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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A.MOHAN ALANKAMONY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
The appeal by the Revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-15, Chennai, dated 29.09.2017 in New ITA No.288/2016-17/CIT(A)-15 for the assessment year 2014-15 passed U/s.250(6) r.w.s. 143(3) of the Act.
2 ITA No.3136/Chny/2017 2. The Revenue has raised several grounds in its appeal however the crux of the issue is that the Ld.CIT(A) has erred in deleting the addition of Rs.2,77,98,930/- made by the Ld.AO towards deemed dividend U/s.2(22)(e) of the Act.
The brief facts of the case are that the assessee is an individual and Shareholder / Director of M/s. Samba Publishing Co. Pvt. Ltd. and Proprietor of M/s. Samba Publishing, filed her return of income for the assessment year 2014-15 on 28.09.2014 admitting total income of Rs.2,78,36,670/-. The case was selected for scrutiny under CASS and notice U/s.143(2) of the Act was issued on 31.08.2015. Finally the assessment order was passed U/s.143(3) of the Act on 20.12.2016 wherein the Ld.AO made addition of Rs.2,77,98,670/- towards deemed dividend U/s.2(22)(e) of the Act and Rs.3,20,842/- towards disallowance of sales promotion expenses.
Addition of Rs.2,77,98,930/- on account of deemed dividend U/s.2(22)(e) of the Act:- During the course of scrutiny assessment proceedings, it was observed by the Ld.AO that the assessee is a substantial
3 ITA No.3136/Chny/2017 shareholder in the company M/s. Samba Publishing Co. Pvt. Ltd., holding 77.5% of the shares. It was also noticed that the assessee owes the company an amount of Rs.15,47,28,852/- as on 31.03.2014 whereas the opening balance as on 01.04.2013 was Rs.12,69,39,922/-. It was also observed that the assessee’s proprietary concern M/s. Samba Publishing Company procures book published by M/s. Samba Publishing Company Pvt. Ltd., and sells them to various schools. Thereafter the assessee’s proprietor concern remits the sale proceeds to M/s. Samba Publishing Company Pvt. Ltd. From this commercial transaction, the assessee’s proprietary concern owes to M/s. Samba Publishing Company Pvt. Ltd., for the year ending 31.03.2014 an amount of Rs.15,47,28,852/-. Further on verifying the past statement of accounts, it was noticed that the outstanding balance in the books of the assessee’s proprietary concern was rising year after year in the following manner:- Financial Year Amount outstanding to ending M/s.Samba Publishing Co.(P) Ltd. 31.03.2012 Rs.11,09,32,400/- 31.03.2013 Rs.12,69,29,922/- 31.03.2014 Rs.15,47,28,852
4 ITA No.3136/Chny/2017
The Ld.AO opined that the increase in the outstanding balance of the assessee’s proprietary concern being amount payable to M/s. Samba Publishing Co. Pvt. Ltd., leads to the inference that the company instead of advancing loans directly to the assessee was allowing the assessee to enjoy the money collected by the assessee from her debtors. Therefore the Ld.AO further opined that in the case of the assessee, provisions of Section 2(22)(e) of the Act would be attracted. The contention of the assessee that the entire transaction was as a result of commercial exigency was rejected by the Ld.AO. Thereafter relying on the various decisions cited in the order of the Ld.AO, made addition of Rs.2,77,98,930/- invoking the provisions of deemed dividend U/s.2(22)(e) of the Act.
When the matter cropped up before the Ld.CIT(A), analyzing the issue he arrived at the following findings:- (i) The CBDT vide circular No.19/2017 dated 12.06.2017 had specifically prescribed to exclude trade advances arising out of commercial transactions from the purview of the provisions of Section 2(22)(e) of the Act. Thus the CBDT
5 ITA No.3136/Chny/2017 has narrowed down the scope of applicability of Section 2(22)(e) of the Act. (ii) The Ld.AO had failed to recognize the business relationship between the assessee as a substantial shareholder in M/s. Samba Publishing Company Pvt. Ltd., Director of M/s. Samba Publishing Company Pvt. Ltd., and proprietor of the proprietary concern M/s. Samba Publishing Company. (iii) The assessee had imported two printing machines during the year 2003-04 and installed the same in the premises of M/s. Samba Publishing Company Pvt. Ltd., and utilized for the purpose of the business of M/s. Samba Publishing Co. Pvt. Ltd., receiving a nominal amount. (iv) Subsequently due to stringent Government policies the revenue from printing activities of M/s. Samba Publishing Company Pvt. Ltd., declined, therefore the assessee had waived printing charges for utilizing her printing machines. (v) The assessee had also canvassed printing jobs for M/s. Samba Publishing Co. Pvt. Ltd., to improve its revenue stream. (vi) There was a strong nexus between the assessee’s proprietary concern and M/s. Samba Publishing Company
6 ITA No.3136/Chny/2017 Pvt. Ltd., because all the assets of the assessee’s proprietary concern was transferred to the company for various reasons discussed in the order of the Ld.CIT(A). (vii) The premise of the assessee was utilized by the company by paying a nominal rent. (viii) Thereafter the Ld.CIT(A) relied in the following decisions:- “(1) The Jurisdictional bench of the ITAT, in the case reported in 32 CCH 308 approved the concept of the management control while deleting the assessment. of deemed dividend presumed based on the transaction between the related entities. The said decision of the ITAT is now confirmed by the Jurisdictional High Court reported in 94 CCH 320.
(2) The jurisdictional bench of the ITAT, in the case reported in 33 CCH496 approved the non application of deemed provisions under consideration in the context of the important role played by the shareholder in the affairs of the business of the company. In this context, the arrangement between the shareholder and the company was held to be merely for the sake of convenience arising out of business expediency.
(3) The jurisdictional High Court in the case reported in 97 CCH 157 approved the limited scope of the deeming provisions for taxing the advanced received by the registered shareholder under Commercial Business consideration and the contractual obligations between the parties would vitiate automatic application section 2(22)(e) of the Act.
(4) The jurisdictional bench of the ITAT, in the case reported in 47 CCH 595 approved the concept of unity of management and control between the entities while deleting the addition made on the application of section 2 (22)(e) of the Act pertaining to the transactions between the registered shareholder and the company. The appellate tribunal has held clearly that the provisions of section 2(22)(e) of the Act cannot be applied to running account between the registered shareholder and the company.
(5) The absence of the personal benefit derived by the registered shareholder in the transaction entered into by the company would negate
7 ITA No.3136/Chny/2017 the applicability of the sections 2(22)(e) of the Act. The said ratio was laid down by the jurisdictional High Court in the case reported in 94 CCH 320 and the High Court has held that the intermediary getting the benefit in the process of supporting the business of the company cannot be considered as taxation as deemed divided under section 2(22)(e) of the Act.
(6) Recently the Gujarat High Court, in the case reported in 394 ITR 50 has ruled that if amounts advanced are for business purposes, such payments would not fall within the ambit of provisions of section 2(22)(e) of the Act. Therefore, the role of the registered shareholder in managing the business of the company in the capacity of the Managing Director while appreciating the history of the business growth of the company captured In the preceding paragraphs cannot be brushed aside lightly in approving mechanically the taxation of incremental outstanding in the business transaction as deemed dividend.”
From the above factual and legal matrix, the Ld.CIT(A) arrived at the following conclusions:- “4.3.3. I have considered both the points of view. On the direction of the Additional CIT, the AO has brought to tax the outstanding payable by the appellant to the company, MI s Samba Publishing Company (P) Ltd without going into the nature of business transactions between the two business entities - MI s Samba Publishing Company (P) Ltd. and Samba Publishing Company, in which the appellant is a proprietress. Both the concerns are in similar line of business and there have been continuous transactions through a running account. The appellant's AR has submitted a paper book containing the following ledger accounts in which the AR has analysed the nature of transactions. These accounts have been already submitted before the Additional CIT and the AO during the assessment proceedings.
No. Particulars 1 Ledger A/c - Abstract of Samba Publishing Company in the books of Samba Publishing Company (P) Ltd. 2 Ledger A/c Abstract of the Appellant m the books of Samba Publishing Company (P) Ltd. 3 Turnover Ration of Samba Publishing Company m the books of Samba Publishing Company (P) Ltd.
