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Income Tax Appellate Tribunal, ‘C’ BENCH : CHENNAI
Before: SHRI ABRAHAM P. GEORGE & SHRI DUVVURU RL REDDY]
आदेश / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER These are cross appeals filed by the assessee and Revenue respectively directed against an order dated 12.06.2015 of ld.
ITA Nos.1691 & 1973 /2015 :- 2 -:
Commissioner of Income Tax (Appeals)-1, Coimbatore. Before
adverting to the grounds taken by the respective parties, it will be
apposite to capture the facts, for proper appreciation of the issues
involved.
Assessee engaged in the business of manufacturing raw 2.
castings and supplying it to leading automobile manufacturers like
Hero Motocorp Limited, Honda Motor Cycle and Scooters India Pvt
Limited, TVS Motors Company Ltd etc., through its sister concern
called M/s. Indo Shell Mound Ltd (in short ‘’the ISML’’), had filed its
return of income for the impugned assessment year disclosing income
of �9,97,440/-. During the course of assessment proceedings, ld.
Assessing Officer found that assessee had received money from
M/s.ISML which was claimed as trading advance. Ld. Assessing Officer
examined the details produced in this regard. According to the ld.
Assessing Officer, assessee had invested in the shares of M/s. ISML
on 02.12.2011, and on 18.01.2012 it was allotted 250000 shares in
M/s.ISML. Thus, as per the ld. Assessing Officer, assessee was a
beneficial owner of the shares in M/s.ISML with a holding in excess
of 20% of equity shares in the latter, from that date. On examination
of the Balance Sheet of M/s.ISML, ld. Assessing Officer found that it
had ‘’Reserve and Surplus’’ of �50,35,17,860/- as on 31.03.2012. Ld.
Assessing Officer calculated the advances received by the assessee
ITA Nos.1691 & 1973 /2015 :- 3 -:
from M/s. ISML and pegged it at �35,82,27,603/- for the period
19.01.2012 to 31.03.2012. Assessee was put on notice why Section
2(22) (e) of the Income Tax Act, 1961 (in short ‘’the Act’’) should not
be applied and why the advances received by it from M/s.ISML
should not be treated as deemed dividend in its hands. Assessee
thereupon submitted to the ld. Assessing Officer that the money
received from M/s.ISML was in the nature of trade advance could
not be treated as deemed dividend u/s.2(22) (e) of the Act. Assessee
also relied on an agreement entered by it with M/s.ISML on
10.12.2011, by virtue of which it was obliged to supply the enter raw
castings produced by it to M/s.ISML, which in turn, after further
refinement, supplied it to its ultimate customers, who were
predominantly vehicle manufacturers. According to the assessee,
M/s.ISML had provided it an advance of �20 Crores based on this
agreement.
However, the ld. Assessing Officer was not impressed with
the above reply. As per the ld. Assessing Officer, advances received
by the assessee from M/s.ISML, subsequent to 18.01.2012 stood
covered by Section 2(22) (e) of the Act. According to him, this was a
deeming provision and had to be construed strictly. As per the ld.
Assessing Officer, by virtue of the judgment of Hon’ble Apex Court in
the case of Kantilal Manilal vs. CIT (1961) 41 ITR 275 and Tarulata
ITA Nos.1691 & 1973 /2015 :- 4 -:
Shyam vs. CIT (1977) 108 ITR 345, Section 2(22) (e) of the Act stood
attracted on loans taken by a shareholder from a controlled company,
to the extent such company possessed accumulated profits.
Aggregate amount of �35,82,27,603/- received by the assessee from
ISML during the period 19.01.2012 to 31.03.2012 was considered as
deemed dividend in assessee’s hand and assessment completed
accordingly.
Aggrieved, assessee moved in appeal before ld. 4.
Commissioner of Income Tax (Appeals). Arguments taken by the ld.
Commissioner of Income Tax (Appeals) could be summarized as
under:-
(i) Money received by it from M/s. ISML was in the nature of trade advances and would not come within the preview of Section 2(22) (e) of the Act.
(ii) Assessee was incorporated in September, 2004 so as to cater to the specified manufacturing requirements of M/s. ISML.
