Income Tax Appellate Tribunal - Mumbai
Ravindra R. Fotedar, Mumbai vs Asst Cit 10(2), Mumbai on 11 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "D", MUMBAI
Before Shri P K Bansal, Vice President &
Shri Amarjit Singh, Judicial Member
ITA No.6778/Mum/2013
Assessment Year : 2010 - 2011
Ravindra R Fotedar ACIT 10(2)
7 Bharat Tirth Society, Mumbai
Sion Trombay Road, Vs.
Chembur,
Mumbai 400 071
PAN AACPF1616R
(Appellant) (Respondent)
Appellant By : Shri Anuj Kisnadwala
Respondent By : Shri Purushottam Kumar
Date of Hearing : 31.08.2017 Date of Pronouncement : 11.09.2017
ORDER
Per P K Bansal, Vice-President:
This appeal has been filed by the against the order of the CIT(A) - 22, Mumbai, dated 07.12.2012, for A.Y.2010 -11. The only issue involved in this appeal relates to the sustenance of the addition u/s. 2(22)(e) made by the Assessing Officer amounting to ` 88,22,785/-, which consists of the following:
i. Advance given by Flamingo Additives & Colourants Pvt. Ltd to Flamingo Polycolours Pvt. Ltd. ` 48,50,000/-
ii. Advance given by Flamingo Additives & Colourants Pvt. Ltd to Genesis Nutech Pvt. Ltd. ` 38,60,000/-2 ITA No.6778/Mum/2013
Shri Ravindra R Fotedar iii. Amount paid by Flamingo Additives & Colourants Pvt. Ltd to Flamingo Polycolours Pvt. Ltd. against credit balance ` 1,09,785 iv. Amount paid by Flamingo Polycolours Pvt. Ltd to M/s. Genesis Neutech Pvt Ltd ` 3000.
In the alternative, the assessee has taken one more ground that in case the amount is treated to be deemed dividend it should be restricted to the extent of accumulated profit amounting to ` 78,50,414/-.
2. The brief facts of the case are that the Assessing Officer during the course of assessment proceedings noted that Flamingo Additives & Colourants Pvt. Ltd had advanced ` 48,50,000/- to Flamingo Polycolours Pvt. Ltd., Flamingo Additives & Colourants Pvt. Ltd had advanced ` 38,60,000/- to Genesis Nutech Pvt. Ltd., Flamingo Polycolours Pvt. Ltd had advanced ` 3000/- to M/s. Genesis Neutech Pvt Ltd. He noted that the assessee had substantial interest in the following companies Name of the Party % of share holding Flamingo Poly Colors Pvt. Ltd 47.3% Genesis Nutech Pvt. Ltd 25% Flamingo Additives and Colourants Pvt Ltd 48% The Assessing Officer was therefore of the view that the amount so advanced is to be treated as deemed dividend u/s. 2(22)(e) of the Act. Accordingly, he asked the assessee why the said amount may not be treated as deemed dividend. The assessee initially contended that under no circumstances the 3 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar aggregate amount of loan/advances of ` 87,10,000/- can be treated as deemed dividend in the hands of the assessee. In this regard reliance was placed on the following decisions:
• Acit vs. Bhaumik Colour Private Ltd. 118 ITD 1 • CIT vs Universal Medicare Pvt Ltd 190 Taxman 144 (Bom) • CIT vs Hotel Hiltop 217 CTR 527 (Raj) The assessee has also taken a plea that the accounts between these companies should be treated as current account and the transactions temporary in nature. The Assessing Officer rejected the plea of the assessee by referring to section 2(22)(e), according to which any loan or deposit given by a company to a share holder, who is holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest, such loan or deposit is deemed to be a dividend from the accumulated profits of the company. The Assessing Officer therefore, after analyzing the source of surplus of the company, ultimately took a view that the afore loan of ` 88,22,785/- is deemed dividend within the purview of section 2(22)(e) of the Act.
3. On appeal, the CIT(A) confirmed the order of the Assessing Officer by allowing relief of ` 18,761/- to the assessee.
4ITA No.6778/Mum/2013
Shri Ravindra R Fotedar
4. We have heard the rival submissions and carefully considered the same along with the orders of the authorities below. The only issue relates to the addition made u/s. 2(22)(e) of the Act amounting to ` 88,22,785/-. The breakup of which is as under:
a) Loan given by M/s. Flamingo Additives and Colourants ` 48,50,000 Pvt Ltd to M/s. Flamingo Polycolours Pvt Ltd
b) Loan given by M/s. Flamingo Additives and Colourants ` 38,60,000 Pvt Ltd to M/s. Genesis Neutech Pvt. Ltd
c) Amount paid by M/s. Flamingo Additives and Colourants ` 1,09,785 Pvt Ltd to M/s. Flamingo Polycolours Pvt. Ltd against the credit balance
d) Amount paid by M/s. Flamingo Polycolours Pvt Ltd to ` 3,000 M/s. Genesis Neutech Pvt Ltd in the trading transaction It is not denied that the assessee has substantial interest in these companies as detailed below:
Name of the Party % of share holding
Flamingo Poly Colors Pvt. Ltd 47.3%
Genesis Nutech Pvt. Ltd 25%
Flamingo Additives and Colourants Pvt Ltd 48%
Before deciding the issue whether the said amount can be treated as deemed dividend u/s. 2(22)(e) of the IT Act or not, in our opinion, it is necessary to look into the provisions of section 2(22)(e), which stipulates as under:5 ITA No.6778/Mum/2013
Shri Ravindra R Fotedar "(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 voting 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 benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits."
4.1 This section which is equivalent to section 2(6A)(e) of the Income-tax Act, 1922 was for the first time introduced as by the Finance Act, 1955 which states as follows :
(a) "Any payment by a company, not being a company in which the public are substantially interested within the meaning of section 23A, of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, or any payment by any such company on behalf, or for the individual benefit, of a shareholder, to the extent to which the company in either case possesses accumulated profits."
4.2 Prior to 1st April 1988, Section 2(22) of the Income-tax Act, 1961 defines dividend as follows:
"Section 2(22) "dividend" includes-- (a) to (d) ....................
(e) Any payment made by a company, not being a company in which the public are substantially interested, of any sum (whether 6 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company, or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits."
4.3 Under the Income-tax Act, 1922, two categories of payment were considered as dividend viz.
(a) any payment by way of advance or loan to a shareholder , or
(b) any payment by any such company on behalf or for the individual benefit of a shareholder.
4.4 In the 1961 Act, for these very same payments an additional condition was introduced that the payment should be to a shareholder being a person who is the beneficial owner of shares and who has a substantial interest in the company i.e. a shareholding which carries not less than 20% of the voting power. This percentage of voting power was reduced from 20% to 10% with effect from 1st April, 1988 by the 1987 amendment. By the very same amendment, 'payment to any concern in which such shareholder is a member or a partner and in which he has a substantial interest' was also considered as dividend. As per section 2(32) the expression "person who has a substantial interest in the company", in relation to a company, means 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, 7 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar carrying not less than 20% of the voting power. "such shareholder" is the shareholder who is a registered and a beneficial holder of shares holding 10% voting power.
4.5 Through this sub-clause, deeming fiction is created whereby the scope and ambit of the word dividend has been enlarged to bring within its cover loans granted by closely held companies to their shareholders. In order to have a check on similar transactions, the legislation widens the scope of the term 'dividend' to include loans granted to shareholder by the closely held companies. The word 'deemed' has not been defined anywhere in the Act. Neither has the word been used in section 2(22)(e). Deemed dividend is therefore a legal fiction created wherein certain payments by companies are deemed to be dividends. This is a settled law in view of the decisions of Apex Court in the case of State of Bombay vs. Pandurang Vinayak Chaphalkar (1953) SCR 773 that legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and cannot extend beyond their legitimate field. The legal fiction is of course to be carried to its logical conclusion, but that must be within the framework of the purpose for which it is created. The Courts must assume that such a state of affairs exists as real, and should imagine as real the consequences and incidents which invariably flow therefrom, and give effect to them. Further, a deeming provision may be intended to enlarge the meaning of a particular word or to 8 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar include matters which otherwise may or may not fall within the main provision [ Refer: G. Viswanathan vs. Hon'ble Speaker, Tamil Nadu Legislative Assembly (1996) 2 SCC 353 (SC)].
4.6 This provision, thus, would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits. It is now a well settled law that the fiction is to be carried to its logical end however, at the same time, it can also not be expanded so as to include the facts which require substantial modification as compared to the facts to be captured as prescribed by the legislature.
4.7 From the reading of section 2(22)(e), it is apparent that it has the effect of bringing to tax as dividend below referred types of payments made by a company:
• any payment of any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan to a shareholder (extended to payment to concerns in which shareholder holds substantial interest);
• any payment on behalf of such shareholder;
• any payment for the individual benefit of such shareholder.
4.8 Any of the above referred payments would be taxed under this sub-
clause if following three conditions are fulfilled:
• The company not to be the one in which the 'Public are substantially interested" within the meaning of Section 2(18); • If the advance or loan is made after 31 May, 1987 to a shareholder who beneficially owns at least 10 per cent of the equity capital, or to a concern in which he is member / partner 9 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar and is beneficially entitled to not less than 20% of income of the concern.
• The Company should possess accumulated profits at the time it makes the payment, the payment being deemed to be dividend only to the extent of such profits.
4.9 Section also prescribes an exception to the above rule. Such exception applies where two cumulative conditions are satisfied -
• Firstly, the loan should have been made by the company in the ordinary course of its business, and • Secondly, money lending should be a substantial part of the company's business.
4.10 Further, the section also gives relief by providing that any subsequent dividend declared by the company and set-off against the loan or advance, which has been deemed as 'dividend' under sub-clause (e), then to the extent of such set-off, it would not be again treated as dividend. That is to say, if the dividend is not so set off but is paid to the shareholder while the loan remains outstanding, the benefit of sub-cl (iii) cannot be obtained. 4.11 In the Act, the word "shareholder" is followed by the expression "being a person who is the beneficial owner of shares". This expression used in section 2(22)(e) both in the Act, and in the amended provisions with effect from 1st April, 1988 only qualifies the word "shareholder" and does not in any way alter the position that the shareholder has to be a registered shareholder. This provision also does not reduce the requirement of being a registered shareholder to a requirement of merely holding a beneficial 10 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar interest in the shares without being a registered holder of shares. The expression "being a person who is the beneficial owner of shares" is therefore a further requirement before a shareholder can be said to fall within the parameters of section 2(22)(e) of the Act. In the Act, section 2(22)(e) imposes a further condition that the shareholder has also to be 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 voting power.
4.12 The expression "shareholder being a person who is the beneficial owner of shares" referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder, then the provisions of section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of section 2(22)(e) will not apply. Mumbai ITAT Special Bench in the case of ACIT vs. Bhaumik Colour P. Ltd., 313 ITR (AT) 147 (Mumbai) [SB] has held that for the purpose of deemed dividend under section 2(22)(e) the shareholder must be both registered and beneficial shareholder on which the Ld. AR has heavily relied.- 4.13 Until 1987, only payments to shareholders were deemed as 'dividend' under sub-clause (e). However, with effect from 1st April, 1988, 'payment to any concern in which such shareholder is a member or a partner and in which 11 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar he has a substantial interest' was also included in deeming fiction of Section 2(22)(e). Explanation 3 to Section 2(22) declares that a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern. In relation to a company, section 2(32) defines the expression "person who has a substantial interest in the company", to mean 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, carrying not less than 20% of the voting power.
4.14 If the payment is to a concern, then such a person should also be a member or a partner in the said concern, holding substantial interest in the concern. In case the concern is a company, then he must be the owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than 20% of the voting power. If the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than 20% of the income of such concern.
4.15 "Such shareholder" is the shareholder who is a registered and a beneficial holder of shares holding 10% voting power. Therefore, the 12 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar expanded meaning of 'dividend' as applied to payments to even non- shareholder would be applicable if all of the following conditions are fulfilled-
(a) The person is a registered shareholder of the company
(b) The person is beneficially entitled to 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 voting power of the company;
(c) The person is a member or partner in other concern
(d) The person has substantial interest in the concern referred to in clause (c) above.
5. In case of ACIT vs. Bhaumik Colour P. Ltd. 313 ITR 146 (AT). The Special Bench held that the provisions of section 2(22)(e) do not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern (non shareholder). It further observed that since the provisions are ambiguous, it is therefore necessary to examine the intention behind enacting the provisions of section 2(22)(e) of the Act. In furtherance it was stated that the intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or advance. The intention of the Legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern and accordingly it held that deemed dividend under section 2(22)(e) 13 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar of the Act can be assessed only in the hands of a shareholder of the lender company and not in the hands of any other person.
6. We noted, Mumbai High Court, in its decision in case of CIT Vs. Universal Medicare Private Limited (324 ITR 263), approved the position taken by the Special Bench decision in case of ACIT vs. Bhaumik Colour P. Ltd. (supra) holding that the definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. It further observed that the effect of clause (e) of Section 2(22) is to broaden the ambit of the expression 'dividend' by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder and thereby it has to be taxed in the hands of shareholder. No contrary decision was brought to our knowledge. In view of the decision of Mumbai High court and that of Special Bench, we hold that the addition on account of deemed dividend can be made in the hands of the assessee provided the case falls within the four corner of section 2(22)(e) of the Income Tax Act. Thus this plea of the assessee stand dismissed.
7. Now, we will take up the contention of the assessee whether the amount received by the assessee was a trade advance/loans or not. In its widest meaning the term "advance" may or may not include lending, however, since the term 'advance' has been used in conjunction with the term 'loan', it should also get meaning akin to 'loan'. Therefore, a reasonable 14 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar interpretation of the term 'advance' could mean such advance which carried with it an obligation of repayment. It is in this regard, the judiciaries have consistently taken a view that trade advances made for procuring/ securing goods or services, it would not attract provisions of Section 2(22)(e).
8. This is settled law in view of the decision of Hon'ble Apex Court in CIT vs. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC)that apparent is real. Onus is on the party who alleges apparent is not real. In view of the settled position of various decisions, the trade advance cannot be regarded to be the transaction falling within the meaning of section 2(22)(e) of the Act. Hon'ble Allahabad High Court has taken the similar view in the case of CIT vs. Atul Engineering Udyog [2015] 228 Taxman 295 (All).
9. This view has been taken by Hon'ble Delhi High Court in the case of CIT vs. Raj Kumar, 318 ITR 462 (Delhi). Similar view has been taken by the Mumbai High Court in the case of CIT vs. Nagindas M. Kapadia, 177 ITR 393 (Bom) in which it was held that advance received to purchase the material for the purpose of executing the job work entrusted to the assessee is a trade advance and will not fall within the ambit of section 2(22)(e). In the case of CIT vs. Ambassador Travels P. Ltd., 318 ITR 376 (Delhi), the Hon'ble Delhi High Court has taken the view that the business transaction entered into by the assessee could not be treated as "loans" or "advances" within the meaning of section 2(22)(e). This decision was followed by the Delhi High 15 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar Court in the case of CIT vs. Creative Dyeing and Printing P. Ltd., 318 ITR 476 (Delhi). In this case, an advance by assessee, engaged in the business of a dyeing and printing of cloth to a sister concern having an ancillary unit of both the assessee and sister company striving for export and made international standard was not regarded to be deemed dividend under section 2(22)(e). Rajasthan High Court also has taken the same view in the case of CIT Vs. Hotel Hilltop 313 ITR 116(Raj.).
10. Now coming to the facts of the assessee. So far as the sum of ` 48,50,000/- is concerned, this amount has been paid by Flamingo Additives & Colourants Pvt. Ltd to Flamingo Polycolours Pvt. Ltd. In Flamingo Additives & Colourants Pvt. Ltd the assessee has 48% share holding while in Flamingo Polycolours Pvt. Ltd., the share holding of the assessee is 47.3%. Apparently, if the payment has been given by Flamingo Additives & Colourants Pvt. Ltd to Flamingo Polycolours Pvt. Ltd. as loan or advances, this will be covered u/s. 2(22)(e). But from the copy of ledger account of Flamingo Additives & Colourants Pvt. Ltd., in the books of Flamingo Polycolours Pvt. Ltd., it is apparent that to that extent payment has been made and received by both the companies from each other, which the learned AR before us vehemently contended that these are debit and credit transactions between the associate concerns and it is not in the nature of loans and advances. From the copy of account, it is also apparent that for 16 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar some time the payment has been given but subsequently the payment has been received back. The learned AR in this regard vehemently relied on the order of Hon'ble Gujarat High Court in the case of CIT vs Schutz Dishman Bio-tech Pvt. Ltd. IT Appeal No.958 & 959 of 2015, judgment dated 21.12.2015. We noted under para 3 and 4 it has been held as under:, judgment dated 21.12.2015. We noted under para 3 and 4 it has been held as under:
"3. The Commissioner (Appeals) however, deleted the order of the Assessing Officer making the following observations:
6. I have carefully considered impugned orders and the submissions of the appellant. I am of the view that the provisions of S.2(22)(e) of the Act are not applicable at all and therefore the question of deduction of tax at source does not arise and therefore the liability u/s.201(1) and 201(A) of the Act also does not arise. For both the years under consideration, I have perused the copies of the ledger accounts placed on record. It can be seen that there are large number of debit and credit transactions. Meaning thereby, the appellant has given and received funds as and when required to and from its associate concern. It is not an account whereby loans and advances have been given to the associate concerns. It is an account which is in the nature of current adjustment accommodation account wherein there is a movement of fund in both ways, on need basis. Unlike transactions of loans and advances, in this kind of current adjustment accommodation account, the movement of funds is both ways and the same is more in the nature of current account rather than a loan account.
Transactions in the nature of loans and advances are usually very few and for a longer duration. In the facts of the present case, the nature of the transaction is in the 17 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar form of current accommodation adjustment account and therefore, the same is not a transaction in the nature of loans and advances. In the absence of any loans and advances, the provisions of section 2(22)(e) of the Act in respect of deemed divided are not attracted and therefore, the question of deduction of tax at source also would not arise. This view is supported by the following direct decisions :
CIT vs. Creative Dyeing & Pringint (P) ltd. 318 ITR 476 (Del) CIT vs. Raj Kumar 318 ITR 462 (Del) NH Securities Ltd v. DCIT (2007) 11 SOT 302 (BOM) ACIT v. Global Agencies(P) ltd. (2005) 87 TTJ 1086(Delhi) CIT v. Nagindas M. Kapadia (1989) 177 ITR 393 (BOM) Even otherwise, if the transactions are not in the nature of current accommodation adjustment account, the same are in the nature of deposits as it apparent from the nomenclature of the ledger account. If the transactions are in the nature of deposits and the same are between two corporate, it is nothing but Inter Corporate Deposits (ICD) which in any case would be outside the purview of section 2(22)(e) of the Act. This view supported by the following direct finding decisions of the ITATs.
