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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI LALIET KUMAR, HON’BLE & SHRI G. MANJUNATHA, HON’BLE
O R D E R PER BENCH : The appeals of the assessee for A.Ys. 2013-14, 2014-15, 2019-20 and 2020-21 arise from the separate orders of Commissioner of Income Tax (Appeals) – 12, dated 22.08.2024, dt.27.09.2014 dt.13.09.2024 and dt.19.08.2024, respectively. The Revenue filed cross appeal for A.Y. 2020-21 only. 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.
The grounds raised by the assessee in for A.Y. 2013-14 read as under :
“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.13,30,291/- 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.35,29,191/- 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.3,52,920/- only on estimate basis at 10% of the gross unaccounted cash receipts from sale of spent solvents and scrap.”
5. In the facts and circumstances of the case, the LD.CIT(A) erred in law in holding that the Assessing Officer has validly assumed jurisdiction 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 jurisdiction 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.”
“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.”
The brief facts of the case are that the appellant company is engaged in the business of manufacturing of bulk drugs and formulation product. A search and seizure operation under Section 132 of the Income tax Act, 1961 (“the Act”) was carried out in M/s. MSN Group of cases on 24.02.2021. The appellant M/s. MSN Life Sciences Private Limited (hereinafter referred to as “MSN Life Sciences”) is one of the companies covered under Section 132 of the Income Tax Act as part of the search. Consequent to search, notice under Section 153A of the Act was issued to the assessee on 15.02.2022 calling for return of income. In response, the assessee filed its return of income on 07.06.2022 for A.Y. 2013-14 declaring total income of Rs.nil. Subsequently, notices u/s 143(2) and 142(1) were issued and served on the assessee by the Assessing Officer. After examining the material on record and the information furnished, assessment was completed by the Assessing Officer u/s 153A of the Act, making addition towards sale of spent solvents and scrap of Rs.35,29,191/-.
3.1. The assessee has filed an appeal against the assessment order passed by the AO for A.Y. 2013-14 and challenged the disallowance of the claim deduction of expenditure of Rs.35,29,191/- made by the AO towards expenses incurred against unaccounted cash receipts from sale of spent solvents / scrap and also challenged the legal validity of assumption of jurisdiction 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 22.08.2024, partly allowed the appeal filed by the assessee wherein the LD.CIT(A) has allowed the deduction of expenditure to the extent 4 of Rs.3,52,920/- only on estimate basis at 10% of the expenditure incurred against unaccounted receipts from sale of spent solvent / scrap.
Aggrieved by the order of LD.CIT(A), the assessee is now in appeal before the Tribunal.
The first issue that came up for our consideration from Ground Nos.2 to 4 of the assessee's appeal for assessment year 2013-14 and ground nos.2 and 3 of Revenue’s appeal for A.Y. 2020- 21 is the disallowance of claim of deduction of expenditure against the unaccounted cash receipts from sale of spent solvents / scrap. The facts with regard to the impugned dispute are that the assessee is engaged in the manufacturing and sale of bulk drugs. In the process, the assessee purchased various solvents and used them for manufacturing bulk drugs. The used solvents had to be discarded by the assessee. During the course of search at the registered office of the assessee on 24.02.2021, a Sony make pen-drive of 16 GB was found in the possession of Shri R. Buchi Reddy, Cashier, which contained various Excel sheet data. From the excel sheets, it was found that the spent solvents / scrap was sold in cash and such transactions were not recorded in the books of accounts for the relevant assessment years. A sworn statement under Section 132(4) of the Act was recorded from Shri R. Buchi Reddy on 24.02.2021, and in response to Question No. 18, he has stated that details of 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 5 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 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 6 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.35,29,191/- was offered as additional income in the hands of the assessee for the year under consideration.
5.1. Subsequently, during the post-search investigation, Shri MSN Reddy has furnished a sworn affidavit dated 05-07-2021 to the DDIT(Investigation), Unit – II(2), Hyderabad, and reiterated his statements made during the course of the search in the statement recorded on 27-4-2021. Apart from reiterating the explanation furnished in his sworn statement dated 27-4-2021, he explained in the affidavit that the disposal of hazardous waste of spent solvents / scrap does not attract serious attention of the management from the financial perspective since the revenue generated from the disposal of the same is insignificant in relation to the operational revenue of the group companies. The only interest of the management is the quick disposal of the said waste due to its hazardous nature, failing which it may invite problems from the pollution regulatory authorities. He further stated that after examination of the issue that the data contained in the pen-drive in respect of sale of spent solvents / scrap represented the amounts collected in excess of the actual consideration for the purpose of 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 7 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 MSN Maithri MSN Total MSN Life API Chem Laboratories Pharmachem Laboratories Organics Sciences Laboratories Pvt Ltd Pvt Ltd Pvt Ltd Pvt Ltd Pvt Ltd Pvt Ltd 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 86,43,206 2015-16 5,27,90,633 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 5.2. During the course of assessment proceedings, in the written submissions furnished to the AO on 21-4-2022 in response to notice under Section 142(1) of the Act, the appellant reiterated the explanation furnished by MSN Reddy, the Managing Director of the appellant company, in the sworn statement dated 27-04-2021 and the affidavit dated 05-07-2021, and contended that the unaccounted cash receipts from the sale of spent solvents / scrap offered as 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.35,29,191/-.
Aggrieved by the assessment order, the appellant preferred an appeal before the LD.CIT(A).
6.1. During the course of appellate proceedings, the appellant brought to the notice of the LD.CIT(A) that the same seized material, which contains the details of unaccounted cash receipts from the sale of spent solvents / scrap also contains the details of the expenditure incurred by the appellant and other group companies against the said unaccounted cash receipts. The expenditure so incurred by the appellant and the group companies is represented through cash outflow entries in the names of various employees at 9 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.35,29,191/- 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.
6.2. The LD.CIT(A), after considering the submissions of the assessee and also taken note of the Excel data sheet found on the pen-drive, allowed partial relief towards the additional claim of expenditure against unaccounted cash receipts from sale of spent solvents / scrap to the extent of 10% gross receipts on estimation basis by holding that the expenditure shown in the seized material 10 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.
6.3. The LD.CIT(A) further observed that, at the same time, it is true that the expenditure out of unaccounted cash receipts is recorded in the seized material and corroborated by the sworn statement and affidavit of Shri MSN Reddy neither complete retraction from admission nor complete denial of claim of expenditure to the appellant is justified. Therefore, the LD.CIT(A) observed that reasonable expenses incurred for earning 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. 2013-14 as handling expenses.
Aggrieved by the order of the LD.CIT(A), the assessee is in appeal before us.
The Learned Counsel for the assessee Shri M.V. Prasad, C.A. submitted that the LD.CIT(A) has erred in allowing the deduction of expenditure to the extent of Rs.3,52,920/- only on estimate basis at 10% of the gross unaccounted cash receipts from sale of spent solvents and scrap without appreciating the fact that income cannot be earned without incurring any expenditure. The Learned Counsel for the assessee further submitted that the LD.CIT(A), having held that the entries in the seized material represents the cash inflow towards unaccounted cash receipts and that the cash outflow represents the amounts spent towards various expenditure as expended by the very same seized material but erred in allowing the additional claim of expenditure only to the extent of 10% of the gross cash receipts from sale of spent solvents / scrap on estimate basis by considering only one element of cost 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.35,29,191/- 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 13 same needs to be estimated by considering the various expenditures involved in handling spent solvents / scrap assets, but not only salary and wages as considered by the LD.CIT(A).
On the other hand, Shir B. Bala Krishna, CIT-DR supporting the order of the LD.CIT(A), submitted that there is no dispute regarding the fact that the amount received from sale of spent solvents / scrap has not been accounted in the books of account for the relevant assessment year. In fact, Shri R. Buchi Reddy, Cashier, who received the amount has clearly admitted in a statement recorded under Section 132(4) of the Act during the course of search that the said receipts are not accounted for in the books of accounts of the appellant company. The statements of Shri R. Buchi Reddy have been confirmed by Shri MSN Reddy, the managing director of the assessee company in his sworn statement recorded on 27.04.2021 and the affidavit filed on 05.07.2021 during the course of search. Further, the appellant had also offered additional income towards unaccounted cash receipts from the sale of spent solvents / scrap in all four companies for the relevant assessment years and also filed a revised return in response to notice under Section 153A of the Act and paid taxes on the said unaccounted income. Therefore, the claim of the assessee towards expenditure during the course of assessment proceedings and appellate proceedings is only an afterthought without there being any evidence to suggest that the amount received from the sale of spent solvents / scrap has been utilized for making payments to employees. Although the appellant has obtained a notarized affidavit from the employees, if you go by the seized document, it clearly 14 shows the cash inflow towards unaccounted cash receipts from the 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.
We have heard both parties, perused the material available on record and gone through the orders of the authorities below. We find that, this issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches, in assessee’s own case for A.Y. 2015-16 in wherein the Tribunal has followed the decision in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in where the Tribunal has directed the Assessing Officer to allow 60% of expenditure against unaccounted cash receipts from sale of spent solvents / scrap for the year under consideration. The relevant findings of the Tribunal are as under:
“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 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. 10.1. There is no dispute regarding the fact that the Excel sheet in the seized material contains entries of cash inflow represents unaccounted cash receipts from the sale of spent solvents / scrap, as well as cash outflow represents cash payments made in the name of various persons. The AO considered one part of the entries contained in the seized material, which includes cash inflow representing unaccounted cash receipts from sale of spent solvents / scrap, however, he conveniently ignored the other part of the entries contained in the very same incriminating material, which represents cash outflow in the name of various employees. Since the cash inflow and outflow are recorded in the very same incriminating material, in our considered view, the said seized material should be read as a whole for the purpose of assessment instead of cherry- picking of data according to the convenience of the Assessing Officer or the assessee. Therefore, in our considered view, the findings recorded by the LD.CIT(A) on this issue while allowing adhoc deduction on estimate basis to the extent of 10% of such unaccounted cash receipts is in accordance with law and needs to be accepted. Furthermore, there is no dispute regarding the fact that, right from the beginning, MSN Reddy, the managing director of the assessee company, made it very clear that the disposal of the hazardous waste material and amount received from sale of spent solvents / scrap does not attract serious attention of the management from the financial perspective, as the revenue 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. 10.2 It is an admitted fact that income cannot be earned without any expenditure. In order to earn any income, expenditure needs to be incurred. The only difference is that the quantum of expenditure may vary based on the nature of the income. In some cases, higher expenditure may be incurred and in some cases, expenditure may be less but it all depends upon the nature of income. But it cannot be said that there is no expenditure required to be incurred to earn any income. Going by the above analogy, it is true that for handling hazardous waste like spent solvents / scrap, there needs to be various expenditures, such as handling charges, packing, salary and wages, transportation and materials required for the quick disposal of the said hazardous waste. In the present case, although there is no direct evidence for incurring any expenditure, including salary and wages, transportation, and other materials required for the quick disposal of waste material, but the entries contained in the seized material clearly indicate that the appellant has incurred certain expenditure for handling and disposal of hazardous waste. This fact is further fortified by the entries in the very same seized material, where the cash outflow represents cash payments made in the name of various employees of the head office, who in turn had clearly admitted in their notarized affidavits that they have disbursed the amounts received out of unaccounted cash receipts from sale of spent solvents / scrap for the purpose of making higher payments to employees, who involved in handling and disbursal of hazardous waste. Therefore, in our considered view, the LD.CIT(A), having noticed the fact that the process involved in handling and disbursal of hazardous waste is cumbersome and also involves a certain amount of expenditure, but erred in allowing deduction of 10% on estimation basis from unaccounted cash receipts from the sale of spent solvents / scrap.
10.3. Having said so, let us come back how to quantify the amount of expenditure incurred by the appellant for earning unaccounted cash receipts from the sale of spent solvents / scrap. Admittedly, the seized material contains cash outflow in the name of 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 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. 10.4. Having said so, let us come back to the issue of quantification of expenditure deductible against unaccounted cash receipts from sale of spent solvents / scrap. Admittedly, the LD.CIT(A) has directed the AO to estimate 10% of the receipts towards expenditure incurred against unaccounted receipts. The LD.CIT(A), while estimating the expenditure, has considered only salaries and wages historically incurred by the appellant and other group companies and observed that the appellant and other group companies have incurred 10% of earnings for salaries and wages; therefore, he estimated 10% expenditure against unaccounted receipts. In our considered view, the LD.CIT(A) has grossly erred in coming to the conclusion that the appellant needs to incur only the salary and wages for handling and disposal of hazardous material even though the prosses of collecting and disposal of hazardous waste requires careful attention in handling the material. The appellant also needs to take steps for quick disposal of such hazardous material. The process of collecting and disposal of spent solvents / scrap requires various other expenditure like transportation, packing, and other necessary items for safe handling of hazardous waste without any environmental impact. If we consider the other expenditure required for the disposal of spent solvents / scrap, in our considered view, the AO needs to consider transportation, packing, and other materials necessary for handling the disposal of spent solvents / scrap. Although there is no direct evidence for incurring these expenditures, the possibility of incurring these expenditures cannot be ruled out. This fact is further strengthened by the disbursal of the cash received from sale of spent solvents / scrap to various employees which accounted for 80% of the total amount received from sales, which is evident from the affidavits filed by the employees, wherein they claimed that the amount received from the head office has been utilized for making payments and incurring other expenditures. Although there is no direct evidence for incurring 80% of the amount towards expenditure, going by the nature of the material, in our considered view, there needs to be certain amount of expenditure for other expenses like transportation, packing etc. Since there is no direct evidence regarding other expenditures, in our 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.”
In this view of the matter and by respectfully, following the decision of the ITAT Hyderabad Benches in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in (supra) and assessee’s own case for A.Y. 2015-16, we direct the Assessing Officer to allow 60% of the receipts as expenditure against unaccounted cash receipts from sale of spent solvents / scrap and sustain 40% of addition towards unaccounted sale of spent solvents and scrap.
The second issue that came up for our consideration from Ground No.5 of assessee’s appeal is the legal validity of assumption of jurisdiction by the Assessing Officer for issuance of notice u/s 153A of the Act.
The learned counsel for the assessee, referring to date of search in the present case, submitted that admittedly, the assessment year in question is beyond six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted and therefore, for issuance of notice u/s 153A of the Act, the conditions prescribed in clauses (a), (b) and (c) are required to be fulfilled. This becomes very clear form the language employed in the 4th proviso which starts with phrase ‘no notice for assessment or re- assessment shall be issued to the assessee for ‘relevant assessment year or years’ unless” followed by 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 jurisdiction to issue notice u/s 153A of the Act for the “relevant assessment year or years”.
The learned counsel for the assessee further referring to the facts of the present case submitted that in the present case, admittedly, the Assessing Officer issued notice u/s 153A of the Act on the basis of “Satisfaction Note” and as per the said ‘satisfaction note’, the Assessing Officer referred to the incriminating material pertains to unaccounted receipts from sale of spent solvents and scrap. However, the ‘satisfaction note’ recorded by the Assessing Officer does not bring out the fulfilment of the conditions laid down in 4th proviso to Section 153A(1) of the Act. Further, the Assessing Officer considered the noting in the material found during the course of search which contains unaccounted receipts from sale of spent solvents and scrap, amounts given to the Director of the appellant company and considered that amount given to the directors as ‘advances’ within the meaning of “asset” as defined in clause (a)(o) of 4th proviso to Section 153A of the Act, but the fact remains that the ‘satisfaction note’ recorded by the Assessing Officer in light of incriminating material found during the course of search does not bring out the fulfilment of conditions for issuance of notice and thus, notice issued for the assessment years in question is invalid and consequent assessment order passed by the Assessing Officer is bad- in-law and is liable to be quashed.
On the other hand, the learned CIT-DR supporting the order of the LD.CIT(A) submitted that the incriminating material found during the course of search clearly shows the details of money advanced to the directors of the appellant company and the appellant company has admitted additional income during the course of search in respect of amounts received from sale of spent solvents and scrap by considering the fact that the amount advanced to the directors has been used for the purpose of investment and the same has been telescoped against the investments in lands by the directors and other group companies. Further, as per the seized material, the appellant company had given advances of Rs.17 crores to M.S.N. Reddy and other Directors and the said advances fall within the meaning of “asset” as per clause (a) of Section 153A(1) of the Act. Therefore, the arguments of the assessee that the ‘satisfaction note’ recorded by the Assessing Officer does not bring out the fulfilment of the conditions laid down u/s 153A of the Act is devoid of merit and needs to be rejected.
We have heard the rival submissions, perused the material on record and gone through the orders of the authorities below. Admittedly, the assessment year in question falls under the ‘relevant assessment year or years’ because going by the date of search in the present case on 24.02.2021, the assessment years in question i.e., A.Ys. 2011-12 to 2014-15 falls beyond six assessment years and within ten assessment years. Once an assessment year falls beyond six assessment years and within ten assessment years, then for assumption of jurisdiction and issuance of notice u/s 153A of the Act, the conditions laid down in clause (a) to (c) of 4th proviso to 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 jurisdiction by issuance of notice u/s 153A and assess or re-assess the total income of the assessee.
17. In the present case, going by the ‘satisfaction note’ recorded by the Assessing Officer for issuance of notice u/s 153A of the Act for assessment year in question, we find that the Assessing Officer recorded satisfaction in light of incriminating material found during the course of search which reveals unaccounted receipts from sale of spent solvents and scrap and also advances given to various directors of the appellant company. Further, based on the said incriminating material, the appellant company has disclosed the additional income for the relevant assessment years and also filed an affidavit confirming the declaration of the additional income for the 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.
18. Further, assuming for a moment, the incriminating material found during the course of search does not show any details of income which represented as “asset” on account of advances given to directors of the appellant company because of the fact that the appellant has retracted from the statement and has also disputed the additions made by the Assessing Officer towards amounts received as unaccounted receipts from sale of spent solvents and scrap, but fact remains that the Tribunal, in appellant’s own case for earlier assessment years has considered the issue of assessment of unaccounted receipts from sale of spent solvents and scrap and, after considering the relevant facts, has estimated the profits from receipts of unaccounted sale of spent solvents and scrap by allowing 60% deduction towards expenditure and treated balance 40% unaccounted cash receipts as income of the assessee. If we consider the profits estimated from unaccounted cash receipts from sale of 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.
In this view of the matter and considering the facts of the case, we are of the considered view that the notice issued u/s 153A of the Act for the assessment years in question and consequent assessment order passed by the Assessing Officer is valid and in accordance with the provisions of Section 153A(1) of the Act and 4th proviso provided therein. Thus, the grounds taken by the assessee challenging the legal validity of the assumption of jurisdiction by the Assessing Officer is hereby rejected. Thus, ground no.5 is dismissed.
In the result, the appeal of the assessee in is partly allowed.
ITA No.1068/Hyd/2024 for A.Y. 2014-15
The first issue that came up for our consideration from ground nos.2 to 4 of assessee’s appeal is addition made by the Assessing Officer towards unexplained cash receipts from sale of spent solvents and scrap and partially sustained by the LD.CIT(A). We have considered an identical issue in assessee’s own case for A.Y. 2013-14 in ITA No.1067/Hyd/2024. But for figures, the facts considered by us and reasons given in para nos.10 and 11 shall mutatis and mutandis apply to this appeal as well. Therefore, for similar reasons, we direct the Assessing Officer to allow deduction of 60% of cash receipts towards expenditure against income of the assessee and treat balance 40% cash from sale of spent solvents and scrap as income of the assessee. Accordingly, the grounds 2 to 4 of the assessee are partly allowed.
The second issue that came up for our consideration from ground no.5 of assessee’s appeal is legal validity of assumption of jurisdiction by the Assessing Officer for issuance of notice u/s 153A of the Act. We have considered an identical issue in appellant’s own case for A.Y. 2013-14 in ITA No.1067/Hyd/2024. The facts considered by us and reasons given in para nos.12 to 20 shall mutatis and mutandis apply to this appeal as well. Therefore, for similar reasons, we reject the ground taken by the assessee for assessment years 2014-15.
The third issue that came up for our consideration from ground nos.6 and 7 of assessee’ appeal is with respect to addition of Rs.1,58,40,000/- towards alleged ‘On Money’ payment made for purchase of land at Bibinagar.
24. The learned counsel for the assessee submitted that the addition of Rs.1,58,40,000/- towards alleged on-money payment for the purchase of land at Bibinagar is legally unsustainable. It was argued that the satisfaction note recorded by the Assessing Officer under Section 153A did not refer to the issue of "on-money" payments, which renders the addition jurisdictionally invalid. The ld.AR further contended that the seized material relied upon by the AO was found at the residence of the CMD of the group, and not at the appellant's premises. Relying on the judgment of the Hon’ble Supreme Court in Pr. CIT v. Abhisar Buildwell, it was argued that no addition could be made under Section 153A in the absence of incriminating material found specifically at the appellant's premises. The ld.AR emphasized that the AO exceeded his jurisdiction by making the addition based on materials unrelated to the satisfaction note and unsupported by direct evidence linking the appellant.
26. On the other hand, the ld.CIT-DR strongly supported the orders of the Assessing Officer and the Ld.CIT(A) stating that the addition was based on seized material and corroborated by the CMD’s statement recorded during the search. The ld.DR argued that the satisfaction note is only meant to establish the necessity of initiating proceedings under Section 153A and does not require every specific issue to be mentioned. It was further submitted that the incriminating material found at the CMD's premises clearly established the nexus with the appellant and proved the undisclosed investment in the Bibinagar land. The DR contended that under Section 153A, the AO is empowered to assess total income based on any incriminating material, even if it is found at a third party’s premises, as long as it pertains to the appellant. The ld.DR further submitted that the reliance on Abhisar Buildwell was misplaced, as the facts of the present case involved specific incriminating material linking the appellant to the undisclosed income.
27. We have heard the rival submissions, perused the material on record and gone through the orders of the authorities below. In the present case, the satisfaction note recorded under Section 153A, though not explicitly mentioning the issue of "on-money" payments but provides the basis for assuming jurisdiction, which is valid under the law. The AO is empowered to assess total income based on incriminating material found during the search, even if the issue is not specifically referenced in the satisfaction note. The material found at the CMD's residence, including the statement admitting undisclosed investments, sufficiently links the appellant to the on- money payment for the Bibinagar land. The case laws relied upon by the learned counsel for the assessee including the decision of Hon'ble Supreme Court in the case of PCIT Vs. Abhisar Buildwell Pvt. Ltd. (supra) is not applicable because in the said case, the issue before the Hon'ble Supreme Court was whether any addition can be made in the assessment framed u/s 153A / 153C of the Act, in the absence of any incriminating material, if such assessment is unabated / concluded as on the date of search. In the present case, going by the facts on record, it is undisputedly clear that the Assessing Officer is having incriminating material which suggests payment of ‘On money” for purchase of land at Bibi Nagar and this fact has been confirmed by the CMD of the company. Further, the arguments of the assessee that the material seized from the premises of CMD cannot be used for the assessment of the appellant is devoid of merit and against the law, because where simultaneous search is conducted in the group of cases and its directors, on any material found during the course of search, whether it is in the premises of assessee or from the group 29 companies or from the director’s residential premises, the same can be used for making the assessment. Therefore, the arguments of the assessee that in the assessment framed u/s 153A of the Act material found in the third party premises cannot be used, is contrary to the law. Thus, we reject the arguments of the assessee. Therefore, we are of the considered view that the Ld.CIT(A) has rightly held that the addition is supported by seized material and corroborative evidence, which is sufficient to sustain the addition under Section 153A. We, therefore, find no reason to interfere with the findings of the Ld.CIT(A) Accordingly, these grounds are dismissed and the addition of Rs.1,58,40,000/- is confirmed.
In the result, the appeal of assessee in for A.Y. 2014-15 is partly allowed.
ITA No.1071/Hyd/2024 for A.Y. 2019-20
25. The first issue that came up for our consideration from ground nos.2 to 4 of assessee’s appeal is addition made by the Assessing Officer towards unexplained cash receipts from sale of spent solvents and scrap and partially sustained by the LD.CIT(A). We have considered an identical issue in assessee’s own case for A.Y. 2013-14 in ITA No.1067/Hyd/2024. But for figures, the facts considered by us and reasons given in para nos.10 and 11 shall mutatis and mutandis apply to this appeal as well. Therefore, for similar reasons, we direct the Assessing Officer to allow deduction of 60% of cash receipts towards expenditure against income of the assessee and treat balance 40% cash from sale of spent solvents and scrap as income of the 30 assessee. Accordingly, the grounds 2 to 4 of the assessee are partly allowed.
26. The next issue that came up for our consideration from Ground No.5 to 5.3 of assessee’s appeal and ground nos.4 and 5 of Revenue’s appeal for A.Y. 2019-20 is the addition made on account of deemed dividend (dividend distribution tax in the hands of the appellant). During the course 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 31 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 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.
27. The AO, after examination of the ledger accounts of the recipient company, observed that the basic ingredients of ‘deemed dividend’ as defined under section 2(22)(e) of the Act, such as common substantial shareholding of Shri MSN Reddy in the Appellant Company, two recipient companies and the availability of accumulated profits by way of reserves in the hands of the appellant company, have been satisfied. The AO analyzed the details of the opening balance, sales, purchases, receipts, payments, and closing balance in the affidavit of the two recipient companies and observed that the appellant has paid an excess amount to MSNL and MSNO 32 in comparison to the amounts payable to the recipient company by aggregating the sales and payments made to the recipient companies and subtracting the purchases made and payments received from the recipient companies. Further, the AO, having regard to the Board’s Circular No.19/2017 dated 12-6-2017 observed that the transactions between the appellant company and 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 addition of Rs.243,66,97,212/- for the assessment year 2019-20.
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 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.
Being aggrieved by the assessment order, the assessee filed an appeal before the LD.CIT(A) and challenged the addition made towards deemed dividend u/s 2(22)(e) and consequent dividend distribution tax under Section 115Q of the Act in the hands of the assessee in respect of the excess payments made to MSNL and MSNO as deemed dividend taxable under Section 2(22)(e) of the Act and contended that commercial transactions between two associated or group companies in the ordinary course of business are not covered under the provisions of Section 2(22)(e) of the Act. The assessee further contended that the AO, having noticed the fact that the appellant and the other two companies are engaged in similar line of business of manufacture and sale of bulk drugs and also there are commercial transactions between the appellant and the other two companies in the form of purchases, sales, receipts, and payments, has erred in applying the provisions of Section 2(22)(e) r.w.s. 115Q of the Act towards excess payments made by 34 the assessee to the above two companies, ignoring the fact that the said transactions are purely commercial transactions between the two companies. The appellant has also challenged the findings of the AO with regard to the re-characterization of transactions between the appellant company and the other two companies as loans and advances as defined under Section 2(22)(e) without 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.
The LD.CIT(A), after considering the relevant submissions of the assessee and also following certain judicial pronouncements and taking into consideration the reasons given by the AO, observed that excess payments to sister concerns in excess of 150% of purchases from the above two companies cannot be treated as normal commercial transactions between two unrelated parties, going by the nature of the payments and purchases. The LD.CIT(A) further observed that the excess payments should be classified under ‘loans and advances’ that fall within the ambit of Section 2(22)(e) of the Act only, and the treatment by the appellant company of such huge payments in its books of accounts is of no relevance. The LD.CIT(A) further observed that the contention of the appellant that the transactions between the two companies are in the nature 35 of current account adjustments due to two-way movement of funds on a need basis is also incorrect because, in a current account (running), it is an opening account, an unsettled running account used in a trade between the buyer and seller, wherein it allows the buyer to make ongoing purchases with amounts paid by reducing the balance, and there is a fixed date by which payments and receipts must be settled.
The LD.CIT(A) further observed that the appellant has also failed to establish any business exigency or need for making huge payments when compared to purchases or sales. Although there are purchase / sale transactions existing between the appellant and the recipient company for both assessment years, when these transactions are compared to payments made by the appellant company to the recipient company, it can be seen that the quantum of these purchases / sales is very less when compared to the payments. Therefore, the case of the appellant does not fulfill the criteria given in the case laws relied upon by it, and accordingly, the account between the appellant company and the recipient company cannot be treated as current account. The LD.CIT(A) has also rejected the contention of the assessee with regard to the 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 36 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.
Aggrieved by the order of the LD.CIT(A), the appellant is in appeal before us.
The Learned Counsel for the assessee Shri M.V. Prasad, C.A. submitted that the LD.CIT(A) erred in sustaining additions made by the AO towards deemed dividend under Section 2(22)(e) and the consequent dividend distribution tax under Section 115Q, without 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 37 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 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- 38 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.
The Learned Counsel for the assessee, referring to certain judicial precedents, including the decision of the Hon'ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT reported in (2020) 425 ITR 435 (Gujarat), submitted 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 intention of the Legislature is to tax funds ultimately received by a shareholder holding not less than 10% of voting power in the company, where such funds have been routed through different modes / concerns and used for the benefit of the shareholder. In the present case, the amounts paid by the appellant company to the two associated companies are for their business requirements, including deployment of working capital, purchase of new assets, and financial support in furtherance of their business activities. Therefore, these transactions cannot be considered as 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 39 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).
Per contra, Shri B. Bala Krishna, CIT-DR supporting the order of LD.CIT(A) submitted that there is no dispute regarding the fact that the conditions required for invoking provisions of Section 2(22)(e) are satisfied. Further, the appellant company and the other two companies are part of the MSN Group, and Shri MSN Reddy is the common shareholder holding more than 10% voting power in all three companies. There is no dispute with regard to the fact that the appellant company has accumulated profits in excess of the amounts of loans or advances given to the two companies. Since the conditions for invoking the provisions of Section 2(22)(e) are satisfied, the reasons given by the AO to consider the transactions between the appellant company and the other two companies as loans and advances must be examined in light of the transactions between these companies. If you go by the analysis of the transactions between the Appellant Company and the other two companies, as done by the Assessing Officer, there is a clear fact to the effect that the appellant has made very minimum purchases from the above two companies, but has made substantial amounts over and above the value of purchases. Therefore, the Assessing Officer came to the conclusion that any amount paid in excess of 150% / 200% of purchases should be treated as loans and advances, and thus, rightly computed the excess amount paid by the appellant company to the two companies and invoked the provisions of Section 2(22)(e) read with Section 115Q of the Act. Therefore, he submitted that the order of LD.CIT(A) should be upheld.
We have heard both parties, perused the material available on record and gone through the orders of the authorities below. We find that, the issue on similar facts has already been decided in favour of the assessee by the decision of the ITAT Hyderabad Benches, in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in wherein the Tribunal has directed the Assessing Officer to delete the addition made u/s 41 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 A.Ys. 2019- 20 and 2020-21 in the hands of the assessee. The relevant findings of the Tribunal are as under:
“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 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 42 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:
A/c of MSN A/c of MSN Laboratories Pvt Ltd Organics Pvt Ltd in Particulars in the books of the the books of the appellant 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 242,51,01,857 1,80,15,228 year (sales + payments – purchases – receipts) Less: Additional 50% of 97,51,822 26,68,051 purchases in addition to 100% of purchases considered above Balance excess payments 241,53,50,035 1,53,47,177 treated as “advance or loan” constituting deemed dividend Aggregate deemed dividend 243,06,97,212 for AY 2019-20
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 267,83,57,645 (sales + payments – purchases – receipts) Less: Additional 50% of purchases in 1,06,72,998 addition to 100% of purchases considered above Balance excess payments treated as 266,76,84,647 “advance or loan” constituting deemed dividend.
16. The AO observed that the appellant company, being the payer company, is liable to pay dividend distribution tax under the provisions of section 115-O of the Act, in respect of the said deemed dividend u/s 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 dividend distribution tax applicable to deemed dividend also. Since no dividend distribution tax has been paid in respect of such deemed dividend by the appellant company, the AO made addition of deemed dividend of Rs.243,06,97,212/- u/s 2(22)(e) of the Act for A.Y. 2019-20 and Rs.266,76,84,647/- for A.Y. 2020-21, in respect of which the appellant failed to pay dividend distribution tax, in the assessment order passed u/s 153A in the case of the appellant company. On first appeal filed by the assessee, the LD.CIT(A) upheld the inference of deemed dividend drawn by the AO in the assessment order. However, the LD.CIT(A) allowed partial relief with regard to the working of the quantum of deemed dividend by holding that payments made to the extent of 200% of purchases can be considered to have been made as per normal commercial practice and excess payments made over and above 200% of purchases should be considered as “loans or advances” falling within the ambit of deemed dividend u/s 2(22)(e) of the Act. Accordingly, the LD.CIT(A) 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.
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 44
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.
There is no dispute regarding the satisfaction of the some of the basic ingredients for inferring deemed dividend such as the payer company (appellant) being a company in which public are not substantially interested, substantial shareholding of Sri. M.S.N. Reddy in both the appellant company as well as the recipient companies as per the specified percentages of shareholding and the availability of accumulated profits in the hands of the appellant company. However, it is the contention of the appellant that the other basic ingredient for inferring deemed dividend that there should be payments by the payer company (appellant) by way of ‘advances or loans’ to the recipient company, is not satisfied in the appellant’s case and consequently, no deemed dividend arises in the hands of the common substantial shareholder and no liability to pay dividend distribution tax arises in the hands of the appellant company. Therefore, it is necessary to examine the issue in light of provisions of section 2(22)(e) of the Act, nature of transactions between two companies and the purpose of payments to two recipient companies.
19. The appellant has made three-fold arguments. The first and foremost argument of the appellant is that all the transactions between the appellant company and the recipient group companies have been made in the ordinary course of the business carried on by them and they do not come under the purview of deemed dividend u/s 2(22)(e) of the Act, as they cannot be characterized as ‘loans or advances’. Admittedly, these group companies are engaged in the 45
same line of business of manufacturing 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. These group companies have made payments in respect of purchases made by them from the other group companies and received payments in respect of sales made by them to other group companies. This is evident from the summary of transactions between the appellant company and the recipient companies, i.e., MSN Laboratories Pvt Ltd and MSN Organics Pvt Ltd for both assessment years. From the above, it is undisputedly proved that these are trade advances, which arises in the course of carrying out purchases in the normal course of the business and which result in closing debit balance in the account of the recipient company in the books of payer company and thus, these trade advances in the ordinary course of business cannot be regarded as payment of ‘loans or advances’ to the recipient company, since the same are undeniably in the nature of commercial transactions. It is a settled position of law that trade advances given in the normal course of business on account of trading transactions cannot be treated as ‘loans or advances’ so as to constitute deemed dividend u/s 2(22)(e) of the Act. This legal position is fortified by the decisions in the case of CIT Vs. India Fruits Ltd [2015] 53 taxmann.com 307 (Andhra Pradesh), where it has been held as under : “The finding of facts arrived at by the Tribunal was that the transaction in question was a business transaction and it would have benefited both, the assessee- company and the company P. In fact, the revenue had also conceded that the amount was not a loan but only an advance because the amount paid to the assessee- company would be adjusted against the entitlement to moneys of the assessee-company payable by P in the subsequent years. [Para 10] The revenue contended that since the company P was not in the business of lending money, the payments made by it to the assessee-company would be covered by section 2(22)(e)(ii) and, consequently, payment even for business transactions would be a deemed dividend. There was no merit in the contentions of the revenue. 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]”
20. Similar view has been expressed by various Courts in CIT Vs. Creative Dyeing & Printing Pvt Ltd [2009] 318 ITR 476 (Delhi), CIT Vs. Ambassador Travels Pvt Ltd [2009] 318 ITR 376 (Delhi), CIT Vs. Raj Kumar [2009] 318 ITR 462 (Delhi), CIT Vs. Nagindas M Kapadia [1989] 177 ITR 393 (Bombay), Jamuna Vernekar Vs CIT [2021] 432 ITR 146 (Karnataka),CIT Vs. Amrik Singh [2015] 56 taxmann.com 460 (P & H),and CIT Vs Atul Engineering Udyog [2014] 51 taxmann.com 569 (Allahabad). This legal position is further fortified from the CBDT Circular No.19/2017 (Pg No.77 of PB-I), where it has been clarified that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) of the Act and that such views have attained finality. The CBDT, therefore, stated that it is a settled position that trade advances, which are in the nature of commercial transactions, would not fall within the ambit of the word ‘advance’ in section 2(22)(e) of the Act. Though, the Assessing Officer and LD.CIT(A) have taken cognizance of the said circular and applied the same to the appellant’s case keeping in view the trading transactions between the appellant company and recipient companies, which resulted in debit balance in the account of the recipient companies at the end of the year, but both authorities have misdirected themselves in holding that payments made to the recipient companies in excess of 150% or 200% of purchases from such company cannot be treated as ‘trade advances’ in the nature of commercial transactions. The AO has wrongly treated the payments in excess of 150% of the purchases as ‘loans or advance’ and wrongly held the same to be deemed dividend u/s 2(22)(e) of the Act. Similarly, the LD.CIT(A) has wrongly treated the payments in excess of 200% of the purchases as ‘loans or advance’ and wrongly upheld the same to be deemed dividend u/s 2(22)(e) of the Act. In our 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 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.
21. We further noted that the transactions of payments made by the appellant to the recipient companies have arisen due to business exigencies and the said transactions therefore bear commercial character. The appellant company and the recipient companies are associate concerns of the same group with a common Managing Director and substantial shareholder Sri.M.S.N Reddy. The group companies, including the said companies, are engaged in similar line of business of manufacture of Active Pharmaceutical Ingredients (API). As mentioned by the AO himself in the assessment order (Pg No. 50 and 51 of the order), the business activities of the group companies are inter-related and inter-dependent since each company is making sale of raw materials, engineering materials and intermediates to the other associate companies, in view of the fact that the manufacturing process is fragmented into different stages and different group companies are handling the manufacture at different stages. In view of existence of such inter-dependency among the associate concerns, the said companies provide funds to each other on a need basis as a measure of business expediency as and when there is requirement of funds for the purpose of business in order to provide the required support to the business of the other associate concerns. Further, this fact is also apparent from the audited financials of the appellant company that export sales constitute a significant portion of its total sales (Pg No 17 of PB-I). The appellant is making the export sales by taking marketing services from the foreign subsidiary companies promoted by MSN Laboratories Pvt Ltd namely, MSN Pharmaceuticals Inc, USA, MSN Laboratories Europe Ltd and Mega MSN Pte Ltd, Singapore (Pg No.37 of PB-I). The sales commission paid to such foreign subsidiary companies is debited to P&L A/c (Pg No.18 back side of PB-I). These facts clearly bring out the large-scale dependency of the appellant on MSN Laboratories Ltd for effecting its export sales. We further noted from the funds flow statement regarding the utilization of the funds given by the appellant company to MSN Laboratories Pvt. Ltd (page No.75 of PB-I), where there is utilization of such funds by way of investment in foreign subsidiaries of MSN Laboratories Pvt. Ltd to the extent of Rs.60 crores during the year, apart from utilization towards working capital and acquisition of fixed assets of the business (for setting up new units/expansion of existing units). The business expediency for making huge payments to MSN Laboratories Pvt. Ltd is revealed by this crucial fact also in addition to the explanation furnished in the preceding paragraph. Therefore, the payments made by the appellant to MSN Laboratories Pvt. Ltd which 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 49 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 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.
24. The third and final proposition canvassed by the appellant is that deemed dividend not attracted when payments to recipient company were utilized for its business and not diverted to or utilized
for the benefit of the common substantial shareholder. In this regard, we find that the payments made by the appellant company to the two recipient companies during the year do not come under the ambit of deemed dividend u/s 2(22)(e), as the said funds have been used by the recipient companies for the purpose of their business and they have not been diverted to or utilised in any manner for the benefit of the common substantial shareholder. The business expediency/exigencies in making the said payments to the recipient companies had already been explained in earlier part of this order. The funds received from appellant company have been wholly used by the recipient companies for meeting the working capital requirements of the business, financing the acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). The funds have not been diverted to the common substantial shareholder or were not utilised for the benefit of said shareholder. The details of the utilisation of the funds by the two recipient companies are submitted at Pg No.75-76 of PB-I, which were submitted to the LD.CIT(A) during the appellate proceedings. The said statements are prepared on the basis of the cash flow statement forming part of the audited financial statements of the recipient companies, the copies of which were furnished to the AO during the assessment proceedings. It may be seen from the perusal of the said statements that the funds received from appellant company have been fully subsumed in the funds utilised by the recipient companies during the year for the purpose of working capital, acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). Thus, the payments made to the recipient companies during the year were wholly used by them for the purpose of their business and such payments did not yield any benefit to the substantial common shareholder. We further noted that at para 7.19.2 of the assessment order, the AO has also accepted the factual position that the funds received from the appellant company have been utilized for financing the current assets of the recipient companies. Thus, it may be seen that there is no finding by the AO on facts that such funds have been diverted by the recipient companies for the benefit of the common substantial shareholder. On the other hand, the AO expressed his opinion that such financing of current assets of the recipient companies by the interest free funds received from the appellant company can be construed as a benefit accruing directly or indirectly to the recipient company. Since the utilization of the relevant funds for financing the working capital (current assets) of the recipient companies is an undisputed fact, it cannot be said that any part of the said funds has been diverted to the common substantial shareholder. Consequently, there is no scope for obtaining any direct or indirect benefit by the common substantial shareholder 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.
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 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.”
Further, the SLP filed by the Revenue against the said decision of the Hon’ble Gujarat High Court has been dismissed by the Hon’ble Supreme Court by stating that it does not find any ground to interfere with the impugned order passed by the High Court, as reported in DCIT Vs. Jayesh T Kotak [2021] 130 taxmann.com 170 (SC) (Pg No.147 of PB-I). Therefore, in our considered view, it is now a settled law that the payment made by the payer company to the recipient company, in which there is a common shareholder holding not less than 10% and 20% of the voting power respectively, would be deemed to be ‘dividend’ in the hands of such shareholder only if any benefit 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.
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 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.
In this view of the matter and by respectfully, following the decision of the ITAT Hyderabad Benches in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in (supra), we set aside the order of the LD.CIT(A) on this issue and direct the Assessing Officer to delete the addition made u/s 2(22)(e) of the Act in the hands of the assessee. Accordingly, ground no.5 to 5.3 of the assessee is allowed and ground nos.3 and 4 of Revenue appeal is dismissed.
ITA No.1072/Hyd/2024 for A.Y. 2020-21
The only issue that came up for our consideration from ground nos.2 to 4 of assessee’s appeal is addition made by the Assessing Officer towards unexplained cash receipts from sale of spent solvents and scrap and partially sustained by the LD.CIT(A). We have considered an identical issue in assessee’s own case for A.Y. 2013-14 in ITA No.1067/Hyd/2024. But for figures, the facts considered by us and reasons given in para nos.10 and 11 shall mutatis and mutandis apply to this appeal as well. Therefore, for similar reasons, we direct the Assessing Officer to allow deduction of 60% of cash receipts towards expenditure against income of the assessee and treat balance 40% cash from sale of spent solvents and scrap as income of the assessee. Accordingly, the grounds 2 to 4 of the assessee are partly allowed.
In the result, the appeal of assessee in for A.Y. 2020-21 is partly allowed.
In the combined result, all the appeals of assessee and the appeal of Revenue are partly allowed.
Order pronounced in the Open Court on 4th February, 2025.