CHANDRASEKHAR MARUTI MUSALE, THANE V. ASST CIT 10(2), MUMBAI

ITA 5410/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3176 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 10-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 28-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: CHETAN A KARIA
• Keywords: Capital asset; Business expenditure; Salary income; Deemed dividend; Commercial expediency
• Section: 37; 11

Judgement Text

, , ,, , IN THE INCOME TAX APPELLATE TRIBUNAL C, BENC H MUMBAI BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER & SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ ITA NO.5410/MUM/2012 ( / ASSESSMENT YEAR :2009-10) SHRI CHANDRASEKHAR MARUTI MUSALE FLAT NO.1203/1204, 12 TH FLOOR, CARLYLE RAHEJA GARDEN, LBS MARG, OFF. TIP TOP THANE, MUMBAI - 400604 VS. ACIT-10(2), MUMBAI- 400020 ./ ./PAN/GIR NO. : ACZPM 3914 E ( /APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY : SHRI CHETAN A. KARIA /REVENUE BY : DR. S.PANDIAN / DATE OF HEARING : 29/03/2016 /DATE OF PRONOUNCEMENT 15/06/2016 / O R D E R PER SANJAY GARG, JUDICIAL MEMBER : THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE AGAINST THE ORDER OF CIT(A), DATED 21-5-2012. 2. THE ASSESSEE THROUGH ITS GROUNDS OF APPEAL HAS A GITATED THE ADDITION OF INCOME MADE BY THE ASSESSING OFFICER (H EREINAFTER REFERRED TO AS THE AO) AT THE HANDS OF THE ASSESSEE ON ACCOUNT OF DEEMED DIVIDEND U/S.2(22)(E) OF THE INCOME TAX ACT. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INDIVIDUAL DERIVING INCOME FROM SALARY, HOUSE PROPERTY AND OTHER SOURCE S. THE ASSESSEE WAS HAVING MAJOR SHAREHOLDING IN 3 COMPANIES NAMELY; (I ) M/S.ANACHEM INSTRUMENTS INDIA P.LTD. (II) M/ S. ADVANCE SCIENTI FIC EQUIPMENT P.LTD. & (III) M/S. STAR EARTH MINERALS P.LTD. DURING ASSESS MENT PROCEEDINGS, FROM THE REPLIES FILED BY THE ASSESSEE, THE AO NOTICED T HAT M/S. ANACHEM ITA NO.5410/12 2 INSTRUMENTS INDIA P.LTD. HAD ADVANCED AN AMOUNT OF RS.31,00,000/- ON 16.12.2008 TO M/S. ADVANCE SCIENTIFIC EQUIPMENT P. LTD. AND M/S. ADVANCE SCIENTIFIC EQUIPMENT HAD ALSO ADVANCED AN A MOUNT OF RS.15,00,000/- ON 17.01.2009 AND RS.20,00,000/- ON 19.01.2009 (TOTALING RS. 35 LAKH) TO M/S. STAR EARTH MINERALS P.LTD. THE AO ALSO NOTICED THAT THE ASSESSEE WAS HAVING MORE THAN 50% SHAREHOLDINGS IN ALL THESE COMPANIES. THE AO ASKED THE ASSESSEE AS TO WHY THE LOAN RECEIVED FROM M/S. ANACHEM INSTRUMENTS INDIA P.LTD. AND M/S. ADVA NCE SCIENTIFIC EQUIPMENT P.LTD. SHOULD NOT BE TREATED AS DEEMED DI VIDEND AS PER PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE ASSE SSEE FURNISHED TO THE AO THE BALANCE SHEET AND P&L ACCOUNT OF THESE TWO C OMPANIES AND ALSO SUBMITTED THAT THE SAID INTER-CORPORATE TRANSACTION S WERE IN THE NATURE OF LOAN. THE AO CONSIDERED THAT AS PER PROVISIONS OF S ECTION 2(22)(E) OF THE ACT, ANY LOAN DEPOSIT GIVEN BY A COMPANY TO ANOTHER COMPANY HAVING A COMMON SHARE HOLDER WHO IS HOLDING NOT LESS THAN 10 % OF THE VOTING POWER OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER I S A MEMBER OR A PARTNER AND IN WHICH HE HAS SPECIAL INTEREST, SUCH LOANS DEPOSITED IS TO BE DEEMED TO BE A DIVIDEND FROM THE ACCUMULATED PROFIT S OF THE PAYER COMPANY. THE AO HELD THAT IF THE CONDITIONS LAID DO WN IN THE SECTION DEALING WITH THE ISSUE OF DEEMED DIVIDEND ARE FULFI LLED, THE LOANS OR DEPOSIT RECEIVED BY ANY ASSESSEE FROM THE COMPANY I N WHICH THE ASSESSEE IS HAVING SUBSTANTIAL INTEREST, AND EVEN I F, THERE ARE REPAYMENTS OF THE LOAN, SUCH LOAN OR DEPOSIT WILL HAVE TO BE T REATED AS DEEMED DIVIDEND. THE AO HELD THAT THE RECEIPT OF LOAN AND SUBSTANTIAL HOLDING OF ITA NO.5410/12 3 THE ASSESSEE IN THE SHARES OF M/S. ANACHEM INSTRUME NTS INDIA P.LTD., M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. & M/S. STA R EARTH MINERALS P.LTD. WAS AN ACCEPTED FACT. IN RESPECT OF ACCUMULA TED PROFITS, M/S. ANACHEM INSTRUMENTS INDIA P.LTD. HAD RESERVES AND S URPLUS AMOUNTING TO RS.28,40,948/- AS ON 31.03.2009 AND RS.20,42,863/- AS ON 31.03.2008. SIMILARLY, M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. HAD RESERVES AND SURPLUS OF RS.1,51,81,196/- AS ON 31.03.2009 AND RS .1,51,70,953/ - AS ON 31.03.2008. THE ASSESSEE HAD NOT BROUGHT ANYTHING O N RECORD TO PROVE THAT THERE WAS NO PROFIT AVAILABLE TO THE SAID COMP ANIES AS ON THE DATE OF ADVANCING OF LOANS. IN THE FACTS AND CIRCUMSTANCES, THE AO HELD THAT THE LOAN OF RS.66,00,000/- WAS DEEMED DIVIDEND IN THE H ANDS OF THE ASSESSEE U/S.2(22)(E) OF THE ACT. THE AO ADDED BACK THE SAME INTO THE INCOME OF THE ASSESSEE. 