LIBRA (AGENCIES ) P.LTD,MUMBAI vs. DCIT 1(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य,राजे�� के अनुसार लेखा सद�य लेखा सद�य राजे�� के अनुसार राजे�� के अनुसार -Per Rajendra,AM: राजे�� के अनुसार Challenging the order,dated 09/10/2013, of the CIT (A)-7,Mumbai the assessee has filed the present appeal.Assessee-company,engaged in the business of export of equipments and technical services,filed its return of income on 26/10/207,disclosing income of Rs.(-)56.08 lakhs.The Assessing Officer (AO) completed the assessment on 20/08/2009, u/s.143(3)of the Act,determining its income at Rs.(-)46.05 lakhs. 2.Effective ground of appeal is about confirming the addition made by the AO for treating the advance received from the subsidiary company as deemed dividend under Sec.2(22)(e) of the Act.During the assessment proceedings,the AO found that M/s. Liberal Techcon Ltd.(LTL) was a100% subsidiary of the assessee, that it had received Rs. 7 lakhs, Rs.33 lakhs and Rs.10 lakhs on 25/08/206, 16/10/2006 and 03/11/206 respectively, that reserves and surplus of LTL were to the tune of Rs. 10.03 lakhs.He directed the assessee to explain as to why the amount to the extent of reserve and surplus should not be treated as dividend under Sec.2(22)(e). After considering submissions of the assessee, the AO held that in the books of accounts of LTL the heading of the transaction was capital advance,that in the narration the transaction was treated as temporary loan, that the advances received by the assessee from its subsidiary for sale of fixed assets was covered by the provisions of Sec.2(22)(e),that there was no difference between the advance received on revenue account or capital account.He made an addition of Rs. 10.03 lakhs to the total income of the assessee.

81/M/14(07-08) Libra Agencies 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him certain additional evidences were produced, so, he called for a remand report from the AO.After considering the available material,he held that LTL was 100% subsidiary of the assessee,that in the accounts of LTL the transaction of Rs. 50 lakhs was mentioned as capital advance, that in the narration the amount was shown as temporary loan, that the nature of the transaction was of loan, that the advances received by the assessee from its subsidiary for sale of fixed assets was covered by the provisions of Sec.2(22)(e).He referred to the case of P K Abubekar(259 ITR 507) and confirmed the order of the AO. 4.During the course of hearing before us, the Authorised Representative (AR) contended that the subsidiary company agreed to purchase assets like land, building, furniture and fixtures, plant and machinery together with goodwill for a consideration of Rs. 5.14 crore, that out of the said amount in advance of Rs. 50 lakhs was received by it during the year under appeal, that the advance was received towards the sale of specified capital assets, that the amount in question was shown on liability side of the balance sheet in the Schedule 8 under the head advances from subsidiary for transfer of fixed assets, that in the balance sheet of the subsidiary company it was shown in the Schedule 9 under the head advances to holding company for capital expenses, that the narration appearing in the books of accounts was incorrect and it was a bona fides mistake, that the advances received by the assessee on account of commercial transaction were neither loan nor advances for the purpose of Sec. 2(22)(e).He referred to the cases of Creative Dyeing and Printing(318ITR476),M/s. Bagmane Developers Pvt.Ltd.(ITA No.293 of 2014) and referred to the pages 14,19 and 105 of the paper book.The Departmental Representative (DR) supported the order of the FAA and stated that it was case of receiving advance from the subsidiary and that provisions of Sec.2(22)(e) were applicable to the facts of the case. 5.We have heard the rival submissions and carefully gone through the material produced before us.Undisputed facts of the case are that the assessee had entered in to an agreement with LTL to sell certain assets vide agreement dtd. 08/01/2008,that LTL made payment of Rs.50 lakhs for purchase of those assets, that the AO and the FAA treated the same as dividend invoking the provisions of section 2(22) (e).Both of them held that other pre- conditions for treating the transaction in question as deemed dividend are existing e.g. share - holding pattern,receipt of an amount by the assessee were exitsing.

81/M/14(07-08) Libra Agencies In our opinion,the most crucial factor to treat an amount as dividend is to find out as to whether the amount received by an assessee was a loan or advance.If it falls within these two categories it has to be taxed as deemed dividend.But,not otherwise.For taxation purposes term loan as well advance has special meaning.In loan /advance transactions the borrower/ receiver agrees to repay the amount received to the lender with or without interest.If such a transaction fulfills the conditions stipulated by the provisions of section 2(22)(e)of the Act, same can be taxed accordingly.Historically,the section was introduced to prevent the malpractices adopted by certain corporate entities.It is a deeming provision,so,a strict compliance all the pre-conditions is a must. In the case before us,the assessee has agreed to sell its assets to the subsidiary.Both the entities have shown the transaction as advance against purchase of capital assets.The essence of the transaction has to be considered in tax proceedings.Nomenclature given by the parties or the entries in the books of accounts are important-they are only indicative.They cannot alter the real nature of transaction.In the present case there is change in the asset side of the balance sheet as well as in the chart showing depreciation.There is no doubt that money received by the assessee from its subsidiary was for purchasing capital assets.In other words it was a trade advance in the normal course of business.In short,the transaction was not a loan/ advance as envisaged by the section 2(22)(e)of the Act.In the case of Bagmane Developers Pvt. Ltd.(supra)the Hon’ble Karnataka High Court has in similar circumstances held that such a case would not be covered by the provisions of section 2(22)(e).As far as case of PK Abubekar(supra),is concerned,we find that in that matter money was received by the assessee as advance under the head rent.The Hon’ble Court held that advance paid to the assessee was to be set off against future rent would not alter the fact that the assessee in the eye of law had received dividend from the company during the relevant accounting period and that the advance was assessable as deemed dividend.Clearly facts of both the cases are distinguishable. Therefore, reversing the order of the FAA,we decide the effective ground of appeal in favour of the assessee. As a result,appeal filed by the assessee stands allowed. फलतः िनधा�रती �ारा दािखल क� गई अपील मंजूर क� जाती है. Order pronounced in the open court on 15th March, 2017. आदेश क� घोषणा खुले �यायालय म� दनांक 15 माच�, 2017 को क� गई । Sd/- Sd/- (संजय गग� /Sanjay Garg) (राजे�� / RAJENDRA) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई Mumbai; दनांक/Dated : 15.03.2017. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 3