Commissioner Of Income Tax-I, Ludhiana vs Amrik Singh Prop Nexo Products (India) on 29 June, 2016
20. Similar view has been expressed by various Courts in CIT Vs.
Creative Dyeing & Printing Pvt Ltd [2009] 318 ITR 476 (Delhi), CIT Vs.
Ambassador Travels Pvt Ltd [2009] 318 ITR 376 (Delhi), CIT Vs. Raj
Kumar [2009] 318 ITR 462 (Delhi), CIT Vs. Nagindas M Kapadia
[1989] 177 ITR 393 (Bombay), Jamuna Vernekar Vs CIT [2021] 432
ITR 146 (Karnataka),CIT Vs. Amrik Singh [2015] 56 taxmann.com 460
(P & H),and CIT Vs Atul Engineering Udyog [2014] 51 taxmann.com
569 (Allahabad). This legal position is further fortified from the CBDT
Circular No.19/2017 (Pg No.77 of PB-I), where it has been clarified
that trade advances in the nature of commercial transactions would
not fall within the ambit of the provisions of section 2(22)(e) of the Act
and that such views have attained finality. The CBDT, therefore,
stated that it is a settled position that trade advances, which are in
the nature of commercial transactions, would not fall within the ambit
of the word 'advance' in section 2(22)(e) of the Act. Though, the
Assessing Officer and LD.CIT(A) have taken cognizance of the said
circular and applied the same to the appellant's case keeping in view
the trading transactions between the appellant company and
recipient companies, which resulted in debit balance in the account of
the recipient companies at the end of the year, but both authorities
have misdirected themselves in holding that payments made to the
recipient companies in excess of 150% or 200% of purchases from
such company cannot be treated as 'trade advances' in the nature of
commercial transactions. The AO has wrongly treated the payments
in excess of 150% of the purchases as 'loans or advance' and
wrongly held the same to be deemed dividend u/s 2(22)(e) of the Act.
Similarly, the LD.CIT(A) has wrongly treated the payments in excess
of 200% of the purchases as 'loans or advance' and wrongly upheld
the same to be deemed dividend u/s 2(22)(e) of the Act. In our
considered view, the said approach of the AO/CIT(A) is arbitrary and
the same is not founded on any settled principle laid down by the
Courts or on any stipulation conveyed by the Board through a circular
regarding the reasonableness of the quantum of trade advances. The
AO/CIT(A) has not revealed the basis on which they arrived at the
threshold of 150%/200% of purchases for accepting the
reasonableness of the quantum of trade advances. In the absence of
47
ITA Nos.1067, 1068, 1071 and 1072/Hyd/2024 &
ITA No.1123/Hyd/2024
specification of the relevant basis by the AO/CIT(A), the same is
required to be regarded as arbitrary and non-maintainable. Further,
having accepted that purchases are being made regularly from the
recipient companies and payments in the nature of trade advances
are being made to the said companies against the purchases, the
AO/CIT(A) has drawn an artificial line for segregating the payments
into 'trade advances' which are in the nature of commercial
transactions and 'loans or advance' which do not have such
commercial character. Such an approach of the AO/CIT(A) is not
permissible since the extent to which trade advances are paid is
purely a commercial decision which is contingent on the business
expediencies. The AO/CIT(A) cannot place himself in the arm-chair of
the businessman and usurp his role for deciding what constitutes
reasonable level of trade advances that can be given against the
purchases. In this regard, reliance is placed on the decision of the
Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd Vs.CIT
[2015] 379 ITR 347 (SC) (Pg No.97-99 of PB-I), wherein it was held
that the Revenue cannot justifiably claim to put itself in the arm-
chair of the businessman or in the position of the Board of Directors
and assume the role to decide how much is reasonable expenditure
having regard to the circumstances of the case. The Hon'ble Apex
Court further held that the income tax authorities must put
themselves in the shoes of the assessee and see how a prudent
businessman would act. The Hon'ble Court further held that the
authorities must not look at the matter from their own viewpoint but
that of a prudent businessman. The said ratio laid down by the
Hon'ble Supreme Court in the context of reasonableness of the
expenditure laid out for the purpose of business is applicable with
equal force in respect of reasonableness of the quantum of trade
advances given against purchases. We, therefore, are of the
considered view that the action of the AO/CIT(A) in holding that
amounts paid upto 150% / 200% of the purchases alone can be
considered as reasonable quantum of trade advances in
contravention of the binding decision of the Hon'ble Supreme Court
cited above and the same is untenable on facts and in law. Having
accepted the factum of purchases and payment of trade advances
against the purchases, the AO/CIT(A) could not have imposed an
imaginary and artificial limit on the quantum of payments that can be
regarded as trade advances by sitting in the arm-chair of the
businessman. Therefore, we are of the considered view that the entire
amount of payments made against purchases has to be regarded as
'trade advances' without any artificial limitation on the quantum of
such trade advances. As a result, the amounts paid to recipient
company in excess of 200% of the purchases also have to be regarded
as 'trade advances' which are in the nature of commercial
transactions only and they cannot be characterized as 'loans or
advance' constituting deemed dividend within the meaning of section
2(22)(e). The addition made by the AO and upheld by the CIT(A)
48
ITA Nos.1067, 1068, 1071 and 1072/Hyd/2024 &
ITA No.1123/Hyd/2024
towards deemed dividend is therefore wholly untenable and needs to
be deleted.