4. BEING AGGRIEVED BY THE ORDER OF AO, ASSESSEE PRE FERRED APPEAL BEFORE THE CIT(A); HOWEVER, THE LD. CIT(A) VIDE IMP UGNED ORDER UPHELD THE FINDING OF AO. BEING AGGRIEVED, THE ASSESSEE HA S COME IN APPEAL BEFORE US. 5. LD. AR OF THE ASSESSEE, BEFORE US, HAS SUBMITTED THAT THOUGH THE ASSESSEE HAS BEEN A DIRECTOR AND SHAREHOLDER HOLDIN G MORE THAN 50% SHARES IN THE ABOVE STATED THREE CLOSELY HELD COMPA NIES BUT THE SAID THREE CLOSELY HELD COMPANIES HAD NO CROSS HOLDING O F SHARES I.E. NONE OF THE COMPANIES HOLD SHARES IN OTHER TWO COMPANIES. T HE 3 COMPANIES HAD REGULAR BUSINESS TRANSACTION WITH EACH OTHER. HE HA S FURTHER SUBMITTED THAT ALL THE THREE COMPANIES OWED TO THE ASSESSEE CERTAIN AMOUNTS SUCH ITA NO.5410/12 4 M/S M/S. STAR EARTH MINERALS P.LTD OWED TO THE ASSE SSEE A SUM OF RS.1,69,60,000/-, SIMILARLY M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. OWED TO THE ASSESSEE RS.33,43,845/- AND M/S. ANACHEM INS TRUMENTS INDIA P.LTD. OWED TO THE ASSESSEE A SUM OF RS.4,07,414/-, HOWEVER, THE ACCUMULATED PROFITS OF M/S. ADVANCE SCIENTIFIC EQUI PMENT P.LTD WERE AT RS.1,18,33,747/- AND THAT OF M/S. ANACHEM INSTRUMEN TS INDIA P.LTD. AT RS.19,73,863/- AND THAT OF M/S. STAR EARTH MINERALS P.LTD. AT RS.(-)50,29,833/-. THE ASSESSEE FURTHER EXPLAINED T HAT M/S M/S. ANACHEM INSTRUMENTS INDIA P.LTD. DEPOSITED A SUM OF RS.31 L AKHS WITH M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. AND M/S ADVANCE SCIENTIFIC EQUIPMENT P.LTD. FURTHER DEPOSITED A SUM OF RS.35 LAKHS WITH M/S. STAR EARTH MINERALS P.LTD. AS INTER-CORPORATE DEPOSITS. LD. AR HAS FURTHER SUBMITTED THAT THE SAID DEPOSITS WERE NOT GRATUITOU S AS THE INTEREST WAS BEING CHARGED AT THE MARKET RATE. THE DEPOSITS WERE IN THE NATURE OF INTER- CORPORATE DEPOSITS MADE FOR BUSINESS CONSIDERATION. HE HAS STATED THAT THE INTER-CORPORATE DEPOSITS DOES NOT FALL WITHIN T HE MISCHIEF OF SECTION 2(22)(E) OF THE ACT. LD. AR HAS FURTHER VEHEMENTLY CONTENDED THAT NO BENEFIT HAD ACCRUED TO THE ASSESSEE OUT OF THE ABOV E TRANSACTIONS AND THAT THERE WAS NO EVIDENCE THAT ABOVE SAID TRANSACT IONS WERE MADE ON BEHALF OF THE ASSESSEE OR FOR THE BENEFIT OF THE AS SESSEE. HE HAS FURTHER SUMMITED ALTERNATIVELY WITHOUT PREJUDICE TO THE ABO VE PLEAS, THAT EVEN FOR THE SAKE OF ARGUMENTS, IF THE DEPOSITS WERE ASSUMED TO BE DIVIDEND, EVEN THEN, THE ACCUMULATED PROFIT IN M/S. ANACHEM I NSTRUMENTS INDIA P.LTD. WERE ONLY RS.19,73,863/- AND AT THE BEST THE ADDITION COULD HAVE ITA NO.5410/12 5 BEEN RESTRICTED TO RS.19,73,863/- INSTEAD OF RS.31 LAKHS. LD. AR HAS FURTHER SUBMITTED THAT EVEN OTHERWISE ADVANCE MADE BY M/S. ANACHEM INSTRUMENTS INDIA P.LTD. AMOUNTING TO RS.31 LAKHS W AS FORMING PART OF THE ADVANCE TO M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. AMOUNTING TO RS.35 LAKHS AND AT THE MOST THE NET AMOUNT OF RS.35 LAKHS CAN ONLY BE TAXED U/S.2(22)(E) OF THE INCOME TAX ACT. BUT THE AO WRON GLY TAXED THE AGGREGATE OF THE ENTIRE AMOUNT INVOLVED IN THE TRAN SACTIONS AMOUNTING TO RS.66 LAKHS AS DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT. 6. ON THE OTHER HAND, LD. DR HAS RELIED UPON THE FI NDINGS OF LOWER AUTHORITIES AND HAS CONTENDED THAT IN VIEW OF THE S PECIFIC PROVISIONS OF SECTION 2(22)(E) OF THE ACT, THE ABOVE TRANSACTIONS SQUARELY FALL WITHIN THE MISCHIEF OF DEEMED DIVIDEND AS PER THE DEFINITION O F DIVIDEND PROVIDED U/S.2(22)(E) OF THE ACT AND, THUS, THE AO HAS RIGHT LY TAXED THE SAID AMOUNT IN THE HANDS OF THE ASSESSEE. 7. WE HAVE CONSIDERED RIVAL CONTENTIONS AND ALSO GO NE THROUGH THE RECORD. TO UNDERSTAND THE ENTIRE CONTEXT OF THE TRA NSACTIONS AND WHETHER THE PAYMENT MADE BY THE CLOSELY HELD COMPANIES TO E ACH OTHER WOULD CONSTITUTE DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT. WE DEEM IT PROPER TO REPRODUCE THE RELEVANT DEFINITION OF DIVIDEND AS PR OVIDED U/S.2(22)(E) OF AS PROVIDED UNDER THE INCOME TAX ACT 1961: 2.DEFINITIONS. IN THIS ACT, UNLESS THE CONTEXT OTH ERWISE REQUIRES, (22) 'DIVIDEND' INCLUDES ( E ) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF AD VANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFIC IAL OWNER OF ITA NO.5410/12 6 SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE O F DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN P ROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER, OR TO A NY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUS E REFERRED TO AS THE SAID CONCERN)] OR ANY PAYMENT BY ANY SUCH COMPA NY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSS ESSES ACCUMULATED PROFITS; WE WOULD ALSO LIKE TO REPRODUCE THE DEFINITION OF D IVIDEND AS IT STOOD UNDER THE OLD ACT I.E. INDIAN INCOME TAX ACT, 1922 (IN SHORT THE ACT, 1922). SECTION 2(6A)(E) OF THE SAID ACT PROVIDED A S UNDER:- ' 'DIVIDEND ' INCLUDES... ( E ) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY, IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED WITHIN THE MEAN ING OF SECTION 23A, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHER WISE) BY WAY OF ADVANCE OR LOA N TO A SHAREHOLDER OR ANY PAYMENT BY ANY SUCH COMPANY ON B EHALF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER, TO THE EXT ENT TO WHICH THE COMPANY IN EITHER CASE, POSSESSES ACCUMULATED PROFI TS; BUT DIVIDEND DOES NOT INCLUDE....... ( II ) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER BY A CO MPANY IN THE ORDINARY COURSE OF ITS BUSINESS WHERE THE LENDI NG OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY ; ( III ) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET OFF B Y THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PR EVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEA NING OF CLAUSE ( E ), THE EXTENT TO WHICH IT IS SO SET OFF.' THUS, THE INCLUSIVE DEFINITION OF 'DIVIDEND' TAKES IN THE PAYMENTS TO WHICH CLAUSE ( E ) OF SECTION 2(6A) REFERS AND MAKES THEM DIVIDEND F OR THE PURPOSE OF THE ACT. SECTION 12(1) PROVIDES THAT THE TAX SHALL BE PAYABL E BY AN ASSESSEE UNDER THE HEAD 'INCOME FROM OTHER SOURCES' IN RESPE CT OF INCOME, PROFITS AND GAINS OF EVERY KIND WHICH MAY BE INCLUD ED IN HIS TOTAL INCOME (IF NOT INCLUDED UNDER ANY OF THE PRECEDING HEADS). SECTION 12(1B) PROVIDES : 'ANY PAYMENT BY A COMPANY TO A SHAREHOLDER BY WAY O F ADVANCE OR LOAN WHICH WOULD HAVE BEEN TREATED AS A DIVIDEND WI THIN THE MEANING OF CLAUSE ( E ) OF SUB-SECTION (6A) OF SECTION 2 IN ANY PREVIOUS YEAR RELEVANT TO ANY ASSESSMENT YEAR PRIOR TO THE ASSESSMENT YEAR ENDING ON THE 31ST DAY OF MARCH, 19 56, HAD THAT CLAUSE BEEN IN FORCE IN THAT YEAR, SHALL BE TREATED AS A DIVIDEND RECEIVED BY HIM IN THE PREVIOUS YEAR RELEVANT TO TH E ASSESSMENT YEAR ENDING ON THE 31ST DAY OF MARCH, 1956, IF SUCH LOAN OR ITA NO.5410/12 7 ADVANCE REMAINED OUTSTANDING ON THE FIRST DAY OF SU CH PREVIOUS YEAR.' BOTH THESE PROVISIONS, VIZ., SECTION 2(6A)( E ) AND SECTION 12(1B), WERE INTRODUCED IN THE ACT BY THE FINANCE ACT, 1955 (15 OF 1955), WHICH CAME INTO OPERATION ON THE 1ST OF APRIL, 1955. WE WOULD LIKE TO MENTION HERE THAT U/S.2(6C) OF THE ACT, 1922, INCOME INCLUDES DIVIDEND. SIMILARLY UNDER THE INCOME TAX A CT, 1961 (IN SHORT THE ACT,1961), SECTION 2(24)(A) STATES THAT INCOME I NCLUDES DIVIDEND. 8. NOW, IF WE COMPARE THE DEFINITION OF DIVIDEND AS PROVIDED UNDER THE OLD ACT OF 1922 WITH THE PRESENT ACT OF 1961, WE FI ND THAT THE DEFINITION OF DIVIDEND UNDER THE RELEVANT PROVISIONS OF BOTH THE ACTS IS ALMOST IDENTICAL. UNDER THE OLD ACT (I.E. ACT OF 1922), ANY PAYMENT B Y COMPANY IN WHICH THE PUBLIC IS NOT SUBSTANTIALLY INTERESTED, ANY SUM BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OF OR FOR THE BENEFIT OF THE SHAREHOLDER TO THE EXTENT TO WHI CH SUCH COMPANY POSSESSES ACCUMULATIVE PROFITS, IS TO BE DEEMED AS DIVIDEND AT THE HANDS OF SUCH SHAREHOLDER. HOWEVER, UNDER THE NEW ACT (I. E. ACT OF 1961), THE SHAREHOLDER OF SUCH A COMPANY MUST BE HAVING A SUBS TANTIAL INTEREST OR HOLDING WHICH SHOULD BE NOT LESS THAN 10% OF THE VO TING POWER. THE ANOTHER CONDITION THAT HAS BEEN ADDED IS THAT THE PAYMENT BY SUCH A COMPANY TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER IN WHICH HE HAS A SUBSTANTIAL INTEREST HAS BEEN ADDED WHICH FIND PLACE BETWEEN THE WORDS ..ADVANCE OR LOAN TO A SH AREHOLDER... AND THE WORDS .OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER. WE FIND THAT THE WORDS TO ANY CONCERN IN WHICH SUCH S HAREHOLDER IS A MEMBER OR A PARTNER.. ARE SANDWICHED BETWEEN THE FIRST CONDITION OF ITA NO.5410/12 8 PAYMENT TO SUCH A SHAREHOLDER DIRECTLY AND THE SECO ND CONDITION OF PAYMENT MADE TO ANY COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER. A PERUSAL OF THE DEFINITIONS AS PROVIDED UNDER THE OLD ACT (I.E. THE ACT OF 1922) AND THE NEW ACT (I. E. THE ACT OF 1961) AND EVEN A CAREFUL PERUSAL OF THE DEFINITION PROVIDED U NDER THE NEW ACT ALONE, WOULD REVEAL THAT THE PHRASE BY WAY OF ADVANCE OR LOAN APPEARING IN SUB-CLAUSE (E), MUST BE CONSTRUED TO MEAN THOSE ADV ANCES OR LOANS WHICH A SHAREHOLDER ENJOYS FOR SIMPLY ON ACCOUNT OF BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES. THE PURPOSE IS T O BRING WITHIN THE TAX NET ACCUMULATED PROFITS WHICH WERE DISTRIBUTED BY CLOSE LY HELD COMPANIES TO ITS SHAREHOLDERS IN THE FORM OF LOANS TO AVOID PAYM ENT OF DIVIDEND DISTRIBUTION TAX U/S.115 O OF THE ACT, 1961. THUS , THE GRATUITOUS LOAN OR ADVANCE GIVEN BY A COMPANY TO ITS SHAREHOLDERS WOUL D COME WITHIN THE PURVIEW OF SECTION 2(22) BUT NOT TO THE CASES WHERE THE LOAN OR ADVANCE IS GIVEN IN COURSE OF BUSINESS OR OUT OF BUSINESS EXPE DIENCY OR IN RETURN TO AN ADVANTAGE CONFERRED UPON THE COMPANY BY SUCH SHA REHOLDER. 9. THE HONBLE SUPREME COURT IN THE CASE OF NAVNIT LAL C. JAVERI VS. K. K. SEN, APPELLATE ASSISTANT COMMISSIONER OF INC OME TAX, REPORTED IN (1965) 56 ITR 198 (SC) WHILE ANALYZING THE RELEVANT PROVISIONS OF SECTION 2(6A)(E) OF THE ACT OF 1922, HAS OBSERVED THAT THRE E KINDS OF PAYMENTS MADE TO THE SHAREHOLDER OF A COMPANY TO WHICH THE S AID PROVISIONS APPLY, ARE TREATED AS TAXABLE DIVIDEND TO THE EXTENT OF TH E ACCUMULATED PROFITS HELD BY THE COMPANY. THESE THREE KINDS OF PAYMENTS ARE: ITA NO.5410/12 9 (I) PAYMENTS MADE TO THE SHAREHOLDER BY WAY OF ADVA NCE OR LOAN ; (II) PAYMENTS MADE ON HIS BEHALF ; AND (III) PAYMENTS MADE FOR HIS INDIVIDUAL BENEFIT. HOWEVER, UNDER THE NEW ACT (I.E. THE ACT OF 1961), UNDER SECTION 2(22)(E) TO CONSTITUTE DEEMED DIVIDEND, FOLLOWING C ONDITIONS CAN BE SUMMED UP :- (I) PAYMENTS BY WAY OF ADVANCE OR LOAN TO A BENEFIC IAL OR A SHAREHOLDER, HAVING SHAREHOLDING NOT LESS THAN 10% OF VOTING POWER; OR (II) TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER HAVING SUBSTANTIAL INTEREST THEREIN; (III) PAYMENT MADE ON HIS BEHALF, AND (III) PAYMENTS MADE FOR HIS INDIVIDUAL BENEFIT. A PERUSAL OF THE ABOVE COMPARISON REVEALS BEYOND DO UBT THAT THE PURPOSE AND OBJECT OF THE PROVISIONS VIDE WHICH THE DIVIDEN D HAS BEEN DEFINED AND INCLUDED INTO THE INCOME OF THE SHAREHOLDER REMAINS THE SAME I.E. TO BRING WITHIN THE TAX NET ACCUMULATED PROFITS WHICH ARE DI STRIBUTED BY CLOSELY HELD COMPANIES TO HIS SHAREHOLDERS IN THE FORM OF LOANS TO AVOID PAYMENT OF DIVIDEND DISTRIBUTION TAX UNDER SECTION 115-O OF TH E ACT. 10. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF BAGMANE CONSTRUCTIONS (P) LTD. & ORS. VS. CIT & ANR., (201 5) CTR (KAR) 338 HAS DISCUSSED AT LENGTH THE PURPOSE AND OBJECT OF THE P ROVISIONS OF SECTION 2(22)(E) IN NEW THE ACT. IN THE AFORESAID CASE, WHI LE RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF K .P. VARGHESE V. ITO [1981] 131 ITR 597, THE HONBLE HIGH COURT HAS OBSE RVED THAT THE TASK OF INTERPRETATION OF A STATUTORY ENACTMENT IS NOT A ME CHANICAL TASK. IT IS AN ATTEMPT TO DISCOVER THE INTENT OF THE LEGISLATURE F ROM THE LANGUAGE USED ITA NO.5410/12 10 BY IT AND SUCH ATTEMPT MUST ALWAYS BE MADE. THOUGH IT IS TRUE THAT THE WORDS USED, EVEN IN THEIR LITERAL SENSE, ARE THE PR IMARY AND ORDINARILY THE MOST RELIABLE SOURCE OF INTERPRETING THE MEANING OF ANY WRITING; BUT STATUTES ALWAYS HAVE SOME PURPOSE OR OBJECT TO ACCO MPLISH, WHOSE SYMPATHETIC AND IMAGINATIVE DISCOVERY IS THE SUREST GUIDE TO THEIR MEANING. THE HONBLE KARNATAKA HIGH COURT, THUS, OB SERVED THAT IT IS NOW A WELL-SETTLED RULE OF CONSTRUCTION THAT WHERE THE PLAIN LITERAL INTERPRETATION OF A STATUTORY PROVISION PRODUCES A MANIFESTLY ABSU RD AND UNJUST RESULT WHICH COULD NEVER HAVE BEEN INTENDED BY THE LEGISLA TURE, THE COURT MAY MODIFY THE LANGUAGE USED BY THE LEGISLATURE OR EVEN 'DO SOME VIOLENCE' TO IT, SO AS TO ACHIEVE THE OBVIOUS INTENTION OF TH E LEGISLATURE AND PRODUCE A RATIONAL CONSTRUCTION. THE HONBLE HIGH COURT FUR THER OBSERVED THAT THE HONBLE APEX COURT AGAIN EXPLAINED THE MEANING OF A DEEMING PROVISION UNDER THE INCOME TAX ACT IN THE CASE OF CIT V. MOTH ER INDIA REFRIGERATION INDUSTRIES (P.) LTD. [1985] 155 ITR 711, WHICH READ S AS UNDER: 'THE LEGAL FICTIONS ARE CREATED ONLY FOR SOME DEFIN ITE PURPOSE AND THESE MUST BE LIMITED TO THAT PURPOSE AND SHOULD NO T BE EXTENDED BEYOND THAT LEGITIMATE FIELD.' THE HONBLE HIGH COURT FURTHER RELIED UPON THE DECI SION OF HONBLE DELHI HIGH COURT CIT V. RAJ KUMAR [2009] 318 ITR 462(DE LHI) AND HONBLE KOLKATA HIGH COURT IN THE CASE OF PRADIP KUMAR MAL HOTRA VS. ITO (2011) 338 ITR 538 (CAL), AND HAS OBSERVED THAT THE COMBIN ED MEANING OF THE VARIOUS CLAUSE OF PROVISIONS OF SECTION 2(22)(E) OF THE ACT IS TO MEAN THAT THE PAYMENTS INCLUDED AS DEEMED DIVIDEND WOULD MEAN THE GRATUITOUS PAYMENTS TO A SHAREHOLDER MEANT TO AVOID THE TAXATI ON OF INCOME ITA NO.5410/12 11 U/S.115O OF THE ACT. THE HONBLE HIGH COURT (SUPRA) FURTHER RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS. ANKITECH (P) LTD. & ORS. (2012) 340 ITR 14 (DEL) AND REPROD UCED THE RELEVANT PART OF THE DECISION OF THE HONBLE DELHI COURT( SUPRA) AS UNDER: 22 . THE DELHI HIGH COURT IN THE CASE OF CIT VS. AN KITECH (P) LTD. & ORS. (2011) 242 CTR (DEL) 129 : (2011) 57 D TR (DEL) 345 : (2012) 340 ITR 14 (DEL), EXPLAINING THE MEANING OF THE WORD CONCERN FOUND IN THE PROVISIONS AS WELL AS EXPL N. (3), WHERE THE MEANING OF THE SAID WORD IS EXPRESSLY GIVEN, HELD A S UNDER:- '24. THE INTENTION BEHIND ENACTING THE PROVISIONS O F SECTION 2(22)(E) IS THAT CLOSELY-HELD COMPANIES (I.E., COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PR OFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF S O DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS O F THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED P ROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OR ADVA NCES TO SHAREHOLDERS OR TO CONCERN IN WHICH EACH SHAREHOLDE RS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SE CTION 2(22)(E) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOL DERS. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOA NS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION T HAT THE LOANS OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABL E TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVA NCE.' 11. FURTHER IN PARA 24 OF THE ORDER IN THE SAID CAS E OF BAGMANE CONSTRUCTIONS (P) LTD. & ANR. (SUPRA), THE HONBLE KARNATAKA HIGH COURT HAS HELD THAT THE PURPOSE OF INSERTION OF SUB-CLAUS E (E) OF SECTION 2(22) OF THE ACT WAS TO BRING WITHIN THE TAX NET ACCUMULATED PROFITS WHICH ARE DISTRIBUTED BY CLOSELY HELD COMPANIES TO HIS SHAREH OLDERS IN THE FORM OF ITA NO.5410/12 12 LOANS TO AVOID PAYMENT OF DIVIDEND DISTRIBUTION TAX UNDER SECTION 115-O OF THE ACT. LOAN OR ADVANCE GIVEN TO THE SHAREHOLDERS OR TO A CONCERN, UNDER NORMAL CIRCUMSTANCES WOULD NOT QUALIFY AS DIVIDEND. IF SUCH LOAN OR ADVANCE IS GIVEN TO SUCH SHAREHOLDER AS A CONSEQUEN CE OF ANY FURTHER CONSIDERATION