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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against order of CIT(A), Pune-1, dated 06.10.2016 relating to assessment year 2012-13 against order passed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:- On facts and circumstances of the case and in law,
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The Deputy Commissioner of Income Tax, Circle-1(1), Pune has erred in assessing total income returned by the assessee of Rs.38,63,972/- at a higher amount of Rs.43,75,440/- and the Commissioner of Income Tax (Appeals)-1, Pune has erred in confirming the same. 2. The Deputy Commissioner of Income Tax, Circle-1(1), Pune has erred in making an addition of Rs.5,11,465/- to the returned income of the assessee on account of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961, and the Commissioner of Income tax (Appeals)-1 has erred in confirming the same.
The issue raised in the present appeal is against addition of ₹ 5,11,465/- on account of deemed dividend under section 2(22)(e) of the Act.
Briefly, in the facts of the case, the assessee was director in M/s. Accurate Industrial Controls Pvt. Ltd. (AICPL) and was also earning salary income from the said company. The assessee furnished return of income declaring total income of ₹ 38,63,972/-. The case of assessee was reopened under section 147 / 148 of the Act. In response the assessee stated that the original return of income filed, be treated as filed in response to notice under section 148 of the Act. The Assessing Officer noted that company AICPL had given advance of ₹ 5,11,465/- to M/s. Accurate Energy Solutions Ltd. (AESL). The assessee held 99% shares in AICPL and AESL. As per Balance Sheet of AICPL, reserves and surplus as on 31.03.2012 were ₹ 3,77,15,196/-. The Assessing Officer invoking the provisions of section 2(22)(e) of the Act, held that advance made to AESL by AICPL was covered under the provisions of deemed dividend under section 2(22)(e) of the Act in the case of assessee on account of following reasons:- a. AICPL is a closely held company b. AICPL have given loan to AESL. Kiran B Jadhav holds more than 10% shares in AICPL and more than 20% shares of AESL. c. AICPL has reserves of Rs.3,77,15,196/- as on 31.03.2012
The assessee was thus, show caused with regard to proposed addition. The assessee explained that AICPL had given amounts in running account to
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the group company AESL for payment of its statutory dues. It was further explained that AESL was newly incorporated company in 2007-08 for the production of energy equipments and since there were no tangible security and hence, incapacity to borrow money for its business plan, amount was advanced by the group company to AESL. Another reason was that AICPL had made the aforesaid payments in consideration of personal guarantee and assets of personal nature hypothecated as security by its managing director for the cash credit obtained from Punjab National Bank. The advances were made for payment of statutory dues and salary & wages of AESL. The assessee also pointed out that the Hon’ble Bombay High Court vide order dated 23.01.2015 had given its approval to the scheme of amalgamation of AICPL and AESL from the appointed date 01.04.2013. The assessee also explained that provisions of section 2(22)(e) of the Act were not attracted in the case. The Assessing Officer has reproduced the explanation of assessee at pages 2 to 11 of the assessment order. The Assessing Officer however, was of the view that provisions of section 2(22)(e) of the Act were attracted and hence, treated the advance received at ₹ 5,11,465/- as deemed dividend in the hands of assessee being beneficial shareholder.
The CIT(A) upheld the order of Assessing Officer rejecting explanation of assessee with regard to payment of statutory dues and salary & wages of AESL for want of funds.
The assessee is in appeal against the order of CIT(A).
The learned Authorized Representative for the assessee pointed out that CBDT vide circular No.19/2017 clarified the position on the cases of deemed dividend under section 2(22)(e) of the Act in respect of advances made in
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nature of commercial transactions. The copy of CBDT circular is placed on record.
The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below.
We have heard the rival contentions and perused the record. The issue which arises in the present appeal is in respect of applicability of provisions of section 2(22)(e) of the Act. The assessee was 99% shareholder in two concerns AICPL and AESL. The concern AESL was in need of funds and AICPL advanced the funds to sister concern for payment of statutory dues and salaries & wages. The assessee had explained that sum of ₹ 44,029/- was payment against TDS dues, ₹ 1,62,803/- against Excise duty payable and ₹ 3,03,633/- for managerial personnel salaries and wages. The said concern AECL amalgamated on a later date with AICPL by the order of the Hon’ble Bombay High Court. The assessee was 99% shareholder in both the concerns and hence, was interested party. The question which arises is that where the advance has been made by one concern to another concern because of business exigencies, can the assessee as director of the said concern being interested party, be burdened with provisions of section 2(22)(e) of the Act on account of deemed dividend. In this regard, it may be pointed out that advance made by AICPL to AESL was in the nature of commercial transaction between two concerns. The CBDT vide circular No.19/2017, dated 12.06.2017 has clarified the position in respect of such advances and has pointed out that the Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of provisions of section 2(22)(e) of the Act. The CBDT circular reads as under:-
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“SECTION 2(22) OF THE INCOME TAX ACT, 1961 – DEEMED DIVIDEND – CBDT’S CLARIFICATIONS ON SETTLED VIEW OF SECTION 2(22)(e) OF SAID ACT ON TRADE ADVANCES / COMMERCIAL TRANSACTIONS CIRCULAR NO.19/2017 [F.NO.279/MISC./140/2015/ITJ], DATED 12-6-2017 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., 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) ofthe Act. (CIT, Agra vs Atul Engineering Udyog, Allahabad High Court) 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. 4. The above may be brought to the notice of all concerned.”
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In view of the settled position as referred by the CBDT in its circular and in view of the fact that the assessee was a shareholder in two concerns, who interse had made certain trade advances, then the same would not fall within the ambit of advances under section 2(22)(e) of the Act fastening assessee with liability to pay tax on the deemed dividend. Accordingly, allowing the claim of assessee, we reverse the order of CIT(A) and direct the Assessing Officer to delete addition of ₹ 5,11,465/-. The grounds of appeal raised by the assessee are thus, allowed.
In the result, appeal of assessee is allowed.
Order pronounced on this 27th day of April, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 27th April, 2018. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : अऩीऱाथी / The Appellant; 1. प्रत्यथी / The Respondent; 2. 3. आयकर आयुक्त(अऩीऱ) / The CIT(A), Pune-1; 4. The Pr.CIT-I, Pune; ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे, एक-सदस्य 5. मामऱा / DR ‘SMC’, ITAT, Pune; गार्ड पाईऱ / Guard file. 6. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे / ITAT, Pune