(iii) M/s.ISML was the leading manufacturer/supplier of castings to various automobile manufacturers and assessee received orders through M/s.ISML for manufacturing rough castings.
(iv) M/s.ISML further machined the rough castings supplied by the assessee and sold it to its customers.
(v) Assessee was a 100% dedicated unit of M/s.ISML manufacturing rough castings and supplying it only to ISML.
(vi) Prior to 18.01.2012, assessee was a subsidiary of M/s.
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ISML though it ceased to be so thereafter.
(vii) Assessee had acquired 20% stake in M/s.ISML, and was registered as it’s shareholder on 23.01.2012. In other words, assessee became a shareholder having more than 20% interest only on 23.01.2012.
(viii) Assessee had an agreement dated 10.12.2011 with M/s.ISML, by virtue of which assessee was receiving funds from M/s.ISML against supply of rough castings.
(ix) Customers of M/s.ISML consisted among others M/s. Hero Honda Limited and the orders were set to increase manifold due to the split of Hero Honda Ltd into two separate companies namely Hero Motocorp Limited and Honda Motorcycle and Scooters India Private Limited.
(x) Assessee had continuing trading relations with M/s.ISML and the ledger page of the assessee in the books of the M/s.ISML reflected such continuing transactions.
(xi) Sum of �20 Crores out of the aggregate amounts received by the assessee from M/s.ISML was before it became a shareholder of M/s.ISML on 23.01.2012.
(xii) Payments received were set-off against supplies made to M/s.ISML.
In support of its contention that trading advances were
outside the preview of Section 2(22) (e) of the Act, assessee relied on
a number of judgments of various High Courts, interalia including that
of Hon’ble Delhi High Court in the case of CIT vs. Rajkumar (2009) 318
ITR 462 and that of Hon’ble Jurisdictional High Court in the case of
CIT vs. F. Praveen (2008) 16 DTR 80.
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Ld. Commissioner of Income Tax (Appeals) after considering
the submissions and verifying records came to a conclusion that
assessee had become a beneficial share holder of M/s.ISML only on
23.01.2012, when it acquired 13,10,000 shares of the said company.
Ld. Commissioner of Income Tax (Appeals) observed that prior to the
said date assessee was not beneficial owner of equity shares in
M/s.ISML. Further, as per the ld. Commissioner of Income Tax
(Appeals) agreements entered by the assessee with M/s.ISML on
10.12.2011 clearly indicated that assessee, since its very incorporation
was catering to the needs of M/s.ISML and its entire production
capacity was made available to the M/s.ISML. As per the ld.
Commissioner of Income Tax (Appeals), assessee having underwritten
its entire capacity to M/s.ISML, the sum of �20 Crores received by it
from them was nothing but a trade advance. Ld. Commissioner of
Income Tax (Appeals) also found from the data sheet submitted by
the assessee that out of the total sales effected by M/s.ISML during
the relevant previous year, contribution of the assessee came to 99%.
According to him, entire quantity of rough castings manufactured by
the assessee were supplied to M/s.ISML only. As per the ld.
Commissioner of Income Tax (Appeals) rough castings were
manufactured by the assessee as per the requirement of Hero
Motocorp Limited, Honda Motor Cycle and Scooters India Pvt Limited,
ITA Nos.1691 & 1973 /2015 :- 7 -:
TVS Motors Company Ltd etc., based on purchase orders of M/s.ISML
and there was a continuing series of receipts and sales from/to
M/s.ISML. Ld. Commissioner of Income Tax (Appeals) relying on the
judgment of Hon’ble Delhi High Court in thecae of CIT vs. Creative
Dyeing & Printing (P) Ltd (2009) 318 ITR 476 held that there being
regular business transactions between two companies, advances
received could not be treated as a loan or an advance in the nature of
a loan. According to ld. Commissioner of Income Tax (Appeals)
advances received during ordinary course of business, for business
expediency, would not constitute loan for the purpose of application of
Section 2(22) (e) of the Act.
On the judgment of Hon’ble Apex Court in the case of
Kantilal Manilal (supra) relied on by the ld. Assessing Officer for
fastening the tax liability on the assessee, ld. Commissioner of Income
Tax (Appeals) observed that the said case was on distribution of
dividend, other than in the form of money, like delivery of property or
right having monetary value. He also distinguished the judgment of
Hon’ble Apex Court in the case of Tarulata Shyam (supra) noting that
in the said case borrowed loans were repaid before the end of the
relevant assessment year.
ITA Nos.1691 & 1973 /2015 :- 8 -:
Thereafter ld. Commissioner of Income Tax (Appeals) did an
examination of the accounts of the assessee in the books of M/s.ISML
and came to a finding that there was an adjustment of
�20,99,81,436/- against trade advances received by the assessee from
ISML. Further, as per the ld. Commissioner of Income Tax (Appeals),
aggregate amount received by the assessee from M/s. ISML during
the period it held beneficial ownership in its shares was
�22,64,11,246/- only. Nevertheless, ld. Commissioner of Income Tax
(Appeals) found that a sum of �2,69,89,513/- represented money paid
by M/s.ISML on behalf of the assessee towards latter’s statutory
duties, TDS and wages. Thus, according to him, out of the aggregate
amount received by the assessee from M/s. ISML, benefit taken by the
assessee company which could be brought within the preview of
Section 2(22) (e) of the Act was only �2,69,89,513/-. He thus
restricted the addition made u/s.2(22) (e) of the Act to �2,69,89,513/-
and deleted the balance.
Now before us, grounds taken by the Revenue assails the
relief given to the assessee, whereas assessee is aggrieved on
sustenance of the addition of �2,69,89,513/- u/s.2(22) (e) of the Act.
Ld. Counsel for the assessee starting his arguments
submitted that paper book pages No. 35 to 136 reflected the accounts
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of the assessee in the books of M/s.ISML. According to him, this
account clearly established that the amounts paid by M/s.ISML to the
assessee, were being adjusted against continuing supply of materials
by the assessee. Contention of the ld. Authorised Representative was
that it was purely a running account. According to him, a reading of
the ledger pages clearly indicated ongoing supply of materials by the
assessee to M/s.ISML. Further, according to him, agreement entered
on 10.12.2011 by the with M/s.ISML, obliged the latter to pay a sum of
�20 crores to the assessee, for catering to the increased requirements
of M/s.ISML. This as per the ld. Authorised Representative, was a
pure trading advance since assessee was obliged to supply its entire
production to M/s.ISML. According to him, there was massive
expansion of demand for castings due to the division of M/s. Hero
Honda Ltd to M/s. Hero Motor Corp. Ltd and M/s. Honda Motor Cycles
& Scooters India P. Ltd. M/s.ISML being the major supplier of
castings, according to the ld. Authorised Representative, it had to
ensure increase in production capacity of the assessee. As per the ld.
Authorised Representative, sums received by the assessee from
M/s.ISML were neither a loan nor an advance in the nature of a loan.
According to him, it was a simple trading account and assessee was
obliged to supply its entire production to M/s.ISML. Ld. Authorised
Representative pointed out that 99% of sales of the M/s. ISML, was
ITA Nos.1691 & 1973 /2015 :- 10 -:
done through castings manufactured by the assessee. Thus,
according to him, ld. Commissioner of Income Tax (Appeals) was
justified in coming to a conclusion that the money given by M/s.ISML
to assessee was nothing but trading advances and not in the nature
of a loan or advance in the nature of a loan. However, according to
him, ld. Commissioner of Income Tax (Appeals) fell in error in
sustaining the addition to the extent of �2,69,89,513/- ignoring the
close interlacing, interdependence and interconnection between the
two companies. When the entire production capacity of the company
was to cater to M/s.ISML, as per ld. Authorised Representative,
payment of statutory duties, TDS and wages made by M/s.ISML on
behalf of the assessee, could not be considered as a benefit derived by
the assessee company, coming within the preview of Section 2(22) (e)
of the Act. Relying on CBDT Circular No.19/2017, dated 12.06.2017,
ld. Authorised Representative submitted that advances made by a
company to sister concern against dues for job work would not fall
within the definition of deemed dividend u/s.2(22) (e) of the Act.