WHICH IS BENEFICIAL TO THE COMPANY RE CEIVED FROM SUCH A SHAREHOLDER, IN SUCH CASE, SUCH ADVANCE OR LOAN CAN NOT BE SAID TO A DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. PARA 24 OF THE AFORESAID DECISION OF THE HONBLE KARNATAKA HIGH COURT WHICH IS MOST RELEVANT IN THE CONTEXT OF THE MATTER FOR THE SAKE OF CONVENIENCE A ND COMPLETENESS IS REPRODUCED AS UNDER :- 24. THEREFORE, FROM THE AFORESAID JUDGMENTS, IT IS CLE AR THAT THE PURPOSE OF THE INSERTION OF SUB-CLAUSE (E) OF SECTI ON 2(22) OF THE ACT WAS TO BRING WITHIN THE TAX NET ACCUMULATED PRO FITS WHICH ARE DISTRIBUTED BY CLOSELY HELD COMPANIES TO HIS SHAREH OLDERS IN THE FORM OF LOANS TO AVOID PAYMENT OF DIVIDEND DISTRIBU TION TAX UNDER SECTION 115-O OF THE ACT. THE PURPOSE BEING THAT PE RSONS WHO MANAGE SUCH CLOSELY HELD COMPANIES SHOULD NOT ARRAN GE THEIR AFFAIRS IN A MANNER THAT THEY ASSIST THE SHAREHOLDE RS IN AVOIDING PAYMENT OF TAX BY HAVING THESE COMPANIES PAY OR DIS TRIBUTE MONEY IN THE FORM OF ADVANCE OR LOAN. LOAN OR ADVANCE GIV EN TO THE SHAREHOLDERS OR TO A CONCERN, UNDER NORMAL CIRCUMST ANCES WOULD NOT QUALIFY AS DIVIDEND. IF SUCH LOAN OR ADVANCE IS GIVEN TO SUCH SHAREHOLDER AS A CONSEQUENCE OF ANY FURTHER CONSIDE RATION WHICH IS BENEFICIAL TO THE COMPANY RECEIVED FROM SUCH A SHAR EHOLDER, IN SUCH CASE, SUCH ADVANCE OR LOAN CANNOT BE SAID TO A DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBU TE THEM AS LOAN OR ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHA REHOLDER, IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT B Y THE COMPANY IS TREATED AS DIVIDEND. IT IS SO MADE BY LE GAL FICTION CREATED UNDER SECTION 2(22)(E) OF THE ACT. THUS, TH E DEFINITION OF DIVIDEND HAS BEEN ENLARGED, AND THAT LOAN OR ADVANC ES GIVEN UNDER THE CONDITIONS SPECIFIED UNDER THIS PROVISION WOULD ALSO BE TREATED AS DIVIDEND. THUS, FOR GRATUITOUS LOAN OR ADVANCE G IVEN BY A COMPANY TO THOSE CLASSES OF SHAREHOLDERS WOULD COME WITHIN THE PURVIEW OF SECTION 2(22) BUT NOT TO THE CASES WHERE THE LOAN OR ADVANCE IS GIVEN IN RETURN TO AN ADVANTAGE CONFERRE D UPON THE COMPANY BY SUCH SHAREHOLDER. THE INTENTION BEHIND T HE PROVISIONS ITA NO.5410/12 13 OF SECTION 2(22)(E) OF THE ACT IS TO TAX DIVIDEND I N THE HANDS OF SHAREHOLDERS. 12. THE HONBLE HIGH COURT FURTHER WHILE RELYING UP ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF STATE OF BOMBAY & ORS. VS. THE HOSPITAL MAZDOOR SABHA & ORS., AIR 1960 SC 610 , HAS OBSERVED THAT NOSCITUR A SOCIIS IS A MERE RULE OF CONSTRU CTION AND IT CANNOT PREVAIL IN CASES WHERE IT IS CLEAR THAT THE WIDER WORDS HA VE BEEN DELIBERATELY USED IN ORDER TO MAKE THE SCOPE OF THE DEFINED WORD CORRESPONDINGLY WIDER. IT IS ONLY WHERE THE INTENTION OF THE LEGISL ATURE IN ASSOCIATING WIDER WORDS WITH WORDS OF NARROWER SIGNIFICANCE IS DOUBTF UL, OR OTHERWISE NOT CLEAR THAT THE PRESENT RULE OF CONSTRUCTION CAN BE USEFULLY APPLIED. IT CAN ALSO BE APPLIED WHERE THE MEANING OF THE WORDS OF W IDER IMPORT IS DOUBTFUL; BUT, WHERE THE OBJECT OF THE LEGISLATURE IN USING WIDER WORDS IS CLEAR AND FREE OF AMBIGUITY, THE RULE OF CONSTRUCTI ON IN QUESTION CANNOT BE PRESSED INTO SERVICE. THE HONBLE HIGH COURT IN PAR A 27OF THE ORDER HAS OBSERVED AS UNDER :- 27. IN THIS BACKGROUND WHEN WE LOOK AT THE AFORESAID P ROVISION, IT IS CLEAR THAT ANY PAYMENT MADE BY A COMPANY BY WAY OF ADVANCE OR LOAN HAS TO BE UNDERSTOOD IN THE CONTEXT OF THE OBJECT WITH WHICH THE SAID PROVISION IS INTRODUCED. THOUGH THE LEGISL ATURE HAS INTRODUCED 'ADVANCE' AS WELL AS 'LOAN' WHICH ARE TW O DIFFERENT WORDS, THE MEANING OF EACH OF THOSE WORDS HAVE TO BE UNDER STOOD IN THE CONTEXT IN WHICH THEY ARE USED. EACH WORD TAKES ITS COLOUR FROM THE OTHER. THE MEANING OF THE WORD 'ADVANCE' IS TO BE U NDERSTOOD BY THE MEANING OF THE WORD LOAN WHICH IS USED IMMEDIAT ELY THEREAFTER ASSOCIATED WORDS TAKE THEIR MEANING FROM ONE ANOTHE R UNDER THE DOCTRINE OF NOSCUNTUR A SOCIIS THE PHILOSOPHY OF WH ICH IS THAT THE MEANING OF A DOUBTFUL WORD MAY BE ASCERTAINED BY RE FERENCE TO THE MEANING OF WORDS ASSOCIATED WITH IT. THIS RULE, ACC ORDING TO MAXWELL, MEANS THAT, WHEN TWO OR MORE WORDS WHICH A RE SUSCEPTIBLE OF ANALOGOUS MEANING ARE COUPLED TOGETH ER THEY ARE UNDERSTOOD TO BE USED IN THEIR COGNATE SENSE. THEY TAKE AS IT WERE THEIR COLOUR FROM EACH OTHER, THAT IS, THE MORE GEN ERAL IS RESTRICTED TO A SENSE ANALOGOUS TO A. LESS GENERAL. IN THE CAS E OF A LOAN, MONEY IS ADVANCED GENERALLY ON PAYMENT OF INTEREST. IN OTHER WORDS THE LOAN ADVANCED HAS TO BE REPAID WITH INTER EST. IN THE CASE OF AN ADVANCE ALSO, THE ELEMENT OF REPAYMENT IS THE RE BUT SUCH A REPAYMENT MAY BE WITH INTEREST OR WITHOUT INTEREST. THEREFORE, WHEN THE SAID TWO WORDS ARE USED IN THE AFORESAID PROVIS ION WITH THE PURPOSE OF LEVYING TAX, IF THE INTENTION OF SUCH AD VANCE OR LOAN IS TO ITA NO.5410/12 14 AVOID PAYMENT OF DIVIDEND DISTRIBUTION OF TAX UNDER SECTION 115-O OF THE ACT., SUCH A PAYMENT BY A COMPANY CERTAINLY CONSTITUTES A DEEMED DIVIDEND. BUT IF SUCH A PAYMENT IS MADE FIRS TLY NOT OUT OF ACCUMULATED PROFITS AND SECONDLY EVEN IF IT IS OUT OF ACCUMULATED PROFITS, BUT AS TRADE ADVANCE AS A CONSIDERATION FO R THE GOODS RECEIVED OR FOR PURCHASE OF A CAPITAL ASSET WHICH I NDIRECTLY WOULD BENEFIT THE COMPANY ADVANCING THE LOAN, SUCH ADVANC E CANNOT BE BROUGHT WITHIN THE WORD 'ADVANCE' USED IN THE AFORE SAID PROVISION. THE TRADE ADVANCE WHICH IS IN THE NATURE OF MONEY T RANSACTED TO GIVE EFFECT TO COMMERCIAL TRANSACTIONS WOULD NOT FA LL WITHIN THE AMBIT OF THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 13. THE HONBLE HIGH COURT, THUS, RELYING UPON THE VARIOUS CASE LAWS, HAS HELD THAT THE PURPOSE AND OBJECT OF SECTION 2(2 2)(E) OF THE ACT IS TO AVOID PAYMENT OF DIVIDEND DISTRIBUTION TAX U/S.115- O OF THE ACT AND SUCH PAYMENTS BY A COMPANY CERTAINLY WOULD CONSTITUTE DE EMED DIVIDEND, HOWEVER, ANY TRADE ADVANCE IN THE COURSE OF BUSINES S WOULD NOT FALL WITHIN THE AMBIT OF SECTION 2(22)(E) OF THE ACT. TH E HONBLE HIGH COURT (SUPRA) WHILE RELYING UPON ANOTHER DECISION OF THE HONBLE APEX COURT IN THE CASE OF LIC OF INDIA VS. RETIRED LIC OFFICERS A SSOCIATION (2008) 3 SCC 321, HAS OBSERVED THAT EACH WORD EMPLOYED IN A STAT UE MUST TAKE COLOUR FROM THE PURPORT AND THE OBJECT FOR WHICH IT IS USE D. THE PRINCIPLE OR PURPOSIVE INTERPRETATION SHOULD BE TAKEN RECOURSE T O. IF A LITERAL INTERPRETATION IS GIVEN TO THE SAID WORDS, IT WOULD MEAN THAT ALL TRADE ADVANCES ARE TO BE TAXED AS DEEMED DIVIDEND. IF SUC H AN INTERPRETATION IS PLACED, IT WOULD LEAD TO ABSURDITY. THAT WAS NOT TH E INTENTION OF THE LEGISLATURE IN ENACTING THE AFORESAID PROVISION. EV EN IF THE ACCUMULATED PROFIT WHICH OUGHT TO HAVE BEEN PAID TO THE SHAREHO LDERS AS THE DIVIDEND PAID TO A SISTER CONCERN FOR THE PURPOSE OF ACQUISI TION OF CAPITAL ASSETS OR AS A CONSIDERATION FOR THE GOODS RECEIVED WHICH IS REQUIRED FOR CARRYING ON ITA NO.5410/12 15 THE BUSINESS, IT WOULD NOT FALL WITHIN THE DEFINITI ON OF SECTION 2(22)(E) OF THE ACT AS THE OBJECT WAS NOT TO PAY THE SAID AMOUN T TO THE SHAREHOLDERS AFTER AVOIDING PAYMENT OF DIVIDEND DISTRIBUTION TAX UNDER SECTION 115-O OF THE ACT. IN THAT VIEW OF THE MATTER, IT IS NOT POSS IBLE TO ACCEPT THE INTERPRETATION SOUGHT TO BE PLACED BY THE REVENUE. 14. THE HONBLE HIGH COURT, THUS, RELIED UPON VARIO US CASE LAWS AND VIDE PARA 29 OF THE SAID DECISION, HAS REJECTED THE CONTENTION OF REVENUE THAT THE PAYMENT BY A COMPANY BY WAY OF ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER WOULD BE OUT OF THE PURVIEW OF SECTION 2(22)(E) OF THE ACT, ONLY IF LENDING OF MONEY IS A SUBSTANTIAL PART OF T HE BUSINESS OF THE COMPANY. THE HONBLE HIGH COURT HAS OBSERVED THAT T HE QUESTION OF LOOKING INTO THE AFORESAID PROVISION WOULD ARISE ON LY WHEN ALL THE CONDITIONS PRESCRIBED IN CLAUSE (E) OF SUB-S.2(2) O F SECTION 22 ARE COMPLIED WITH. IF THE PAYMENT IS MADE BY WAY OF TRA DE OR BUSINESS, ADVANCE OR LOAN, CLAUSE (C) OF SUB-S.(2) OF S.22 OF THE ACT IS NOT AT ALL ATTRACTED. 15. NOW, IN THE LIGHT OF THE AFORESAID PROPOSITION OF LAW LAID DOWN BY THE HONBLE KARNATAKA HIGH COURT (SUPRA) WHILE RELYING UPON VARIOUS DECISIONS OF THE HONBLE SUPREME COURT AND HONBLE DELHI HIGH COURT AS WELL AS HONBLE KOLKATA HIGH COURT, WE EXAMINE THE FACTS OF THE ASSESSEE IN THE PRESENT CASE. ADMITTEDLY, THE ASSESSEE IS A DIRECTOR IN THREE CLOSELY HELD COMPANIES. IT IS ALSO UNDISPUTED FACT THAT THE COMPANY M/S. ANACHEM INSTRUMENTS INDIA P.LTD. PAID RS.31 LAKHS T O M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. WHICH IN TURN PAID A SU M OF RS.35 LAKHS TO ITA NO.5410/12 16 M/S. STAR EARTH MINERALS P.LTD. THE ASSESSEE HAS EX PLAINED THAT M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. IS A PARENT COM PANY, WHICH IS AN INDIAN REPRESENTATIVE OF FOREIGN MANUFACTURER OF AN ALYTICAL INSTRUMENTS, WHICH ARE USUALLY SUPPLIED TO INDUSTRIES LIKE CEMEN T, CHEMICAL, PETROLEUM, UNIVERSITY, EDUCATIONAL INSTITUTIONS, HO SPITALS, GOVERNMENT LABORATORIES ETC. AFTER IMPORTS OF THE MACHINERY AN D EQUIPMENTS, THE COMPANY DOES THE INSTALLATION AND COMMISSIONING OF INSTRUMENTS. THE COMPANY EITHER DIRECTLY OR THROUGH ITS AGENTS PROVI DES MAINTENANCE SERVICES OF INSTRUMENTS. FOR GETTING THE ORDERS, CO MPANY HAS TO PROVIDE DEMONSTRATION OF EQUIPMENT AT USERS SITE AND PROVE FEASIBILITY OF INSTRUMENT TO THE INTENDED BUYER. FOR THAT PURPOSE, BUYERS USUALLY PROVIDE THEIR SAMPLES AND PARAMETERS TO SATISFY THEIR REQUI REMENT AND CONFIRM SPECIFICATIONS. THE ANOTHER COMPANY, NAMELY, M/S. S TAR EARTH MINERALS P.LTD PROVIDES SCIENTIFIC AND TECHNICAL SERVICES TO M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. @ RS.3 LAKHS PER MONTH. M/S. STAR EARTH MINERALS P.LTD. PROVIDES SERVICES SUCH AS DEMONSTRATION OF I NSTRUMENT TO PROSPECTIVE CUSTOMERS OF M/S. ADVANCE SCIENTIFIC EQ UIPMENT P.LTD., AND CARRIES OUT ANALYSIS OF SAMPLES PROVIDED BY CUSTOME RS AND PROVIDES INFORMATION REQUIRED BY THE CUSTOMERS. M/S. STAR EA RTH MINERALS P.LTD. IS HAVING A WELL EQUIPPED LABORATORY WITH ANALYTICAL E QUIPMENTS WITH QUALIFIED STAFF IN THIS RESPECT. THE NATURE OF BUSI NESS OF M/S. ANACHEM INSTRUMENTS INDIA P.LTD. IS THE SALE OF INSTRUMENTS AND AFTER SALE SERVICE. IT IS MAINLY DEALING WITH AND RENDERING OF SERVICES OF INSTALLATION, COMMISSIONING AND AFTER SALE SERVICES OF ANALYTICAL INSTRUMENTS SUPPLIED ITA NO.5410/12 17 BY M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD., SUCH A S INSTALLATION OF INSTRUMENT, PROVIDING ONSITE TRAINING TO THE USERS OF INSTRUMENTS, PROVIDING ANNUAL MAINTENANCE SERVICES. FOR THESE SERVICES M/S . ANACHEM INSTRUMENTS INDIA P.LTD. RAISES ITS BILLS ON M/S. A DVANCE SCIENTIFIC EQUIPMENT P.LTD.; IT HAS BEEN FURTHER EXPLAINED IN THE STATEMENT OF FACTS THAT DURING THE FINANCIAL YEAR 2008-09, M/S. ANACHE M INSTRUMENTS INDIA P.LTD. RECEIVED THE OUTSTANDING AMOUNT FROM, M/S. A DVANCE SCIENTIFIC EQUIPMENT P.LTD. AMOUNTING TO RS.39,95,907/-. SINC E THE SAID AMOUNT WAS NOT IMMEDIATELY REQUIRED BY M/S. ANACHEM INSTRU MENTS INDIA P.LTD., A SUM OF RS.31 LAKHS WAS KEPT AS INTER-CORPORATE DE POSIT ON 16-12-2008 WITH M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. AND I NTEREST WAS CREDITED IN ACCOUNT AMOUNTING TO RS.96,450/-. SO FAR AS TRANSAC TION OF RS.35 LAKHS AS ADVANCE BY M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. IS CONCERNED, IT HAS BEEN EXPLAINED THAT DURING THE YEAR M/S. STAR EARTH MINERALS P.LTD. RAISED BILLS TOTALING TO RS.39,70,800/- ON M/S. ADVANCE SC IENTIFIC EQUIPMENT P.LTD. A SUM OF RS.4,08,992/- WAS DEDUCTED BY THE S AID ADVANCE SCIENTIFIC EQUIPMENT PVT. LTD. TOWARDS TAX, THUS, A SUM OF RS.35,61,808/- WAS OUTSTANDING. A SUM OF RS.35 LAKHS WAS RECEIVED BY M/S. STAR EARTH MINERALS P.LTD.. WHICH THE COMPANY TREATED AS INTER -CORPORATE DEPOSIT INSTEAD OF TREATING THE SAME AS PAYMENT AGAINST THE BILLS OUTSTANDING. 16. LD. AR IN THIS RESPECT HAS RELIED UPON THE BALA NCE SHEET OF M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. AND M/S. ANACHE M INSTRUMENTS INDIA P.LTD. LD. AR OF THE ASSESSEE HAS FURTHER RELIED UP ON THE PAPER BOOK AT PAGE 5 TO SHOW THAT THERE WERE OTHER TRANSACTIONS A LSO AND THAT THE M/S. ITA NO.5410/12 18 ADVANCE SCIENTIFIC EQUIPMENT P.LTD. HAD A RUNNING ACCOUNT IN THE BOOKS OF M/S. ANACHEM INSTRUMENTS INDIA P.LTD. IN THIS RE SPECT, LD. AR RELIED UPON THE ENTRY DATED 3-4-2007 BY WHICH M/S. ANACHEM INSTRUMENTS INDIA P.LTD. HAS MADE A PAYMENT OF RS.5 LAKH TO M/S. ADVA NCE SCIENTIFIC EQUIPMENT P.LTD. ON 17-4-2007, BY WHICH AN AMOUNT OF RS.35,000/- HAD BEEN PAID TO M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LT D. THROUGH PROPER BANKING CHANNEL. FURTHER THERE ARE ENTRIES DATED 2 0-12-2007 AND 24-12- 2007 IN RELATION TO CERTAIN TRANSACTION OF RS.38,32 09/- AND RS.23,5436/- RESPECTIVELY ON ACCOUNT OF SOME SALES OF SHARES/SPA RE PARTS. THERE IS A RUNNING LEDGER ACCOUNT OF M/S. ADVANCE SCIENTIFIC E QUIPMENT P.LTD. IN THE BOOKS OF M/S. ANACHEM INSTRUMENTS INDIA P.LTD., WHEREIN THERE IS CONTINUOUS EXCHANGE OF TRANSACTIONS. THERE ARE ALMO ST MORE THAN 40 ENTRIES OF DEBIT AND CREDIT OF THE AMOUNTS. LD.AR H AS FURTHER RELIED UPON THE PAGE 11 OF THE PAPER BOOK AND HAS SUBMITTED THA T THE M/S. STAR EARTH MINERALS P.LTD. HAD RAISED BILLS IN THE YEAR ENDING 31-3-2009 IN RESPECT OF SALES MADE TO M/S. ADVANCE SCIENTIFIC EQUIPMENT P.L TD. HE HAS FURTHER RELIED UPON PAGE 12 TO 16 THAT THE ASSESSEE HAD A R UNNING ACCOUNT WITH THESE COMPANIES AND THESE COMPANIES OWED MONEY TO T HE ASSESSEE AS NARRATED IN THE INITIAL PARAS OF THIS ORDER. 17. LD. AR HAS FURTHER INVITED OUR ATTENTION TO PAR A 2.3 OF THE IMPUGNED ORDER OF THE CIT(A), WHEREIN LD. CIT(A) HAS HIMSELF OBSERVED THAT THE ASSESSEE HIMSELF HAD NOT RECEIVED ANY LOAN/ADVANCE FROM THESE COMPANIES. LD. CIT(A) FURTHER IN PARA 2.3(B) OF THE ORDER HAS ALSO DISCUSSED THAT DURING THE YEAR, THESE COMPANIES WER E HAVING VARIOUS ITA NO.5410/12 19 BUSINESS TRANSACTIONS AND HAVING RUNNING ACCOUNTS W ITH EACH OTHER. THE CIT(A) IN THE IMPUGNED ORDER HAS CATEGORICALLY OBSE RVED THAT THERE WERE VARIOUS INTER-SE TRANSACTIONS BETWEEN THE COMPANIES AND THAT AS ON 16- 12-2008 M/S. ANACHEM INSTRUMENTS INDIA P.LTD. HAD T O RECEIVE RS.48,12,600/- FROM M/S ADVANCE SCIENTIFIC EQUIPMEN T P.LTD.; FURTHER THAT M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. MADE CERTA IN PAYMENTS TO M/S. ANACHEM INSTRUMENTS INDIA P.LTD. AND THAT AS ON 1-1 2-2008 THE DEBIT AND CREDIT AMOUNT WAS SAME AND THUS, ON THE SAID DATE N OTHING WAS RECEIVABLE OR PAYABLE BY M/S. ANACHEM INSTRUMENTS I NDIA P.LTD. FROM M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. AND VICA-VERSA. . THE FACTS ITSELF REVEAL THAT THESE COMPANIES WERE CARRYING ON INTER- SE TRANSACTIONS AND WERE HAVING RUNNING ACCOUNTS, THE AMOUNTS WERE PAID AND RETURNED ALSO AND THAT NO PART OF THE SAID AMOUNT WAS ATTRIBUTED TO THE SHAREHOLDERS. THE NATURE OF BUSINESS OF THE THREE COMPANIES IS CO NNECTED WITH EACH OTHER AND THAT ARE DEPENDING UPON EACH OTHER FOR TH EIR BUSINESS AND THERE ARE MUTUAL TRANSACTIONS WHICH THESE COMPANIES USE T O DO FOR THE FINANCIAL HELP OF EACH OTHER FOR THE PURPOSE OF BUSINESS EXPE DIENCY.. ALL THE MORE, THE MOST IMPORTANT FACT IS THAT THE ASSESSEE HAD TO RECEIVE AMOUNTS FROM M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. AND M/S. STAR EARTH MINERALS P.LTD. BUT, IN FACT, NO AMOUNT HAS BEEN RECEIVED BY THE ASSESSEE. EVEN OTHERWISE, IF THE ASSESSEE HAD TO RECEIVE CERTAIN A MOUNT FROM THE SAID COMPANY, THEN UNDER SUCH CIRCUMSTANCES, ANY PAYMENT , WHICH IS NOT MORE THAN THAT SUCH COMPANY OWES TO THE ASSESSEE, M ADE BY THE SAID COMPANY TO THE ASSESSEE WILL NOT CONSTITUTE DEEMED DIVIDEND ITA NO.5410/12 20 U/S.2(22)(E) OF THE ACT. THE OTHER IMPORTANT ISSUE IS THAT THE PAYMENTS WERE NOT GRATUITOUS OR FOR THE BENEFIT OF THE SHARE HOLDER. THERE IS ALSO MERIT IN THE CONTENTION OF LD. AR THAT SAME AMOUNT WAS ROUTED IN THE CHAIN OF TRANSACTIONS I.E. AMOUNT OF RS.31 LAKHS BY M/S. ANACHEM INSTRUMENTS INDIA P.LTD. TO M/S. ADVANCE SCIENTIFIC EQUIPMENT P .LTD. AND IN TURN M/S. ADVANCE SCIENTIFIC EQUIPMENT P.LTD. PAID THE AMOUNT OF RS.35 LAKHS TO PARENT COMPANY. UNDER SUCH CIRCUMSTANCES IT CANNOT IN ANY MANNER BE HELD THAT THE ASSESSEE HAD RECEIVED THE BENEFIT OF RS.66 LAKHS I.E. THE TOTAL AMOUNT OF TRANSACTION. UNDER THE CIRCUMSTANCE S, THERE IS MERIT ALSO IN THE ALTERNATE CONTENTIONS RAISED BY THE ASSESSEE . AS HELD BY HONBLE KARNATAKA HIGH COURT AND OTHER H IGH COURTS AND HONBLE SUPREME COURT, THE OBJECT AND PURPOSE OF SE CTION 2(22)(E) IS TO CHECK ESCAPEMENT OF TAX U/S.155-O BUT IN THIS CASE THE FACTS REVEAL BEYOND DOUBT THAT THE TRANSACTIONS IN QUESTION WERE OUT OF BUSINESS REQUIREMENTS BETWEEN THE SAID THREE COMPANIES WHICH WERE HAVING RUNNING ACCOUNTS WITH EACH OTHER. THE ASSESSEE HAS NOT RECEIVED ANY DIRECT OR INDIRECT INDIVIDUAL BENEFIT OUT OF THESE TRANSACTIONS. 18. THE HONBLE SUPREME COURT IN THE CASE OF S.A.B UILDERS VS. CIT (2007) 288 ITR 1 (SC) IN THE CONTEXT OF EXPENDITURE ALLOWABLE U/S.37 OF THE ACT HAS OBSERVED THAT WHAT IS TO BE SEEN AS TO WHETHER THE ASSESSEE ADVANCED LOAN TO ITS SISTER CONCERN OR A SUBSIDIARY AS A MEASURE OF COMMERCIAL EXPEDIENCY. THE HONBLE SUPREME COURT HA S FURTHER HELD THAT FOR THE PURPOSE OF BUSINESS INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY AND IT IS IMMATERIAL IF A THI RD PARTY ALSO BENEFITS ITA NO.5410/12 21 THEREBY. THE HONBLE SUPREME COURT HAS FURTHER EXPL AINED THE EXPLANATION COMMERCIAL EXPEDIENCY AS UNDER :- THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRES SION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUD ENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATI ON, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCUR RED ON GROUNDS OF COMMERCIAL EXPEDIENCY. HONBLE SUPREME COURT HAS FURTHER HELD THAT IT IS N OT NECESSARY THAT LOAN AMOUNT SHOULD BE EXCLUSIVELY USED IN THE BUSINESS O F THE ASSESSEE. HOWEVER, REQUIREMENT IS THAT IT SHOULD BE USED FOR THE PURPOSE OF BUSINESS EXPEDIENCY. THOUGH, THE ABOVE OBSERVATION S HAVE BEEN MADE BY THE HONBLE SUPREME COURT IN THE CONTEXT OF SECT ION 37 OF THE ACT, YET, THE PROPOSITION AS TO WHEN THE AMOUNT WAS ADVANCED OR PAID IN THE CASE WAS OUT OF ANY COMMERCIAL EXPEDIENCY OR IN THE COUR SE OF BUSINESS AND WERE NOT GRATUITOUS PAYMENTS FOR THE BENEFIT OF THE SHAREHOLDERS, THEN, APPLYING THE SAME ANALOGY, SUCH PAYMENTS MADE THROU GH INTER-CORPORATE TRANSACTIONS BETWEEN THE PARTIES CANNOT BE TREATED DEEMED DIVIDEND AT THE HANDS OF THE ASSESSEE-SHAREHOLDER. 19. THE COORDINATE VISAKHAPATNAM BENCH IN THE CASE OF M. AMARESWARA RAO VS. DCIT {2016] 16 TAXMANN.COM 15(V ISAKHAPATNAM TRIB) HAS OBSERVED THAT A CAREFUL STUDY OF THE PROV ISIONS OF SECTION 2(22)(E) MAKE IT CLEAR THAT THE LEGISLATURE WANTED TO BRING TO TAX THE AMOUNT PAID BY CLOSELY HELD COMPANIES TO THEIR PRIN CIPLE SHAREHOLDERS TO AVOID DIVIDEND DISTRIBUTION TAX AND THAT THE PROVIS IONS OF SECTION 2(22)(E) OF THE ACT MUST BE MADE APPLICABLE, WHEREIN THE DIV IDEND IS PAID IN THE ITA NO.5410/12 22 GUISE OF LOAN OR ADVANCE TO AVOID TAX. BUT TO APPLY THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, AN HONEST ATTEMPT IS T O BE MADE TO UNDERSTAND, WHETHER THE IMPUGNED AMOUNT IS A LOAN O R ADVANCE WITHIN THE MEANING OF SAID SECTION. 20. AS DISCUSSED ABOVE, IN THE LIGHT OF THE VARIOUS CASE LAWS AND THE PURPOSE AND OBJECT OF SECTION 2(22)(E) OF THE ACT A S HELD BY THE HONBLE SUPREME COURT AS WELL AS HIGH COURTS AND IN VIEW OF THE FACTS AND CIRCUMSTANCES, PAYMENTS MADE THROUGH INTER-SE TRANS ACTIONS BETWEEN THE COMPANIES CANNOT BE TERMED AS ANY GRATUITOUS PAYMEN T TO THE ASSESSEE SHAREHOLDER AND, THUS, THE PROVISIONS OF SECTION 2( 22)(E) ARE NOT APPLICABLE IN THIS CASE. IN VIEW OF THIS, THE APPEA L OF THE ASSESSEE IS ALLOWED AND THE ADDITIONS MADE BY THE LOWER AUTHORI TIES U/S.2(22)(E) IN THE HANDS OF THE ASSESSEE ARE HEREBY DELETED. 21. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 15/06/20 16. SD/- SD/- (RAMIT KOCHAR ) (SANJAY GARG ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI ; DATED 15/06/2016 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT ITA NO.5410/12 23 / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//