WEP PERIPHERALS LTD,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-7(1)(2), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against the order of CIT(A) dated 20.6.2017. First ground for our consideration is with regard to treating a sum of Rs.1.5 crores as deemed dividend u/s 2(22)(e) of the Act.

ITA No.1905/Bang/2017 Wep Peripherals Ltd., Bangalore

Page 2 of 18 received one of Rs.1,50,00,000/- from M/s. Elnova Private Limited (“EPL”) (both group concerns) as follows:- a) On 23.9.2011 a sum of Rs.50,00,000/- was given as loan by Elnova Private Limited to Wep Solutions India Ltd. (“WSIL”) b) Elnova on various dates had borrowed from its parent company Wep Peripherals Ltd. (present assessee) (“WPL”) and outstanding as on 30.3.2012 was Rs.90 lakhs. On the said date, Elnova advanced a sum of Rs.1 crore to Wep Solutions India Ltd. Wep Solutions India Ltd. utilized this money and paid to Wep Peripherals Ltd. (present assessee). Thus, the money was routed within a group company in this manner.

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Page 3 of 18 4. The Ld. A.R. submitted as follows:-

a) Elnova Pvt. Ltd. does not hold any shares in WPL nor WSIL. b) WSIL (borrowed company) does not hold any shares in EPL (lender company). c) WPL is the holding company of EPL holding 100% shares. d) WSIL does not hold any shares in EPL nor WPL. e) WPL shareholding in WSIL is as under:- Upto 7.12.2011 19.48% After 5/7.12.2011 45.31%

f) On 23.9.2011 a sum of Rs.50,00,000/- was given as loan by Elnova Private Limited to Wep Solutions India Ltd.. g) Elnova on various dates had borrowed from its parent company Wep Peripherals Ltd. (present assessee) and outstanding as on 30.3.2012 was Rs.90 lakhs. On the said date, Elnova advanced a sum of Rs.1 crore to Wep Solutions India Ltd. Wep Solutions India Ltd. utilized this money and paid to Wep Peripherals Ltd. (present assessee). Thus, the money was routed within a group company in this manner.

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Page 4 of 18 6. The WPL shareholdings in WSIL upto 7.2.2011 - 19.48%. to support this claim, the Ld. A.R. drew our attention to the page No.83 with regard to the shares in the company held by the share holders more than 5% as listed in the annual report ending on 31.3.2012, which reads as under:

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Page 5 of 18 7. Further, after 5/7.12.2011, 45.31% for which he drew our attention to the page No.130 which is as follows:-

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Page 6 of 18 h) He relied on the judgement of Hon’ble Kerala High Court in the case of CIT Vs. S. Parthavarthini Ammal (219 ITR 661) and the order of the Tribunal in the case of Victor Aluminium Industries Pvt. Ltd. 25 CCH 415 (Del). i) Thus, he submitted that as per above judgement, shareholdings of WPL in WSIL to be considered as on the date of advance of money where WPL is holding more than 20% on the date of advance or not that is important and not after the date of advance, if it is having more than 20% shares in WSIL is irrelevant. j) He submitted that this is a commercial transaction, wherein EPL has given an amount of Rs.50 lakhs to WSIL for which present assessee paid interest on it. For this purpose, he relied on the present judgement of Hon’ble Kolkata High Court in the case of Pradip Kumar Malhotra Vs. CIT 79 CCH 600 (Kol), Chandrasekhara Maruti Vs. ACIT 47 CCH 783 (Mum Trib.) and Krishna Coil Cutters Pvt. Ltd. In ITA No.1492/Ahd/2014 & others dated 6.7.2021. k) He also submitted that there was no individual benefit to the individual shareholders. The money was advanced only for the business purpose. It cannot be considered as deemed dividend in the hands of the assessee. For this purpose, he relied on the judgement of Kolkata High Court in the case of Pradip Kumar Malhotra Vs. CIT cited (supra) and ACIT Vs. Krishna Coil Cutters Pvt. Ltd. Cited (supra). l) He submitted that WPL has given loan to EPL and charged interest. Similarly, EPL given loan to Wep and has earned interest. According to the Ld. A.R., these are running accounts between the companies and there is no deemed dividend. For that purpose, he relied on Saamaga Developers

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Page 7 of 18 Pvt. Ltd. 54 CCH 329, Exotica Housing & Infrastructure (P) Ltd. 59 CCH 0141.

m) He submitted that when the lender EPL has declared dividend and paid dividend distribution tax, there is no intention to avoid payment of dividend distribution tax u/s 115-O of the Act and provisions of section 2(22)(e) of the Act cannot be applied. For this purpose, he relied on the following judgements:- 1) Bagmane Constructions (P) Ltd v CIT — 277 CTR 0518 Karnataka HC Above decision relied in Chandrasekhar Maruti v ACIT — 47 CCH 783 Mum Trib

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Page 8 of 18 9,2 Accordingly, he submitted in the instant case loan was given to a company in which the assessee is a shareholder and assessee is having substantial interest in the borrowed company and also in the lender company. In view of this, the assessee liable for deemed dividend u/s 2(22)(e) of the Act.

“2(22)(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) 5 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; but" dividend" does not include— (i) a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) 1 a distribution made in accordance with sub- clause (c) or sub- clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964 , 2 and before the 1st day of April, 1965 ];] (ii) any advance or loan made to a shareholder 3 or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

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Page 9 of 18 (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub- clause (e), to the extent to which it is so set off. (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A f the Companies Act, 1956 (1 of 1956); Explanation 1-The expression" accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948 , and before the 1st day of April, 1956.

Explanation 2.-- The expression" accumulated profits" in sub- clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub- clauses, and in subclause (c) shall include all profits of the company up to the. date of liquidation, 4 but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. Explanation 3.- For the purposes of this clause,-

(a) " concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company;

(b) 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;]”

10.1 For applicability of section 2(22)(e) of the Act, there must be a payment by the company by way of advance or loan or if no loan or advance was given by the company, section 2(22)(e) of the Act is not applicable. Therefore, any amount which does not represent loan or advance given by a company during the year under consideration, the said amount does not fall within the ambit of section 2(22)(e) of the Act provided, he or she holds not less than

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Page 10 of 18 20% of the voting power in the lending company. In the case of present assessee on 23.9.2011, Rs.50 lakhs was given as loan by EPL to WSIL. The WPL (present assessee) holds only 19.48% of holdings as on date of advancing money by EPL to WSIL. As held by Hon’ble Kerala High Court in the case of CIT Vs. S. Parthavarthini Ammal cited (supra), wherein held as follows:- “Held, that the Commissioner of Income-tax (Appeals) and the Tribunal had accepted the evidence of the execution of the gift deed. The Tribunal had reached the conclusion that the gift of 11,000 shares by the assessee in favour of the daughter’s minor children was a genuine transaction and that there was a mere delay in the process of registration. There was no suggestion that the application form for transfer of shares had any defects and, therefore, it was clear that the applications were submitted in accordance with the statutory provisions. The Tribunal was right in holding that transfer of the shares had taken place on the date the transfer forms were executed by the assessee and not on October 25, 1980, on which the company registered the shares in the names of the minors. Hence, the loans aggregating to Rs.6,25,000/- received by the assessee from the company between December 19,1978, and February 16, 1979, could not be treated as deemed dividends within the meaning of section 2(22)(e) of the Income Tax Act, 1961.”

10.2 Same view was taken in the case of ACIT Vs. Jagjit Singh Jaswant Singh Oberoi 134 DTR 74. Being so, the first Rs.50 lakhs advanced by EPL to WSIL cannot fall within the purview of section 2(22)(e) of the Act. Accordingly, this addition made by AO u/s 2(22)(e) of the Act is deleted.

10.3 With regard to second advance of Rs.1 crore by EPL to WSIL, it is admitted fact that EPL has borrowed a sum of Rs.90 lakhs from WPL and the balance outstanding on 30.3.2012 is Rs.90 lakhs and the amount of Rs.1 crore received by WSIL from EPL has paid to WPL (present assessee). More so, WSL paid interest to EPL and the said income has been offered to tax by EPL. It is to be noted that Hon’ble Kolkata High Court in the case of Pradeep Kumar Malhotra Vs. CIT cited (supra) wherein it was held as under:

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Page 11 of 18 “The phrase "by way of advance or loan" appearing in sub-cl. (e) of cl. (2) of s. 2 must be construed to mean those advances or loans which a share holder enjoys for simply on account of 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; but 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. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of s. 2(22) but not the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. In the present case the assessee permitted his property to be mortgaged to the bank for enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from the mortgage. In such -a situation, for retaining the benefit of loan availed from the bank if decision is taken to give advance to the assessee such decision is not to give gratuitous advance to its shareholder but to protect the business interest of the company. Authorities below erred in law in treating the advance given by the company to the assessee by way of compensation to the assessee for keeping his property as mortgage on behalf of the company to reap the benefit of loan7;as deemed dividend within the meaning of s. 2(22)(e).—CIT vs. Creative Dyeing & Printing (P) Ltd. (2010) 229 CTR (Del) 250 : (2009) 30 DTR (Del) 143 : (2009) 318 ITR 476 (Del) and CIT vs. Nagindas M. Kapadia (1989) 75 CTR (Born) 161: (1989) 177 ITR 393 (Born) relied on.”

10.4 Further, same view was taken by Ahmedabad bench in the case of Krishna Coil Cutters Pvt. Ltd. cited (supra), wherein it was held as under:- “9.2 In this factual backdrop, the CIT(A) has adjudicated the issue in favour of the assessee and held that Section 2(22)(e) of the Act is not applicable in the peculiar facts. On a perusal of the order of the CIT(A), we find that the CIT(A) has acted on sound legal principles in broadly noticed above. On facts, it has emerged that the lender company has charged interest on the advances made to the assessee company. In the circumstances, the Hon'ble Calcutta High Court in the case of Pradip Kumar Malhotra vs. CIT (2011)338 ITR

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Page 12 of 18 538(Cal) has observed that advances given by the lender was not for the individual benefit of the shareholder but for business purposes and therefore such transactions would not fall within the sweep of deeming fiction created under s.2(22)(e) of the Act. This reason on a standalone basis 1$ sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee. 9.3 We also simultaneously find merit in the other line of argument advanced on' behalf of the assessee. t It is case of the assessee than money lent to the assessee was received in the ordinary course of business for fulfillment of business supply through consolidated negotiation. It is also demonstrated by the assessee that similar advance was obtained in the earlier years right from AY 2010-11 where assessee was not a shareholder in the lender company at all. It is also simultaneously the case of the assessee that the lender company was substantially engaged in money lending activity. Furthermore, the lender company has charged interest on the loans advanced to the assessee. In these facts, the case of the assessee is squarely covered by the decision of the Hon'ble Gujarat High Court in Pr. CIT v Mohan Bhagwat prasad Agrawal [2020j 115 taxmann.com 69 (Gujarat) & CIT Vs. Parle Plastics Ltd. (2011) 332 1TR 63 (Bombay). Section 2(22)(e) of the Act requires money so lent to be only 'substantial part' of business and in contrast to the 'principal business' as wrongly assumed by the AO.”

10.5 Further, it is noticed that these are running account between the group companies for which section 2(22)(e) of the Act cannot be applied as held by Saamaga Developers Pvt. Ltd. cited (supra) where it was held as under: “14.3.13 Section 2(22)(e) of the IT Act only considers those amounts which are having characteristic of loans and advances. In the instant case, a transaction between the group concerns is not having a character of loans and advances but these are the current accounts. The transactions in current accounts are also outside the purview of section 2(22)(e) of the IT Act as held in the following cases:

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Page 13 of 18 • 28 ST 383 (Mum Trib) Bombay Oil Industreis Ltd. Vs. Deputy Commissioner of Income-tax • 367 ITR 78 (P&H) CIT Vs. Suraj Dev Dada • 167 ITD 100 (Mum Trib) Ravindra R. Fotedar Vs. ACIT • IT Appeal Nos.958 & 959 of 2015 dated 21.12.2015 Deputy Commissioner of Income-tax Vs. Schutz Dishman Biotech (P) Ltd. (Guj)”

10.6 Further, in the case of Exotica Housing & Infrastructure Company Pvt. Ltd. cited (supra), wherein it was held as under: “In the case of Saamag Developers Pvt. Ltd., & Others New delhi vs., The ACIT, Central Circle-19, New Delhi in ITA.No.2053/Del./2017 the ITAT, Delhi Bench considered an identical issue which was also considered in its case in earlier year in the light of several decisions of various Benches of the Tribunal and different High Courts and held that "the relevant record reveal that they are in the form of current and inter banking account and contain both type of entries i.e., giving and taking the amount and appear to be current account and cannot be considered as loans and advances as contemplated under section 2(22)(e)." When subsequent year's appeals was considered by the Tribunal, the assessee relied upon Judgments of Delhi High Court in the case of Creative Dyeing and Printing Pvt. Ltd., 318 ITR 476 (Del.), CIT vs., Rajkumar 318 ITR 462 (Del.), CIT vs., Ambassador Travels Pvt. Ltd., 318 ITR 376 (Del.) and Judgment of Hon'ble Bombay High Court in the case of CIT vs., Nagindas M. Kapadia 177 ITR 393 WO (Born.) in which it was held that "the amounts advanced for business transaction - will not fall within the definition of deemed dividend under section 2(22)(e) ". The Tribunal following the same decisions as well as decision in earlier year in the case of M/s. Saamag Developers Pvt. Ltd., New Delhi & Others (supra) held that "the amount in question could not be treated as deemed dividend under section 2(22)(e).”

10.7 It is also brought on record that EPL has declared dividend and also paid dividend distribution tax. Thus, there is no question of intention to avoid payment of dividend distribution tax. Being so, on this reason also provision of section 2(22)(e) of the Act cannot be invoked. Further, Hon’ble Karnataka High Court in the case of

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Page 14 of 18 Bagmane Constructions Pvt. Ltd. Vs. CIT & Anr. 277 CTR 518, wherein it was held as under:-

“27. In this background when we look at the aforesaid provision, it is clear that any payment made by a company by way of advance or loan has to be understood in the context of the object with which the said provision is introduced. Though the legislature has introduced 'advance' as well as 'loan' which are two different words, the meaning of each of those words have to be understood in the context in which they are used. Each word takes its colour from the other. The meaning of the word 'advance' is to be understood by the meaning of the word loan which is used immediately thereafter. Associated words take their meaning from one another under the doctrine of noscuntur a sociis, the philosophy of which is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it. This rule, to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general. In the case of a loan, money is advanced generally on payment of interest. In other words the loan advanced has to be repaid with interest. In the case of an advance also, the element of repayment is there but such a repayment may be with interest or without interest. Therefore, when the said two words are used in the aforesaid provision with the purpose of levying tax, if the intention of such advance or loan is to avoid payment of dividend distribution of tax under Section 115-0 of the Act, such a payment by a company certainly constitutes a deemed dividend. But if such a payment is made firstly not out of accumulated profits and secondly even if it is out of accumulated profits, but as trade advance as a consideration for the goods received or for purchase of a capital asset which indirectly would benefit the company advancing the loan, such advance cannot be brought within the word 'advance' used in the aforesaid provision. The trade advance which is in the nature of money- transacted to give effect to commercial transactions would not fall within the ambit of the provisions of Section 2(22)e of the Act.”

10.8 Same view was taken by Mumbai bench of Tribunal in the case of Chandrasekhar Maruti Vs. ACIT 47 CCH 783, wherein it was held as under:-

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Page 15 of 18 “The Hon’ble High Court further relied upon the decision of Hon’ble Delhi High Court “CIT v. Raj Kumar” (2009) 318 ITR 462 (Delhi) and Hon’ble Kolkata High Court in the case of "Pradip Kumar Malhotra Vs. ITO" (2011) 338 ITR 538 (Cal), and has observed that the combined meaning of the various clause of prow of section 2(22)(e) of the Act is to mean that the payments included as deemed dividend would mean the gratuitous payments to a shareholder meant to avoid the taxation of Income u/s.1150 of the Act.

Further in Para 24 of the order in the said case of "Bagmane Constructions (P) Ltd. & Anr." (supra), the Hon'ble Karnataka High Court has held that the purpose of 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 Hon'ble High Court, thus, relied upon various case laws and vide para 29 of the said decision, has rejected the contention of revenue that the payment by a company by way of any advance or loan made to a shareholder would be out of the purview of Section 2(22)(e) of the Act, only if lending of money is a substantial part of the business of the company. The Hon'ble High Court has observed that the question of looking into the aforesaid provision would arise only when all the conditions prescribed in clause (e) of sub- s.2(2) of section 22 are complied with. If the payment is made by way of trade or business, advance or loan, clause (c) of sub-s.(2) of s.22 of the Act is not at all attracted.

As held by Hon'ble Karnataka High Court and other High Courts and Hon'ble Supreme Court, the object and purpose of Section 2(22)(e) is to check escapement of tax u/s.155-0 but in this case the facts reveal beyond doubt that the transactions in question were out of business requirements between the said three companies which were having running accounts with each other. The assessee has not received any direct or indirect individual benefit out of these transactions.”

10.9 Further, the transaction took place between the group only on account of business exigency. On this reason also, it cannot be considered as deemed dividend in terms of section 2(22)(e) of the

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Page 16 of 18 Act. Further, Hon’ble Supreme Court in the case of S.A. Builders Vs. CIT 288 ITR 1 (SC) , wherein it was held as follows:- “The Hon'ble Supreme Court in the case of "S.A.Builders Vs. CIT" (2007) 288 ITR 1 (SC) in the context of expenditure allowable u/s.37 of the Act has observed that what is to be seen as to whether the assessee advanced loan to its sister concern or a subsidiary as a measure of commercial expediency. The Hon'ble Supreme Court has further held that "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. Hon'ble Supreme Court has further held that it is not necessary that loan amount should be exclusively used in the business of the assessee. However, requirement is that it should be used for the purpose of business expediency.”

10.10 In view of the above discussion, we are inclined to delete this amount of Rs.1 crore treated as deemed dividend in the hands of the present assessee.

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Page 17 of 18 from mutual funds at Rs.7,12,046/- and already disallowed a sum of Rs.2,64,730/- u/s 14A of the Act and the assessee’s networth is Rs.32.41 crores, whereas non-current and current investments is only Rs.13.7 crores. Since the investments are made out of own funds, no interest is required to be disallowed.

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 14th Jul, 2022. VG/SPS

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Page 18 of 18 Copy to:

Asst. Registrar, ITAT, Bangalore.