8 ITA No.3136/Chny/2017 4 Ledger A/c - Abstract of Samba Publishing Company (P) Ltd., in the books of Samba Publishing company. 5 Ledger A/c - Abstract of Samba Publishing Company (P) Ltd., in the books of the appellant.
4.3.4. From the above analysis of the accounts of both the entities, the AR has argued that the current running account between the appellant and M/s Samba Publishing Company (P) Ltd. was wrongly taken into reckoning for the purpose of applying the deemed provision under the Act. From the description of nature of business transactions elaborately mentioned in the AR's submission reproduced above under para 4.2, it is clear that there has been symbiotic relationship between the two business entities which has not been taken into account by the AO.
4.3.5. The AR has relied on several decisions including that of the jurisdictional High Court and ITAT, I have perused the decisions which are briefly mentioned below:
A) The Hon'ble ITAT, Chennai Bench, m the case of Farida Holding Pvt. Ltd. Vs. DCIT [32 CCH 308 (2012)] has held as under:
"Section 2(22) of the Income-tax Act, 1961 - Deemed dividend - Assessments years 2003-04 and 2004-05 - Assessee-company was mainly functioning in role of a holding company over eleven fully owned subsidiary companies - During relevant year, it had received loans amounts from different subsidiaries and advanced same to other subsidiaries - Assessing Officer held that loans obtained by assessee were in nature of deemed dividends as per section 2(22)(e) and were liable to be taxed - Whether as a holding company, assessee was bound to monitor financial discipline of its subsidiaries, especially when all subsidiaries were fully owned by holding company - Held, yes - Whether since assessee was transacting loans as a treasury manager for its fully owned subsidiaries and it had not availed any benefit out of those loans, those financial transactions managed by assessee as a holding company did not partake character of deemed dividend under section 2(22)(e) - Held, yes [In favour of assessee]"
B) The Hon'ble ITAT, Chennai Bench, m the case of ACIT Vs. Smt.G.Sreevidya [33 CCH 496 (2012)] has held as under:
"Section 2(22) of the Income tax Act, 1961 - Deemed dividend - Assessment year 2006-07 - Assessee was a managing director in a
9 ITA No.3136/Chny/2017 company - She had taken a loan of Rs. 17,65,517 from company - Assessing Officer treated said amount as 'deemed dividend' - Assessee contended that said amount was advanced to her as per her pre-condition of granting bank guarantee and collateral security for funding of company and at time of extending guarantee/ security she had sought liberty to withdraw funds from company as and when required by her for personal purposes - It was thus in this background, she had withdrawn certain amount from company periodically and had also repaid same - Whether on facts it could be said that arrangement between assessee and company was merely for sake of convenience arising out of business expediency, which could not partake character of deemed dividend - Held, yes [In favour of assessee]"
C) The Hon'ble Madras High Court, in the case of CIT Vs. C.Subba Reddy [97 CCH 157 (2016)] has held as under:
"Section 2(22) of the Income-tax Act, 1961 - Deemed dividend (Loans and advances to shareholders) - Assessment year 2001-02 - Assessee, proprietor of CPD, entered into an agreement with CHPL sub-contracting construction work to it - CPD was a shareholder in CHPL, a closely held company, holding substantial voting rights - CHPL gave credit to assessee by virtue of contractual obligation and business transaction which was settled in very next year - No individual benefit accrued to assessee - Whether amount having been given by CHPL as a part of contractual obligation could be treated as deemed dividend in hands of assessee - Held, no [Para 9J [In favour of assessee]"
D) The Hon'ble High Court of Madras, m the case of CIT Vs. Farida Holdings P. Ltd. has held as under:
"Section 2(22) of the Income-tax Act, 1961 - Deemed dividend (Loans or advances to shareholders) - Assessment year 2006-07 - Assessee- company had 100 per cent shareholding in six subsidiary companies - During year, it received certain amount as loan from subsidiary companies - Assessing Officer treated said amount as deemed dividend under section 2(22)(e) and added same in income of assessee - Both Commissioner (Appeals) and Tribunal allowed appeal of assessee - Whether in view of decision of Division Bench of Madras High Court made in Tax (Appeal) No. 16 of 2010, dated 17-6-2013, wherein a similar issue had been decided in favour of assessee, order of Tribunal deserved to be upheld - Held, yes [Para 11] [In favour of assessee]".
10 ITA No.3136/Chny/2017 E) The Hon'ble High Court of Gujarat, in the case of Gujarat Mall Management Co. P. Ltd. Vs. ITO - Ward 2(1)(1)[84 taxmann.com 242(Gujarat)] has held as under:
"Section 2 (22), read with section 147, of the Income-tax Act, 1961 - Deemed dividend (Loans and advances) - Assessment year 2008-09 - Notice for reopening assessment in case of assessee was issued beyond a period of four years from end of relevant assessment year where original assessment was framed after scrutiny - According to Assessing Officer, assessee company had received loan of Rs. 2.17 crores from another company, however, it had not disclosed information regarding share holding pattern; hence Assessing Officer desired to tax said loan received by assessee as a deemed dividend under section 2(22)(e) - Whether assessee having made disclosures about borrowings from another company and also having filed necessary details thereof along with audited return, did not thereafter have onus of further disclosing its share holding pattern to enable Assessing Officer to examine applicability of section 2(22)(e) - Held, yes - Whether if Assessing officer desired to scrutinize this aspect it was always open for him to call upon assessee to provide for such details as and when necessary - Held, yes - Whether thus impugned notice was to be set aside - Held, yes[Paras 12 & 15][In favour of assessee]"
4.3.6. In the decisions mentioned above, it has been held that where there is unity of management and control between the two similar concerns, the provisions of Section 2(22)(e) of the Act cannot apply, more particularly, to the running account between the two entities which is in the ordinary course of business transactions. Besides, the AR has also relied on the CBDT circular No.19/2017 dated 12-06-2017 which it is mentioned that in view of certain courts decisions in the recent past, the trade advances in the nature of commercial transactions would not fall within the ambit of Section 2(22)(e) of the Act. In the said circular, it is further mentioned that, appeals may not be filed on this ground by the department as trade advances which are in the nature of commercial transactions would not fall within the ambit of the word, "advances" mentioned under Section 2(22)(e) of the Act.
4.3.7. After analysis of the accounts submitted by the appellant and after perusing the case laws relied on by the AR including that of jurisdictional High Court and ITAT and the CBDT's circular mentioned above, I am of the considered opinion that the outstanding liability payable by the appellant to the company, M/s Samba Publishing
11 ITA No.3136/Chny/2017 Company (P) Ltd. cannot be treated as deemed dividend u/s 2(22)(e) of the Act and therefore, the aforesaid addition is deleted and the appellant's ground on this issue is allowed. It is also pertinent to mention that in AY 2009-10, under similar facts and circumstances, the AO did not make disallowance u/s 2(22)(e) of the Act as pointed out by the appellant's AR.”
Before us the Ld.DR vehemently argued in support of the order of the Ld.AO, whereas the Ld.AR relied in the order of the Ld.CIT(A).
We have heard the rival submissions and carefully perused the materials on record. From the order of the Ld.CIT(A), it is crystal clear that there was various commercial factors existing between the assessee and M/s. Samba Publishing Company Pvt. Ltd. The business transaction between the assessee and M/s. Samba Publishing Company Pvt. Ltd., were intermingled and both the entities were consistently working together to develop a common business. In such situation, the circular of the CBDT cited supra squarely applies to the case of the assessee which specifically narrows down the scope of the rigger in the provision of Section 2(22)(e) of the Act. In the case of the assessee, outstanding balances occured due to commercial exigencies such as regular trading business and consistent services rendered by
12 ITA No.3136/Chny/2017 the assessee. In these circumstances the provision of Section 2(22)(e) of the Act cannot be invoked as clarified by the CBDT circular cited supra. Further the case laws referred by the Ld.CIT(A) extracted herein above also squarely applies to the case of the assessee. In this situation, we do not find it necessary to interfere in the order of the Ld.CIT(A). Accordingly we hereby uphold the same.
In the result, the appeal of the Revenue is dismissed.
Order pronounced on the 12th June, 2018 at Chennai.
Sd/- Sd/- (एन.आर.एस. गणेशन) (ए. मोहन अलंकामणी) (N.R.S. Ganesan) (A. Mohan Alankamony) लेखा सद�य/Accountant Member �याियक सद�य/Judicial Member चे�ई/Chennai, �दनांक/Dated 12th June, 2018 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF