Kishorilal Kashila Ramraika, Pune V. Dy.CIT Cir-10 Pune, Pune

ITA 643/PUN/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2925 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-01-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 27-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DHEERAJ KUMAR JAIN
• Keywords: Capital asset; Principle of natural justice; Deemed dividend
• Section: 143(3); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA , AM . / ITA NO. 643 /PN/201 2 / ASSESSMENT YEAR : 20 0 7 - 0 8 SHRI KISHORILAL KASHILA RAMRAIKA, 54/2, D - 2 BLOCK, MIDC CHINCHWAD, PUNE 411019 . / APPELLANT PAN: AA RPR9535N VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 10 , PUNE . / RESPONDENT / APPELLANT BY : S HRI PRAMOD SHINGTE / RESPONDENT BY : SHRI DHEERAJ KUMAR JAIN / DATE OF HEARING : 24 . 1 1 .2015 / DATE OF PRONOUNCE MENT: 27 . 0 1 .201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT (A) - V , PUNE , DATED 0 2 . 0 3 .20 1 2 RELATING TO ASSESSMENT YEAR 20 0 7 - 0 8 AGAINST ORDER PASSED UNDER SECTION 143(3) R.W.S. 147 OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LOWER AUTHORITIES ERRED IN TREATING THE AMOUNT PAID A SUM OF RS. 51,00,000/ - FOR BUSINESS / COMMERCIAL TRANSACTION IN ORDINARY COURSE OF BUSINESS AS DEEMED DIVIDEND U/S.2(22)(E) OF THE INCOME TAX ACT, 1961 BY REJECTING APPELLANTS CONTENTION THAT THE SAID AMOUNT WAS ADVANCED TO MERCURY CIRCUITS PVT. LTD. IN ORDINARY COURSE OF BUSINESS / COMMERCIA L TRANSACTION AND AS SUCH IS NOT COVERED U/S 2(22)(E) OF THE INCOME TAX ACT, 1961. ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 2 THE APPELLANT CRAVES FOR TO LEAVE, ADD, ALTER, MODIFY, DELETE ABOVE GROUND OF APPEAL BEFORE OR AT THE TIME HEARING, IN THE INTEREST OF NATURAL JUSTICE. 3. THE ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST THE ADDITION MADE OF RS.51,00,000/ - BY TREATING THE AMOUNT ADVANCED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT BY REJECTING THE CONTENTION OF ASSESSEE THAT IT WAS BUSINESS ADVANCE. 4. BRIEFLY, IN THE FACTS OF TH E PRESENT CASE, THE ASSESSEE HAD FURNISHED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 47,64,527/ - . THE RETURN OF INCOME WAS PROCESSED UNDER SECTION 143(1) OF THE ACT. DURING THE COURSE OF SCRUTINY ASSESSMENT OF M/S.STAR ENGINEERS (INDIA) PVT. LTD. (IN SHORT STAR) FOR ASSESSMENT YEAR 2007 - 08, IT WAS FOUND THAT THE SAID COMPANY HAD GIVEN LOAN / ADVANCE OF RS.51,00,000/ - TO THE SISTER CONCERN M/S. MERCURY CIRCUITS PVT. LTD. (IN SHORT MERCURY). IT WAS FURTHER FOUND THAT THE DIRECTOR OF THE COMPANY I.E. THE ASSESSEE BEFORE US HAD MORE THAN 10% SHAREHOLDING IN STAR AND 50% THE ASSESSEE BEFORE US HAD MORE THAN 10% SHAREHOLDING IN STAR AND 50% SHAREHOLDING IN MERCURY , THEREFORE THE PAYMENT OF ADVANCE OF RS.51,00,000/ - BY STAR WOULD FALL WITHIN THE MEANING OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT, WHICH IN TUR N, WAS TAXABLE IN THE HANDS OF THE ASSESSEE BEING BENEFICIAL OWNER OF MORE THAN 10% SHARES IN STAR AND ALSO SUBSTANTIAL SHARE / INTEREST IN THE RECEIVING COMPANY I.E. MERCURY . ACCORDINGLY, NOTICE UNDER SECTION 148 OF THE ACT WAS ISSUED TO THE ASSESSEE AFT ER RECORDING REASONS FOR REOPENING THE ASSESSMENT. IN REPLY, THE ASSESSEE FURNISHED RETURN OF INCOME DECLARING THE SAME INCOME AT RS. 47,64,527/ - . THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN AS TO WHY SUM OF RS.51,00,000/ - SHOULD NOT BE TREATED AS DEEMED DIVI DEND UNDER SECTION 2(22)(E) OF THE ACT. IN REPLY, IT WAS CLARIFIED BY THE ASSESSEE THAT SUM OF RS.51,00,000/ - WAS ADVANCED TO MERCURY IN THE ORDINARY COURSE OF BUSINESS AS BUSINESS / COMMERCIAL ADVANCE AND WAS NOT ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 3 DEEMED DIVIDEND COVERED UNDER SECTION 2(2 2)(E) OF THE ACT. THE ASSESSEE FURTHER EXPLAINED THAT PRINTED CIRCUITS BOARD (IN SHORT PCB) WAS VERY IMPORTANT AND CRUCIAL INPUT OF ASSEMBLY WHERE ALL OTHER SMALL PARTS WERE SOLDERED AND MOUNTED AS F A R AS PRINCIPAL PRODUCT OF STAR. THUS, PCBS WERE MANU FACTURED BY M/S. R.D. ELECTRONICS, PROPRIETARY CONCERN OF M/S. SULTANE. HE WAS SUPPLYING THE SAME TO OTHER ELECTRONIC UNITS IN TH IS AREA. DUE TO HIS LIMITED CAPACITY OF MANUFACTURE, THE SUPPLY WAS NOT SUFFICIENT AND REGULAR . AFTER DISCUSSIONS WITH HIM, A PROPOSAL WAS FINALIZED TO FORM SEPARATE PRIVATE LIMITED COMPANY AS PART OF BACKWARD INTIGRATION FOR STAR HAVING 50 : 50 SHARE HOLDING OF SULTANE BROTHERS AND THE ASSESSEES FAMILY MEMBERS. ACCORDINGLY, A COMPANY M/S. MERCURY CIRCUITS PVT. LTD. WAS IN CORPORATED IN DECEMBER, 2006 EXCLUSIVELY FOR MAKING ASSURED SUPPLY OF QUALITY PCBS TO STAR FOR ITS PRESENT AND FUTURE REQUIREMENTS. THE NEW COMPANY MERCURY WANTED TO PLACE THE ORDERS FOR MACHINERY PROCUREMENTS AND TO CONSTRUCT THE BUILDING ON THE BASIS O F SANCTION OF BANK PROPOSAL FROM ORIENTAL BANK OF COMMERCE. HOWEVER, THE BANK REFUSED TO DISBURSE LOAN TILL MORTGAGE AND OTHER DOCUMENTS WERE REGISTERED IN THE NAME OF THE COMPANY. THE PLOT OF LAND WAS IN A CO - OPERATIVE INDUSTRIAL SOCIETY AND BANK WANTED THE NAME OF THE COMPANY ON RECORD OF RIGHTS INSTEAD OF NAME OF THE SOCIETY. THUS, THE LOAN PROPOSAL WAS DEL AYED AND ULTIMATELY THERE WAS NO DISBURSEMENT OF FUNDS BY THE BANK . TO AVOID THE DEL AY AND TO MAKE SUPPLIES TO STAR , IT WAS AGREED THAT STAR WOULD ADVANCE RS.50,00,000/ - AS AN ADVANCE AGAINST THE SUPPLY. ACCORDINGLY, THE SAID ADVANCE WAS GIVEN TO MERCURY IN FEBRUARY, 