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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS. SUCHITRA KAMBLE
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals] -16, New Delhi dated 19.03.2019 pertaining to Assessment Year 2014-15.
2. The sum and substance of the grievance of the assessee is that the ld. CIT(A) erred in confirming the addition of Rs. 46,66,803/– made by the Assessing Officer on account of amount received from Brahmand System Private Limited treating the same as deemed dividend by invoking the provisions of Section 2(22)(e) of the Act.
3. The other grievance relates to the disallowance of Rs. 2,42,110/– made by the Assessing Officer on account of 5% of car expenses.
Briefly stated the facts of the case are that during the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has received an amount of Rs.78 lakhs from Brahmand Systems Private Limited in which Shri Naveen Makrani and Shri Manohar Lal, partners of the firm, have been holding directorship since 16.03.2011.
5. The Assessing Officer further noticed that shareholding of Shri Naveen Makrani and Shri Manohar Lal in the said company is 1% each.
The Assessing Officer further found that balance 98% shareholding in Brahmand System Pvt Ltd is held by TQM Advertising and Marketing Ltd in which Shri Naveen Makrani and Manohar Lal are having 20% each in shareholding. Being convinced that the provisions of section 2(22)(e) of the Act squarely apply on the facts of the case, the Assessing Officer issued a show cause notice to the assessee asking it to explain as to why the loan amount should not be treated as deemed dividend u/s 2(22)(e) of the Act.
In its reply, the assessee contended that it has received Rs.78 lakhs from the said company as it was not loan but received as an advance for purchase of property owned by the assessee and since the transaction had not materialised, the amount was returned back to the said company.
The assessee furnished necessary evidence in support of its contention. This contention of the assessee was dismissed by the Assessing Officer who was of the firm belief that any payment by a company by way of advance or loan attracts the provisions of section 2(22)(e) of the Act and the purpose and duration of advance or loan is immaterial for the purposes of this section. The Assessing Officer, accordingly, made an addition of Rs. 46,66,803/– being amount of accumulated profit as on 31.3.2013.
The Assessing Officer further made disallowance of 5% of car expenses amounting to Rs.2,42,110/–.
Aggrieved by the addition the assessee carried the matter before the ld. CIT(A) but without any success.
Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities, whereas the ld. DR strongly supported the findings of the ld. CIT(A).
We have carefully considered the orders of the authorities below and the relevant documents brought to our notice. The undisputed fact is that vide agreement to sell dated 16.5.2003, entered into between the assessee and the company Brahmand System Private Limited, the assessee agreed to sell the property situated at Haryana to the said company and the sale consideration was fixed at a sum of Rs.98 lakhs out of which Brahmand System Private Limited advance Rs.78 lakhs as earnest money and part payment. There is no dispute in so far as this agreement is concerned.
The observation of the Assessing Officer that the purpose of the advance or loan is immaterial is contrary to the CBDT Circular No. 19/2017 dated 12.06.2017, which is as under:
F.No.279IMisc.l140/2015I1TJ Government of India Ministry of Finance Central Board of Direct Taxes Circular No. 19/2017 New Delhi,
Dated 12th June, 2017
Sub: Settled View on section 2(22)(e) of the Income Tax Act, trade advances -reg.
Section 2(22) clause (e) of the Income Tax Act, 1961 (the Act) provides that "dividend" includes any payment by a company, not being a company in which the public are substantially interested, of any sum 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.
The Board has observed that some Courts in the recent past have held 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. Such views have attained finality.
2.1 Some illustrations/examples of trade advances/commercial transactions held to be not covered under section 2(22) (e) of the Act are as follows: i. Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do not to fall within the definition of deemed dividend under section 2(22) (e) of the Act. (CIT vs. Creative Dyeing & Printing Pvt. Ltd. l, Delhi High Court). ii. Advance was made by a company to its shareholder to install plant and machinery at the shareholder's premises to enable him to do job work for the company so that the company could fulfil an export order. It was held that as the assessee proved business expediency, the advance was not covered by section 2(22)(e) of the Act. (CIT vs Amrik Singh, P&H High Court). iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22) (e) of the Act. (CIT, Agra vs Atul Engineering Udyog, Allahabad High Court).
In view of the above 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. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed in Courts Tribunals may be withdrawn/not pressed upon.
4. The above may be brought to the notice of all concerned.
Hindi version follows.
(Neetika Bansal) Deputy Secretary to Government of India “
In light of the aforementioned CBDT Circular, which is binding on the Assessing Officer, we are of the considered view that the business transaction of Rs. 78 lakhs cannot be treated as deemed dividend u/s 2(22)(e) of the Act. We, accordingly, direct the Assessing Officer to delete the addition of Rs. 46,66, 803/–.
The second grievance relates to the disallowance of 5% of car expenses etc. This issue was not seriously contested by the ld. AR and, therefore, the same is dismissed.
In the result, the appeal filed by the assessee in is partly allowed.
The order is pronounced in the open court on 06.08.2021.