SHOULD NOT ARRANGE THEIR AFFAIRS IN A MAN NER THAT THEY ASSIST THE SHAREHOLDERS IN AVOIDING THE PAYMENT OF TAXES BY HA VING THESE COMPANIES PAY OR DISTRIBUTE, WHAT WOULD LEGITIMATELY BE DIVID END IN THE HANDS OF THE SHAREHOLDERS' MONEY IN THE FORM OF AN ADVANCE OR LO AN. THE WORD 'ADVANCE' HAS TO BE READ IN CONJUNCTION WITH THE WORD 'LOAN'. USUALLY ATTRIBUTES OF A LOAN ARE THAT IT INVOLVES THE POSITIVE ACT OF LENDI NG COUPLED WITH ACCEPTANCE BY THE OTHER SIDE OF THE MONEY AS LOAN : IT GENERAL LY CARRIES INTEREST AND THERE IS AN OBLIGATION OF REPAYMENT. ON THE OTHER HAND, I N ITS WIDEST MEANING THE TERM 'ADVANCE' MAY OR MAY NOT INCLUDE LENDING. THE WORD 'ADVANCE' IF NOT FOUND IN THE COMPANY OF OR IN CONJUNCTION WITH A WO RD 'LOAN' MAY OR MAY NOT INCLUDE THE OBLIGATION OF REPAYMENT. IF IT DOES, TH EN IT WOULD BE A LOAN. THUS, ARISES THE CONUNDRUM AS TO WHAT MEANING ONE WOULD A TTRIBUTE TO THE TERM 'ADVANCE'. THE RULE OF CONSTRUCTION WHICH ANSWERS T HIS CONUNDRUM IS NOSCITUR A SOCIIS. THE RULE HAS BEEN EXPLAINED BOTH BY THE PRIVY COUNCIL IN THE CASE OF ANGUS ROBERTSON V. GEORGE DAY [1879] 5 AC 6 3 BY OBSERVING 'IT IS LEGITIMATE RULE OF CONSTRUCTION TO CONSTRUE WORDS I N AN ACT OF PARLIAMENT WITH REFERENCE TO WORDS FOUND IN IMMEDIATE CONNECTI ON WITH THEM' AND THE SUPREME COURT IN THE CASE OF ROHIT PULP AND PAPER M ILLS LTD. V. COLLECTOR OF CENTRAL EXCISE, AIR 1991 SC 754 AND STATE OF BOMBAY V. HOSPITAL MAZDOOR SABHA, AIR 1960 SC 610. THE PRINCIPLES WITH REGARD TO THE APPLICABILITY OF THE RULE OF CONSTRUCTION ARE BRIEFLY AS FOLLOWS : (I) D OES THE TERM IN ISSUE HAVE MORE THAN ONE MEANING ATTRIBUTED TO IT, I.E., BASED ON THE SETTING OR THE CONTEXT ONE COULD APPLY THE NARROWER OR WIDER MEANI NG ; (II) ARE THE WORDS OR TERMS USED FOUND IN A GROUP TOTALLY 'DISSIMILAR' OR IS THERE A 'COMMON THREAD' RUNNING THROUGH THEM ; (III) THE PURPOSE BE HIND INSERTING OF THE TERM. IN THE INSTANT CASE (I) THE TERM 'ADVANCE' HAS UNDO UBTEDLY MORE THAN ONE MEANING DEPENDING ON THE CONTEXT IN WHICH IT IS USE D ; (II) BOTH THE TERMS, THAT IS, 'ADVANCE' OR 'LOAN' ARE RELATED TO THE ACC UMULATED PROFITS OF THE COMPANY ; AND (III) THE PURPOSE BEHIND THE INSERTIO N OF THE TERM 'ADVANCE' WAS TO BRING WITHIN THE TAX NET PAYMENTS MADE IN TH E GUISE OF LOAN TO SHAREHOLDERS BY COMPANIES IN WHICH THEY HAVE A SUBS TANTIAL INTEREST SO AS TO AVOID PAYMENT OF TAX BY THE SHAREHOLDERS. THE WORD 'ADVANCE' WHICH APPEARS IN THE COMPANY OF THE WORD 'LOAN' COULD ONL Y MEAN SUCH ADVANCE WHICH CARRIES WITH IT AN OBLIGATION OF REPAYMENT. T RADE ADVANCES WHICH ARE IN THE NATURE OF MONEY TRANSACTED TO GIVE EFFECT TO A COMMERCIAL TRANSACTION WOULD NOT FALL WITHIN THE AMBIT OF THE PROVISION OF SECTION 2(22)(E) OF THE ACT. I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 5 THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURING C USTOMIZED KITCHEN EQUIPMENT. THE ASSESSEE WAS ALSO THE MANAGING DIREC TOR AND HELD NEARLY 65 PER CENT. OF THE PAID-UP SHARE CAPITAL OF C. A SUBS TANTIAL PART OF THE BUSINESS OF THE ASSESSEE, WHICH WAS NEARLY 90 PER CENT WAS O BTAINED THROUGH C. FOR THIS PURPOSE, C WOULD PASS ON THE ADVANCE RECEIVED FROM ITS CUSTOMERS TO THE ASSESSEE TO EXECUTE THE JOB WORK ENTRUSTED TO THE A SSESSEE. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE MONEY RECEIVED BY THE ASSESSEE WAS IN THE NATURE OF A LOAN GIVEN BY C TO THE ASSESSEE WHO ADM ITTEDLY HELD MORE THAN 10 PER CENT. OF THE SHARES IN C. THE ASSESSING OFFICER CONCLUDED THAT THE MONEY RECEIVED BY THE ASSESSEE WAS DEEMED DIVIDEND WITHIN THE MEANING OF THE PROVISIONS OF SECTION 2(22)(E). THE COMMISSIONER (A PPEALS) REVERSED THE ORDER OF THE ASSESSING OFFICER. THE TRIBUNAL SUSTAI NED THE DECISION OF THE COMMISSIONER (APPEALS). ON APPEAL : HELD, THAT THE TRADE ADVANCES GIVEN TO THE ASSESSEE BY C COULD NOT BE TREATED AS DEEMED DI VIDEND UNDER SECTION 2(22)(E). 12. THE HON'BLE DELHI HIGH COURT IN FACT FOLLOWED T HE PRINCIPLES ESTABLISHED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. NAGINDAS M. KAPADIA 177 ITR 393. THE SAME PRINCIPLES WERE ALSO REITERAT ED BY THE HON'BLE DELHI COURT IN THE CASE OF CIT VS. AMBASSADOR TRAVELS P. LTD. 318 ITR 376. IN VIEW OF THESE PRINCIPLES, WE ARE OF THE VIEW THAT THE CO MMERCIAL TRANSACTIONS BETWEEN TWO COMPANIES COULD NOT BE BROUGHT WITHIN T HE PURVIEW OF THE PROVISIONS OF SECTION 2(22)(E). ACCORDINGLY ON MERI TS ALSO WE FIND NO CASE TO INTERFERE WITH THE ORDER OF THE CIT(A) ON THIS ISSU E. THE GROUNDS 1,2 & 3 ARE THEREFORE REJECT. 5. LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, CO NTENDS THAT THE VIEW SO TAKEN BY THE CO-ORDINATE BENCH IS PER-INCURRIUM INASMUCH IT DOES NOT TAKE INTO ACCOUNT THE LAW LAID DOWN BY THE HONBLE BOMBAY HIG H COURT IN THE CASE OF CIT V. P.K.. BADIANI, 76 ITR 369(BOM), WHICH HOLD THAT EV EN A DEBIT BALANCE IS TO BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTING THE DEEME D DIVIDEND UNDER SECTION 2(22)(E). LEARNED D.R.S CONTENTION IS THAT IT IS NOT AT ALL NECESSARY THAT THE TRANSACTIONS WHICH CAN SUCCESSFULLY INVOKE THE DEEM ING FICTION ENVISAGED UNDER SECTION 2(22)(E) MUST BE IN THE NATURE OF LOANS OR ADVANCES AND THAT EVEN A DEBIT BALANCE IN ACCOUNT CAN BE A REASON ENOUGH TO INVOKE SECTION 2(22)(E) OF THE ACT. HOWEVER, WHEN THE SAID JUDGEMENT OF HONBLE BOMBAY HIGH COURT WAS PERUSED, WE FIND THAT, QUITE TO THE CONTRARY WHAT LEARNED D.R. HAS ARGUED, THEIR LORDSHIPS HAVE OBSERVED THAT A DEBIT IN THE ACCOUNT NEEDS TO BE EX AMINED SO AS TO FIND ITS TRUE NATURE AND ONLY WHEN A DEBIT IN THE NATURE OF LOANS OR ADVANCES, IT CANNOT BE I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 6 CONSIDERED AS DEEMED DIVIDEND UNDER SECTION 2(220(E ). UPON THIS FACT BEING POINTED OUT TO THE LEARNED D.R., HE DID NOT HAVE MU CH TO SAY EXCEPT TO NEVERTHELESS PLACE HIS RELIANCE OF HONBLE HIGH COURT JUDGEMENT. IN VIEW OF THESE FACTS, AND BEARING IN MIND THE LAW LAID DOWN BY THE HONBLE BO MBAY HIGH COURT, WE SEE NO MERITS IN THE OBJECTION RAISED BY LEARNED D.R. TO T HE ISSUE BEING COVERED BY THE TRIBUNALS DECISION IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2002-03(SUPRA). IN OUR CONSIDERED VIEW, THE ISSUE, WHICH IS AGITATE D IN THIS APPEAL, IS SQUARELY COVERED BY THE TRIBUNALS DECISION FOR THE ASSESSM ENT YEAR 2002-03 AND WE RESPECTFULLY CONCUR WITH THE VIEWS OF OUR DISTINGUI SHED COLLOGUES. THE MATERIAL FACTS IN THE YEAR BEING IDENTICAL TO A.Y. 2003-04 AND THE OBJECTION RAISED BY THE LEARNED D.R. BEING DEVOID OF LEGALLY SUSTAINABLE MERITS, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF THE CIT (A). ACCORDINGLY, WE DISMISS THE APPEAL FILED BY THE REVENUE. 6. IN THE RESULT, APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 7 TH JANUARY, 2011 SD/- (V. DURGA RAO ) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 7 TH JANUARY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)II, THANE 4. COMMISSIONER OF INCOME TAX, I, THANE 5. DEPARTMENTAL REPRESENTATIVE, BENCH G, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 7 I.T.A NO.2012/M/2010 M/S. GHARDA CHEMICALS LTD. 8