2007 FOR PURCHASE OF MACHINERY AND COMPLETING CONSTRUCTION OF BUILDING ON THE CONDITION THAT THIS WOULD BE AN ADVANCE AGAINST THE ORD ER S FOR PURCHASE OF PCBS AND THE COMPANY WOULD NOT SUPPLY TO ANY OTHER PARTY UNLESS SCHEDULED SUPPLY TO STAR , WAS COMPLIED WITH. THE COPY OF THE AGREEMENT MADE IN MARCH, 2007 WAS ANNEXED TO THE ASSESSMENT ORDER . IN THE AUDITED BALANCE ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 4 SHEET SUBMITTED AL ONG WITH RETURN OF INCOME , MERCURY AS ON 31.03.2007 , HAD SHOWN THE SAID FACT I.E. THE CURRENT LIABILITY TO THE EXTENT OF RS.50 LAKHS AS ADVANCE AGAINST THE ORDER S AND ON ASSET SIDE UNDER THE HEAD CURRENT ASSETS I.E. ADVANCE FOR PURCHASE OF MACHINERY OF RS. 47 LAKHS. THE CLAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT THE SAID AMOUNT WAS NOT A MERE ADVANCE OR LOAN, BUT WAS A PART OF COMMERCIAL / BUSINESS TRANSACTION TO ENABLE THE COMPANY TO ENHANCE ITS PRODUCTION CAPACITY. RELIANCE WAS PLACED ON O THE R DECISIONS INCLUDING THE DE CISION OF JURISDICTIONAL HIGH COURT AND IT WAS CONTENDED THAT THE SAME WOULD NOT BE WITHIN THE DEFINITION OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. IT WAS FURTHER POINTED OUT BY THE ASSESSEE THAT TILL DATE I.E. UP TO OCTOBER, 2010, THE SITUATION WAS STATUS QUO I.E. COMPANY MERCURY COULD NOT START ITS BUSINESS. SINCE THE COMPANY MERCURY COULD NOT START THE BUSINESS, THE ASSESSEE POINTED OUT THAT HE HAD TAKEN LOAN FROM M/S. KOTAK MAHINDRA FOR PAYMENT TO THE C OMPA NY TOWARDS HIS SHAREHOLDING, FOR WHICH HE WAS PAYING INTEREST @ 18% PER ANNUM FOR THE LAST THREE YEARS. THE ASSESSING OFFICER NOTED THAT THE COMPANY MERCURY WAS INCORPORATED IN DECEMBER, 2006 AND HAD NOT STARTED PRODUCTION OF PCBS TILL 31.03.2008 , I N THE ABSENCE OF THE BUILDING AND PLANT AND MACHINERY . T HE AMOUNT ADVANCE D OF RS.51 LAKHS WAS TO BE UTILIZED FOR THE CONSTRUCTION OF BUILDING AND PURCHASE OF MACHINERY, HENCE, THE STAND TAKEN BY THE ASSESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER. IT WAS F URTHER OBSERVED BY THE ASSESSING OFFICER THAT THE AMOUNT GIVEN TO MERCURY WAS NOTHING BUT LOAN AS PER THE BALANCE SHEET OF STAR. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSESSEE H O LD S 70% SHARE S OF STAR AND 50% SHARES OF MERCURY AND MERCURY W AS CLOSE LY HELD COMPANY OF STAR , WHICH IN TURN HAS RESERVE S AND SURPLUS OF RS. 3.32 CRORES AS PER THE BALANCE SHEET. SINCE STAR HAD GIVEN LOAN OF RS.51 LAKHS TO MERCURY , THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WERE APPLICABLE TO THE ASSESSEE, WHO ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 5 WAS A SHARE HOLDER HAVING MORE THAN 10% OF VOTING POWER IN STAR AND THERE WAS ALSO SHAREHOLDER IN MERCURY, IN WHICH HE HAD SUBSTANTIAL INTEREST. HENCE, THE AMOUNT ADVANCED OF RS. 51 LAKHS WAS TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT AND WAS ADDED T O THE INCOME OF THE ASSESSEE. 5. BEFORE THE CIT(A), THE CONTENTION OF THE ASSESSEE WAS THAT THE DETAILED FLO W CHART REVEALS THE MOVEMENT OF FUNDS TRANSFER RED FROM STAR TO MERCURY ALONG WITH COPIES OF BILLS OF MACHINERY I.E. MONEY WAS TRANSFERRED FROM STAR TO MERCURY AND IN TURN, MERCURY MADE PAYMENTS TO THE RESPECTIVE MACHINERY SUPPLIERS, WHO HAD SUPPLIED THE MACHINERY. HOWEVER, DUE TO NON - TRANSFER OF TITLE IN LAND, MERCURY COULD NOT START ITS ACTIVIT IES AND OUT O F THE TOTAL MACHINERY PURCHASED, SOME MACH INERY WAS SOLD AND S OME MACHINERY WAS STILL LYING IDLE IN THE POSSESSION OF MR. SULTANE , WHO WAS ANOTHER SHAREHOLDER IN MERCURY. THE CONTENTION OF THE ASSESSEE BEFORE THE CIT(A) WAS THAT IT WAS BUSINESS ADVANCE AND AMOUNT WAS USED FOR PURCHASE OF MACHINER Y AND ONLY BECAUSE OF ADVANCE AND AMOUNT WAS USED FOR PURCHASE OF MACHINER Y AND ONLY BECAUSE OF THE DEFECT IN TITLE OF LAND TILL TODAY, THE PRODUCTION ACTIVITY COULD NOT BE STARTED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT, NO DOUBT THE ASSESSEE FITS INTO THE CRITERI ON OF SHAREHOLDER WITH SUBSTANTIAL INTEREST IN MERCURY AS WELL AS STAR AND STAR HAD ACCUMULATIVE PROFITS , HOWEVER, OTHER PARAMETERS COULD NOT BE FULFILLED I.E. IT WAS AN ADVANCE OR LOAN OR SUCH PAYMENT HAD TO BE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. TH E CIT(A) HELD AS UNDER: - 10. IT IS IMPORTANT TO NOTE THAT M/S. MERCURY CIRCUITS PVT. LTD. WAS INCORPORATED IN DECEMBER, 2006 AND THE FACILITIES FOR PRODUCTION AS WELL AS CONSTRUCTION OF BUILDING, ACQUIRING OF MACHINERY WAS YET TO TAKE UP. THEREFORE; THE C LAIM OF THE APPELLANT THAT THE ADVANCE WAS RECEIVED FOR ASSURED SUPPLY OF PRODUCTION IS JUST LIKE PUTTING THE CART BEFORE A HORSE. IT CAN ALSO BE SEEN THAT THE AMOUNT WAS SPENT IN PURCHASING CAPITAL ASSETS LIKE MACHINERY ETC. AND THERE WAS NO LIKELIHOOD OF COMMENCEMENT OF PRODUCTION IN THE NEAR FUTURE. THIS ADVANCE WAS BASICALLY UTILIZED FOR PURCHASE OF MACHINERY TO SET UP THE FACILITIES OF THE COMPANY WHICH WAS THE RESPONSIBILITY OF THE SHAREHOLDER WHO IS THE APPELLANT IN THIS CASE. THEREFORE, THIS ADVANCE WAS BASICALLY GIVEN TO M/S. MERCURY CIRCUITS PVT. LTD. ON BEHALF OF THE APPELLANT'S SHARE HOLDER TO HELP SETTING UP THE FACTORY AND THEREFORE THIS ADVANCE CANNOT BE TREATED AS TRADE ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 6 ADVANCE. SECONDLY, WHETHER THE ADVANCE IS A TRADE ADVANCE HAS TO BE EXAMI NED FROM THE FACT THAT WHETHER M/S. MERCURY CIRCUITS PVT. LTD. WAS CAPABLE OF OBTAINING SIMILAR ADVANCES FROM THE MARKET AT THE GIVEN POINT OF TIME. A COMPANY WHICH WAS INCORPORATED IN DECEMBER, 2006 AND WHICH WAS YET TO SET' UP PLANT AND MACHINERY AND WHI CH WAS YET TO CONSTRUCT ITS FACILITIES COULD NOT HAVE OBTAINED SUCH ADVANCE FROM THE 3 RD PARTY. THEREFORE, THIS ADVANCE CANNOT BE TREATED AS ADVANCE IN A NORMAL COURSE OF BUSINESS. THEREFORE, ON THE FACTS OF THE CASE, IT IS PROVED BEYOND DOUBT THAT THE ADV ANCE WAS MADE ON BEHALF OF THE APPELLANT TO HELP SET UP THE MANUFACTURING FACILITIES OF THE COMPANY I.E. M/S. MERCURY CIRCUITS PVT. LTD. AND THEREFORE, THIS ADVANCE IS HIT BY THE MISCHIEF OF SEC.2(22)(E) OF THE I.T. ACT AND THEREFORE, THE ASSESSING OFFICER HAS RIGHTY TREATED THE ADVANCE AS 'DEEMED DIVIDEND. 6. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 7. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AFTER TAKING US THROUGH THE FACTS OF THE CASE POINTED OUT THAT THE ADVANCE WAS MADE TO MERCURY FOR THE PURPOSE OF PURCHASE OF MACHINERY. HE FURTHER POINTED OUT THAT THE LOAN OF RS.50 LAKHS WAS GIVEN BY STAR TO MERCURY , BUT IT WAS IN THE FO RM OF AN ADVANCE FOR THE PURCHASE OF MACHINERY, WHICH WERE PURCHASED BY MERCURY AND THE SAME WERE LY ING IDLE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STATED THAT ADMITTEDLY, THE ASSESSEE WAS HOLDING MORE THAN 10% SHARES AND THERE WERE ACCUMULAT IVE PROFITS IN THE HANDS OF STAR. OUR ATTENTION WAS DRAWN TO THE COPY OF LETTER PLACED AT PAGE 9 OF THE PAPER BOOK, UNDER WHICH MERCURY VIDE LETTER DATED 17.01.2007 HAD MADE A REQUEST TO MAKE THE AFORESAID ADVANCE AGAINST THE CONTRACT FOR SUPPLY OF PCBS. IT WAS POINTED OUT IN THE LETTER IT WAS MENTIONED THAT THE COMPANY NEEDED FUNDS FOR SHORT PERI OD TO MAKE PAYMENT OF ADVANCE FOR PLACING ORDERS FOR MACHINERY AND AMOUNT WOULD BE REPAID OUT OF SUPPLY BILLS AS SOON AS THE COMMERCIAL PRODUCTION HAD COMMENCED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER REFERRED TO THE SANCTION LETTE R OF CREDIT FACILITIES ISSUED BY ORIENTAL BANK OF COMMERCE FOR TERM LOAN OF RS. 320.00 LAKHS, COPY OF WHICH IS PLACED AT PAGE 17 OF THE PAPER BOOK. THIS SANCTION OF LOAN WAS SUBJECT TO THE CONDITION OF CLEAR TITLE OF LAND. OUR ATTENTION WAS FURTHER DRAWN TO THE FUNDS FLOW CHART ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 7 PLACED AT PAGES 76 AND 77 OF THE PAPER BOOK AND COPIES OF BILLS OF PURCHASE OF MACHINERY AT PAGES 78 ONWARDS. IT WAS CLARIFIED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT NO CONTRIBUTION WAS MADE BY MR. SULTANE A ND ONLY INVESTMENT WAS BY STAR. OUR ATTENTION WAS DRAWN TO THE BALANCE SHEET OF MERCURY PLACED AT PAGE 14 OF THE PAPER BOOK AND POINTED OUT THAT THE ASSESSEE HAD SHOWN ADVANCE FOR MACHINERY. HE FURTHER STRESSED THAT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WERE NOT APPLICABLE AS FAR AS THE BUSINESS ADVANCES WERE CONCERNED. IN THIS REGARD, HE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT IN CIT VS. RAJ KUMAR (2009) 318 ITR 462 (DELHI) AND POINTED OUT THAT TRADE ADVANCES WOULD NOT FALL WITHIN THE AMBIT OF SECTION 2(22)(E) OF THE ACT. THE RELEVANT FINDING IS AS UNDER: - 10.7 IMPORTANTLY, THE BROAD PRINCIPLES WHICH EMERGE FROM THE JUDGMENT OF THE SUPREME COURT WITH REGARD TO THE APPLICABILITY OF THE SAID RULE OF CONSTRUCTION ARE BRIEFLY AS FOLLOWS: ( I ) DOES 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 MEANING; WIDER MEANING; ( II ) ARE WORDS OR TERMS USED FOUND IN A GROUP TOTALLY DISSIMILAR OR IS THERE A COMMON THREAD RUNNING THROUGH THEM; ( III ) THE PURPOSE BEHIND INSERTION OF THE TERM. 10.8 LETS EXAMINE AS TO WHETHER BASED ON THE AFORESAID TESTS THE SAID RULE OF CONSTRUCTION NOSCITUR A SOCILS OUGHT TO BE APPLIED IN THE INSTANT CASE. ( I ) THE TERM ADVANCE HA S UNDOUBTEDLY MORE THAN ONE MEANING DEPENDING ON THE CONTEXT IN WHICH IT IS USED; ( II ) BOTH THE TERMS, THAT IS, ADVANCE OR LOAN ARE RELATED TO THE ACCUMULATED PROFITS OF THE COMPANY; ( III ) AND LAST BUT NOT THE LEAST THE PURPOSE BEHIND INSERTION OF THE TERM ADVANC E WAS TO BRING WITHIN THE TAX NET PAYMENTS MADE IN GUISE OF LOAN TO SHAREHOLDERS BY COMPANIES IN WHICH THEY HAVE A SUBSTANTIAL INTEREST SO AS TO AVOID PAYMENT OF TAX BY THE SHAREHOLDERS. 8. FURTHER, RELIANCE WAS PLACED ON THE OTHER DECISION S OF HONBLE D ELHI HIGH COURT IN CIT VS. ARVIND KUMAR JAIN IN ITA NO.589 OF 2011, JUDGMENT DATED 30.09.2011 AND IN CIT VS. ANKITECH (P) LTD. (2011) 199 TAXMAN 341 (DELHI) . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 8 THAT SLP FILED BY THE REVENUE ON SIMILAR ISSUE AGAINST THE DECISION OF HONBLE DELHI HIGH COURT WAS DISMISSED BY THE HONBLE SUPREME COURT IN CIT VS. CREATIVE DYEING & PRINTING (P) LTD. IN SLP(C) NO.18197 OF 2010 , JUDGMENT DATED 07.07.2010 . OUR ATTENTION WAS DRAWN TO THE DECISION OF H ONBLE DELHI HIGH COURT IN CIT VS. CREATIVE DYEING & PRINTING (P) LTD. (2009) 318 ITR 476 (DEL) , IN WHICH THERE IS REFERENCE TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN CIT VS. NAGINDAS M. KAPADIA (1989) 75 CTR (BOM) 161 . FURTHER, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE CHANDIGARH BENCH OF TRIBUNAL IN SHALIMAR INFONET (P.) LTD. VS. ITO (2013) 37 TAXMANN.COM 224 (CHANDIGARH TRIB) AND IN ACIT VS. SANJIV GUPTA (2011) 14 TAXMANN.COM 153 (CHD.) . 9. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR TH E REVENUE POINTED OUT THAT IN THE FACTS OF THE PRESENT CASE, IT WOULD BE CLEAR THAT THE ISSUE IS WHETHER LOAN IS HIT BY SECTION 2(22)(E) OF THE ACT OR WHETHER THE ADVANCES ARE BUSINESS ADVANCES. HE FURTHER POINTED OUT THAT TILL DATE NO BUSINESS HAD STARTE D AND ALSO ADVANCES. HE FURTHER POINTED OUT THAT TILL DATE NO BUSINESS HAD STARTE D AND ALSO THE AMOUNT WAS NOT RETURNED . I N RESPECT OF VARIOUS RELIANCES PLACED UPON BY THE LEARNE D AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE FACTS OF THE SAID CASES WERE DIFFERE NT. FURTHER, RELIANCE WAS PLACED ON THE RATIO S LAID DOWN BY THE CHANDIGARH BENCH OF TRIBUNAL IN SMT. SUNITA JINDAL VS. DCIT (2014) 45 TAXMANN.COM 29 (CHANDIGARH TRIB) AND THE HONBLE MADRAS HIGH COURT IN CIT VS. P.K. ABUBUKER (2004) 135 TAXMAN 77 (MAD) . 10. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED OUT THAT THE RELIANCE ON THE DECISION OF CHANDIGARH BENCH OF TRIBUNAL IN SMT. SUNITA JINDAL VS. DCIT (SUPRA) IS MIS - PLACED AS THE AMOUNT IN THAT CASE HELD AS LOAN, BUT IN THE FACTS OF THE PRESENT CASE, THE AMOUNTS WERE NOT TO BE ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 9 REPAID, BUT ADJUSTE D IN BUSINESS DEALINGS, HENCE, THE SAME IS NOT A LOAN, BUT BUSINESS ADVANCE. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING IN THE PRESENT APPE AL IS IN RELATION TO THE APPLICABILITY OF SECTION 2(22)(E) OF THE ACT, WHICH READS AS UNDER: - ( 22 ) DIVIDEND INCLUDES ( A ) . . . . . . . . . . . . . . . . . . (B) . . . . . . . . . . . . . . . . . . (C) . . . . . . . . . . . . . . . . . . (D) . . . . . . . . . . . . . . . . . . (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOT ING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE 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 BEHALF, OR FOR THE INDIVIDUAL BENEF IT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS. 12. READING OF SECTION REVEALS THAT WHERE ANY PAYMENT IS MADE BY A COMPANY OF ANY SUM BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER , BEING A PERSON WHO IS BENEFICIAL OWNER OF SHARES H OLDING NOT LESS THAN 10% VOTING POWER OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BE NEFIT, OF ANY SUCH SHAREHOLDER, WHICH IN TURN, IS TO BE LIMITED TO THE EXTENT OF ACCUMULATED PROFITS OF THE COMPANY. THE CONDITION TO BE SATISFIED FOR APPLYING THE SAID SECTION IS AN ADVANCE OR LOAN BY A COMPANY EITHER TO A SHAREHOLDER OR TO ANY CONCERN I N WHICH SUCH SHAREHOLDER IS A MEMBER OR PARTNER AND THE SHAREHOLDING BENEFIT SHOULD BE NOT LESS THAN 10% OF VOTING POWER, THEN IN SUCH CIRCUMSTANCES, THE SAID ADVANCE OR LOAN WOULD BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE SHAREHOLDER TO THE EXTENT OF ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 10 COMPANY S ACCUMULATED PROFITS. IN THE FACTS OF THE PRESENT CASE BEFORE US, STAR IS A COMPANY, IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED, HENCE, THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT W OULD BE APPLICABLE. STAR WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF ELECTR ICAL MACHINES AND ONE OF THE IMPORTANT RAW MATERIAL I S PRINTED CIRCUITS BOARD (PCB) . STAR WAS PURCHASING THE SAID PCBS FROM M/S. R.D. ELECTRONICS, A PROPRIETARY CONCERN OF MR. SULTANE, WHO WAS SUPPLYING THE SAME TO OTHER ELECTR ONIC UNITS IN THIS AREA ALSO. DUE TO THE LIMITED MANUFACTURING CAPACITY OF MR. SULTANE, SUPPLY TO THE ASSESSEE WAS NOT SUFFICIENT . H E MADE A PROPOSAL TO MR. SULT ANE TO FORM A SEPARATE PRIVATE LIMITED COMPANY AS PART OF BACKWARD INTIGRATION FOR STAR H AVING 50 : 50 SHAREHOLDING OF SULTANE BROTHERS AND THE FAMILY MEMBERS OF THE ASSESSEE. ACCORDINGLY, THE COMPANY NAMED MERCURY WAS INCORPORATED IN DECEMBER, 2006 EXCLUSIVELY FOR MAKING THE ASSURED SUPPLY OF QUALITY PCBS TO STAR FOR ITS REQUIREMENTS. THE NEW COMPANY MERCURY WANTED TO PLACE THE ORDERS FOR MACHINERY AND ALSO TO CON STRUCT BUILDING AS LAND WAS ZERO ED DOWN BY IT. A PROPOSAL WAS MADE TO ORIENTAL BANK OF COMMERCE FOR THE RELEASE OF LOAN FOR THE PURPOSE, WH ICH WAS REFUSED TILL THE MORTGAGE AND OT HER DOCUMENTS OF LAND WERE REGISTERED IN THE NAME OF COMPANY. THE SAID PLOT OF LAND WAS IN CO - OPERATIVE INDUSTRIAL SOCIETY AND THE REQUIREMENT OF THE BANK WAS THAT IT SHOULD BE IN THE NAME OF MERCURY. THERE WERE CERTAIN DISPUTES ABOUT THE SAID PROPOSAL O F TRANSFER OF DOCUMENTS IN THE NAME OF MERCURY AND THERE WAS NO DISBURSEMENT OF FUNDS BY THE BANK. MEANWHILE, THE ASSESSEE IN ORDER TO GET THE PRODUCTION STARTED, MADE A REQUEST TO STAR TO ADVANCE RS.50 LAKHS FOR THE PURCHASE OF MACHINERY. THE SAID ADVAN CE WAS TO BE ADJUSTED AGAINST THE FUTURE SUPPLIES TO BE MADE TO STAR . AN ADVANCE OF RS.50 LAKHS WAS GIVEN BY STAR TO MERCURY IN FEBRUARY, 2007 FOR THE PURCHASE OF MACHINERY AND COMPLETING THE CONSTRUCTION WORK ON THE CONDITION THAT THE MANUFACTURING ITEMS ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 11 WOULD BE SUPPLIED TO IT AND NO OTHER SUPPLIES SHOULD BE MADE TO ANY OTHER PARTY UNLESS THE SCHEDULED SUPPLY TO STAR WAS COMPLIED WITH . THE ADVANCE RECEIVED BY MERCURY WAS TO BE ADJUSTED AGAINST THE SUPPLY OF PCBS. THESE TERMS WERE EXCHANGED BETWEEN STAR AND MERCURY BY WAY OF DOCUMENT DATED 17.01.2007. THE FIRST THING TO BE NOTED WAS THAT MERCURY WAS A COMPANY FLOATED BY STAR HAVING 50% SHARES AND THE BALANCE 50% SHARES BELONGING TO MR. SULTANE, WHO WAS ALREADY ENGAGED IN THE MANUFACTURE OF PCBS, WHICH W ERE TO BE MANUFACTURED BY THIS JOINT VENTURE COMPANY, IN ORDER TO FEED THE REQUIREMENT OF STAR, WHO IN ITS MANUFACTURING ACTIVITY USES PCB AS THE BASIC TOOL. IN SUCH SCENARIO, STAR AGR EED TO ADVANCE RS. 50 LAKHS TO MERCURY, WHICH IN TURN WAS TO BE UTILIZED FOR MAKI NG PAYMENT FOR THE PURCHASE OF MACHINERIES FOR PCB MANUFACTURING PLANTS. AS PART OF THE TERMS AGREED UPON, IT WAS AGREED THAT THE SAID ADVANCE OF RS.50 LAKHS WOULD BE ADJUSTED AGAINST THE SUPPLIES MADE BY MERCURY AND IT WAS ALSO AGREED THAT MERCU RY WOULD NOT UNDERTAKE ANY OTHER SUPPLY UNLESS IT FULFILLS THE COMPLETE REQUIREMENTS BY STAR. THE COPY OF THE SAID LETTER IS PLACED AT PAGE 9 OF THE PAPER BOOK. PURSUANT TO THE SAID TERMS AGREED UPON BETWEEN STAR AND THE COMPANY FLOATED BY IT I.E. MERCUR Y, SUM OF RS.50 LAKHS WAS ADVANCED BY STAR, WHICH WAS UTILIZED FOR THE PURCHASE OF MACHINERY. THE ASSESSEE HAS PLACED THE COPIES OF THE PURCHASE BILLS OF MACHINERY AT PAGES 78 ONWARDS. THE FIRST BILL IS DATED 13.04.2007. THE ASSESSEE HAS ALSO FILED FUND S FLOW STATEMENT, IN WHICH IT IS POINTED OUT THAT THE LOAN WAS RECEIVED IN FINANCIAL YEAR 2006 - 07 AND THE AMOUNT WAS UTILIZED THEREAFTER IN FINANCIAL YEAR 2007 - 08 ITSELF BY MERCURY FOR PURCHASING MACHINERY OF RS.53.74 LAKHS. SINCE THE TITLE OF THE LAND WA S NOT CLEAR, THE BUILDING COULD NOT BE CONSTRUCTED BY MERCURY AND HENCE, MACHINERY WAS KEPT IDLE. HOWEVER, SOME MACHINER Y WERE SOLD IN FINANCIAL YEAR 2008 - 09 AND THE BALANCE MACHINERY W ERE LYING IDLE IN POSSESSION OF MR. SULTANE, WHO IS THE OTHER SHAREHOL DER IN MERCURY. ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 12 13. IN THE ABOVE SAID FACTS AND CIRCUMSTANCES, THE ISSUE TO BE CONS IDERED IS WHETHER THE ADVANCE MADE BY STAR TO MERCURY WAS A LOAN SIMPLICIT OR OR WAS A BUSINESS ADVANCE. THE TRANSACTION BETWEEN THE TWO I.E. STAR AND MERCURY IF LOOKED AT IN ENTIRETY WOULD REFLECT THAT STAR WANTED ITS JOINT VENTURE MERCURY TO START PRODUCTION AT THE EARLIEST AND TOOK PART IN THE ESTABLISHMENT OF MERCURY BY GIVING ADVANCE TO IT FOR THE PURCHASE OF MACHINERY. THE SAID MACHINERY WAS PURCHASED IN FINANCIAL YE AR 2007 - 08 . IT IS INC OMPREHENSIBLE TO DIGEST THAT STAR WHO IS 50% JOINT OWNER OF MERCURY WOULD UTILIZE THE FUNDS FOR THE PURCHASE OF MACHINERY, WHICH WAS NOT GOING TO BE USE D FOR ITS BUSINESS . THE LOAN WAS ADVANCED FOR THE PURCHASE OF MACHINERY AND NOT F OR THE PURCHASE OF LAND . S INCE THE LOAN AMOUNT REQUIREMENTS OF MERCURY WERE ALREADY UNDER FINALIZATION , MERCURY HAD APPLIED FOR SANCTION OF LOAN FROM ORIENTAL BANK OF COMMERCE. HOWEVER, THE SAID LOAN WAS NOT SANCTIONED SINCE THE LAND WAS NOT REGISTERED I N THE NAME OF MERCURY. IN THE ABOVE SAID SCENARIO WHEN STAR ENTERS INTO THE FIELD AND GIVES AN ADVANCE TO MERCURY IN ORDER TO START THE BUSINESS OF MANUFACTURE OF PCBS, WHICH IN TURN, HAD TO BE SOLD TO STAR, WE ARE UNABLE TO COMPREHEND THE FINDINGS OF ASS ESSING OFFICER AND CIT(A) IN THIS REGARD THAT THE SAID LOAN MADE BY STAR TO MERCURY WAS THE LOAN SIMPLICITOR . M AY BE THE SAID LOAN CARR IED SOME INTEREST, WHICH WAS BUSINESS DECISION AS MONEY WAS FINANCED BY ONE PART OF THE JOINT HOLDER AND THE OTHER PERSO N MR. SULTANE, WHO WAS THE OWNER OF OTHER 50% HAD NOT ADVANCED ANY AMOUNT, BUT MERELY BECAUSE LOAN MAY CARRY SOME INTEREST, WOULD NOT MAKE IT A LOAN SIMPLICITOR. THE TRANSACTION BETWEEN THE PARTIES WAS PURELY A BUSINESS TRANSACTION AND THE INTENTION TO ADV ANCE AMOUNT TO MERCURY WAS TO START THE BUSINESS. IT IS JOINT VENTURE AND THE DECISION TAKEN TO ADVANCE SUM OF RS.50 LAKHS WAS DEFINITELY A BUSINESS DECISION AND CANNOT BE HELD TO BE A LOAN CARRYING INTEREST. WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW IN HOLDING THAT THE SAID ADVANCE MADE BY STAR TO MERCURY WAS ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 13 A LOAN , SINCE THE ASSESSEE WAS THE BENEFICIAL OWNER OF SHARES TO THE EXTENT OF 10% OR MORE, THEN SUCH ADVANCE BY STAR, WHO HAD SUFFICIENT ACCUMULATED RESERVES AND SURPLUS, FULFILLS THE CON DITION LAID DO WN IN SECT ION 2(22)(E) OF THE ACT AND THE SAME WAS TO BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF ASSESSEE. 1 4 . WE FIND THAT THIS ISSUE HAS BEEN DELIBERATED UPON BY THE VARIOUS COURTS. THE FIRST DECISION IS JURISDICTIONAL HIGH COURT IN CI T VS. NAGINDAS M. KAPADIA (SUPRA) . THE HONBLE BOMBAY HIGH COURT IN CIT VS. NAGINDAS M. KAPADIA (SUPRA) HELD THAT WHERE PAYMENTS WERE MADE AS ADVANCE TOWARDS PURCHASES TO BE MADE BY THE COMPANY FROM THE ASSESSEE, THE SAME WOULD NOT BE COVERED AS DEEMED DI VIDEND WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT. FURTHER, THE HONBLE DELHI HIGH COURT IN CIT VS. RAJ KUMAR (SUPRA) HAD LAID DOWN THE PROPOSITION THAT THE WORD ADVANCE HAD TO BE READ IN CONJUNCTION WITH THE WORD LOAN AND THE WORD ADVANCE WH ICH APPEARS IN THE COMPANY OF THE WORD LOAN LOAN AND THE WORD ADVANCE WH ICH APPEARS IN THE COMPANY OF THE WORD LOAN COULD ONLY MEAN SUCH ADVANCE WHICH CARRIES WITH IT AN OBLIGATION OF REPAYMENT. THE HONBLE HIGH COURT FURTHER HELD THAT TRADE ADVANCE WHICH IS IN THE NATURE OF MONEY TRANSACTED TO GIVE EFFECT TO A COMMERCIAL T RANSACTION WOULD NOT FALL WITHIN THE AMBIT OF PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE SAID PROPOSITION WAS APPLIED BY THE HONBLE DELHI HIGH COURT IN ANOTHER DECISION I.E. CIT VS. ARVIND KUMAR JAIN (SUPRA) AND IT WAS FURTHER HELD THAT MERE NOMENCLA TURE OF ENTRY IN THE BOOKS OF ACCOUNT WAS NOT DETERMINATIVE OF TRUE NATURE OF TRANSACTION. IN THIS REGARD, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN CIT VS. INDIA DISCOUNTS COMPANY LTD. (1970) 75 ITR 191 AND WHERE THE PAYM ENT WAS MADE AS A RESULT OF TRADING TRANSACTION BETWEEN THE PARTIES AND THE AMOUNT WAS NOT GIVEN BY WAY OF LOAN, THEN THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WOULD NOT APPLY. IN ANOTHER DECISION BY ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 14 THE HONBLE DELHI HIGH COURT IN CIT VS. ANKITECH ( P ) LTD . (SUPRA) HELD AS UNDER: - 24. THE INTENTION BEHIND ENACTING PROVISIONS OF 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 PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE 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 SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDERS. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH IT S SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOANS OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. 25. FURTHER, IT IS AN ADMITTED CASE THAT UNDER NORMAL CIRCUMST ANCES, SUCH A LOAN OR ADVANCE GIVEN TO THE SHAREHOLDERS OR TO A CONCERN, WOULD NOT QUALIFY AS DIVIDEND. IT HAS BEEN MADE SO BY LEGAL FICTION CREATED UNDER SECTION 2(22)(E) OF THE ACT. WE HAVE TO KEEP IN MIND THAT THIS LEGAL PROVISION RELATES TO 'DIVIDEND'. THUS, BY A DEEMING PROVISION, IT IS THE DEFINITION OF DIVIDEND WHICH IS ENLARGED. LEGAL FICTION DOES NOT EXTEND TO 'SHAREHOLDER'. WHEN WE KEEP IN MIND THIS ASPECT, THE CONCLUSION WOULD BE OBVIOUS, VIZ., LOAN OR ADVANCE GIVEN UNDER THE CONDITIONS SPECIFIED UNDER SECTION 2(22)(E) OF THE ACT WOULD ALSO BE TREATED AS DIVIDEND. THE FICTION HAS TO STOP HERE AND IS NOT TO BE EXTENDED FURTHER FOR DIVIDEND. THE FICTION HAS TO STOP HERE AND IS NOT TO BE EXTENDED FURTHER FOR BROADENING THE CONCEPT OF SHAREHOLDERS BY WAY OF LEGAL FICTION. IT IS A COMMON CASE THAT ANY COMPANY IS SUPPOSED TO DIS TRIBUTE THE PROFITS IN THE FORM OF DIVIDEND TO ITS SHAREHOLDERS/MEMBERS AND SUCH DIVIDEND CANNOT BE GIVEN TO NON - MEMBERS. THE SECOND CATEGORY SPECIFIED UNDER SECTION 2(22)(E) OF THE ACT, VIZ., A CONCERN (LIKE THE ASSESSEE HEREIN), WHICH IS GIVEN THE LOAN O R ADVANCE IS ADMITTEDLY NOT A SHAREHOLDER/MEMBER OF THE PAYER COMPANY. THEREFORE, UNDER NO CIRCUMSTANCE, IT COULD BE TREATED AS SHAREHOLDER/MEMBER RECEIVING DIVIDEND. IF THE INTENTION OF THE LEGISLATURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEMED DIVIDEND AT THE HANDS OF 'DEEMING SHAREHOLDER', THEN THE LEGISLATURE WOULD HAVE INSERTED DEEMING PROVISION IN RESPECT OF SHAREHOLDER AS WELL, THAT HAS NOT HAPPENED. MOST OF THE ARGUMENTS OF THE LEARNED COUNSELS FOR THE REVENUE WOULD STAND ANSWERED, ONCE WE LOOK INTO THE MATTER FROM THIS PERSPECTIVE. 26. IN A CASE LIKE THIS, THE RECIPIENT WOULD BE A SHAREHOLDER BY WAY OF DEEMING PROVISION. IT IS NOT CORRECT ON THE PART OF THE REVENUE TO ARGUE THAT IF THIS POSITION IS TAKEN, THEN THE INCOME 'IS NOT TAXED AT THE HANDS O F THE RECIPIENT'. SUCH AN ARGUMENT BASED ON THE SCHEME OF THE ACT AS PROJECTED BY THE LEARNED COUNSELS FOR THE REVENUE ON THE BASIS OF SECTIONS 4, 5, 8, 14 AND 56 OF THE ACT WOULD BE OF NO AVAIL. SIMPLE ANSWER TO THIS ARGUMENT IS THAT SUCH LOAN OR ADVANCE, IN THE FIRST PLACE, IS NOT AN INCOME. SUCH A LOAN OR ADVANCE HAS TO BE RETURNED BY THE RECIPIENT TO THE COMPANY, WHICH HAS GIVEN THE LOAN OR ADVANCE. 27. PRECISELY, FOR THIS VERY REASON, THE COURTS HAVE HELD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTIONS BETWEEN THE PARTIES, SUCH PAYMENT WOULD NOT FALL WITHIN THE DEEMING DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 28. INSOFAR AS RELIANCE UPON CIRCULAR NO. 495, DATED 22 - 9 - 1997 ISSUED BY CENTRAL BOARD OF DIRECT TAXES IS CONCERNED, WE ARE INCLIN ED TO AGREE WITH THE ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 15 OBSERVATIONS OF THE MUMBAI BENCH DECISION IN BHAUMIK COLOUR (P.) LTD.'S CASE (SUPRA) THAT SUCH OBSERVATIONS ARE NOT BINDING ON THE COURTS. ONCE IT IS FOUND THAT SUCH LOAN OR ADVANCE CANNOT BE TREATED AS DEEMED DIVIDEND AT THE HANDS OF SUCH A CONCERN WHICH IS NOT A SHAREHOLDER, AND THAT ACCORDING TO US IS THE CORRECT LEGAL POSITION, SUCH A CIRCULAR WOULD BE OF NO AVAIL. 29. NO DOUBT, THE LEGAL FICTION/DEEMED PROVISION CREATED BY THE LEGISLATURE HAS TO BE TAKEN TO 'LOGICAL CONCLUSION' AS HELD IN ANDALEEB SEHGAL'S CASE (SUPRA). THE REVENUE WANTS THE DEEMING PROVISION TO BE EXTENDED WHICH IS ILLOGICAL AND ATTEMPT IS TO CREATE A REAL LEGAL FICTION, WHICH IS NOT CREATED BY THE LEGISLATURE. WE SAY AT THE COST OF REPETITION THAT THE DEFINITION OF SHAREHOLDER IS NOT ENLARGED BY ANY FICTION. 1 5 . IN ANOTHER DECISION, THE CHANDIGARH BENCH OF TRIBUNAL IN ACIT VS. SANJIV GUPTA (2011) 14 TAXMAN.COM 153 (CHD.) HAS HELD AS UNDER: - 13. THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE APPLICABLE UNDER DIFFERENT CIRCUMSTANCES. THE FIRST LIMB OF THE SAID CLAUSE DEALS WITH THE AMOUNT PAID BY WAY OF ADVANCE OR LOAN TO THE BENEFICIAL SHAREHOLDER. THE SECOND LIMB OF THE SAID CLAUSE DEALS WITH PAYMENTS OF ANY SUM BY WAY OF ADVANCE OR LOAN TO ANY CONCERN IN WHI CH THE SAID SHAREHOLDER IS A MEMBER OR PARTNER. THE THIRD LIMB OF THE SAID CLAUSE IS PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR THE BENEFIT OF ANY SUCH SHAREHOLDER, BUT LIMITED TO THE EXTENT OF THE ACCUMULATED PROFITS OF THE COMPANY. IN THE FACTS OF THE PRESENT CASE, M / S PEE JAY FABRICS PVT.LTD. HAD MADE THE SAID PAYMENTS TO M / S RAYMONDS LTD. WHICH WAS RELATABLE TO THE ASSESSEE BEFORE US. THE PLEA OF THE ASSESSEE THAT NO DIRECT PAYMENT WAS MADE BY THE COMPANY TO THE ASSESSEE HAS NO RELEVANCE AS THE CASE O F THE ASSESSEE FALLS WITHIN THE THIRD LIMB I.E. PAYMENT ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF THE SHAREHOLDER. ADMITTEDLY, THE PAYMENT IN THE CASE HAS BEEN MADE BENEFIT OF THE SHAREHOLDER. ADMITTEDLY, THE PAYMENT IN THE CASE HAS BEEN MADE WITHIN THE EXTENT OF THE ACCUMULATED PROFITS OF THE COMPANY. HOWEVER, THE ALTERNATE LIMB O F THE ARGUMENT OF THE ASSESSEE WAS THAT THE ENTRIES WERE PASSED IN THE NORMAL COURSE OF CARRYING ON OF THE BUSINESS. 