Per contra, the ld. Departmental Representative strongly 11.
assailing the order of the ld. Commissioner of Income Tax (Appeals),
on the relief given to the assessee, submitted that advances received
by the assessee from M/s.ISML were much more than the value of
raw materials supplied by the assessee to M/s.ISML. According to
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him, advances received were not commensurate with the supply of
raw materials and this clearly indicated that at least a part of the
advances were not in the nature of trading transactions. According to
him, for a supply of raw material worth �10/-, nobody would have
given an advance of �20/-. As per the ld. Departmental
Representative, assessee could not take refuge under CBDT Circular
No.19/2017, since it could not establish that the advances received
were purely in the nature of trading advance. Thus according to him,
ld. Commissioner of Income Tax (Appeals) fell in error when he held
that substantial portion of the advances received by the assessee did
not come within the ambit of Section 2(22)(e) of the Act.
We have considered the rival contentions and perused the
orders of the authorities below. The question raised in this case
involve interpretation of Section 2(22) (e) of the Act, in so for as it
concerns the term ‘’loan’ and ‘’advance’’ used therein. Section 2(22) (e)
of the Act is reproduced hereunder:-
‘’2- In this Act, unless the context otherwise requires,- (1) ...... (2) ..... (3) ..... (22).....
ITA Nos.1691 & 1973 /2015 :- 12 -:
(a)...... (b)...... (c)..... (d)..... (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, 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 ; but "dividend" does not include-
(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;
(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ;
(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;
(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off ;
(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956) ;
ITA Nos.1691 & 1973 /2015 :- 13 -:
(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)’’.
Meaning of term ‘’advance’’ as it appear in the above Section 13.
was a matter of interpretation considered by Hon’ble Delhi High Court
in the case of Raj Kumar(supra). Their lordships applied the principle
of ‘’noscitur a sociis’’ and held that for an advance to come within the
purview of Section 2(22) (e) of the Act, it should have the trappings of
a loan. According to their lordships, unless advances received by an
assessee carried with it an obligation of repayment, it would not come
within the preview of Section 2(22) (e) of the Act. In other words, as
per Hon’ble Delhi High Court, trade advances which was to give
effect to a commercial transaction would not fall within the ambit of
Section 2(22) (e) of the Act. Their lordships had considered the
judgment of Hon’ble Apex Court in the case of Kantilal Manilal (supra)
as well as Tarulata Shyam (supra) while reaching the above
conclusion.
Law as elucidated by Hon’ble Delhi High Court with regard
to interpretation of Section 2(22) (e) of the Act found acceptance of
the Revenue though CBDT Circular No.19/2017, dated 12.06.2017.
The said Circular is reproduced hereunder:-
ITA Nos.1691 & 1973 /2015 :- 14 -:
‘’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. 2. The Board has observed that some Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22) (e) of the Act. Such views have attained finality. 2.1 Some illustrations/examples of trade advances/commercial transactions held to be not covered under section 2(22) (e) of the Act are as follows: i. Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do not to fall within the definition of deemed dividend under section 2(22) (e) of the Act. (CIT vs. Creative Dyeing & Printing Pvt. Ltd. l , Delhi High Court). ii. Advance was made by a company to its shareholder to install plant and machinery at the shareholder's premises to enable him to do job work for the company so that the company could fulfil an export order. It was held that as the assessee proved business expediency, the advance was not covered by section 2(22)(e) of the Act. (CIT vs Amrik Singh, P&H High Court). iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilised gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a business transaction arising in the normal course of business between two concerns and the transaction did not attract section 2(22) (e) of the Act. (CIT, Agra vs Atul Engineering Udyog, Allahabad High Court)
ITA Nos.1691 & 1973 /2015 :- 15 -:
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 Board has observed clearly that trading advances which were in
the nature of commercial transactions would not come within the
preview of Section of 2(22) (e) of the Act and such view had attained
finality.
In the above backdrop of law, we have to examine the 15.
transactions between M/s.ISML and assessee, in so far as application
of Section2(22) ( e) of the Act is concerned. There is no dispute that
a sum of �20 Crores was received by the assessee from M/s.ISML by
virtue of its agreement entered by the assessee with M/s.ISML on
10.12.2011. It is also not disputed that assessee had made available
its entire capacity for manufacturing rough castings on captive basis
to M/s.ISML on a regular basis. Assessee had also undertaken not to
utilize its manufacturing capacity for any other party. It is obvious in
our opinion, that the sum to the extent of �20 Crores received by the
assessee based on the above agreement, through which it gave away
all its manufacturing capacity, was nothing but a commercial
transaction.
ITA Nos.1691 & 1973 /2015 :- 16 -:
Now coming to the advances received by the assessee from
M/s.ISML during the period 23.01.2012 to 31.03.2012, the statement
of account of the assessee in the books of M/s.ISML, has been
placed before us at paper book pages 35 to 136. Date 23.01.2012 is
important since prior to that assessee was not having shareholding in
excess of 20% in M/s.ISML and this has not been disputed by the
Revenue. What we find is that against the advances received by the
assessee there were continuing supply of materials by the assessee to
M/s.ISML. It is not as though assessee was always a debtor to
M/s.ISML. Though prior to 23.01.2012, on a number of days, for
example 4.5.2011, 6.5.2011, 9.5.2011, 11.05.2011 to 26.05.2011,
31.5.2011, 13.6.2011, 26.06.2011 to 29.06.2011 there were debit
balance in assessee’s account with M/s.ISML. Or in other words,
amounts were due to the assessee from M/s. ISML and not vice-versa.
Thus at some point of time, there were a credit balances and at some
other point of time there were debit balance. The ledger account, in
our opinion, clearly indicate that it was a trading account and the
transactions were purely commercial in nature. Money received by
the assessee from M/s.ISML was not in the nature of any advance
which had the trappings of a ‘’loan’’, which alone could bring it within
the ambit of Section 2(22) (e) of the Act. Ld. Assessing Officer had
only considered the amounts given by M/s. ISML to the assessee and
ITA Nos.1691 & 1973 /2015 :- 17 -:
omitted to consider the entries relating to the value of materials
supplied by the assessee to M/s.ISML and the real nature of the
transactions assessee had with M/s.ISML. It may be true that during
the period 23.01.2012 to 31.03.2012 advances received by the
assessee was in excess of the value of the materials supplied by it.
But transactions between assessee and ISML had started much
earlier to 20.12.2011 and we have already pointed a large number of
instances when the balance in the name of the assessee was
negative. In our opinion, ld. Assessing Officer fell in error in taking an
isolated view and considering only a part of the transactions ignoring
the transactions prior to 23.01.2012, which together clearly indicated
that account was in the nature of a running trade account.
Coming to the addition of �2,69,89,513/- sustained by the ld. 17.
Commissioner of Income Tax (Appeals), there is a clear finding by the
ld. Commissioner of Income Tax (Appeals) that M/s.ISML had paid
such sum towards statutory duties, TDS and wages of the assessee.
Nevertheless, in our opinion, such payments would not take the
transaction out of preview of a commercial transaction. Assessee had
given its entire capacity to M/s.ISML and if M/s.ISML paid part of the
statutory duties, TDS and wages of the assessee directly, in our
opinion, such payments cannot be considered as loans or advances
coming within the ambit of Section 2(22) (e) of the Act. We cannot
ITA Nos.1691 & 1973 /2015 :- 18 -:
say that assessee received any benefit since there was a quid-pro-quo in the nature of surrendering its entire production capacity to M/s. ISML. Thus in our opinion sums received by the assessee from M/s. ISML would not come within the preview of advances/ loans mentioned in Section 2(22) (e) of the Act. We are of the opinion that ld. Commissioner of Income Tax (Appeals) was not justified in sustaining the addition to the extent of �2,69,89,513/-. We do not have any hesitation in deleting the whole of the addition made u/s.2(22) (e) of the Act.
In the result, the appeal of the Revenue is dismissed 18. whereas that of assessee is allowed.
Order pronounced on Wednesday, the 3rd day of October, 2018, at Chennai.
Sd/- Sd/- (धु�वु� आर.एल रे�डी) (अ�ाहम पी. जॉज�) (DUVVURU RL REDDY) (ABRAHAM P. GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:03 October, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF
ITA Nos.1691 & 1973 /2015 :- 19 -: