SUSHIL GROVER,NEW DELHI vs. ADDL. CIT, NEW DELHI

The facts in brief are that the assessee was the proprietor of two concerns, namely, M/s DK Traders and M/s Flair Impex during relevant period. In the scrutiny assessment proceedings, the Assessing Officer (AO) observed from the balance sheet of M/s Flair Impex for the year end relevant to year under consideration that under the head ‘current liabilities - advance received’ an advance of Rs. 28,52,941/- was received by the assessee from M/s Cosmo Tribology (I) Private Limited, in which the assessee was having substantial interest, i.e., having shareholding more than 10% of shares eligible for voting. It was also observed by the AO that the company M/s Cosmo Tribology (I) Private Limited, was having reserve and surplus in the books of Rs. 26,71,222/- at relevant period of time. According to the Assessing Officer, the advance received by the assessee from the company was in the nature of loans or advances which satisfied all the conditions of section 2(22)(e) of the Income-tax Act, 1961 (for short “the Act”). The assessee, however, submitted that the advance was for the purpose of supply of material. The Assessing Officer did not accept the submission of the assessee and held the amount to the extent of accumulated profit of the company amounting to Rs. 26,71,222/- as deemed dividend under section 2(22)(e) of the Act. Before the learned Commissioner of Income-tax(Appeals), the assessee reiterated the submission that amount of Rs. 28,52,941/- received from M/s Cosmo Tribology (I) Private Limited was a trade advance against supply of goods, namely, waxes. In support of the proposition that trade advances do not fall within the ambit of section 2(22)(e) of the Act, the assessee relied on the Jurisdictional High Court decision in the case of CIT Vs. Rajkumar reported in (2009) 318 ITR 462 (Del). The learned Commissioner of Income-tax (Appeals), on the basis of the bill books of the proprietary concern of the assessee, the Ledger account of the company and no VAT registration of the assessee, held that the transaction between the assessee and company was not of a trade advance and, therefore, the learned Commissioner of Income-tax (Appeals) upheld the findings of the AO. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds reproduced above.

The only effective ground of grievance of the assessee in ground No. 1 to 4 is against confirming the addition of deemed dividend of Rs. 26,71,222/- by the learned Commissioner of Income-tax(Appeals). 4.1. Before us, the learned Authorized Representative of the assessee addressing the grounds submitted that the proprietary concern of the assessee M/s. Flair Impex, was having a running account with the company M/s Cosmo Tribology (I) Private Limited and the assessee received payment against supply of materials on continuous basis which was supported by the bills. Further, he submitted that the word ‘advance’ as mentioned in section 2(22)(e) of the Act had to be read in conjunction with the word ‘loan’ that there should be attributes of money lend coupled with the acceptance by the other side as a borrower on the specific terms which, normally, includes payment of interest at a fixed percentage, obligation of repayment, tenure of amount advanced etc. and no such features were observed in the transaction of the assessee and, therefore, the provisions of section 2(22)(e) of the Act were not applicable in the case of the assessee. The learned Authorised Representative further rebutting the findings of the learned Commissioner of Income-tax(Appeals) that modus operandi adopted by the assessee was to record transactions in such a manner as to confuse the authorities to make-believe that these transactions were made against the trade advances, submitted that transaction of purchase of wax by the company from the assessee was duly reflected in the annual statements of the company, a copy of which was available from page 22 to 32 of the paper book dated 21/04/2016. The learned Authorized Representative submitted that the assessee was maintaining separate bill books for paraffin wax and slack wax and, therefore, the bill number T1/008 dated 30/04/2007 of paraffin wax was issued from book No. 1 and bill number T1/053 dated 30 /04/ 2007 of slack wax was issued from book No. 2 and thus the finding of the learned Commissioner of Income-tax (Appeals) that supplies rendered by the assessee were not date wise on the serial number provided in the bill books, was based on incorrect appreciation of the facts. In respect of the observation of the learned Commissioner of Income Tax(Appeals) on cheques issued by the company, the learned. AR submitted that all the cheques received were deposited in the bank account of the proprietary concern M/s. Flair Impex and in fact six cheques were issued and not the three as observed by the learned Commissioner of Income Tax(Appeals). As regard to the observation of the learned Commissioner of Income Tax(Appeals) that no transport bills were furnished by the company to prove that goods were actually lifted from the premises of the assessee, the learned AR submitted that the assessee did not incur any transport cost and as mentioned in the bills, the party used to arrange their own transports for lifting goods from the premises of the assessee. As regard to the observation of the learned Commissioner of Income Tax(Appeals) that the assessee did not furnish any VAT registration number, the ld. AR submitted that in the bills submitted to the learned Commissioner of Income Tax(Appeals), the VAT registration number was clearly mentioned as TIN 07910136693. In view of above, the learned AR submitted that learned Commissioner of Income Tax(Appeals) arrived at wrong conclusion that the transaction between the assessee and the company was not a commercial transaction and the amount advanced was not a trade advance. 4.2 On the contrary, learned Sr. Departmental Representative relied on the findings of the authorities below and submitted to confirm the addition of the deemed dividend. 4.3 We have heard the rival submissions and perused the material on record including the paper book filed by the assessee. The only issue in dispute is whether the amount of Rs. 28,52,941/- advanced by the company M/s Cosmo Tribology (I) Private Limited was a trade advance or not. The learned Commissioner of Income-tax(Appeals) has decided the issue as under : “The above three situations in the section 2(22)(e) have to be seen separately. On perusal of the details, it is seen, that the appellant is a shareholder in M/s. Cosmo Tribology (l)Pvt. Ltd. having more than 10% voting rights. The other two shareholders are also apparently the family members of the appellant. The appellant is a proprietor of two concerns namely M/s. Flair Impex and M/s. D.K. Traders. M/s. D.K. Trader is in the business of manufacture of wax and candles and M/s. Flair Impex is engaged in trading in all kinds of waxes like paraffin wax, Slack wax etc. The company and the above two concerns are under the control and management of the appellant. The AR of the appellant furnished the bills for supplying the material to M/s. Cosmo Tribology India Pvt. Ltd. A perusal of the same showed that the appellant maintained six bill books which are serially numbered but the transactions were recorded in an irregular manner spreading the transactions to be covered in all the six bills books. For instance, book no.1 consists of 200 invoices. However, it is seen on 30.4.2007 supplies were made to the company vide an invoice no.TI/008 from book no.-1 and again on the same date another invoice no. TI/053 the supplies were booked from the bill book no.-2 instead of the same book no.-1. In fact the supplies should have been rendered date-wise on the serial numbers provided in the bill books rather than one supply was recorded in one book number and the second one in another bill book number on the same day and date. In fact the recording of the sale by the appellant should have been in the consecutive numbers. At present they are hand-picked and recorded in different bill books and arranged in such a manner as if they are in continuity in ledger account. Similarly, on 17.9.2007 goods were supplied vide invoice no.Ti/165 from the bill book no.-4 and on the very next date i.e. 18/9/2007 vide invoice no.TI/069 material was supplied to the company. Similarly, from book no.-2 on 4/2/2008, 12/2/2008 and 1.3.2008 against the invoice numbers TI/092, 094, 097 goods were supplied and from bill book no.-6 on 8.2.2008 16.2.2008 against the invoice no. TI/251 and 253 goods were supplied. On perusal of the bills for the year under consideration and also for the subsequent years, it is seen that this modus operandi adopted by the appellant was to record transactions in such a manner to confuse the authorities to make believe that these are the transactions where supplies were made against the trade advances. It is also seen from these examples that bills were drawn according to the adjustments to be made rather than in the regular course of business. On perusal of the ledger account furnished by the appellant it is seen, that cheques were issued by the company and credited in the accounts in the following manner against their dates:- DATE CHEQUES NOS. 10.4.2007 221614 7.5.2007 221617 17.7.2007 221620 5.11.2007 221627 etc. From the above it is seen that the company is maintaining only one single cheque book exclusively to issue the cheques to the appellant as they are in serial number almost throughout the year. There are no cheques issued for months together to any other person as only three cheque leaves were issued between 17.7.2007 and 5.11.2007. The AR of the appellant has not provided the bank statement to substantiate whether the above cheques were actually encashed and recorded in the respective account. No transport bills were furnished by the company to prove that the goods were actually lifted from the appellant’s premises because on the bill it is mentioned “party own transport”. The appellant also has not furnished the VAT registration number of the appellant because the goods those were supplied were subjected to VAT in the appellant’s bills. Therefore, the appellant could not conclusively prove that the transactions between the appellant and the company M/s. Cosmo Tribology (I) Pvt. Ltd. is strictly a commercial transaction where the trade advances were extended by the company to the appellant. Since the appellant is a proprietor of a concern who benefitted to the extent of the accumulated profits in the garb of trade advances, the Assessing Officer has rightly held it to be a deemed dividend under section 2(22)(e). In view of this, the addition made by the Assessing Officer is upheld and is confirmed.” 4.4 In respect of the observations of the learned Commissioner of Income Tax(Appeals), the assessee filed an application under section 154 of the Act before the learned Commissioner of Income-tax (Appeals) on 10/01/2012, which is available at page 64 to 68 of the assessee’s paper-book dated 4/4/2012, wherein the assessee has submitted explanation of each observation of the Commissioner of Income Tax(Appeals), which is very much relevant in deciding the issue in dispute and, therefore, for the purpose of clarity, we reproduce the same as under: “At page no.12 of your Honour’s order in the 2nd paragraph at line no.8 it is stated that: “the AR of the appellant furnished the bills for supplying the material to M/s Cosmo Tribology (I) Pvt. Ltd. A perusal of the same showed the appellant maintain 6 bill books which are serially numbered but the transactions were recorded in an irregular manner spreading the transactions to be covered in all the 6 Bill books”. Reply:- The fact of assessee maintaining 6 Bill books is correct. However, it is clarified that the transactions are not recorded irregularly but are recorded according to the requirement of the material namely Paraffin Wax or Slack wax by the company. The assessee caters to other buyers also. The 6 bound bill books of the assessee is produced to clarify this fact. At line no.12 of your Honours order it is noted that: “For instance, book no. 1 consists of 200 invoices. However it is seen on 30.4.2007 supplies were made to the company vide invoice no. TI/008 from Book No.1 and again on the same date another Invoice No.TI/053 the supplies were booked from Bill Book No.2 instead of bill book no.1. In fact the supplies should have been rendered date- wise on the serial no. provided in the bill books rather than one supply recorded on one bill book number and the second one is on the another book no. on the same date".

The grounds No. 5 and 6 are general in nature and, therefore, not required to adjudicate upon at our end.

In the result, the appeal of the assessee is allowed. The decision is pronounced in the open court on 14th June, 2016.