14. WE FIND THAT THE CHANDIGARH BENCH OF TRIBUNAL IN LAKRA BROTHERS CASE (SUPRA) HAD LAID DOWN THE PRINCIPLE THAT LOAN IS SOMETHING DIFFE RENT FROM SALE AND EVERY SALE OF GOODS ON CREDIT DOES NOT MEAN TO BE TRANSACTION OF LOAN. IN THE FACTS OF THE CASE BEFORE THE CHANDIGARH TRIBUNAL, THERE WAS A DEBIT BALANCE ON ACCOUNT OF ADVANCE PAID BY AEPL WHICH WAS HELD TO BE PURELY ADVANCE DURING THE C OURSE OF BUSINESS AND IT WAS HELD THAT SUCH PAYMENT DO NOT CONSTITUTE LOAN FOR THE PURPOSE OF SECTION 2(22)(E) OF THE ACT. WE ARE OF THE VIEW THAT IN THE FACTS OF THE PRESENT CASE, THE TRANSACTION IN QUESTION IS RELATABLE TO THE CARRYING ON OF BUSINESS BY THE ASSESSEE. THE AFORESAID PAYMENT WAS MADE BY M / S PEE JAY FABRICS LTD. AS THE DEMAND WAS RAISED BY THE CONSIGNOR M / S RAYMONDS LTD. AFTER DEBITING THE ACCOUNT OF THE SAID COMPANY, THOUGH THE SAID TRANSACTION RELATED TO THE ASSESSEE. THEREAFTER, ON RECONCI LIATION OF STATEMENT OF ACCOUNTS, THE SAID AMOUNT WAS REPAID BY THE ASSESSEE TO THE SAID COMPANY AND THE SAME DOES NOT PARTAKE THE CHARACTER OF LOAN AS CONTEMPLATED U / S 2(22)(E) OF THE ACT. 1 6 . THE HONBLE DELHI HIGH COURT IN CIT VS. CREATIVE DYEING & PR INTING (P) LTD. (SUPRA) REFERRED TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN CIT VS. NAGINDAS M. KAPADIA (SUPRA) AND IN TURN, RELIED ON THE RATIO LAID DOWN IN CIT VS. RAJ KUMAR (SUPRA) , WHICH IN TURN HAD DEALT WITH THE PART OF DEFINITION OF ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 16 DEEMED DIVI DEND UNDER SECTION 2(22)(E) OF THE ACT, WHICH STATES THAT DEEMED DIVIDEND DOES NOT INCLUDE AN ADVANCE OR LOAN MADE TOWARDS SHAREHOLDER BY A BANK IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF BUSINESS OF THE COM PANY. THE PROPOSITION OF THE REVENUE IN THIS REGARD WAS THAT WHERE A COMPANY WAS NOT ENGAGED IN THE BUSINESS OF LENDING OF MONEY, THE PAYMENTS MADE BY IT TO THE ASSESSEE COMPANY WOULD THEREFORE, BE COVERED BY SECTION 2(22)(E)(II) OF THE ACT AND CONSEQUENT LY, THE PAYMENTS EVEN FOR BUSINESS TRANSACTIONS WOULD BE A DEEMED DIVIDEND. THE HONBLE HIGH COURT DID NOT AGREE WITH THE SAID PROPOSITION AND HELD AS UNDER: 1 2 .........WE DO NOT AGREE. THE TRIBUNAL HAS DEALT WITH THIS ASPECT AS REPRODUCED IN PARA (9) AB OVE. THE PROVISION OF SECTION 2(22)(E)(II) IS BASICALLY IN THE NATURE OF AN EXPLANATION. THAT CANNOT, HOWEVER, HAVE A BEARING ON INTERPRETATION OF THE MAIN PROVISION OF SECTION 2(22)(E) AND ONCE IT IS HELD THAT THE BUSINESS TRANSACTIONS DO NOT FALL WITHIN SECTION 2(22)(E), WE NEED NOT GO FURTHER TO SECTION 2(22)(E)(II). THE PROVISION OF SECTION 2(22)(E)(II) GIVES AN EXAMPLE ONLY OF ONE OF THE SITUATIONS WHERE THE LOAN/ADVANCE WILL NOT BE TREATED AS A DEEMED DIVIDEND, BUT THAT IS ALL. THE SAME CANNOT BE EXPA NDED FURTHER TO TAKE AWAY THE BASIC MEANING, INTENT AND PURPORT OF THE MAIN PART OF SECTION 2(22)(E). WE FEEL THAT THIS INTERPRETATION OF OURS IS IN ACCORDANCE WITH SECTION 2(22)(E). WE FEEL THAT THIS INTERPRETATION OF OURS IS IN ACCORDANCE WITH THE LEGISLATIVE INTENTION OF INTRODUCING SECTION 2(22)(E) AND WHICH HAS BEEN EXTENSIVELY DE ALT WITH BY THIS COURT IN THE JUDGMENT IN RAJKUMAR' S CASE [2009] 318 ITR 462 (DELHI) ; [2009] 181 TAXMAN 155 . THIS COURT IN RAJ KUMAR' S CASE (SUPRA) EXTENSIVELY REFERRED TO THE REPO RT OF THE TAXATION ENQUIRY COMMISSION AND THE SPEECH OF THE FINANCE MINISTER IN THE BUDGET WHILE INTRODUCING THE FINANCE BILL. ULTIMATELY, THIS COURT IN THE SAID JUDGMENT HELD AS UNDER (PAGE 473) : ' A BARE READING OF THE RECOMMENDATIONS OF THE COMMISSION AND THE SPEECH OF THE THEN FINANCE MINISTER WOULD SHOW THAT THE PURPOSE OF THE 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 O F LOANS AND ADVANCES TO AVOID PAYMENT OF TAX. THEREFORE, IF THE SAID BACKGROUND IS KEPT IN MIND, IT IS CLEAR THAT SUB - CLAUSE (E) OF SECTION 2(22) OF THE ACT, WHICH IS IN PARIMATERIA WITH SUB - CLAUSE (E) OF SECTION 2(6A) OF THE 1922 ACT, PLAINLY SEEKS TO BRI NG WITHIN THE TAX NET ACCUMULATED PROFITS WHICH ARE DISTRIBUTED BY CLOSELY HELD COMPANIES TO ITS SHAREHOLDERS IN THE FORM OF LOANS. THE PURPOSE BEING THAT PERSONS WHO MANAGE SUCH CLOSELY HELD COMPANIES SHOULD NOT ARRANGE THEIR AFFAIRS IN A MANNER THAT THEY ASSIST THE SHAREHOLDERS IN AVOIDING THE PAYMENT OF TAXES BY HAVING THESE COMPANIES PAY OR DISTRIBUTE, WHAT WOULD LEGITIMATELY BE DIVIDEND IN THE HANDS OF THE SHAREHOLDERS, MONEY IN THE FORM OF AN ADVANCE OR LOAN. IF THIS PURPOSE IS KEPT IN MIND THEN, IN O UR VIEW, THE WORD ' ADVANCE' HAS TO BE READ IN CONJUNCTION WITH THE WORD ' LOAN' . USUALLY ATTRIBUTES OF A LOAN ARE THAT IT INVOLVES POSITIVE ACT OF LENDING COUPLED WITH ACCEPTANCE BY THE OTHER SIDE OF THE MONEY AS LOAN : IT GENERALLY CARRIES AN INTEREST A ND THERE ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 17 IS AN OBLIGATION OF REPAYMENT. ON THE OTHER HAND, IN 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 WORD ' LOAN' MAY OR MAY NOT INCLUDE THE OBLI GA TION OF REPAYMENT. IF IT DOES, THEN IT WOULD BE A LOAN. THUS, ARISES THE CONUNDRUM AS TO WHAT MEANING ONE WOULD ATTRIBUTE TO THE TERM ' ADVANCE' . THE RULE OF CONSTRUCTION TO OUR MINDS WHICH ANSWERS THIS CONUNDRUM IS NOSCITUR A SOCIIS. THE SAID RULE HAS BE EN EXPLAINED BOTH BY THE PRIVY COUNCIL IN THE CASE OF ANGUS ROBERTSON V. GEORGE DAY [1879] 5 AC 63 BY OBSERVING ' IT IS A LEGITIMATE RULE OF CONSTRUCTION TO CONSTRUE WORDS IN AN ACT OF PARLIAMENT WITH REFERENCE TO WORDS FOUND IN IMMEDIATE CONNECTION WITH T HEM' AND OUR SUPREME COURT IN THE CASE OF ROHIT PULP AND PAPER MILLS LTD. V. COLLECTOR OF CENTRAL EXCISE, AIR 1991 SC 754 AND STATE OF BOMBAY V. HOSPITAL MAZDOOR SABHA, AIR 1960 SC 610.' 13. THEREFORE, WE HOLD THAT THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE AMOUNTS ADVANCED FOR BUSINESS TRANSACTION BETWEEN THE PARTIES, NAMELY, THE ASSESSEE - COMPANY AND M/S. PEE EMPRO EXPORTS PVT. LTD. WAS NOT SUCH TO FALL WITHIN THE DEFINITION OF DEEMED DIVIDEND UNDER SECTION 2(22)(E). THE PRESENT APPEAL IS, THEREFORE, DIS MISSED. 1 7 . THE H ONBLE SUPREME COURT IN CIT VS. CREATIVE DYING & PRINTING (P) LTD., DISMISSED THE SLP FILED BY THE REVENUE AND HELD THAT WHERE A TRANSACTION IN QUESTION WAS A BUSINESS TRANSACTION AND IT WOULD HAVE BENEFITED BOTH THE ASSESSEE COMPANY AND THE COMPANY P AND WHERE THE AMOUNT WAS NOT A LOAN, BUT ONLY AN ADVANCE BECAUSE THE AMOUNT PAID TO THE ASSESSEE COMPANY WOULD BUT ONLY AN ADVANCE BECAUSE THE AMOUNT PAID TO THE ASSESSEE COMPANY WOULD BE ADJUSTED AGAINST THE ENTITLEMENT TO MONEYS PAYABLE BY THE ASSESSEE COMPANY IN THE SUBSEQUENT YEARS, THE AMOUNT ADVANCED FOR BU SINESS TRANSACTION WAS NOT SUCH TO FALL WITHIN THE DEFINITION OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. THE HONBLE SUPREME COURT FURTHER HELD THAT THE PROVISION OF SECTION 2(22)(E)(II) OF THE ACT IS BASICALLY IN THE NATURE OF AN EXPLANATION. THAT CANNOT, HOWEVER, HAVE BEARING ON INTERPRETATION OF THE MAIN PROVISION OF SECTION 2(22)(E) OF THE ACT AND ONCE IT IS HELD THAT THE BUSINESS TRANSACTIONS DO NOT FALL WITHIN SECTION 2(22)(E) OF THE ACT, THERE IS NO NEED TO GO FURTHER TO SECTION 2(22)(E) (II) OF THE ACT . THE PROVISION OF SECTION 2(22)(E)(II) OF THE ACT GIVES AN EXAMPLE ONLY OF ONE OF THE SITUATIONS WHERE THE LOAN/ADVANCE WILL NOT BE TREATED AS A DEEMED DIVIDEND, BUT THATS ALL. THE SAME CANNOT BE EXPANDED FURTHER TO TAKE AWAY THE BASIC M EANING, INTENT AND PURPORT OF THE ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 18 MAIN PART OF SECTION 2(22)(E) OF THE ACT. THIS INTERPRETATION IS IN ACCORDANCE WITH THE LEGISLATIVE INTENTION OF INTRODUCING SECTION 2(22)(E) OF THE ACT. 1 8 . NOW, COMING TO THE RELIANCE PLACED UPON BY THE LEARNED DEPARTM ENTAL REPRESENTATIVE FOR THE REVENUE ON THE RATIO LAID DOWN BY THE HONBLE MADRAS HIGH COURT IN CIT VS. P.K. ABUBUKER (SUPRA), WHEREIN IT WAS HELD THAT THE AMOUNT ADVANCED IS TO BE TREATED AS DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) OF THE AC T, WHERE ADVANCE WAS PAID TO THE ASSESSEE, WHICH IN TURN HAD TO BE SET OFF AGAINST FUTURE RENT. THE SAID AMOUNT WAS HELD TO BE DIVIDEND FROM THE COMPANY DURING THE ACCOUNTING YEAR AND WAS INCLUDABLE AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. F URTHER, THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE RELIED ON THE RATIO LAID DOWN BY THE CHANDIGARH BENCH OF TRIBUNAL IN SMT. SUNITA JINDAL VS. DCIT (SUPRA) , IN THE FACTS OF WHICH THE AMOUNT WAS ADVANCED AS LOAN AND THERE WAS NO DISPUTE ABOUT T HE ADVANCING OF THE LOAN AND HENCE, THE FACTS IN THE SAID CASE ARE ABOUT T HE ADVANCING OF THE LOAN AND HENCE, THE FACTS IN THE SAID CASE ARE DISTINGUISHABLE. IN RESPECT OF RELIANCE PLACED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE DECISION OF HONBLE MADRAS HIGH COURT IN CIT VS. P.K. ABUBUKER (SUPRA) , WE FIND NO MERIT IN VIEW OF THE DECISION OF JURISDICTIONAL HIGH COURT IN CIT VS. NAGINDAS M. KAPADIA (SUPRA) AND ALSO THE VARIOUS DECISIONS OF THE HONBLE DELHI HIGH COURT IN RESPECT OF THE BUSINESS ADVANCES. 1 9 . IN THE FACTS OF THE PRESENT CASE, THE AMOUNT HAS BEEN ADVANCED AS BUSINESS ADVANCE, WHEREIN THE AMOUNT WAS ADVANCED TO A JOINT VENTURE COMPANY FOR THE PURPOSE OF PURCHASING MACHINERY TO CARRY ON THE BUSINESS. THE RECIPIENT COMPANY HAD PURCHASED THE MACHINERY AGAINST THE MONEY SO ADVANCED AND THE ASSESSEE HAS ALSO PLACED ON RECORD THE TRAIL OF PAYMENTS IN THIS REGARD AND IN SUCH FACTS AND CIRCUMSTANCES, WHERE A BUSINESS DECISION ITA NO. 643 /PN/20 1 2 SHRI KISHORILAL KASHILA RAMRAIKA 19 WAS TAKEN BETWEEN TWO CONCERNS AND THE AMOUNT WAS ADVANCED, SUCH AN ADVANCE CANNOT TAKE THE COLOUR OF LOAN SIMPLICITO R. SUCH A BUSINESS TRANSACTION BETWEEN TWO CONCERNS, UNDER WHICH AMOUNT IS TRANSFERRED FROM ONE TO ANOTHER CANNOT BE TREATED AS DIVIDEND IN THE HANDS OF SHAREHOLDER BY APPLYING THE DEEMING PROVISIONS OF SECTION 2(22)(E) OF THE ACT. WE FIND NO MERIT IN TH E ORDER OF CIT(A) IN THIS REGARD AND REVERSING THE SAME, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS. 51,00,000/ - . THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 20 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 27 TH DAY OF JANUARY , 201 6 . SD/ - SD/ - (PRADIP KUMAR KEDIA) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; D ATED : 27 TH JANUARY , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - V , PUNE ; 4 . / THE CIT - V , PUNE ; 5. , , / DR A , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE