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Facts
The Revenue appealed against the order of the Ld. CIT(A) who deleted an addition of Rs. 3,27,81,102/- made by the AO under Section 2(22)(e) as deemed dividend. The addition was based on advances given by a company in which the assessee held substantial interest to the assessee.
Held
The Tribunal held that the advances were in the nature of regular trade transactions and business expediency, not gratuitous loans, and therefore did not fall under Section 2(22)(e). The Tribunal relied on various judicial precedents and a CBDT circular.
Key Issues
Whether advances made by a closely held company to a substantial shareholder, in the context of business transactions and commercial expediency, constitute deemed dividend under Section 2(22)(e) of the Income Tax Act.
Sections Cited
2(22)(e), 139, 143(2), 142(1), 44AB
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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & SHRI VINAY BHAMORE
Assessment Year : 2015-16 ACIT, Central Circle-1, Vs. Avinash Kantilal Jain, Nashik. 36, Aryan Bunglow, Samta Nagar Road, Venketesh Colony- 425001. PAN : ACWPJ9538Q Appellant Respondent Revenue by : Shri Ramnath P. Murkunde Assessee by Smt. Deepa Khare : Date of hearing : 11.02.2025 Date of pronouncement : 08.05.2025 आदेश / ORDER
PER VINAY BHAMORE, JM:
This appeal filed by the Revenue is directed against the order dated 04.10.2023 passed by Ld. CIT(A), Pune-12 [‘Ld. CIT(A)’] for the assessment year 2015-16.
2. The Revenue has raised the following grounds of appeal :-
01. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs 3,27,81,102/- on account of deemed dividend u/s 2(22)(e) of the I.T. Act by not considering the contents of the deeming provision.
02. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) erred in not appreciating the fact that the decision in the case of Pradeep Kumar Malhotra Vs. CIT(Calcutta High Court), which was relied by Ld.CIT(A) has distinguishable facts AO while finalising the issue under consideration.
3. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) erred in not appreciating the fact that the decision of Hon'ble Bombay High Court in the case of CIT Vs. P.K. Badani 76 ITR 369, which was confirmed by the Hon'ble Supreme Court of India vide 105 ITR 642 is applicable to the facts of the case under consideration.
4. The appellant craves leave to add, alter, modify, delete and amend any of the grounds, as per the circumstances of the case.”
Facts of the case, in brief, are that the assessee is an individual and is proprietor of Jain Solar Agency and also engaged in the business of manufacturing of Solvent cement. He had filed his original return of income u/s 139 of the Act on 31.10.2015, declaring total income at Rs.38,56,480/-. The case was selected for limited scrutiny under CASS. Accordingly, notice u/s 143(2) and 142(1) of the Act were issued and duly served on the appellant. During the course of scrutiny proceedings, the Assessing Officer had observed that the appellant has held substantial interest in the company M/s JB Plastochem Pvt, Ltd. and the company JB Plastochem Pvt. Ltd. has reserves as under on 31.03.2014 and 31.03.2015 at Rs.2,92,05,079/- and Rs.4,14,78,383/- respectively. It was also found by the Assessing Officer that the above company has advanced following amounts to the assessee :-
(i) Shri Avinash Kantilal Jain - Rs.2,26,38,107/- (ii) M/s Jain Solar, Proprietor Shri Avinash Kantilal Jain - Rs.1,51,43,000/- Total - Rs.3,77,81,102/- 4. In this regard, the assessee contended that he has also maintained two loan accounts with the company, one for loan taken and given in individual capacity and the other is maintained for loan given and taken in the capacity of proprietor of Jain Solar. The assessee claimed that the account with the company is the current account and the transactions entered in these accounts were mutual. Not being satisfied with the reply of the assessee, the Assessing Officer held that the provisions of section 2(22)(e) of the IT Act are applicable in this case and therefore addition of Rs.3,77,81,102/- was required to be made in the hands of the assessee as deemed dividend. However, it was found by the Assessing Officer that the maximum amount which was outstanding with the assessee during the year was only Rs.3,27,81,102/- & therefore the Assessing Officer made addition of Rs.3,27,81,102/- u/s 2(22) e of the IT Act & the assessment was completed by determining income at Rs.3,66,37,582/- as against income returned by the assessee at Rs.38,56,480/-.
5. After considering the reply of the assessee, Ld. CIT(A) allowed the appeal by observing as under:- “5.2 I have considered the facts of the case and the submissions made by the appellant. In brief, the issue involved in this appeal is that the appellant holds substantial shares of M/s. J.B. Plastochem Pvt. Ltd. The company had reserve of Rs.4,14,78,383/- as on 31.03.2015. On verification, it was noticed that the appellant had maintained two loan accounts with the company. The case of private limited company as well as appellant was covered by section 44AB of the Income Tax Act and duly audited by the Chartered Accountant. The auditor of the appellant as well as company had reported that both maintained two loan accounts. First loan account was maintained for loan taken and given in individual capacity. The net debit balance with the company in this account was Rs.2,26,38,102/-. Second loan account was maintained for the loan given and taken in the capacity of proprietor of Jain Solar. The net debit balance of appellant with company was Rs.1,51,43,000/-. During the assessment proceedings the AO had show caused the appellant as to why these amounts should not be held liable for addition of Rs. 3,77,81,102/- u/s 2(22)(e) of Income Tax Act, 1961. While furnishing the reply to the show cause notice the appellant had furnished written submission. It is seen that the appellant had maintained four accounts. The net debit balance as per appellant comes to Rs. 40,43,913/- on 04.10.2014. The appellant's contention and submission that all four accounts should be merged, was not acceptable by the AO. Hence, an amount of Rs. 3,27,81,102/- being the maximum debit balance was added to the total income of the appellant u/s 2(22)(e) of the Income Tax Act, 1961. 5.3 The appellant's case is squarely covered by the decision of Pradip Kumar Malhotra vs. CIT (Calcutta High Court) (supra) relied upon by the appellant wherein it was held that S. 2(22)(e) does not apply to "non-gratuitous" advances to substantial shareholder. The Hon'ble High Court held that- "The phrase "by way of advance or loan" s. 2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares. If such loan or advance is given to such share holder as a consequence of any further consideration received from the shareholder, then such advance or loan cannot be said to be "deemed dividend" u/s 2(22)(e).
Thus, while gratuitous loan or advance given by a company to a substantial shareholder comes within the purview of s. 2(22)(e), a case where the loan or advance is given in return to an advantage conferred upon the company by the share holder does not. On facts, as the advance was in lieu of the company being permitted to mortgage the assessee's flat, it was not "gratuitous" and so not assessable as "deemed dividend" (Creative Dyeing 318 ITR 476 (Del) & Nagindas Kapadia 177 ITR 393 (Bom) followed)." 5.4 Hence, in view of the case laws relied upon by the appellant, the addition of Rs. 3,27,81,102/- made by the AO by invoking provisions of s. 2(22)(e) is not tenable in the eyes of law. As the transactions in the instant case are in the nature of regular trading transactions entered into in the ordinary course of business, the same cannot be held as advances/ loans so as to invoke provisions of sec 2(22)(e). Hence, Grounds No. 1 to 9 of the appellant are ALLOWED. As the Grounds No. 1 to 9 are ALLOWED, Ground No. 10 does not require separate adjudication and is DISMISSED. Ground No. 11: 6. Vide this ground of appeal
, the appellant has sought to reserve the right to add / alter / amend / withdraw any of the grounds of appeal. Since no such request was made by the appellant during appellate proceedings, this ground is hereby DISMISSED.
7. In the result, appeal is partly allowed.”
6. It is the above order against which the Revenue is in appeal before this Tribunal.
7. Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A) is unjustified. Ld. DR submitted before us that the case law of Pradip Kumar Melhotra vs. CIT relied on by Ld. CIT(A) has distinguishable facts and was already considered by the Assessing Officer while finalizing the assessment order. Apart from above it was also contended before the Bench that Ld. CIT(A) committed error in not following the judgement passed in the case of CIT vs. P.K. Badiani, 76 ITR 369 which was subsequently confirmed by Hon’ble Supreme Court of India vide 105 ITR 642. Accordingly, it was requested by Ld. DR to set-aside the order passed by Ld. CIT(A).
8. Ld. AR appearing from the side of the assessee relied on the order passed by Ld. CIT(A) and requested to confirm the same. Apart from above, circular No 19 of 2017 issued by CBDT was also relied on by the assessee wherein it has been directed not to file appeal wherein trade advances are given which are in the nature of commercial transactions. It was pointed out by the counsel of the assessee that the assessee has sold goods worth Rs.2,87,37,189/- to M/s J B Plastochem Pvt. Ltd. & therefore the circular mentioned above is applicable on the department & the appeal should not have been filed by the revenue since the loan is a trade advance. Ld. AR also pointed out that the assessee has given his personal guarantee & provided his own property at plot no.22 gut no.408-409 of Rs.2,20,84,000/- situated at Jalgaon as mortgage Rs.4,36,58,000/- obtained by M/s J B Plastochem Pvt. Ltd. from corporation bank Jalgaon. Accordingly, it was submitted by the counsel of the assessee that the facts of the case of Pradip Kumar Malhotra vs. CIT [2011] 15 taxmann.com 66 relied on by the assessee are identical with the case of the assessee & the case of Pradip Kumar Malhotra was also followed by Hon’ble High Court of Calcutta in the case of CIT, Kolkata vs. Gayatri Chakraborty [2018] 94 taxman.com 244, accordingly it was again requested by the counsel of the assessee that the appeal filed by the Revenue may kindly be dismissed. In support of its contentions Ld. AR relied on following Judgements - (i) CIT vs. Gayatri Chakraborty, [2018] 94 taxmann.com 244 (Calcutta). (ii) Ishwar Chand Jindal vs. ACIT, [2015] 61 taxmann.com 428 (Delhi – Trib.). (iii) Smt. Kanduben Karshanbhai Tejani vs. DCIT, [2022] 145 taxmann.com 530 (Surat – Trib.). (iv) CIT vs. Suraj Dev Dada, [2014] 46 taxmann.com 402 (Punjab & Haryana).
We have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that the revenue is relying on the order passed by Hon’ble Bombay High Court in the case of P K Badiani (supra) & challenging the order Ld. CIT(A) on this ground only that Ld. CIT(A) has allowed the appeal of the assessee by mainly relying on the judgement of Pradip Kumar Malhotra (supra) which was again followed by Hon’ble Calcutta High Court. In this regard, we find that LD CIT(A) while allowing the appeal of the assessee has also relied on the Judgement passed by Hon’ble Bombay High Court in the case of CIT V Nagindas M Kapadia (1989) 42 Taxman 128, wherein Hon’ble Court dismissed the reference filed by the revenue by observing as under :- “2. It is common ground that the assessee is a shareholder in the company styled as Maganlal Chhaganlal (P.) Ltd. and 'is a person who has substantial interest in the company' for the purpose of section 2(22)(e) of the Income-tax Act, 1961. He also carries on a proprietary business in the name and style of Rainbow Paints. The company maintains a running account in the name of Rainbow Paints and during: the previous years relevant for the assessment years 1968-69 and 1969-70, the years involved herein, the running account disclosed cash payments by the company to the assessee at Rs. 1,31,672 and Rs. 3,86,000 in the respective years. The ITO held that the payments would be deemed dividend income within the meaning of section 2( 22)(e) . The AAC reduced the addition to Rs. 26,262 and Rs. 40,675 which represented the peak of the payments in the two years. The Tribunal has, on going through the details of the account, found that payments other than the payments of Rs. 28,500 in the assessment year 1968-69 and other than Rs. 10,000 in the assessment year 1969- 70 were made as advances towards the purchases to be made by the company from the assessee. Accordingly, the Tribunal held that only the sum of Rs. 28,500 in the assessment year 1968-69 and Rs. 10,000 in the assessment year 1969-70 represented payments and advances within the meaning of section 2( 22)(e) and could be treated as deemed dividend income.
3. Shri Bhatia, the learned counsel for the department has not disputed the finding of the Tribunal in this behalf. If the finding is not in dispute, the answer to the question is obvious because it is only the payments and advances to the extent of accumulated profits that can be treated as loans and advances within the meaning of section 2( 22)(e) and this is what the Tribunal has clone.
4. In the above view of the matter, the question is answered in the affirmative and in favour of the assessee. No order as to costs.”
In this regard, we find that in the above judgement Hon’ble Bombay High Court held that the payments which were made as advances towards the purchases to be made by the company from the assessee cannot be treated as deemed dividend u/s 2(22)e of the IT Act.
We further find that the assessee has sold substantial amount of goods of the value of Rs.2,87,37,189/- to the lender company & it was the claim of the assessee that separate accounts were prepared unintentionally & if we merge all the accounts in one account then the position will change & at the end of the year only Rs.40,43,913/- will remain payable to the lender company. We also find that the assessee has mortgaged his property against the loan obtained by the company. It was also claimed by the assessee that in a circular issued by CBDT the Revenue authority were directed not to file any appeal if the trade advances are in the nature of commercial transactions. For ready reference, the CBDT Circular No.19/2017 dated 12.06.2017 is reproduced hereinbelow :- “Sub: Settled View on section 2(22)(e) of the Income Tax Act, trade advances -reg. Section 2(22) clause (e) of the Income Tax Act, 1961 (the Act) provides that "dividend" includes any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
The Board has observed that some Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22) (e) of the Act. Such views have attained finality. 2.1 Some illustrations/examples of trade advances/commercial transactions held to be not covered under section 2(22) (e) of the Act are as follows: i. Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do not to fall within the definition of deemed dividend under section 2(22) (e) of the Act. (CIT vs. Creative Dyeing & Printing Pvt. Ltd.¹, Delhi High Court). ii. Advance was made by a company to its shareholder to install plant and machinery at the shareholder's premises to enable him to do job work for the company so that the company could fulfil an export order. It was held that as the assessee proved business expediency, the advance was not covered by section 2(22)(e) of the Act. (CIT vs Amrik Singh, P&H High Court)2. iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction 2(22) (e) of the Act. (CIT, Agra vs Atul Engineering Udyog, Allahabad High Court)³ 3. In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon.
The above may be brought to the notice of all concerned.
Hindi version follows.”
Accordingly, considering the totality of the facts of the case & in the light of the circular issued by CBDT wherein it has been directed not to file appeal if the trade advances are in the nature of commercial transactions, & also in the light of the judgement passed by Hon’ble Bombay High Court in the case of Nagindas M. Kapadia (supra) we deem it appropriate to set-aside the order passed by LD CIT(A) & remand the matter back to the file of the Assessing Officer with a direction to decide the issue of deemed dividend u/s 2(22)(e) afresh and as per fact & law after verifying the nature of transactions entered into by the lender company with the assessee, since it is the claim of the assessee that the parties are same & due to inadvertent error four different accounts were maintained & the transactions were trade advances in the nature of commercial transactions. Needless to say, the AO shall provide