MSN PHARMACHEM PRIVATE LIMITED,HYDERABAD vs. ACIT., CENTRAL CIRCLE-2(4), HYDERABAD

PER BENCH : The appeals of the assessee arise from the separate orders of Commissioner of Income Tax (Appeals) – 12 dated 21.08.2024 for A.Y. 2011-12 and dated 22.08.2024 for A.Ys 2012-13 to 2014-15, respectively. Revenue filed cross appeal for the assessment year 2019-20. Since, the facts are identical and issues are common but for the figures, for the sake of convenience, these five appeals were heard together and are being disposed of, by this consolidated order.

“1.The order of the Ld. CIT(A) is erroneous on the facts of the case and contrary to the provisions of law.
2. The Ld. CIT(A) erred on facts and in law in not allowing the claim of additional deduction of expenditure of Rs.94,55,036/- as evidenced by the entries of cash outflows in the names of the employees found in the seized material against the gross unaccounted cash receipts from sale of spent solvents and scrap of Rs.1,10,89,415/- for arriving at the real income thereon.
3. In the facts and circumstances of the case and in law, the Ld.
CIT(A) erred in failing to consider the notarized affidavits of the employees and labour contractors furnished as additional evidence which substantiate the additional claim of expenditure towards labour payments by corroborating and supplementing the entries of cash outflows in the names of the employees found in the seized material.
4. In the facts and circumstances of the case and in law, the Ld.
CIT(A) erred in allowing the deduction of expenditure to the extent of Rs.10,84,916/- only on estimate basis at 10% of the gross unaccounted cash receipts from sale of spent solvents and scrap.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

“1. The Ld. CIT (Appeals) erred both on facts and in law in granting relief to the assessee
2. The CIT(A) erred in reducing the income returned u/s 153A of the Act by allowing 10% of gross amount realized on sale of spent solvent.
3. The Ld. CIT(A) erred in granting relief of 10% on sale of spent solvent towards unsubstantiated alleged payments to workers for handling hazardous waste in the absence of demonstrable contemporaneous evidence.
4. The Ld. CIT(A) ought to have considered the fact that 150% of the purchases were treated as trade advances in view of the CBDT
Circular No. 19/2017 and the balance positive balances alone were considered for the purpose of calculation of Deemed. Dividend.
5. The Ld.CIT(A) erred in appreciating the fact that the outstanding debit balance of M/s. MSN Laboratories Pvt. Ltd. is in fact loan/advance which attracts the provisions of section 2(22)(e) of the Act.”

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

validity of assumption of juri iction by the Assessing Officer for issuance of notice u/s 153A of the Act. The LD.CIT(A), for the reasons stated in the appellate order dated 20.08.2024, partly allowed the appeal filed by the assessee wherein the LD.CIT(A) has allowed the deduction of expenditure to the extent of Rs.10,84,916/- only on estimate basis at 10% of the expenditure incurred against unaccounted receipts from sale of spent solvent /
scrap.

“5. The LD.CIT(A) crossly erred in law in holding that A.Y. 2011-12
falls under the scope of “relevant Assessment Year or Years” as defined in Explanation-1 to section 153A of the Act, though the said assessment year is later than 10 assessment years from the end of the assessment year relevant to the previous year in which search was conducted.”

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

preceding the assessment year relevant to the previous year in which search is conducted or requisition is made which falls beyond six assessment years but not later than the ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

2020-21 and tenth assessment year will be A.Y. 2011-12. Therefore, the notice issued by the Assessing Officer u/s 153A(1)(a) for assessment year is in question and is as per the Explanation – 1 to Section 153A(1) and therefore, the argument of the assessee is devoid of merit and needs to be rejected.

“Assessment in case of search or requisition.

153A. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003 (but on or before the 31st day of March, 2021), the Assessing Officer shall-

(a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years and for the relevant assessment year or years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139;

(b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

previous year in which such search is conducted or requisition is made and for the relevant assessment year or years:

Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years and for the relevant assessment year or years:

Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years and for the relevant assessment year or years referred to in this sub-section pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate:

Provided also that the Central Government may by rules62 made by it and published in the Official Gazette (except in cases where any assessment or reassessment has abated under the second proviso), specify the class or classes of cases in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years:

Provided also that no notice for assessment or reassessment shall be issued by the Assessing Officer for the relevant assessment year or years unless-

(a) the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in the relevant assessment years;

(b) the income referred to in clause (a) or part thereof has escaped assessment for such year or years; and (c) the search under section 132 is initiated or requisition under section 132A is made on or after the 1st day of April, 2017. Explanation 1 For the purposes of this sub-section, the expression
"relevant assessment year" shall mean an assessment year preceding the assessment year relevant to the previous year in which search is conducted or requisition is made which falls beyond six assessment years but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made.”

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

assessment year or years” has been defined as the assessment year preceding the assessment year relevant to the previous year in which search is conducted which fall beyond six assessment years but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

Safiullah Vs. ACIT (supra) wherein the Hon'ble High Court after considering the relevant provisions of Section 153A(1) and Explanation - 1 provided therein has held that while the ‘six assessment years’ as per Section 153A(1)(b) are the six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted, thereby excluding the search assessment year, the starting point for the purpose of computing the ten assessment years as per Explanation - 1 to Section 153A(1) of the Act has to be the end of the search assessment year, which implies that the search assessment year is also to be excluded in the latter case. The relevant portion of the Hon'ble Madras High Court’s order is extracted below :

“7. The principles of interpreting a taxation statute have been authoritatively laid down by the Constitution Bench of the Supreme Court in Commissioner of Customs (Import), Mumbai vs. Dilip Kumar and Company and others
(2018) 9 SCC 1. It was held therein that other tools of interpretation such as contextual or purposive interpretation cannot be applied, nor any resort be made to look to other supporting material in taxation statutes. There is no room for any Intendment. Regard must be had to the clear meaning of the words. Equity has no place. One has to strictly look to the language used.
There is no room for searching intendment nor drawing any presumption.
Nothing has to be read into nor should anything be implied other than essential inferences while considering a taxation statute. (Para 29). This judgment is now a leading authority for the proposition that in the event a provision of fiscal statute is obscure such construction which favours the assessee may be adopted would have no application to construction of an exemption notification, as in such a case it is for the assessee to show that he comes within the purview of exemption.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

But I can endorse the stand of the respondent as regards computation of the period of ten years only if there is ambiguity or obscurity in Explanation-I. To me, there is absolutely no ambiguity.

1st year
2019-20
2nd year
2018-19
3rd year
2017-18
4th year
2016-17
5th year
2015-16
6th year
2014-15
7th year
2013-14
8th year
2012-13
9th year
2011-12
10th year
2010-11

The case on hand pertains to AY 2009-10. It is obviously beyond the ten year outer ceiling limit prescribed by the statute. The terminal point is the tenth year calculated from the end of the assessment year relevant to the previous year in which search is conducted. The long arm of the law can go up to this terminal point and not one day beyond. When the statute is clear and admits of no ambiguity, it has to be strictly construed and there is no scope for looking to the explanatory notes appended to statute or circular issued by the department.

prescribed a particular length, it is not for the court to stretch it. Plasticity is the new mantra in neuroscience, thanks to the teachings of Norman Doidge.
It implies that contrary to settled wi om, even brain structure can be changed. But not so when it comes to a provision in a taxing statute that is free of ambiguity. Such a provision cannot be elastically construed.”

“85. That then takes us to the principal question of identifying the point of origin for the purposes of computation of the six AYs' and the "relevant assessment year" as defined by section 153A. As is manifest from a plain reading of section 153C, the six AYs' are ordained to be those which immediately precede the AY relevant to the previous year in which the search may have been conducted or requisition made. The block of six AYs'
would thus have to be identified bearing in mind the AY pertaining to the FY in which the search had been conducted or requisition made. The aforesaid
AY would thus constitute the anchor point for the purposes of identification of the six AYs'. The statute envisages a similar process to be adopted for the purposes of computation of the "relevant assessment year" and where applicable constructs a block of ten AYs'. The significant difference between the two however is that while the six AYs' hinge upon the phrase
"Immediately preceding" the AY pertaining to the search year, the ten AYs'
are liable to be computed or reckoned from the end of the AY relevant to the year of search. In our considered opinion, the petitioners have correctly

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

identified the aforesaid distinction as being crucial and determinative for the purposes of reckoning the six and the ten AY block period.

G. COMPUTATION OF THE SIX AND TEN YEAR BLOCK IN THE PRESENT
BATCH OF WRIT PETITIONS

Computation of the six-year block period as provided under section 153C of the Act

No. of years
AY 2021-22
1
AY 2020-21
2
AY 2019-20
3
AY 2018-19
4
AY 2017-18
5
AY 2016-17
Consequently, AY 2021-22 would become the first of the six preceding AYs'
and would as per the table set out hereinabove terminate at AY 2016-17. 88. Section 153A replicates the basis on which the six AYs' are to be identified and computed with the solitary distinction being that in the case of the searched person, the six AYs' are liable to be computed from the AY pertaining to the FY in which the search was conducted. The starting point for the purposes of identifying the six AYs' in the case of section 153A would thus turn upon the year of search as opposed to the handover of material which is spoken of in the First Proviso to section 153C. If one were to therefore assume that a search took place on a person between 01 April
2021 to 31 March 2022, the pertinent AY would become AY 2022-23 and the corresponding six AYs' would be as follows:-

Computation of the six-year block period as provided under section 153C of the Act

No. of years
AY 2021-22
1
AY 2020-21
2
AY 2019-20
3
AY 2018-19
4
AY 2017-18
5
AY 2016-17
6

Computation of the ten-year block period as provided under section 153C of the Act

No. of years

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

AY 2022-23
1
AY 2021-22
2
AY 2020-21
3
AY 2019-20
4
AY 2018-19
5
AY 2017-18
6
AY 2016-17
7
AY 2015-16
8
AY 2014-15
9
AY 2013-14
10

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

cash generated from the sale of utilized solvents and scrap has been maintained by him in an excel work book - APRIL 19.29.04.19XZ.
xls, found in the seized pen-drive, and further stated that the said cash receipts are not recorded in the books of accounts for the relevant assessment year and further, he has furnished the entity- wise and financial year-wise working of the said cash receipts. As per the details furnished by Shri R. Buchi Reddy, the total cash receipts from the sale of spent solvents / scrap for the financial years 2012-13 to 2020-21, in respect of the appellant and four other group companies, were worked out at Rs.63,61,27,585/- and the total cash receipts from the sale of spent solvents / scrap for the financial years
2015-16
to 2020-21
were worked out at Rs.18,76,02,606/-. The sworn statement recorded from Shri R.
Buchi Reddy along with the Excel sheet data found in the pen-drive was confronted to Shri MSN Reddy, the Managing Director of the appellant and other group companies, and his statement on oath was recorded on 27.04.2021. In response to a specific Question No.
5, he stated that the spent solvents / scrap used for manufacturing of bulk drugs, after such reuse are categorized as hazardous waste and the same are required to be disposed of at the earliest. He further explained that he was given to understand that such waste is sold to local buyers, and some of the employees of the group companies have utilized such money for their own purposes, and the said money has not reached the respective companies. He further explained that the interest of the management in this regard is the quick disposal of such hazardous waste, and the management has not paid much attention to any other aspect. With regard to the sale of scrap, he explained that the same is generated out of ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

dismantling of old building / units purchased by the companies and the proceeds from the disposal of such scrap have never reached the respective companies since the immediate disposal of such scrap for paving the way for further construction or development, is the priority of the management. However, considering the fact that the data was found in the registered office of the appellant company and in order to put a quietus to the issue, he stated that the cash receipts from the sale of spent solvents / scrap of Rs.1,10,89,415/- was offered as additional income in the hands of assessee for the year under consideration.

distribution among the workers, who involved in handling the said waste and further submitted that since the workers used to demand payment of high remuneration in cash for handling and disposal of spent solvents/ scrap, the excess amount so collected, being in the nature of remuneration paid to workers for handling hazardous waste never reached the respective companies and accordingly, the same cannot be treated as income in the hands of the respective companies. However, he once again, to put a quietus to the issue and avoid prolonged litigation, reiterated his stand with regard to offering additional income in the hands of the respective companies in the relevant assessment year. The details of party- wise and year-wise additional income offered towards unaccounted receipts from the sale of spent solvents / scrap is as follows:

A.Y
MSN
Laboratories
Pvt Ltd
MSN
Pharmachem
Pvt Ltd
Maithri
Laboratories
Pvt Ltd
MSN
Organics
Pvt Ltd
MSN
Life
Sciences
Pvt Ltd
API
Chem
Laboratories
Pvt Ltd
Total
2013-14
3,61,75,014
2,05,91,892
-
19,42,003
35,29,191
-
6,22,38,100
2014-15
5,35,06,633
1,09,57,678
-
22,84,403
28,30,031
-
6,95,78,745
2015-16
5,27,90,633
86,43,206
17,94,442
51,22,781
-
6,83,51,062
2016-17
4,55,32,945
1,28,39,052
-
14,20,467
47,71,521
-
6,45,63,985
2017-18
4,12,58,374
1,99,12,082
57,87,267
18,43,047
47,61,798
-
7,35,62,568
2018-19
6,77,03,448
1,74,25,120
93,97,572
26,08,388
61,56,891
-
10,32,91,419
2019-20
5,12,80,827
4,51,88,803
1,26,36,584
49,90,673
2,68,95,756
-
14,09,92,643
2020-21
5,12,22,731
3,27,38,075
1,02,22,479
48,55,404
2,67,81,999
-
12,58,20,688
2021-22
5,57,69,012
1,62,07,177
58,57,556
41,70,416
3,24,22,875
9,03,945
11,53,30,981
Total
45,52,39,617
18,45,03,085
4,39,01,458
2,59,09,243
11,32,72,843
9,03,945
82,37,30,191

additional income in the return of income filed under Section 153A of the Act do not represent the real income of the assessee, as the said amounts were expended for the purpose of business by way of disbursement to the workers who were involved in handling of the said material as per their demand considering the risks and inconveniences they had to face in handling the hazardous waste.
Therefore, the appellant requested for deduction towards expenditure incurred for disposal of such hazardous material and claimed that the appellant and other group companies incurred a sum of Rs. 66,80,52,108/- towards the cash payments made to workers through the head office employees for Assessment Years
2011-12 to 2021-22, as per the seized material for all six group companies. The AO, however, was not convinced with the explanation furnished by the assessee, completed the assessment by accepting the additional income declared by the appellant towards unaccounted cash receipts from the sale of spent solvents /
scrap of Rs.1,10,89,415/-.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

through cash outflow entries in the names of various employees at the head office appearing in the seized material. The aggregate amount of such cash outflows worked out to Rs. 66,80,52,108/- for AYs.
2011-12 to 2021-22
and the same represented the expenditure incurred by the appellant and other companies for handling and disposal of spent solvents / scrap. The appellant further contended that, out of the cash outflow as recorded in the same seized material, an amount of Rs.17,63,52,315/- was in the name of MSN Reddy and his family members, which represents an amount drawn by the management out of unaccounted cash receipts from the sale of spent solvents / scrap and in respect of the said amount, no deduction has been claimed in the hands of the group companies. The appellant further contended that, in the case of the assessee for the instant assessment year, an amount of Rs.1,10,89,415/- was spent on various expenses against the unaccounted cash receipts. To corroborate and supplement the entries of cash outflows in the seized material, the appellant furnished notarized affidavits of various employees of the group who were involved in the process of collection of cash towards sale of spent solvents / scrap and disbursement of the same to the concerned workers and the labour contractors, who have deployed such workers.

holding that the expenditure shown in the seized material containing entries of cash inflow towards unaccounted cash receipts from sale of spent solvents / scrap as well as cash outflow entries showing handling the cash to various persons. Since both debit and credit entries are simultaneously recorded in the same seized document, the document should be read as a whole and cherry picking of data according to convenience is not justified. The LD.CIT(A) further observed that it is evident from the sworn statement dated 27-4-2021 and the subsequent affidavit dated 5-7-
2021 of Shri MSN Reddy that since beginning, he adhered to his stand that the unaccounted cash receipts were utilized for making payments to workers who were involved in handling of disposal of hazardous waste. The appellant submitted notarized affidavits of the concerned employees and labour contractors as additional evidence to substantiate its claim of making excess payments to workers. Since the appellant's claim of expenditure incurred for making payments to workers is based on seized material, the sworn statement and subsequent affidavits, the claim of the appellant has some reasonable force even if additional evidence by way of notarized affidavits is ignored.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

unaccounted income is required to be considered. Therefore, considering the evidence filed during the course of appellate proceedings and also taking support from the financials of the MSN group of companies for the relevant financial years, the appellant and other companies have historically incurred an average of 11%
of their turnover on salary and wages. Therefore, considering the disposal of such hazardous material associated with risk and challenges, the LD.CIT(A) has directed the AO to allow 10% of the gross amount realized on sale of spent solvent and scrap for the A.Y.
2011-12 as handling expenses.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

involved in the disposal of scrap without considering the other elements of cost like transportation, handling, and disposal of hazardous waste. The LD.CIT(A), referring to seized material found in the form of an Excel sheet, submitted that except few occasions, the amounts received from the sale of spent solvents / scrap have been given back for further disposal of hazardous waste, as additional wages, to employees who were involved in the disposal of said scrap. The AO conveniently ignored one part of the seized document, which contains details of expenditure incurred against unaccounted cash receipts from the sale of spent solvents / scrap, even though the Managing Director of the appellant company claimed that the management did not pay any attention to the financial aspects of the disposal of spent solvents / scrap, but only showed interest in the quick and early disposal of waste because of its hazardous nature and the impact that may be created on environment. Although, the appellant has furnished all the evidence, including the sworn affidavit from the persons deployed to disburse expenditure to various persons, but the LD.CIT(A) has ignored all the evidence filed by the assessee and allowed 10% of receipt as expenditure incurred against unaccounted cash receipts from the sale of spent solvents / scrap. Therefore, he submitted that the deduction towards expenditure incurred for handling and disposal of spent solvents / scrap, as per the very same seized material, which was quantified as Rs.1,10,89,415/- may be allowed as a deduction against the unaccounted cash receipts. The Learned
Counsel for the assessee made an alternative claim that if at all a reasonable portion of expenditure needs to be estimated, then the same needs to be estimated by considering the various expenditures

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

involved in handling spent solvents / scrap assets, but not only salary and wages as considered by the LD.CIT(A).

sale of spent solvents / scrap and also the cash outflow towards various payments made to MSN Reddy and other Directors of the appellant and other companies. From the above, it is very clear that the LD.CIT(A) has rightly allowed 10% of the receipt as expenditure incurred against unaccounted cash receipts, considering the nature of the material and the risk involved in the disposal of the said hazardous waste. Therefore, CIT-DR submitted that the order of the LD.CIT(A) should be upheld.

“10. We have heard both parties, perused the material, and gone through the orders of the authorities below. There is no dispute with regard to the fact that during the course of the search in the office of the appellant and other group companies, a Sony make 16 GB pen drive was found and seized from the possession of cashier Shri R.
Buchi Reddy, which was marked as Annexure A/MSN/OFF/PD1. The entries contained in the Excel workbook in the seized pen drive pertains to the cash receipts of the appellant company as well as the other group companies about the sale of spent solvents / scrap. In fact, Shri R. Buchi Reddy, the cashier, in his sworn statement

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

recorded on 24-02-2021, has admitted unaccounted cash receipts from sale of spent solvents / scrap and also stated that the said receipts are not accounted for in the books of accounts for the relevant assessment years. The statement of Shri R. Buchi Reddy has been confirmed by the MSN Reddy, the Managing Director of the appellant company. He has further explained the process involved in handling and disbursal of spent solvents / scrap, and according to MSN Reddy, the management did not pay any attention to the financial aspects of the disposal of spent solvents / scrap, but their only interest is the early disposal of the said material, considering the hazardous nature and environmental issues involved in handling and disbursal of the said material. Further, it is also an admitted fact that the appellant and other group companies have admitted additional income received from sale of spent solvents / scrap for the respective assessment years and filed returns in response to notices issued under Section 153A of the Act and paid taxes. Therefore, the issue of the additional claim of expenditure against unaccounted cash receipts from sale of spent solvents / scrap needs to be considered in light of the incriminating material found during the course of the search, statements recorded from the persons who handled the issue, and MSN Reddy, the Managing Director of the appellant company, as well as the subsequent additional evidence filed by the assessee before the LD.CIT(A), including the notarized affidavits from the employees who are involved in the disposal of the said hazardous waste.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

generated from the dispersal of the same is insignificant when compared to the operational revenue of the group companies. He further stated that the only interest of the management is the quick disposal of the said waste, failing which, it may invite problems from the pollution regulatory authorities. Therefore, going by the averments made by the managing director of the assessee company during the early days of the search, during the post-search investigation, and during the assessment proceedings, in our considered view, the subsequent claim made by the appellant during the assessment proceedings towards the deduction of expenditure against unaccounted cash receipts from sale of spent solvents /
scrap needs to be considered going by on the entries contained in the very same seized document, which represents cash outflow in the name of various employees.

various persons, including the employees of the appellant company, and their associates. The appellant has quantified the total amount of cash outflow in the seized document in the name of employees at Rs. 66,80,52,108/- for all assessment years and for all the assessees put together. The appellant has also quantified cash outflows of Rs.17,63,52,315/- in the name of MSN Reddy and family members out of unaccounted cash receipts. The appellant has not claimed deduction towards the amount received by MSN
Reddy, the managing director and other directors of the appellant company amounting to Rs.17,63,52,315/-. In respect of cash outflow representing amounts paid to various employees, the appellant has quantified an amount of Rs. 66,80,52,108/-. Although the appellant claims that the said amount represents various expenditures incurred for handling and disbursement of spent solvents / scrap, but no evidence has been filed except for notarized affidavits from few employees. In the affidavits filed by employees, they have explained the process involved in handling and disbursement of spent solvents / scrap and the amounts incurred towards various expenditures for disposal of spent solvents / scrap. Further, the cash paid to various employees and the purpose of said payments have been explained by the employees in their notarized affidavits.
Going by the entries contained in the seized document, coupled with the affidavits filed by the employees, in our considered view, the purpose of maintaining data in the Excel sheet by the cashier is only for internal control at his end regarding the source from sale of spent solvents / scrap and the disbursal of the said cash to various persons at his end. Once the cash is disbursed by him to the head office employees for the purpose of further disbursal of the said cash to the workers by them and the said fact is noted in the Excel workbook by him, it has served the purpose, and there is nothing more to be recorded by him. This explains the reasons why there is no evidence of material regarding the actual disbursement of cash by the head office employees to the workers. Having regard to the limited purpose of maintaining the said excel workbook, it is not correct to draw any adverse conclusion regarding the absence of evidence in the seized material regarding the actual disbursement of the cash by the head office employees to the workers. It is in this background of said circumstances only that the head office employees have submitted the notarized affidavits stating that the cash handed over to them periodically by the cashier has been fully utilized for making payments to the workers involved in collection and disposal of spent solvents / scrap needs to be accepted. The said notarized affidavits hold evidentiary value. However, the AO, in the remand report, even though not disputing the veracity of the said notarized affidavits or discrediting its contents or bringing any other material on record to disprove the contents of the affidavits, has simply rejected the arguments made by the assessee regarding the expenditure incurred for handling the said scrap. We further noted that the cash outflow represents payments made to various employees are in the name of few employees, and during the course

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

of search, simultaneously search was carried out at the residence of three employees, where no incriminating material has been found in their possession to allege that the cash received by them has been utilized for their personal purposes, including the acquisition of any assets. This fact is further strengthened the arguments of the assessee that the cash given to said employees has been utilized for the purpose of business and also for disbursal of cash to the workers, who involved in handling of hazardous waste. Therefore, we are of the considered view that the LD.CIT(A), having taken note of the affidavit filed by the employees of the assessee, who are involved in handling and disposal of scrap, but erred in considering only 10% of receipts as expenditure against unaccounted cash receipts from sale of spent solvents /scrap.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

considered view, the only possible way is to estimate a reasonable amount of expenditure against unaccounted receipts from sale of spent solvents / scrap. Therefore, considering the fact that the appellant has already disbursed 80% of the amount received from unaccounted cash receipts in the name of various employees, and also going by the nature of the material, in our considered view, at least 60% of the receipts need to be considered as expenditure against unaccounted receipts from the sale of spent solvents / scrap.
Therefore, we direct the AO to deduct 60% of the receipts as expenditure against unaccounted receipts from sale of spent solvents / scrap. In other words, out of the additional income offered by the assessee and assessed by the AO towards unaccounted receipts from sale of spent solvents / scrap, the assessee gets relief to the extent of 60%, and the balance amount of 40% of unaccounted cash receipts is hereby sustained for both the assessment years.”

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

GROUND NO.6 OF ASSESSEE’s APPEALS FOR A.Y. 2012-13 TO 2014-15

“6. In the facts and circumstances of the case, the Ld.CIT(A) erred in law in holding that the Assessing Officer has validly assumed juri iction u/s 153A of the Act though the satisfaction note recorded by him omitted to provide any justification for reaching the conclusion that the income escaping assessment, being the unaccounted income from sale of spent solvents, is represented in the form of an asset, which is a mandatory condition precedent for assuming juri iction to issue notice u/s 153A for assessment years falling beyond six assessment years preceding the assessment year relevant to the previous year in which search was conducted as per the fourth proviso to section 153A(1) of the Act.”

the enumeration of the specific conditions which need to be fulfilled.
Unless the conditions laid down in clauses (a), (b) and (c) specified in the said forth proviso are cumulatively fulfilled, the Assessing Officer does not get juri iction to issue notice u/s 153A of the Act for the “relevant assessment year or years”.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

Section 153A(1) of the Act requires to be satisfied. As per 4th proviso to Section 153A(1) of the Act, the Assessing Officer can assess or reassess the total income of the assessee, provided the Assessing
Officer has in his possession books of accounts or other documents or evidence which reveal that the income, represented in the form of “asset”, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in the relevant assessment years. From the 4th proviso to Section 153A(1) of the Act, it is undisputedly clear that, if the Assessing Officer has in his possession, the books of accounts or other documents or evidence which reveals that the income represented in the form of an “asset”, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in the aggregate in relevant assessment years, then the Assessing Officer shall assume juri iction by issuance of notice u/s 153A and assess or re-assess the total income of the assessee.

relevant assessment years. From the above, it is undisputedly clear that the Assessing Officer is having in possession books of accounts or other documents or evidence which reveal that the income represented in the form of “asset”, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in the relevant assessment years. Therefore, we are of the considered view that the arguments of the assessee based on the ‘satisfaction note’, that the Assessing
Officer did not bring out the fulfillment of the conditions laid down for issuance of notice u/s 153A of the Act are devoid of merit and cannot be accepted.

spent solvents and scrap which becomes the income of the appellant.
Therefore, in our considered view, the profits estimated from sale of unaccounted spent solvents and scrap becomes income represented in the form of an “asset” being the advances given to the directors and other parties and therefore, the ‘satisfaction note’ recorded by the Assessing Officer, in light of said incriminating material constitutes fulfillment of the conditions laid down for issuance of notice u/s 153A of the Act for the assessment years in question.
Thus, we consider that the arguments advanced by the learned counsel for the assessee on this issue is devoid of merit and are hereby rejected.

GROUND NOS.4 AND 5 OF REVENUE’S APPEAL for A.Y. 2019-20

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

of search operation at the premises of MSN Group Companies, books of accounts were found and seized vide Annexure
A/MSN/Off/HD3. On verification, the AO found that there was a substantial amount of debit balance outstanding from M/s. MSN
Laboratories Pvt. Ltd (hereinafter referred to as “MSNL”) and M/s.
MSN Organics Pvt. Ltd (hereinafter referred to as “MSNO”) in the books of the appellant company. The AO further noted that Shri
MSN Reddy is a common director in all the three companies and holds more than 10% of the voting share. During the course of search proceedings, summons u/s 131 of the Act, dated
09.04.2021 was issued to the assessee requesting him to produce the information with regard to the purchases and sales made, receipts, and also excess payments made to MSNL and MSNO. The assessee was asked to provide details of sales and purchases made to/from both the companies. The assessee was also required to produce the nature and purpose of payments made, the necessity or purpose of giving such amounts in excess of purchases made, and to provide a copy of the Board resolution passed, if any, for making payments in excess of purchases made along with details of interest charged on such excess amounts paid, if any. In response, the assessee has submitted ledger account copies of MSNL and MSNO in the books of the appellant company and also filed details of opening balance and sales made during the relevant financial year, purchases made from the above two companies, payments made and received from the above two companies and closing balances. The assessee had also explained the nature and necessity of payments made to the above two group companies and submitted that the appellant company and the other two group

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

companies i.e., MSNL and MSNO, are engaged in the same line of business of manufacture and sale of Active Pharmaceutical
Ingredients (APIs). The appellant company and the recipient company have carried out trading transactions of both purchases and sales made with each other in the course of said business. The appellant company has made payments in respect of purchases made from the above two companies and also received payments in respect of sales made to the above two companies, and submitted that these transactions are in the course of the normal business of the assessee and have business exigency or commercial expediency.

the other two recipient companies are in the nature of commercial transactions would not fall under the ambit of the word "advance"
as defined under Section 2(22)(e) of the Act. However, keeping in view the flexibility required in practical business situations, the AO treated the payments made by the assessee company to the above two companies to the extent of 150% of the purchases made from the recipient companies as the payments made in the ordinary course of business, and the payments made in excess of 150% of the purchases as payments having no nexus with business transactions. Accordingly, the AO reduced the additional amount of 50% of the purchases from the excess payments computed by him, and such balance excess payments have been treated as payments made by way of ‘advances or loans’ on the reasoning that the said excess payments have no relation to the trading transactions between the appellant company and two recipient companies. The AO further observed that although the appellant has made excess payments over and above the normal business transactions, but the appellant company has not engaged in the business of finance and no interest was charged in respect of said loans and advances and therefore, invoked provisions of Section 2(22)(e) of the Act and made additions of Rs.243,06,97,212/- for the assessment year 2019-20. 31. The AO further observed that the appellant company, being the payee, is liable to pay dividend distribution tax under the provisions of Section 115-O of the Income Tax Act, 1961 in respect of the said deemed dividend under Section 2(22)(e) in the hands of the common substantial shareholder, in view of the amendment made to Section 115Q with effect from 01.04.2018, making

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

dividend distribution tax applicable to deemed dividends also. Since no dividend distribution tax has been paid as deemed dividend by the appellant company, the AO made addition towards deemed dividend under Section 2(22)(e) of the Act and computed dividend distribution tax for both the assessment years.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

appreciating the fact that current account transactions between the two groups in the normal course of business of the assessee cannot be treated as ‘loans or advances’ for the purpose of Section 2(22)(e) of the Act. The assessee further contended that the provisions of Section 2(22)(e) r.w.s. 115Q of the Act do not attract when payments to the recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder.

receipts must be settled. However, in the present case, during the assessment year 2019-20, the appellant has purchased ₹1.95 crores from MSNL and made sales of ₹100.52 crores, and consequently, the appellant had to receive a balance amount of ₹ 98.57 crores.
However, against total receivable of ₹156 crores, (₹98.57 crores +
opening balance of ₹53.43 crores), the appellant paid further amounts to MSNL, and the peak of such debit in the guise of trading account reaches ₹ 299.95 crores as on 31-03-2019 against the opening balance of ₹ 53.43 crores. Therefore, this account of MSNL in the books of the appellant company cannot be termed as a Current Account as the actual sales and purchase transactions have significantly deviated from trade transactions, with payments that reached a peak of Rs.299.95 crores and hence, the payments so made cannot be termed as trade transactions.

argument that the excess amount paid to the two companies has been utilized for the business of the recipient company and that no part of the said payments was utilized / diverted for the benefit of the common shareholder because it is seen that Shri MSN Reddy is the substantial shareholder in both the payee and the recipient company, and any excess payment made to the payee in the guise of trade and advances would avoid the payment of dividend distribution tax under Section 115-O and would indirectly benefit the common shareholder; thus, the said payments fall under the deeming provisions of Section 2(22)(e) of the Act. Therefore, considering the nature of transactions between the parties, the quantum of payment, and also by considering the CBDT Circular
No.19/2017 dated 12-6-2017 coupled the details of amount paid by the appellant to the recipient companies, by allowing 200% of purchases as normal payments in the ordinary course of business, and excess payments over and above 200% have been treated as loans and advances for the purpose of Section 2(22)(e) of the Act, and directed the Assessing Officer to rework the deemed dividend under Section 2(22)(e) and also compute the dividend distribution tax under Section 115Q of the Act.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

appreciating the fact that the transactions between the appellant company and two other associated concerns are trade advances, which are in the nature of commercial transactions effected in the ordinary course of business and does not fall under ‘loans or advances’ for the purpose of Section 2(22)(e) of the Act. The Learned
Counsel for the assessee further submitted that the LD.CIT(A) failed to appreciate that there is a two-way movement of funds between the appellant company and the recipient companies and the said transactions, which are in the nature of current adjustment account transactions, cannot be termed as loans or advances falling within the ambit of deemed dividend under Section 2(22)(e) of the Act. The Learned Counsel for the assessee further submitted that the LD.CIT(A) failed to appreciate the fact that payments made to recipient companies, who is not a shareholder of the appellant company, do not come under the purview of deemed dividend under Section 2(22)(e), since the same have been utilized for the purpose of business of the recipient companies and no part of the said payments were utilized / diverted for the benefit of substantial shareholders. The Learned Counsel for the assessee took us to relevant documents, including ledger accounts of the two companies in the books of accounts of the appellant, and argued that if you go by the nature of transactions involving purchases and sales with the above companies and against purchase and sales, the appellant received payments from these companies and also made payments for purchases. There is a series of day-to-day transactions between the two companies which are arising in the normal course of business of carrying out manufacturing of API and bulk drugs.
Since all the three companies are engaged in the business of ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

manufacturing of Active Pharmaceutical Ingredients (API) and bulk drugs, they have transactions with each other for purchases, sales, and also requirement of short-term funds for carrying out the business activities. Therefore, the Assessing Officer having accepted the fact that there are commercial transactions between the appellant and the two companies, and that these are in the nature of trade advances as per Board Circular No.19/2017 dated 12-06-
2017, but erred in coming to the conclusion that only a portion of advances paid by the appellant company falls under trade advances and rest is loans and advances.

loans and advances for the purpose of Section 2(22)(e) of the Act.
The Learned Counsel for the assessee further referred to the decision of the Hon’ble Supreme Court in the case of CIT Vs.
Mukundray K. Shah reported in (2007) 290 ITR 433 (SC) and submitted that, in order to invoke provisions of Section 2(22)(e), two factors must be considered: whether the payment was a loan or advance and whether on the date of payment there existed accumulated profits. Unless the transactions are in the nature of loans and advances, the provisions of Section 2(22)(e) cannot be invoked. In this regard, he relied upon the following judicial precedents placed at page 9 of the written submissions:

1) CIT vs. India Fruits Ltd [2015] 53 taxmann.com 307 (Andhra
Pradesh) (PB-I: Pg 78-79).
2) CIT vs. Creative Dyeing & Printing Pvt Ltd [2009] 318 ITR 476
(Delhi) (PB-I: Pg 80-82)
3) CIT vs. Ambassador Travels Pvt Ltd [2009] 318 ITR 376 (Delhi)
(PB-I: Pg 83)
4) CIT vs. Raj Kumar [2009] 318 ITR 462 (Delhi) (PB-I: Pg 84-88).
5) CIT vs. Nagindas M Kapadia [1989] 177 ITR 393 (Bombay) (PB-
I: Pg 89)
6) Jamuna Vernekar vs. CIT [2021] 432 ITR 146 (Karnataka) (PB-
I: Pg 90-91)
7) CIT vs. Amrik Singh [2015] 56 taxmann.com 460 (P & H) (PB-I:
Pg 92-93).
8) CIT vs. Atul Engineering Udyog [2014] 51 taxmann.com 569
(Allahabad) (PB-I: Pg 94-96).

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

“15. We have heard both parties, perused the materials available on record and gone through the orders of the authorities below. We have also carefully considered the plethora of case laws relied upon by both sides. The addition towards deemed dividend for the purpose of levy of dividend distribution tax has been made by considering the debit balance outstanding in the accounts of two group concerns i.e.,
M/s MSN Laboratories Pvt. Ltd and M/s MSN Organics Pvt. Ltd, in the books of the appellant company as on 31.03.2019. The appellant company and two group companies MSN Laboratories Pvt. Ltd and MSN Organics Pvt. Ltd (referred to as recipient companies) are engaged in the same line of business of manufacture and sale of Active Pharmaceutical Ingredients (API). The appellant company and the recipient companies have carried out trading transactions of purchases and sales with each other in the course of the said business. The appellant company has made payments in respect of purchases made from the recipient companies and received payments in respect of sales made to recipient companies. During course of assessment proceedings, the AO analyzed the details of opening balance, sales, purchases, receipts, payments and closing balance in the accounts of the two recipient companies and observed that they are in receipt of excess amounts from the appellant company in comparison to the amounts receivable by them against the trading transactions of purchases and sales that took place between the appellant company and the recipient companies during the year. The AO worked out the quantum of excess payments made by the appellant company to the recipient companies by aggregating the sales and payments made to the recipient companies and subtracting the purchases made and payments received from the recipient companies. However, having regard to the Board’s Circular

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

No.19/2017, wherein it was stated that the trade advances, which are in the nature of commercial transactions, would not fall under the ambit of the word “advance” in section 2(22)(e) and keeping in view the flexibility required in practical business situations, the AO treated the payments made by the appellant company to the extent of 150%
of the purchases made from the recipient companies as the payments made in the ordinary course of business and the payments made in excess of such 150% of the purchases as payments having no nexus with the business transactions. Accordingly, the AO reduced an additional amount of 50% of the purchases from the excess payments and such balance excess payments were treated as payments made by way of ‘advances or loans’ on the reasoning that they have no relation to the trading transactions between the companies. In this connection, the AO noted that the appellant company is not engaged in the business of finance and that no interest was charged in respect of such ‘advances or loans’. The said amounts of excess payments were accordingly held to be constituting deemed dividend u/s 2(22)(e) in the hands of Sri. M.S.N.Reddy, who is the common substantial shareholder in the appellant company and the recipient companies.
The deemed dividend worked out by the AO amounted to Rs.241,53,50,035/- in the case of payments made to MSN
Laboratories Pvt Ltd and Rs.1,53,47,177/- in the case of payments made to MSN Organics Pvt Ltd. The aggregate deemed dividend worked out for Asst. Year 2019-20 amounted to Rs.243,66,97,212/-.
Similar working has been made for Asst. Year 2020-21 and worked out deemed dividend of Rs.266,76,84,647/-. The details of the recipient companies and the payments made to them by the appellant company in excess of 150% of the purchases, which has been treated as deemed dividend u/s 2(22)(e) by the Assessing Officer for the assessment years 2019-20 and 2020-21 under consideration are summarized in the table given below:

Particulars
A/c of MSN
Laboratories Pvt Ltd in the books of the appellant
A/c of MSN
Organics Pvt Ltd in the books of the appellant
Amount (Rs.)
Amount (Rs.)
Opening debit Balance
57,44,33,690
0
Add: Sales
100,52,08,397
54,74,844
Add: Payments (net of rent)
298,63,99,230
14,79,63,266
Less: Purchases
1,95,03,644
53,36,102
Less: Receipts
154,70,02,126
13,00,86,779
Closing debit balance
299,95,35,547
1,80,15,229
Excess payments during the year
(sales + payments – purchases
– receipts)
242,51,01,857
1,80,15,228
Less:
Additional
50%
of purchases in addition to 100%
97,51,822
26,68,051

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

of purchases considered above
Balance excess payments treated as “advance or loan”
constituting deemed dividend
241,53,50,035
1,53,47,177
Aggregate deemed dividend for AY 2019-20
243,06,97,212

Particulars
A/c of MSN Laboratories Pvt Ltd in the books of the appellant.
Amount in (Rs.)
Opening debit balance
299,95,35,547
Add: Sales
100,43,24,928
Add: Payments (net of rent)
506,40,05,020
Less: Purchases
2,13,45,020
Less: Receipts
336,86,26,307
Closing debit balance
567,78,93,192
Excess payments during the year
(sales + payments – purchases –
receipts)
267,83,57,645
Less: Additional 50% of purchases in addition to 100% of purchases considered above
1,06,72,998
Balance excess payments treated as “advance or loan” constituting deemed dividend.
266,76,84,647

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

reduced an additional amount of 50% of the purchases from the excess payments computed by the AO and the balance excess amount has been treated as “advance or loan” constituting deemed dividend.
17. The provisions of section 2(22)e) of the Income Tax Act, 1961
deals with ‘Deemed Dividend’. As per the provisions of section 2(22)(e) of the Act, deemed dividend defined to mean, 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 holding not less than 10% of the voting power, or to any Concern in which such shareholder is member or partner and in which he has a substantial interest 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 term ‘Concern’ has been defined which includes ‘a company’
also. Therefore, in the present case, the conditions prescribed for invoking the provisions of Section 2(22)(e) of the Act is primarily satisfied to the extent the appellant company and other two companies are having common share holder Shri MSN Reddy, who is holding more than 10% voting power in all the three companies and further, the appellant company is having accumulated profits which is in excess of the amount of advance computed by the Assessing
Officer. However, whether the transactions between the appellant company and the other two companies are trade advances which are carried out in the normal course of business of all the companies or any loan or advances which fall within the ambit of Section 2(22)(e) of the Act has to be seen in light of nature of transaction between the parties.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

The provision of section 2(22)(e)(i) is basically in the nature of an explanation. That cannot, however, have bearing on interpretation of the main provision of section 2(22)(e) and once it is held that the business transactions do not fall within section 2(22)(e), there is no need to go further to section 2(22)(e)(ii). The provision of section 2(22)(e)(i) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that's all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of section 2(22)(e).
This interpretation is in accordance with the legislative intention of introducing section 2(22)(e). [Para 11]
Therefore, the Tribunal was correct in holding that the amount advanced for business transaction between the assessee-company and the company P was not such to fall within the definition of the deemed dividend under section 2(22)(e). [Para 12]”

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

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 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

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

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) towards deemed dividend is therefore wholly untenable and needs to be deleted.

are evidently imbued with business expediency cannot be considered to be falling under the ambit of “advance or loans” under section 2(22)(e) so as to constitute deemed dividend. Further, the provisions of deemed dividend are not attracted in the facts of the case for the instant assessment years as the basic ingredient to invoke the said provisions that payments by way of ‘advance or loans’ have been made by the appellant company to the recipient companies in which Sri. M.S.N.Reddy is the common substantial shareholder, is non- existent. Therefore, in our considered view, the addition made by the AO, to the extent upheld by the CIT(A), towards deemed dividend u/s 2(22)(e) in the hands of the appellant for the purpose of levy of dividend distribution tax without the satisfaction of the said basic condition laid down in the section is unwarranted and untenable.
22. The second limb of argument of the appellant is that current adjustment account transactions do not represent ‘loans or advance’
for the purpose of deemed dividend. We, find that there is a two-way movement of funds between the appellant company and the recipient companies as per the business requirements of the said companies and the same is evident from the perusal of the respective ledger account copy of the recipient companies in the books of the appellant company, the copies of which were furnished to the AO during the assessment proceedings (Pg No.62-67 and Pg No.68 of PB-I). We further observed that there is a series of debits and credits in the concerned ledger accounts, which clearly indicate that the transactions were effected in the normal course of business and the concerned group companies have given funds to and received funds from each other as and when required for the purpose of the business of the said group companies. It needs to be borne in mind that such transactions between the group companies cannot be considered to be in the nature of ‘loans or advance’ to the group companies. An account containing such series of debit and credit entries reflecting movement of funds both ways between the associate/group companies as per their business requirements has to be construed to be in the nature of a Current Adjustment Account unlike the transactions in the nature of ‘loans or advances’ to a shareholder or to a concern in which the shareholder has substantial interest, the movement of funds in a current adjustment/ accommodation account is in either direction on a need basis. Therefore, transactions which are in the nature of current adjustment account transactions cannot be termed as ‘loans or advances’ falling within the ambit of deemed dividend u/s 2(22)(e) of the Act.
23. The appellant, in support of the aforesaid contention places reliance on several judicial decisions. In the case of CIT Vs. Schutz
Dishman Bio-tech Pvt Ltd in Tax Appeal Nos. 958 & 959 of 2015 (Pg
No.100-101 of PB-I), the Hon’ble Gujarat High Court held that where there is movement of funds on a need basis, unlike transactions in the nature of loans or advances which are usually few in number, such transactions are in the form of current adjustment

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

accommodation entries. The Hon’ble Court held that when the CIT(A) and Tribunal have concurrently held that the amounts are not in the nature of loan or deposit but merely adjustments based on large number of adjustment entries occurring in the accounts between the entities, application of section 2(22)(e) would not arise. Similarly,
Hon’ble Calcutta High Court in the case of CIT Vs. Gayatri
Chakraborti [2018] 407 ITR 730 (Calcutta) (Pg No.102-104 of PB-I) held that the transactions between the shareholder and the company were in the nature of current account and the provisions of section 2(22)(e) would not be applicable, where there were transactions of giving money by the company to the shareholder and vice versa in the account. Further, the ITAT, Mumbai held in the case of Ravindra R
Fotedar Vs. ACIT [2017] 85 taxmann.com 314 (Mumbai) (Pg No.105-
111 of PB-I) that where the movement of funds is in both ways on need basis between the two companies in which the assessee held substantial interest, the transactions are in the form of current accommodation entries and the amount in question could not be regarded as deemed dividend. In another case of Neha Home
Builders Pvt Ltd Vs. DCIT [2018] 98 taxmann.com 465 (Mumbai-Trib) also (Pg No.112-116 of PB-I), the ITAT, Mumbai held that when the transactions between group companies were current and inter banking accounts containing both receipt and payment entries, same could not be regarded as loans and advance, as contemplated under section 2(22)(e) and no addition could be made as deemed dividend.
Similar view was expressed by the ITAT, Delhi in the case of Saamag
Developers Pvt Ltd Vs. ACIT [2018] 90 taxmann.com 20 (Delhi-Trib)
(Pg No.117-131 of PB-I), wherein the Tribunal held that the amounts received from various group companies could not be considered as loans and advance, as contemplated u/s 2(22)(e) since the said transactions between the group concerns are current and inter banking accounts containing both types of entries of giving and taking of amounts. In the case of Iswar Chand Jindal Vs. ACIT [2015] 61
taxmann.com 428 (Delhi-Trib), the ITAT, Delhi held that the transactions between the two group companies are in the nature of current account transactions and the same cannot be regarded as deemed dividend under section 2(22)(e) of the Act. The sum and substance of ratio laid down by various courts and Tribunals is that current account transactions between two group companies cannot be regarded as loans or advances as defined u/s 2(22)(e) of the Income
Tax Act, 1961. Therefore, we are of the considered view that the provisions of deemed dividend u/s 2(22)(e) are not applicable to the transactions between the appellant company and recipient companies, as the said transactions bear the character of current adjustment account transactions due to two-way movement of funds on a need basis. Thus, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax to the extent upheld by the LD.CIT(A) is not warranted and therefore, deleted for this reason also.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

from the said funds. Therefore, in our considered view, it is not legally tenable to consider the payments made by the appellant company to the recipient companies as ‘deemed dividend’ in the hands of the common substantial shareholder for the purpose of levy of dividend distribution tax in the hands of the appellant company, in the absence of any benefit derived by such shareholder from the said payments.
25. In support of this contention, the appellant placed reliance on the decision of the Hon’ble Gujarat High Court in the case of Jayesh T
Kotak Vs. DCIT [2020] 425 ITR 435 (Gujarat) (Pg No.140-146 of PB-I), wherein it was held in the light of the decision of the Hon’ble Supreme
Court in the case of CIT Vs. Mukundray K. Shah [2007] 290 ITR 433
(SC) that any payment made by a company in which a shareholder has shareholding exceeding 10% of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The Hon’ble High Court held that the intention of the legislature is to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed through different modes/concerns. The Hon’ble High Court held that what needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. The relevant portion of the said decision is extracted below:
“7.11 Examining the facts of the case in the light of the above legal and statutory position, this case relates to the second mode of payment envisaged under clause (e) of section 2(22) viz. to any concern in which such shareholder is a member or a partner and in which he has substantial interest. From the reasons recorded it emerges that according to the Assessing Officer unsecured loans have been extended by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd.
and Aryan Arcade Pvt. Ltd. and that the petitioner held
27.49% shares in M/s J.P. Infrastructure Limited; 50%
shares in Gujarat Mall Management Co. Pvt. Ltd.; and 29%
shares in Aryan Arcade Pvt. Ltd., which according to him had to be treated as deemed dividend in the hands of the shareholder and taxed accordingly. As is apparent on a plain reading of the reasons recorded, while the Assessing
Officer has information that M/s J.P. Infrastructure Limited has advanced unsecured loans as referred to therein to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd.
and Aryan Arcade Pvt. Ltd., there is no information to the effect that such payment was made for the benefit of the petitioner. Except for the fact that the loan giver company in which the petitioner had shareholding in excess of 10
per cent of the voting power, had given loans and advances as referred to therein to two concerns in which ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

the petitioner had substantial interest, the reasons are totally silent as regards any benefit having been obtained by the petitioner from the said loan transactions. It is not the case of the respondent that even if no amount has travelled to the petitioner, he would still be liable to be taxed for the said transactions merely by dint of the fact that two concerns in which he had substantial interest had received loans from a company in which he had shareholding exceeding 10 per cent of the voting power.
According to the respondent, the question as to whether or not the amount had travelled to the petitioner is a matter to be decided at the stage of evaluation at during the course of the re-assessment proceedings. Evidently, therefore, the Assessing Officer has not recorded any satisfaction that the amount paid by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd.
and Aryan Arcade Pvt. Ltd. had been paid for the benefit of the petitioner. In the opinion of this court, in the light of the decision of the Supreme
Court in Mukundray
K.
Shah (supra), any payment made by a company in which a shareholder has shareholding exceeding 10 per cent of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the legislature is to tax funds ultimately received by a shareholder holding more than 10% voting power in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions.”

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

from such transaction has been received by such shareholder or the amount is ultimately used for the benefit of the shareholder. This settled legal principle has been judicially laid down having regard to the intention of the legislature to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed to him through different concerns in which he holds substantial interest.
27. Let us now come back to the observations of the Assessing
Officer. In the assessment order, the AO expressed the view that the requirement that the payment made by the payer company should result in a benefit to the shareholder so as to construe the same to be in the nature of deemed dividend is not applicable to the limb of section 2(22)(e) dealing with “payments by way of loans or advances made by a company in which the shareholder has not less than 10%
voting power to a company/concern in which such shareholder has substantial interest”. The AO stated that the said condition is applicable only to another limb of section 2(22)(e) which deals with the “payments made by the payer company on behalf of or for the individual benefit of the shareholder”. However, the said view of the AO is patently contrary to the decision rendered by the Hon’ble
Gujarat High Court in the case of Jayesh T Kotak (supra) which has since been affirmed by the Hon’ble Supreme Court. The decision rendered by the Hon’ble Gujarat High Court in the said case that receipt of benefit by the shareholder on account of payment made by the company in which he holds voting power of not less than 10% is a sine qua non for regarding such payment to be deemed dividend is with specific reference to the limb of section 2(22)(e) dealing with “payments by way of loans or advances made by a company in which the shareholder has not less than 10% voting power to a company/concern in which such shareholder has substantial interest”. Therefore, in our considered view, the said decision is squarely applicable to the facts of the appellant’s case where the transactions forming the subject matter of examination of the applicability of provisions of deemed dividend in the assessment order are the payments made by the appellant company to the recipient company in which the appellant holds not less than 10%
and 20% of the voting power respectively. In the case of the appellant, it is undisputed that the payments made by the appellant company have been used for the business purposes of the recipient companies as already discussed above. The relevant funds have not been utilized by the recipient companies for the benefit of the common substantial shareholder. In view of the said incontrovertible fact and having regard to the decisions of the Hon’ble Gujarat High Court and Hon’ble Supreme Court in the case of Jayant T Kotak (supra), we are of the considered view that the payments made by the appellant company to the recipient companies during the year do not fall under the scope of deemed dividend u/s 2(22)(e) of the Act. Therefore, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax, to ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

the extent upheld by the LD.CIT(A) is not warranted for this reason also and thus, deleted.
28. In this view of the matter and considering facts and circumstances of this case and also, by following ratios of various
Courts/Tribunals discussed hereinabove, we are of the considered view that the transactions between appellant Company and two other recipient Companies do not come under the provisions of section 2(22)(e) of the Income tax Act, 1961 and consequently, the AO/CIT(A) is erred in levying dividend distribution tax in the hands of the assessee for both assessment years. Thus, we set aside the order of the LD.CIT(A) on this issue, and direct the Assessing Officer to delete addition made u/s 2(22)(e) and consequent levy of Dividend
Distribution Tax u/s 115-O r.w.s. 115Q of the Income Tax Act, 1961
for Asst. Years 2019-20 and 2020-21 in the hands of the assessee.

ITA Nos.1050 to 1053/Hyd/2024 and ITA 1122/Hyd/2024

Order pronounced in the Open Court on 4th day of February, 2025. (G. MANJUNATHA)
ACCOUNTANT MEMBER
Hyderabad, dated 04.02.2025. TYNM/Sr.P.S.

Copy to:

S.No Addresses
1
MSN Pharmacem Private Limited, Hyderabad. C/o. M.V.
Prasad, CA, D.No.60-7-13, Ground Floor, Siddharth
Nagar, 4th Lane, Vijayawada, Andhra Pradesh – 500018. 2
The Assistant Commissioner of Income Tax, Central
Circle – 2(4), Hyderabad
3
The Pr.CIT – (Central), Hyderabad.
4
DR, ITAT Hyderabad Benches
5
Guard File

By Order