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ACIT CIRCLE- 61(1), NEW DELHI vs ADIISH JAIN, NEW DELHI | BharatTax

ACIT CIRCLE- 61(1), NEW DELHI vs. ADIISH JAIN, NEW DELHI

ITA 284/DEL/2021Status: DisposedITAT Delhi12 January 2024AY 2016-179 pages

AI SummaryN/A

Facts

The Assessing Officer added Rs. 5,67,72,393/- as deemed dividend under Section 2(22)(e) to the assessee's income, citing advances made by SMW Metal Pvt. Ltd (where assessee was a shareholder) to JP Engineers (where assessee was a partner). The AO contended these were not commercial transactions before 27.11.2015, while the CIT(A) deleted the addition, classifying them as continuous business transactions.

Held

The Tribunal upheld the CIT(A)'s decision, ruling that the reciprocal advances between the two entities, both engaged in aluminum products, were commercial in nature and formed part of a running current account. Relying on judicial precedents, it concluded that such transactions, being in the ordinary course of business, do not fall within the definition of deemed dividend under Section 2(22)(e) of the Act, and thus dismissed the revenue's appeal.

Key Issues

Whether reciprocal advances between two entities, in which the assessee holds substantial interest, constitute deemed dividend under Section 2(22)(e) when these transactions are claimed to be in the ordinary course of business.

Sections Cited

Section 143(3), Section 2(22)(e)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI BENCH A: NEW DELHI

Before: SHRI M. BALAGANESH & SHRI ANUBHAV SHARMA

For Appellant: Shri Satish Aggrawal, CA

For Respondent: Shri Kanv Bali, Sr. DR

Hearing: 01/11/2023Pronounced: 12/01/2024

O R D E R PER M. BALAGANESH, A. M.: The appeal in AY 2016-17, arises out of the order

1.

of the Commissioner of Income Tax (Appeals)-33, Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. 10324/18-19/773/19-20 dated 21.09.2020 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 21.12.2018 by the Assessing Officer, ACIT, Circle-63(1), New Delhi (hereinafter referred to as „ld. AO‟).

2.

The revenue has raised the following grounds of appeal :-

“1 The Ld. CIT(A) has erred in deleting the addition of Rs. 5,67,72,393/- and has not appreciated the fact that till 27.11.2015 no sale or purchase transactions occurred between the two parties, Mis J.P. Engineers and M/s SMW Metal Pvt Ltd, however, there was huge amount of financial transactions held between the two parties. Further, the Lat. CIT(A) has not appreciated the fact that the credit entries to M/s J.P. Engineers received from SMW Metals were almost settled even before initiation of any commercial transaction. This clearly establishes that such transaction are not in nature of trade advances but deemed dividend in the hands of assessee u/s 2(22)(e) of the Act.”

3.

The only issue to be decided in this appeal is as to whether the ld CIT(A) was justified in deleting the addition made on account of deemed dividend u/s 2(22)(e) of the Act in the facts and circumstances of the instant case.

part of the definition of deemed dividend under Section 2(22)(e) which states that deemed dividend does not include an advance or loan made to a shareholder 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 [Section 2(22)(e)(ii)] i.e. there is no deemed dividend only if the lending of moneys is by a company which is engaged in the business of money lending. Dilating further the counsel for the appellant contended that since M/s. Pee Empro Exports Pvt. Ltd. is not into the business of lending of money, the payments made by it to the assessee company would therefore be covered by Section 2(22)(e)(ii) and consequently payments even for business transactions would be a deemed dividend. We do not agree. The Tribunal has dealt with this aspect as reproduced in para (9) above. The provision of Section 2(22)(e)(ii) 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 ITA 250/2009 Page 8 the business transactions does not fall within Section 2(22)(e), we need not to go further to Section 2(22)(e)(ii). The provision of Section 2(22)(e)(ii) 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). We feel that this interpretation of ours is in accordance with the legislative intention of introducing Section 2(22)(e) and which has been extensively dealt with by this Court in the judgment in Raj Kumar‟s case(supra). This Court in Raj Kumar‟s case (supra) extensively referred to the report of the Taxation Enquiry Commission and the speech of the Finance Minister in the Budget while introducing the Finance Bill. Ultimately, this Court in the said judgment held as under: " 10.3 A bare reading of the recommendations of the Commission and the Speech of the then Finance Minister would show that the purpose of insertion of clause (e) to section 2(6A) in the 1922 Act was to bring within the tax net monies paid by closely held companies to their principal shareholders in the guise of loans and advances to avoid payment of tax. 10.4 Therefore, if the said background is kept in mind, it is clear that sub- clause (e) of section 2(22) of the Act, which is pari material with clause (e) of section 2(6A) of the 1922 Act, plainly seeks to bring within the tax net accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders, money in the form of an advance or loan. 10.5 If this purpose is kept in mind then, in our view, the word „advance‟ has to be read in conjunction with the word „loan‟. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term „advance‟ may or may not include lending. The word „advance‟ if not found in the company of or in conjunction with a word „loan‟ may or may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term „advance‟. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the of Angus Robertson v. George Day (1879) 5 AC 63 by observing "it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them" and our Supreme Court in the case of Rohit Pulp & Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610."