M/s Utkarsh Fincap (P) Ltd., v ITO 1288 ITR 38 On.(Tri. Ahmedabad) M/s. Bombay Oil Industries Ltd, v. DCIT, Central Circle-35 Mumbai 128 SOT 383 (Mum.)"
4. It can thus be seen that the Commissioner as a matter of fact found that the payments were net in the nature of current adjustment. There was movement of fund both ways on need basis. The transactions in the nature of loans and advances are usually very few in number whereas in the present case, such transactions are in the form of current accommodation adjustment entries. The Commissioner therefore, held that the transactions were not in the nature of loans and advances. The Revenue carried the matter in appeal. The Tribunal concurred with the view of the CIT 18 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar (Appeals) and held that the amounts were not in the nature of Inter Corporate Deposits and were therefore, not to be treated as loans or advances as contemplated in section 2(22)(e) of the Act."
On the basis of this judgment, it is apparent that if there are transactions in the form of current accommodation entries, they cannot be regarding to be loans and advances.
11. We have also noted that similar view has been taken by Hon'ble Punjab & Haryana High Court in the case of CIT vs. Suraj Dev Dada [367 ITR 78], wherein, it has been held as under:
"10. From the above, it emerges that the Commissioner of Income-tax (Appeals) and the Tribunal had concurrently recorded that the assessee had running account with the company--M/s. Dada Motors Pvt. Ltd. and had been advancing money to it. It was further observed that the provisions of section 2(22) (e) of the Act were not attracted in the present case; this provision was inserted to stop the misuse by the assessee by taking the funds out of the company by way of loan advances instead of dividend and thereby avoid tax. In the present case, the assessee had in fact advanced money to the company and there was credit for only 55 days for which the provisions of section 2(22)(e) of the Act could not be invoked These findings were not shown to be erroneous or perverse in any manner.
11. In view of the above, no substantial question of law arises in this appeal. Consequently, finding no merit in the appeal, the same is hereby dismissed."
12. Further, we also noted that the 'G' Bench of this Tribunal, vide its order dated 25.08.2010, in ITA Nos. 4869 to 4872/Mum/2009 in the case of Ackruti City Ltd. vs. DCIT has observed as under: 19 ITA No.6778/Mum/2013
Shri Ravindra R Fotedar "59. We now examine whether the financial transactions between sister concerns, which are admittedly working together in many cases for the same project, after dividing their functions, through under the same management, can be considered loans or advances. Every financial transaction cannot be a loan or advance.
Commercial expediency, business necessity and emergency needs result in financial accommodation between sister concerns. This cannot be termed either a loan or an advance. These transfer of funds are with the object of achieving a common objective.
60. In the case of M/s Chandra Cement vs. DCIT 68 TTJ (Jaipur) 35, the Jaipur Bench held as follows :
" When one single individual is managing the affairs of two concerns and the decision to transfer the funds from one concern to another or to repay the funds could have been said to have been largely influenced by the same individual, it cannot be said that transaction partake the nature of either deposit or loan. The Hon'ble Madhya Pradesh High Court has in the case of Patiram Jain held that :
It has also been accepted by the respondents that the transactions made between the two sister concerns were under exceptional circumstances to accommodate the emergency needs of the sister concern for a very short and temporary period. As such, it did not amount to a loan or deposit as defined under Section 269SS of the Income-tax Act.
The Cochin Bench of the Tribunal in Muthoot M. George Bankers vs. ACIT (1994) 47 TTJ (cochin) 435 held as under :
"Against the background, we examine the transactions between the sister concerns and the assessee There are transfer of funds from and to the sister concerns. There is no evidence to show that money was loaned or kept deposited for a fixed period or repayable on demand. Further, the sister concerns and the assessee are owned by the same family group of people with a common managing partner with centralised accounts under the same roof. Transfer of funds has taken place in a whimsical manner. Therefore, it is rather difficult to say that the transactions are in the nature of deposits or loans with certain conditions attached to them, either as regards the period of such deposits or loans or with regard to their repayments. From the copies of the accounts 20 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar furnished before us all that can be gathered is that funds have been transferred from and to the sister concerns as and when required and since the managing partner is common to all the sister concerns, the decision to transfer the funds from one concern to another concern or to repay the funds could be said to have been largely influenced by the same individual. In other words, the decision to give and the decision to take rested with either the same group of people or with the same individual. In such circumstances of the case, we hold that the transaction interse between the sister concerns and the assessee can not partake or the nature of either "deposit" or "loan" though interest might have been paid on the same. Excepting for the transfer of funds being witnessed in the books of account of the concerned firms, no material is on record to show issue of receipt or pronote in evidence of accepting deposits or loans as understood in common parlance. It only represents diversion of funds from one concern to another depending upon the exigencies of the business."
From the above, it is clear that transaction between sister concerns are just diversion of funds for meeting vistitudes of business and are neither loans or advances. These decisions support the view that current account transactions between the sister concerns cannot be called loans or advances for the purpose of invoking section 2(22)(e). The term 'advances' in this section is used along with the word 'loan' and this word does not include transfer of funds for trade or business advances as held by the Hon'ble Delhi High Court in CIT v. RajKumar (2009) 181 Taxman 155 (Del.).
61. The Hon'ble Delhi High Court in the case of CIT vs. Ambassador Travels P. Ltd. (2009) 318 ITR 376 (Del) held that when the assessee entered into normal business transaction as a part of day to day business activity, this cannot be treated as loans or as advances. The Mumbai 'A' Bench of the Tribunal in the case of N.H. Securities Ltd. vs. DCIT reported in 11 SOT 302 held that where payments are made by a company in the course of carrying on its regular business through a mutual, open and current account to a related party do not come under the purview of section 2(22)(e). Applying the propositions laid down in these case laws for the facts of the case, we accept the arguments of the learned counsel for the assessee that the transactions between these sister concerns are business transactions and are guided by commercial expediency and are mere diversion of funds and are neither a loan or advance 21 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar as contemplated u/s 2(22)(e). Thus this ground of the assessee is allowed."
12. From the copy of account of both the companies, which is available at pages 1 and 9 of the paper book, it is apparently clear cut case of current adjustment accommodation and movement of funds in both ways and, therefore, it is in the nature of current account of one company with the other company rather than a loan account. The learned DR vehemently contended before us that this issue be restored to the file of the Assessing Officer as the assessee as raised this contention for the first time before this Tribunal and no such contention was raised before any other authority. We noted that the assessee has raised this contention even before the Assessing Officer, which is clear from para 4.3.3 of the assessment order. The Assessing Officer has observed "the plea of the assessee that the accounts between these companies should be treated as current account and the transactions are temporary in nature cannot be accepted." On this basis, we reject the plea of the learned DR. No contrary decision was brought to our knowledge. Respectfully, following the decision of Hon'ble Gujarat High Court in the case of Schutz Dishman Bio-tech P Ltd (supra), we hold that the sum of ` 48,50,000/- cannot be treated as deemed dividend u/s. 2(22)(e) of the Act.
13. Now coming to the sum of ` 36,60,000/-, which was paid by Flamingo Additives & Colourants Pvt. Ltd to Genesis Nutech Pvt. Ltd. The assessee is 22 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar having 48% share holding in Flamingo Additives & Colourants Pvt. Ltd and 25% share holding in Gnesis Nutech Pvt. Ltd. Again the learned AR before us has taken the same contention as has been taken in respect of the amount paid by Flamingo Additives & Colourants Pvt. Ltd to Flamingo Polycolours Pvt. Ltd., and for this our attention was drawn to pages 4 and 5 of the paper- book. From the copy of the account, we do agree with the learned AR that there are debit and credit transactions between both the companies. The companies has given and received funds as and when required to and from its associate concern. The account here also appeared to be in the nature of current adjustment accommodation account where there is movement of funds in both ways on need basis. These transactions, as has been held by us in the preceding paragraphs, following the decision of the Hon'ble Gujarat High Court in the case of Schutz Dishman Bio-tech P Ltd (supra), we hold that the sum of can also not be regarded as deemed dividend u/s. 2(22)(e) of the Act. We hold accordingly, and, therefore delete the addition of ` 38,60,000/-.
14. Now coming to the sum of ` 1,09,785/- paid by Flamingo Additives and Colourants Pvt. Ltd. to Flamingo Polycolours Pvt. Ltd. The copy of account is available at page 2 of the paper-book, from which it is apparent that the sum represents three amounts i.e. ` 89,774/-, ` 18761/- and ` 1,250/- out of which the amount to the extent of ` 18,761 has already been deleted by the 23 ITA No.6778/Mum/2013 Shri Ravindra R Fotedar CIT(A) to which we agree. Now the balance amount in the ground taken by the assessee should have been in respect of ` 89,774/- and ` 1,250/-. The Revenue is not in any appeal against the sum of ` 18,761/-. We, therefore, restrict the source to the sum of ` 89,774/- and ` 1,250/-. We noted from the copy of the account of the submissions made by the assessee the fact that these amounts were received by customers of Flamingo Polycolours Pvt. Ltd viz Shree Mother Plast in favour of Flamingo Additives and Colourants Pvt. Ltd. Since the cheque has been drawn in the name of Flamingo Additives and Colourants Pvt., therefore a cheque was issued in favour of Flamingo Polycolours Pvt. Ltd. This amount in our view cannot be regarded as loan and advances within the ambit of section 2(22)(e). We, accordingly, delete the addition in respect of ` 89,774/- and ` 1,250/-. Thus, in fact, the whole addition of ` 1,09,785/- stands deleted.
15. Now coming to the sum of ` 3000/-, which was the amount paid by Flamingo Polycolours Pvt. Ltd to M/s. Genesis Nutech Pvt. Ltd. In this regard we have gone though the copy of account available lat page 1 of the paper- book. From the account, it is apparent that as on 01.04.2009, there was a opening balance of ` 3,000/- against which on 10.09.2009 a cheque bearing no.180322 was paid to S.P. Enterprise. Since the cheque has to be paid by Flamingo Polycolours Pvt. Ltd but wrongly paid out of Genesis Nutech Pvt. Ltd., later on Flamingo Polycolours Pvt. Ltd repaid to Genesis Nutech Pvt. Ltd. 24 ITA No.6778/Mum/2013
Shri Ravindra R Fotedar Thus, this payment is nothing but repayment of the dues by Flamingo Polycolours Pvt. Ltd. to Genesis Nutech Pvt. Ltd. Thus this payment cannot be regarded as loans and advances as per section 2(22)(e) of the I.T.Act. We, therefore delete the addition of ` 3,000/-.
16. Since we have deleted the addition made u/s. 2(22)(e), in our opinion, the alternate ground taken by the assessee being ground no.1.4 does not require any adjudication as the main ground no.s1.1 to 1.3 stands allowed.
17. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 11th day of September, 2017.
Sd/- Sd/-
(Amarjit Singh) (P K Bansal)
JUDICIAL MEMBER VICE-PRESIDENT
Mumbai; Dated: 11th September, 2017
SA
Copy of the Order forwarded to :
1. The Appellant.
2. The Respondent.
3. The CIT(A),Mumbai
4. The CIT
5. DR, 'D' Bench, ITAT, Mumbai
BY ORDER,
#True Copy #
Assistant Registrar
Income Tax Appellate Tribunal, Mumbai