SANDHYA DYES & CHEMICALS,,UMBERGAM vs. THE ADDL.CIT, VAPI RANGE,, VAPI

आदेश /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. This appeal filed by the Assessee is directed against the order of learned Commissioner of Income tax (Appeals)–Valsad, Valsad (in short “the CIT (A)”) dated 19.08.2015 pertaining to Assessment Year 2011-12, which in turn has arisen from the order passed by the

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 2 of 18 Additional Commissioner of Income-tax, Vapi Range, Vapi, (in short “the AO”) dated 18.03.2014 under section 143(3) of Income Tax Act,1961 (in short ‘the Act’). 2. Grounds raised by the assessee read as follows : “1. The order of Assessment is contrary to the facts and prejudicial to the appellant. 2. On appreciation of the facts and circumstances of the case and law, the additions made by the Learned Assessing Officer and confirmed by the Learned Commissioner of Income Tax (Appeals) are contrary to law and based on erroneous understanding of the facts. 3. On appreciation of the facts and circumstances of the case and law the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assessing Officer in making addition of Rs.82,523/- out of sundry creditors. The action of the Learned Commissioner of Income Tax (appeals) is contrary to the facts of the case and deserves to be deleted. 4. On appreciation of the facts and circumstances of the case the learned commissioner of Income Tax (Appeals – I) has erred in confirming the action of the Learned Assessing Officer in making additions of Rs.17,50,000/- treating the same as deemed dividend by invoking the provisions of Section 2(22)(e) of the Act. The action of the Learned commissioner of Income Tax (Appeals) is contrary to the facts of the case and deserves to be deleted. 5. On appreciation of the facts and circumstances of the case the Learned Commissioner of Income Tax (Appeals – I) has erred in confirming the action of the Learned Assessing Officer in disallowing Rs.5,86,392/- being notional interest @12% on loan given to its sister concern. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts of the case and deserves to be deleted.”

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 3 of 18

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 4 of 18 maintenance charges. Hence, the same was shown as payable liability in the balance sheet. Since the matter was under dispute, therefore, the assessee did not make the payment to the said party nor the said liability has been written off in the books of accounts. The ld.Counsel placing reliance on the decision of Hon'ble Gujarat High Court in the case of CIT vs. Bhogilal Ramjibhai Atara 80 Tax Appeal No.588/2013 dated 04.02.2014 submitted that where the liability was not ceased to exist the amount in question cannot be added back as a deemed income u/s.41(1) of the Act.

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 5 of 18 remission of the liability during the previous year relevant to assessment year under consideration. Therefore, considering the ratio laid down by the Hon'ble Gujarat High Court in the case of CIT vs. Bhogilal Ramjibhai Atara [Tax Appeal No. 588 of 2013 dated 04.02.2014] following the ratio laid down in CIT v. Miraa Processors (P) Ltd. [2012] 208 Taxman 93 (Guj), CIT v. Nitin Garg [2012] 208 Taxman 16 (Guj) and CIT v. G.K. Patel [2013] 212 Taxman 384 (Guj) it was observed that “ The Assessing Officer undertake the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee nor did they knowledge him. Of course, these inquiries were made ex-parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps hold that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as deemed income under section 41(c) of the Act. This is of the one of the strange case where even if the debt is itself is found to be non-genuine from very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed. In view

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 6 of 18 of this matter, following the above ratio of Hon`ble High Court we hold that the AO was not justified in making the addition u/s. 41(1) of the Act. Accordingly, the addition sustained by the CIT(A) is therefore, directed to be deleted, we order accordingly.

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 7 of 18 11. Being aggrieved, the assessee preferred appeal before the CIT(A) wherein it was contested that the said transaction by its nature is not a loan but a deposit, hence, it is outside the purview of the section 2(22)(e) of the Act. However, the CIT(A) was of the view that even if the loan is repaid before the end of the previous year will attract the provisions of deemed dividend. It was also observed that M/s. Sandhya Organics Pvt. Ltd has failed to satisfy the very purpose of making deposit with the appellant firm. The distinction between a loan and a deposit is that in the case of loan, the needy person approaches the lender for obtaining the loan and the loan is given on the terms stated by the lender. But, in the case of deposit, the deposit goes to the depositee for investing in money with the intention of earning interest. However, the appellant failed to provide any details regarding the earning of interest, because the claim of the appellant is that the transaction is a deposit. Secondly, giving deposit free of interest on one hand and borrowing money on other hand does not support the contention of the appellant. The CIT(A) further observed that the depositee has secured loan of Rs.3,47,68,434/-, unsecured loan of Rs.14,29,882/- and interest liability of Rs.37,34,245/- all these data belies the stand of the appellant that the amount involved

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 8 of 18 was deposit. Therefore, the addition made by the AO was came to be confirmed.

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 9 of 18 and page 36, 37 refers to deposit of Rs.8 lakhs with the assessee company. In view of these facts, it was argued that the assessee has received the amount as deposits and not as loan and advances, therefore provisions of section 2(22)(e) of the Act are not attracted. In support of his contention with the deposits received by the assessee cannot be brought to tax a deemed dividend. The learned counsel for the assessee has placed reliance in the case of Sharda Talkies vs. Smt. Madhu Latha Vyas AIR 1966 MP 68. The learned counsel for the assessee further relied in the case of and CIT vs. Daisy Packers Pvt. Ltd. [2013] 40 taxmann.com 480 (Gujarat) of Hon’ble Gujarat High Court wherein it was held that where the assessee has received a deposit from a company but it did not own any share of said company , said deposit was inter corporate deposit and could not be treated as deemed dividend. It was also submitted that the amount of money received by the assessee firm is akin to term deposit, the said amount of deposit accepted by the assessee firm should not be brought within the ambit of the term advances or loan and accordingly the deeming provisions u/s.2(22)(e) any payment by a company, not being company in which the public / substantially interested or any sum [whether as representing a part of the asset of the company or otherwise] [ made after the 31st day of May 1987 by way of advance

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 10 of 18 or loan to a shareholder, being a person who is the beneficiary of the share] [not being shares entitled to a fixed representing dividend whether with or without a right to participate any profits] holding not less than 10% of the voting power, or to any other concern in which such shareholder is a member of a partner and in which he has a substantial interest [hereafter in this clause referred as ‘the said concern’] or any payment by any such company on above, or for the individual benefit, or any such shareholder to the extent to which the company in either case possesses accumulated profits]. Therefore, it was contended that in view of plain reading the provisions, the recipient should be a beneficiary share shareholder holding not less than 10% of voting power in the case of assessee who has received the money is not fulfilling the requirements of being a shareholder and hence, the first limb of the provision is not applicable to the case of the assessee. In support of his contention the ld.Counsel has placed reliance in the case of CIT-II vs. Mahavir Inductomelt (P) Ltd. [2017] 88 taxmann.com 562 (Gujarat) wherein it was held that merely because one of the directors of lending company holding more than 20 percent shares therein was also director in the assessee-company, advances/loan made by that company to the assessee company could not be treated as deemed dividend in the hands of the assessee-

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 11 of 18 company. The ld.Counsel further supported his case by placing reliance in the case of CIT v. Ankitech Pvt. Ltd. [2012] 340 ITR 14/ [2011] 199 Taxman 341/11 taxmann.com 100 (Delhi) and CIT vs. Universal Medicare Private Limited [2010] 190 taxman 144 (Bombay) and others and as per his submissions. Lac further, cited decision in the case of CIT-II Delhi v. Madhur Housing And Development Company Civil Appeal No. 3961 of 2013 dtd. 05.10.2017 wherein various SLP were rejected on deemed dividend issue. 13. Per contra, the learned Senior Departmental Representative (the ld. Sr. Dr.) submitted that the partner of the assessee firm, Mr. Kantilal M. Koli was having 55% share in the assessee firm and was also holding 65% voting power in the lending company. Therefore by virtue of holding 65% voting power in the lender company, the assessee firm holds substantial interest in the lending company, as per provisions of section 2(22)(e)of the Act. Hence, provisions of section 2(22)(e) have been rightly invoked. Further, the amount received by the assessee was a loan/advance and not a term deposit as claimed by the assessee. The claim of deposit has been made afterthought which the lower authorities rightly termed as bogus claim made before

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 12 of 18 them. Therefore, the ld. Sr. DR vehemently supported the orders of the Lower Authorities.

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 13 of 18 that these are deposit is found to be acceptable. Therefore, deposit are not hit by the provisions of section 2(22)(e) of the Act as held in the case CIT vs. Daisy Packers Pvt. Ltd. [2013] 40 taxmann.com 480 (Gujarat) of Hon’ble Gujarat High Court wherein it was held that where the assessee has received a deposit from a company but it did not own any share of said company , said deposit was inter corporate deposit and could not be treated as deemed dividend. Further, the provisions of section 2(22)(e) of the Act provides that the recipient should be a beneficiary being registered share shareholder holding not less than 10% of voting power in the case of assessee who has received the money is not fulfilling the requirements of being a shareholder and hence, the first limb of the provision is not applicable to the case of the assessee. In support of his contention the ld. Counsel has placed reliance in the case of CIT-II vs. Mahavir Inductomelt (P) Ltd. [2017] 88 taxmann.com 562 (Gujarat) wherein it was held that merely because one of the directors of lending company holding more than 20 percent shares therein was also director in the assessee-company, advances/loan made by that company to the assessee company could not be treated as deemed dividend in the hands of the assessee- company. The ld. Counsel further supported his case by placing reliance in the case of CIT v. Ankitech Pvt. Ltd. [2012] 340 ITR 14/

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 14 of 18 [2011] 199 Taxman 341/11 taxmann.com 100 (Delhi) and CIT vs. Universal Medicare Private Limited [2010] 190 taxman 144 (Bombay) and others and as per his submissions. We find that decision in the case of CIT-II Delhi v. Madhur Housing And Development Company Civil Appeal No. 3961 of 2013 dtd. 05.10.2017 of Hon`ble Delhi High Court has been confirmed by the Hon`ble Supreme Court by dismissing the various SLP on this very point and issue of deemed dividend issue. Therefore, respectfully following the ratio of aforesaid decisions of Hon`ble High Courts and Hon`ble Supreme Court as mentioned above, we are of the considered opinion that when the assessee-firm is not registered beneficiary in the lender company, provisions of section 2(22)(e) are not attracted nor the transaction is in the nature of loans and advances as same being short-term deposits which have been returned back during the year itself. In view of this matter, the addition of Rs. 17,50,000 is hereby directed to be deleted. Accordingly, Ground No. 4 of the appeal is allowed in favour of the assessee.

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 15 of 18 16. Facts apropos of this ground are that the assessee has claimed interest expenses of Rs. 7,61,825 and has given interest free loans of Rs. 48,86,600 to sister concern M/s. S M Chemicals of which outstanding balance during the year was at Rs. 39 lakhs. It was explained that this loan was given for business purpose and commercial expediency and that too out of interest-free funds available with the assessee in the form of partners capital and interest free borrowings for other sister concerns. However, this explanation was not found favour with the AO on the ground that no documentary evidence was adduced in support of his claim that loan was given for the purpose of business and commercial expediency. Further on partners capital balances, interest of Rs. 7,20,000 was given during the year under consideration so as the assessee has no interest-free funds available. Moreover, so called short term deposit from M/s. Sandhya Organic Pvt. Ltd. cannot be used for giving interest free loans. If the interest-free funds are available then why the secured loan as well as unsecured loan have been raised. The AO further observed that net cash from operating activities of Rs. 1.79 crore and Rs. 46.80 Lakh has been used for purchase of fixed assets and Rs. 1.01 crores were used for repayment of secured loan and unsecured loan

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 16 of 18 and partners withdrawal and interest payments. Thus after adjustment net cash available remains at Rs. 36,69,876 and out of it loan of Rs. 48,86,600 has been given to sister concern. Therefore, following the decision in the case of Abhishek Industries 286 ITR 1 (P&H) interest @ 12% at Rs. 5,86,392 was disallowed. 17. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). Who has confirmed the disallowance so made by observing that the appellant could not substantiate it with evidence whereas the AO has clearly rebutted all the argument taken by the appellant. Neither the appellant proved commercial expediency nor was able to show availability of interest-free funds to make interest free advances to sister concerns. 18. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned counsel for the assessee submitted that the assessee has sufficient fund to make loan to its sister concerns. The learned counsel for the assessee referred cash flow statement placed at Paper Book Page No. 40 and contended that the assessee had accumulated cash flow from its operating activities. Further, the loan taken for financial institution is for specific purpose nor same cannot be diverted to make loan to sister concern. Hence, there is direct nexus

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 17 of 18 between borrowed funds and advance made to sister concerns. Hence, no disallowance of notional interest should be made. 19. Au contraire, the ld. D.R. supported the order of CIT (A) and submitted that has not able to substantiate the interest-free funds available with him and interest free advances were made out of that to sister concern. The cash flow statement has been already analyzed by the AO. 20. We have heard the rival submissions and perused the relevant material on record. We find that the assessee has not been able to justify that interest free advances was given for business purpose and commercial expediency. The assessee has paid interest of Rs. 7,20,000 on partners capital balance hence, it cannot be said that the assessee had interest-free funds on account of partners capital. Further, the cash flow statement shows that net cash of Rs. 1.79 crores and Rs. 46.80 Lakh has been used for purchase of fixed assets and Rs. 1.01 crores was used for repayment of secured loan and unsecured loans and partners withdrawal and interest payments. After all these adjustments, net cash available at Rs. 36.9 Lakh as against the interest free advances of Rs. 48.86 Lakh given to sister concerns. Further, the so-called short-term deposit from M/s. Sandhya Organics Pvt. Ltd.

Sandhya Dyes & Chemicals Vs. Addl. CIT, Vapi Range, Vapi/I.T.A. No.3225/Ahd/2015/A.Y.:2011-12 Page 18 of 18 cannot be used for giving interest-free advances/loans. Therefore, the assessee is not able to establish that there were sufficient interest-free funds available with the assessee to make interest free advances to sister concerns. Moreover, the assessee has secured loan of Rs. 3.47 crores and unsecured loan of Rs. 14.29 lakhs and interest liability of Rs. 37.34 lakhs. In view of this, we do not find any infirmity in the order of CIT (A), accordingly, same is upheld. 21. In the result, the appeal of the assessee is partly allowed. 22. The order pronounced in the open Court on 04.10.2018.

Sd/- Sd/- (सी.एम.गग� /C.M. GARG) (ओ.पी.मीना/O.P.MEENA) �याियकसद�यतथा/JUDICIAL MEMBER लेखासद�यकेसम� /ACCOUNTANT MEMBER सुरत/ Surat, �दनांक Dated: 04 October.,2018/S.Gangadhara Rao, Sr.PS Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat