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INCOME TAX APPELLATE TRIBUNAL , ‘D’ BENCH, CHENNAI

I.T.A.No.2824/Mds/2014 Assessment Year: 2006-07
The Assistant Commissioner of Income Tax (Appellant) vs P.Dwarkanath Reddy (Respondent)
Date of Order: 29-02-2016

ORDER

Per A. Mohan Alankamony, AM:

These two are appeals filed by the Revenue and assessee respectively aggrieved by the order of the learned Commissioner of Income Tax (Appeals)-IV, Chennai dated 19.08.2014 in ITA No.1094/13-14 passed under section 143(3) r.w.s.147 of the Act for the assessment year 2006-07.

ITA No.2824 /Mds/2014 (Revenue’s appeal):

2. The Revenue in its appeal has raised elaborate grounds. However, the crux of the issue is as follows:-

The learned Commissioner of Income Tax (Appeals) has erred by deleting the addition of `10,00,00,000/- made by the learned Assessing Officer under section 2(22)(e) of the Act for the assessment year 2006-07 based on the fresh evidence without giving reasonable opportunity to the learned Assessing Officer under Rule 46A of the Act.

ITA No. 2853/Mds/2014:- (Assessee’s appeal):-

3. The assessee in its appeal has also raised several elaborate grounds. However, the cruxes of the issues are as follows:-

i) The learned Commissioner of Income Tax (Appeals) has erred in confirming the reopening of assessment under section 147 as the reassessment was made on mere change of opinion and there was no concealment of particulars of income.

ii) The learned Commissioner of Income Tax (Appeals) ought to have appreciated that as per CBDT circular No.495 dated 22.09.1987 the amount of Rs.10.19 crores received from M/s.KEPL has to be taxed only in the hands of M/s. SIDCPL who has received the loan.

iii) The learned Commissioner of Income Tax (Appeals) has erred in restricting the disallowance to `19,00,000/- towards deemed dividend in the hands of the assessee under section 2(22)(e) of the Act.

iv) The learned Commissioner of Income Tax (Appeals) has erred in confirming the unsecured loans of `2,39,160/- and ` 68,10,010/- received from M/s. KEPL & M/s.SIDCPL respectively as deemed dividend under section 2(22)(e) of the Act though they were in the nature of trade advances and not in the nature of loan.

4. Brief facts of the case are that the assessee is a Director in M/s. Nippon Batteries Ltd., M/s. Sindhya Infrastructure Development Corporation Pvt. Ltd., M/s.Kalpatharu Enterprises Pvt. Ltd., and certain other companies, filed his return of income on 30.03.2007 for the assessment year 2006-07. On scrutiny, the learned Assessing Officer noticed that the assessee is a substantial shareholder in M/s. Sindhya Infrastructure Development Corporation Pvt. Ltd. and M/s. Kalpatharu Enterprises Pvt.Ltd., were there were transactions in the nature of intercorporate loans and advances. Therefore, the learned Assessing Officer reopened the assessment and thereafter invoked the provisions of section 2(22)(e) of the Act and made additions.

Revenue’s Appeal:-

5. During the course of assessment proceedings, the learned Assessing Officer observed that the assessee held shares in private limited companies wherein public are not substantially interested for the relevant assessment year as follows:-

S No.

Name of the Company

Percentage of shareholding

1

M/s. Sindhya Infrastructure Development Corporation Pvt. Ltd.,(SIDCPL)

50%

2

M/s.Kalpatharu Enterprises Pvt. Ltd (KEPL)

48%

It was further observed by the learned Assessing Officer that M/s. SIDCPL had received a sum of Rs.10.00 crores and another sum of Rs.19.00 lakhs on 11.05.2005 & 20.02.2006 respectively from its sister concern M/s. KEPL. M/s. KEPL also had accumulated profit to the extent of Rs 12,72,00,000/- . From the above facts the learned Assessing Officer was of the view that provisions of section 2(22)(e) of the Act will be attracted because the assessee is a substantial shareholder in both the aforesaid companies. The assessee vide his letter dated 27.11.2013 had submitted before the learned Assessing Officer that the loan received from M/s. KEPL aggregating Rs.10.19 crores was utilized for the business purpose and therefore the provision of section 2(22)(e) of the Act will not apply. However, the learned Assessing Officer opined that provisions of section 2(22)(e) of the Act does not differentiate between trade advance or any other advance made by the company in the course of the business and pure loan transactions. Thereafter, the learned Assessing Officer made substantive addition invoking the provisions of section 2(22)(e) of the Act for Rs. 10.19 crores in the hands of the assessee Shri Dwarkanath Reddy. He did so by following the assessment made in the case of M/s. SIDCPL for the relevant assessment year wherein addition for the same amount of Rs.10.19 crores was made by invoking section 2(22)(e) of the Act which was modified by the learned Commissioner of Income Tax (Appeals) by holding that the addition has to be made in the hands of the assessee Shri Dwarkanath Reddy as he was the substantial shareholder and not M/s. SIDCPL which was subsequently confirmed by the Tribunal in ITA No.484/Mds/2000 vide order dated 1.6.2011.

6. On appeal, the learned Commissioner of Income Tax (Appeals) sustained the addition only for Rs.19,00,000/- and gave relief of Rs.10.00 crores to the assessee based on his elaborate finding. The relevant portion of the order is reproduced herein below for reference:-

“15.4. It is seen that the payment by M/s. KEPL by way of advances of loan has admittedly not been made to Shri Dwarakanath Reddy, the instant assessee, who is the substantial shareholder of both M/s, KEPL and M/s. SIDCPL. It is also clear from the facts and records of the case that it has not been made on behalf of or for the benefit of Shri Dwarakanath Reddy either. As a matter of fact, it is clear from the series of correspondence between M/s. KEPL and M/s. SIOCPL as also the Joint Venture Agreement between them, which has been reproduced in the foregoing paragraphs and which have not been disputed or rebutted by the AO that the payment was in the form of inter-corporate deposits, which as per the ratio of the case of IFB Agro Industries Ltd. vs. JCIT, cited supra, and relied upon by the AR, is very distinct from either a loan or advance and further could not be treated as loan or advance in the sense implied u/s.2(22)(e). The financial transaction between the two concerns appears to be normal business transaction and therefore could not be treated as a loan or advance.

15.5. From the Joint Venture Agreement between the two concerns, it appears that the amount transferred by M/s. KEPL and M/s. SIOCPL was treated as intercorporate deposit (ICO) till such time it was used in real estate projects for the benefit of both the companies and the amounts advanced by M/s. KEPL to M/s. SIOCPL was for investment in properties for KEPL's own benefit. The AR also submitted that the JVA was closed as the property identified to be part of the JVA had not been sold or developed due to various reasons and further that M/s. KEPL required funds for investing in overseas venture.

15.6. Therefore it is clear that the requisite conditions in treating the payment by M/s. KEPL to M/s. SIDCPL, as deemed dividend in the hands of their substantive shareholder Shri Dwarakanath Reddy does not strictly exist as per the provisions of Section 2(22)( e) which being a deeming fiction, is settled should be construed strictly and judged from that point of view and in the light of the above discussions including the judicial pronouncements relied on by the AR and also considering the totality of the facts and circumstances, the action of the AO in taxing deemed dividend amounting to Rs.l0,00,00,000/- in the hands of the instant assessee is held to be legally invalid and therefore directed to be deleted.

15.7. However, as the AR was not able to substantiate even during the present appellate proceedings with any documentary evidence that Rs.19,00,000/- separately received on 20.2.2006 by M/s. SIDCPL from M/s. KEPL was by way of a trading loan between the two concerns, it being out of the accumulated profits of M/s. KEPL, is held, in the absence of any satisfactory explanation either, as to its nature, to be advances for the individual benefit of the substantial shareholder i.e. the instant assessee and therefore deemed dividend within the meaning of Section 2(22)(e) and therefore the addition made by the AO to the extent of `19,00,000/- out of ` 10,19,00,000/- advance treating it as deemed dividend is confirmed. In the result, this ground is partly allowed.”

7. Before us the learned Authorized Representative submitted that the assessee and all his sister concerns were engaged in business and there was close business nexus between all these entities. Therefore, in the interest of the business of all the three assessees there were routine commercial transactions due to which funds were transferred from one entity to the other.

8. The learned Departmental Representative on the other hand, argued in support of the order of the learned Assessing Officer and pleaded that the same may be confirmed. He further submitted that the learned Commissioner of Income Tax (Appeals) has decided the issue based on the fresh evidence submitted by the assessee before him for the first time without giving reasonable opportunity to the Assessing Officer in accordance with Rule 46A and therefore the order of the learned Commissioner of Income Tax (Appeals) is erroneous.

9. We have heard both the parties and carefully perused the materials available on record. From the facts of the case it is evident that the learned Assessing Officer has come to a conclusion regarding the applicability of section 2(22)(e) of the Act in the case of the assessee because of the following reasons:-

i) The assessee has substantial interest in M/s. KEPL and M/s. SIDCPL being companies where public are not having substantial holdings.

ii) Loan for Rs.10,19,00,000/- was extended by M/s. KEPL to M/s. SIDCPL

Even before the learned Assessing Officer, the assessee had explained about the business nexus between the assessee and his two sister concerns due to which the funds were transferred from one company to the other. This is apparent from the order of the learned Assessing Officer in para no.4.2 at page 6, wherein the learned Assessing Officer has recorded the details of the letter dated 27.11.2013 submitted by the assessee. The learned Assessing Officer disregarding the dynamics of the business of the assessee and its three sister concerns has simply invoked the provisions of section 2(22)(e) of the Act. On appeal, the learned Commissioner of Income Tax (Appeals) considered the matter elaborately reached at a conclusion that there was close business nexus within all the three entities due to which Rs.10,00,00,000/- was transferred from M/s. KEPL to M/s. SIDCPL. Thereafter the learned Commissioner of Income Tax (Appeals) placed reliance in the following decisions cited by the learned Authorized Representative:-

i)        CIT Vs. Nagin Das M.Kapadia (177 ITR 393) (Bom) - it was held that business transaction are outside the purview of section 2(22)(e) of the Act. In the said case, the company in which Kapadia was having substantial interest had paid various amounts to Kapadia. The Tribunal found Kapadia had business transactions with the company and on verification of the accounts, the Tribunal deleted the amounts which were relating to business transactions and which finding was upheld by the High Court.

ii)       CIT Vs.Creative Dyeing & Printing P.Ltd., (318 ITR 476)(Del) - it was held that the amounts advanced for business transactions between the parties namely assessee and M/s. Pee Empro Exports Ltd. was not such to fall within the definition of deemed dividend under section 2(22)(e). It is noted that in this case similar to the instant case , the two companies had common substantial shareholders which formed the basis of the demand U/s.2(22)(e) by the department which was as stated above quashed by the Hon’ble High Court.

iii) CIT Vs.Ambassador Travels P.Ltd. (318 ITR 376)(Del) – it was held that financial transaction in the normal course of business cannot be treated as loan or advances and are not taxable as deemed dividend U/s.2(22)(e) of the Act.

iv)   CIT Vs.Raj Kumar (318 ITR 462) (Del) – The Court held that if the payments are made by such a company to even its shareholder having substantial interest but are the result of business transactions between the parties, then such payments cannot be treated as loan or advance and the money so received cannot be treated as deemed dividend within the meaning of section 2(22)(e) of the Act.

v)    CIT Vs.Arvind Kumar Jam in ITA No.589 of 2011 dated 30.09.2011(Del) – It was held that payments between parties were the result of trading transactions between them and would not fall under the ambit of section 2(22)(e) of the Act. vi) Smt. Radha Daga Vs. ACIT in ITA Nos.201 & 202/Mds/2014 dated 02.06.2014 (ITAT., Chennai) – It was held by the Tribunal that amounts advanced for business transaction between the assessee company and the other company will not fall within the definition of deemed dividend u/s.2(22)(e).

Drawing strength from the above decisions, the learned Commissioner of Income Tax (Appeals) held that, since in the assessee’s case, transfer of funds from one company to another company wherein the assessee had substantial interest was due to commercial exigencies and not being pure loans or advances, the provisions of section 2(22)(e) of the Act would not be applicable and accordingly he deleted the addition of Rs.10.00 crores, however he sustained the additions for Rs.19,00,000/- because the nature of advance due to commercial exigencies was not established.

10. Before us, the above facts with respect to the reasons for inter- corporate transfer of funds of Rs.10.00 crores could not be controverted by the Revenue. Right from the beginning the assessee has been claiming that the assessee and his two sister concerns were all engaged in business and they had close business nexus. These facts were even before the learned Assessing Officer. Therefore, we are of the opinion that the learned Commissioner of Income Tax (Appeals) has not violated the provisions of section 46A of the Rules while arriving at his decision. Further, on the earlier occasion Chennai Bench of the Tribunal had expressed similar view in the case of DCIT Vs. M/s Agile Electric Sub Assembly Pvt. Ltd., in ITA No.1272/Mds/2015 vide order dated 27.11.2015. The gist of the case is reproduced herein below for reference:-

“7.1 We heard the rival submissions and carefully perused the materials on record. From the facts of the case it is apparent that the assessee-company had acquired the company’s viz., M/s Agile Electrical Sub Assembly Pvt. Ltd., and M/s Agile Electrical Technologies which are in the related fields of business to that of the assessee company’s business. The entire process of consolidation of business of all the three companies was made with an intention for deriving strategical benefits. These facts are not disputed. In similar circumstance, Hon’ble Karnataka High Court in M/s Bagmane Constructions Pvt. Ltd. v. CIT dated 16th September, 2014 has held as under:-

“Deemed dividend - Trade advances - Receipt of advances from sister concern - Whether any payment by a company by way of advance or loan to a shareholder or to any concern made under Section 2(22) (e) of the Income Tax Act, 1961, to the extent to which the company possessed the accumulated profits includes a trade advance and constitutes deemed dividend - Held that: purpose of the insertion of sub-clause (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 shareholders in the form of loans to avoid payment of dividend distribution tax under Section 115-0 of the Act. 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 payment of tax by having these companies pay or distribute money in the form of advance or loan. 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 consequence of any further consideration which is beneficial to the company received from such a shareholder, 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 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. It is so made by legal fiction created under Section 2(22)(e) of the Act.

Even if the accumulated profit which ought to have been paid to the shareholders as the dividend paid to a sister concern for the purpose of acquisition of capital assets or as a consideration for the goods received which is required for carrying on the business, it would hot fall within the definition of Section 2(22)(e) of the Act as the object was not to pay the said amount to the shareholders after avoiding payment of dividend distribution tax under Section 115-0 of the Act. In that view of the matter, it is not possible to accept the interpretation sought to be placed by the revenue.

Having regard to the plain words used in clause (e) ‘to any concern’, when the amount is paid or when any payment is made to a concern, the tax is levied on the concern and not on the shareholders. As far as this question is concerned, this Court following the judgment of the Bombay High Court in the case of Commissioner of income Tax vs Universal Medicare (P) Limited reported in [2010 (3) TMI 323 - BOMBAY HIGH COURT] has categorically held that when any payment is made by a company to any concern, which falls under clause (e), the tax is leviable on the shareholder only and not on the concern - Therefore, the finding recorded by the Tribunal that, these advances made by the BDPL to the sister concern as well as to its shareholder do not constitute deemed dividend under Section 2(22)(e) of the Act, is legal and valid and do not call for any interference. - Decided in favour of assessee.”

The jurisdictional High Court in the case CIT v. Madurai Chettiyar Karthikeyan reported in 223 Taxman 350, it has been categorically held that trade advance in relation to business transaction cannot be treated as deemed dividend U/s. 2(22)(e) of the Act. In the present case before us, the entire transaction has been made with a view to consolidate the business of the assessee and thereby derive benefit by stalling competition. Further, in the case Farida Holdings Pvt. Ltd. v. DCIT decided by the Chennai Bench of the Tribunal reported in 51 SOT 452, it has been held that regular business transaction carried on by the assessee in its ordinary course of business cannot be treated deemed dividend for the purpose of Section 2(22)(e) of the Act. Following the above cited decisions, we hereby hold that in the case of the assessee the provisions of Section 2(22)(e) of the Act will not be applicable because there is a close nexus between the business activity of the assessee-company and its sister concern and the loan received from the assessee’s sister concern is utilized for the very purpose of acquiring the shares of the sister concern itself in order to have a strategical edge over the competing business environment. The benefit of the entire transaction has flowed to the assessee’s sister company also because the assessee had obtained the loan from its sister company in order to purchase the shares of the very same sister company and thus avoid the perils of those shares being held by two entities thus endangering its existence. Accordingly, this issue is decided in favour of the assessee.”

11. For the above decisions, we find that the order of the learned Commissioner of Income Tax (Appeals) on this issue is in accordance with law and on merits, therefore we do not find it necessary to interfere with his order. Accordingly, Revenue’s appeal does not have any merit.

Assessee’s appeal:-

Reopening of assessment u/s.147:-

12. Subsequent to processing of return under section 143(1) of the Act on 23.7.2007 after a period of four years, however within a period of six years from the end of the relevant assessment year, it was revealed that one of the sister companies of the assessee which had reserves more than Rs.10.00 crores had extended loan of Rs.10.19 crores to another sister company of the assessee and the assessee had substantial interest in both those companies. These facts came into light when assessment was completed in the case of the assessee’s sister concern wherein subsequently there was a direction from the learned Commissioner of Income Tax (Appeals) vide order dated 27.02.2009 which was upheld by the Tribunal vide order dated 01.06.2011 for invoking the provisions of section 2(22)(e) of the Act in the hands of the assessee rather than in the case of M/s. SIDCPL. Thereafter the learned Assessing Officer had issued notice u/s.148 of the Act on 30.03.2013 which was served on the assessee. Considering these facts, we are of the view that the reopening the assessment in the case of the assessee under section 147 of the Act is valid because fresh materials were available with the learned assessing officer for reopening the case of the assessee and therefore we uphold the orders of the Revenue on this issue. Thus, this ground raised by the assessee is decided against him.

Ground No.2: - Invoking the provisions of section 2(22)(e) of the Act in the case of M/s. SIDCPL:-

13. The assessee has raised a plea before us stating that the learned Commissioner of Income Tax (Appeals) ought to have held that the amount of Rs.10.19 crores received from M/s. KEPL has to be taxed only in the hands of M/s. SIDCPL invoking the provisions of section 2(22)(e) of the Act and in accordance with the Circular No.495 of CBDT dated 22.9.1987. On this issue, we are reminded of the decision of the special bench of the Tribunal in the case of Bhaumik Colour P.Ltd., reported in 118 ITD 1 wherein it was held that, by virtue of the provisions of section 2(22)(e) of the Act, additions can be made with respect to deemed dividend only in the hands of the beneficial shareholder. Therefore, we do not find any merit in the claim of the assessee on this issue because in the case of the assessee, the assessee is the beneficial share holder in both the companies where intercorporate transfer of funds had occurred and where the assessee is substantial share holder. Accordingly, this ground is decided against the assessee.

Ground No.3 - Sustaining the addition of Rs.19,00,000/- under section 2(22)(e) of the Act:-

14. M/s. KEPL had extended loan of Rs.10,19,00,000/- to M/s. SIDCPL where the assessee had substantial shareholding. Therefore, the learned Assessing Officer had invoked provisions of section 2(22)(e) of the Act and made addition in the hands of the assessee for Rs.10,19,00,000/- as deemed dividend. However, after examining the issue in detail, the learned Commissioner of Income Tax (Appeals) deleted the addition of Rs.10.00 crores because it was satisfactorily proved before him that the amount of Rs.10.00 crores was transferred by M/s. KEPL to M/s. SIDCPL due to the overall business nexus between the assessee and his two sister concerns. While doing so, he sustained the addition of Rs.19,00,000/- because the assessee had not brought out any documentary evidence to establish that this amount of Rs.19.00 lakhs was also extended due to business exigencies. Before us also the assessee did not produce any materials to justify his stand. Therefore, we do not find it necessary to interfere with the order of the learned Commissioner of Income Tax (Appeals) on this issue. Accordingly, this ground raised by the assessee is also decided against him.

Ground No.4 - Sustaining the addition made by invoking section 2(22)(e) of the Act as deemed dividend due to the unsecured loans received by the assessee for `2,39,160/- and ` 68,10,010/- from M/s.KEPL & M/s.SIDCPL respectively:

15. The learned Assessing Officer had made the additions in the hands of the assessee by invoking the provisions of section 2(22)(e) of the Act because the assessee had received loan for Rs. `2,39,160/- and ` 68,10,010/- from M/s.KEPL & M/s.SIDCPL respectively and both the sister companies had reserves beyond the amount of loan extended and further the assessee had substantial interest in those companies. On appeal before the learned Commissioner of Income Tax (Appeals), the order of the learned Assessing Officer was confirmed because it appeared to be pure loan transaction and there was no business nexus attached to the transaction. Before us also the assessee has not brought out any materials to establish that these transactions were due to the business dynamics between the assessee and his two sister concerns.

Therefore, we do not find it necessary to interfere with the orders of the Revenue on this issue.

16. In the result, appeals of the Revenue and the assessee are dismissed.

Order pronounced in the open court on the 29th February, 2016

(N.R.S.Ganesan)         ( A.Mohan Alankamony )
Judicial Member           Accountant Member

Fund Transfers due to commercial exigencies from one company to another wherein assessee had substantial interest not deemed dividend u/s 2(22)(e) | 01-03-2016 |

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