DCIT 9(1), MUMBAI vs. GHARDA CHEMICALS LATD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the orders of the Cs.IT(A)the Assessing Officer (AO)and the assessee have filed the appeals/cross objections for the above mentioned assessment years (AY.s.),raising various grounds of appeal.Assessee-company,engaged in the business of manufacture and sale of pesti- cides,insecticides, weedicides,veterinary-drugs and polymers.The details of filing of returns, returned incomes,assessed incomes etc.can be summarised as under: A.Y. ROI filed on Returned Assessment dt. Assessed Dt. of orders Income(Rs.) Income(Rs.) of CIT(A) 2007-08 15.11.2007 100,24,39,340/- 22.12.2009 166,24,71,480/- 27.10.2010 2009-10 29.09.2011 106,07,32,139/- 27.12.2011 157,52,79,790/- 15.05.2012 ITA/559/Mum/2011,AY.2007-08:

07. (ITA.s/1375,2321&6588/ Mum/2011,dtd.29/04/2016).We find that the Tribunal had held as under: “2.2.During the course of hearing before us,Authorised Representative(AR)and Departmental Representative(DR)agreed that the issue stands decided in favour of the assessee by the orders of the Tribunal for the AY.s.2000-01,2001-02 and 2003-04.We would like to re-produce the relevant portion of the order of the Tribunal dealing with the issue dealt with in the appeal for the AY.2003

04. (ITA/4405&4246/Mum/2007-dtd.16.01.2015)and same reads as under: 9.2.Before us,Representatives of both the sides agreed that the issue is covered by the order of the Tribunal for the earlier years.(ITA/2146-47/M/2007/-dated 12.12.2008,AY.2000-01,2001-02.).We have heard the rival submission.We find that in the earlier years identical issue had arisen in the appeal filed by the AO and the Tribunal had held as under: “6.We have heard the learned representatives of the parties and perused the record.We find that the issue is squarely covered by the judgment of Hon'ble Supreme Court in the case of Core Health Ltd. (supra),on which the assessee has placed reliance. We respectfully follow the law laid down by the Hon'be Supreme Court in the said case and in the light of that we confirm the orders of the CIT(A) in both the assessment years 2000-01 and 2001-02.” Respectfully following the above,we decide ground.no.1-3 against the AO.” Following the above mentioned orders of the Tribunal,we decide the first effective ground of appeal against the AO.” Respectfully,following the order for the earlier years,first ground is decided against the AO.

3.Second ground pertains to addition of Rs. 23.20 crores of unutilised moderate credit to closing stock.Representatives of both the sides agreed that while deciding the appeals for the earlier years,on 29/04/2016 the Tribunal had set aside the matter to the file of the AO for giving effect to the provisions of section 145A in entirety and not restricting its operation to the value of closing stock alone. Following the order of the Tribunal for earlier years,second ground is allowed,in part.

559/M/11 & 4922/M/12+C.O.Gharda chemicals 4.Next ground is about addition of Rs. 27.54 crores of excise duty to closing stock. It was brought to our notice that the Tribunal had restored back the issue to the file of the AO,while deciding the appeals for AY.s.2004-05 and 2005-06. Following the same,the matter is restored back to the file of the AO for fresh adjudication.Third ground stands partly allowed.

5.Disallowance of claim of depreciation on IPR,of Rs. 3.24 crores is the subject matter of ground four.It is found that while deciding the appeal for the AY.s.2005-06 and 2008-09,the Tribunal had,on 29/04/2016, decided the issue against the AO in following manner: “We have heard the rival submissions and perused the material before us.We find that the wholly owned subsidy of the assessee held registration rights in two products,that it had paid registration charges for selling those products in the US markets,that it had also paid other fees as required by the US laws,that it had incurred total expenditure of USD 1,58,79,306 under the head registration charges,that the AE got the assets revalued as on 01.01.2204,that registration rights were revalued from Rs. 44.29 crores to Rs. 67.99 crores by the independent valuer,that on 30.09.2004 the AE was dissolved,that the assessee took over the assets and liabilities of the AE at the revalued price,that the payment for registration rights and other fees were paid much before the revaluation,that it adopted lesser value of the rights as compared to the value determined by the valuer,that further clarification were called from the valuer,that in the remand report the TPO agreed that payment was made by the AE for the rights in earlier years,that there was no discrepancy in the method of valuation,that the TPO pointed out element of non transferability in the valuation report for supporting the adjustment,that the FAA has given a categorical finding of fact that the TPO was factually incorrect in arriving at the conclusion of non transferability, that the AE had right to transfer the rights to others also.Considering the above facts,we are of the opinion,that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, confirming his order,we decide ground no.8 against the AO.” Respectfully following the above order ground number four is decided against the AO.

6.Last ground of appeal deals with disallowance made u/s.2(22)(e)of the Act, amounting to Rs.46.96 crores.It was agreed by the representatives of both the sides that Tribunal vide its order,dated 29/04/2016, for the AY.s.2005-06, had dismissed the appeal filed by the AO. We would like to reproduce the order of the Tribunal for the AY.2005-06 and same reads as under:

559/M/11 & 4922/M/12+C.O.Gharda chemicals

“16.Next ground of appeal pertains to deletion of addition of Rs.44.52 Crores made u/s.2(22) (e) of the Act.It was brought to our notice that identical issue was decided by the Tribunal,while deciding the appeal for the AY.2002-03(ITA/916/Mum/2010 dtd. 03. 12.2010).Relevant portion of the order reads as follow: “11.Even on merits there is no case for the Revenue. In fact the CIT(A) has analysed this issue elaborately and came to a conclusion that provisions of section 2(22)(e) are not attracted in the case of normal business transactions. The same principle was upheld by the Hon'ble Delhi High Court in the case of CIT vs. Raj Kumar 318 ITR 462 wherein this issue was elaborately discussed as under: - "Section 2(22)(e) of the Income-tax Act, 1961, shows that a payment would acquire the attributes of a dividend within the meaning of the provision if the following conditions are fulfilled : (i) the company making the payment is one in which the public are not substantially interested ; (ii) money should be paid by the company to a shareholder holding not less than ten per cent. of the voting power of the company. It would make no difference if the payment was out of the assets of the company or otherwise ; (iii) the money should be paid either by way of an advance or loan or it may be "any payment" which the company may make on behalf of or for the individual benefit of any shareholder or also to any concern in which such shareholder is a member or a partner and in which he is substantially interested ; and (iv) the limiting factor being that these payments must be to the extent of accumulated profits, possessed by such a company. The immediate precursor to section 2(22)(e) is found in section 2(6A) of the Indian Income-tax Act, 1922. The purpose of insertion of sub-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. Therefore, sub-clause (e) of section 2(22) of the 1961 Act, which is in pari materia with sub-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. The word "advance" has to be read in conjunction with the word "loan". Usually attributes of a loan are that it involves the positive act of lending coupled with acceptance by the other side of the money as loan : it generally carries interest and there is an obligation of repayment. On the other hand, in its widest meaning the term "advance" may or may not include

559/M/11 & 4922/M/12+C.O.Gharda chemicals 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 which answers this conundrum is noscitur a sociis. The rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day [1879] 5 AC 63 by observing "it is legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them" and the Supreme Court in the case of Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 and State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610. The principles with regard to the applicability of the rule of construction are briefly as follows : (i) does the term in issue have more than one meaning attributed to it, i.e., based on the setting or the context one could apply the narrower or wider meaning ; (ii) are the words or terms used found in a group totally "dissimilar" or is there a "common thread" running through them ; (iii) the purpose behind inserting of the term. In the instant case (i) the term "advance" has undoubtedly more than one meaning depending on the context in which it is used ; (ii) both the terms, that is, "advance" or "loan" are related to the accumulated profits of the company ; and (iii) the purpose behind the insertion of the term "advance" was to bring within the tax net payments made in the guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders. The word "advance" which appears in the company of the word "loan" could only mean such advance which carries with it an obligation of repayment. Trade advances which are in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provision of section 2(22)(e) of the Act. The assessee was in the business of manufacturing customized kitchen equipment. The assessee was also the managing director and held nearly 65 per cent. of the paid-up share capital of C. A substantial part of the business of the assessee, which was nearly 90 per cent. was obtained through C. For this purpose, C would pass on the advance received from its customers to the assessee to execute the job work entrusted to the assessee. The Assessing Officer was of the opinion that the money received by the assessee was in the nature of a loan given by C to the assessee who admittedly held more than 10 per cent. of the shares in C. The Assessing Officer concluded that the money received by the assessee was deemed dividend within the meaning of the provisions of section 2(22)(e). The Commissioner (Appeals) reversed the order of the Assessing Officer. The Tribunal sustained the decision of the Commissioner (Appeals).On appeal :

559/M/11 & 4922/M/12+C.O.Gharda chemicals Held, that the trade advances given to the assessee by C could not be treated as deemed dividend under section 2(22)(e)."

C.O/266/M/2012,AY,2007-08: 7.During the course of hearing before us,the AR did not press ground 3-5,raised in the CO.Therefore,same stand dismissed as not pressed.First and second Grounds are about mistakes appearing in the order of the FAA.The AO is directed to verify the correctness of the figures and take necessary action as per law.Both the grounds are partly allowed.

ITA/4922/Mum/2012,AY,2009-10 8.The solitary ground,raised by the AO for the year under consideration is about IPR.Following our order,for the earlier year we decide the ground against the AO.

फलतः िन. व. 2007-08 के िलये िनधा�रती अिधकारी �ारा दािखल क� गई अपील और िनधा�रती का ��या�ेप अंशतःमंजूर �कया जाता है. िनधा�रती अिधकारी �ारा िन. व. 2009-10 के िलये दािखल क� गई अपील नामंजूर क� जाती है. As a result,appeal by the AO and CO of the assessee for the AY.2007-08 stand partly allowed. Appeal filed by the AO,for the AY.2009-10 stands dismissed. Order pronounced in the open court on 9th May,2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 9,मई2016 को क� गई । Sd/- Sd/- जोिग�दर �सह �सह /Joginder Singh) (राजे ! / RAJENDRA) जोिग�दर जोिग�दर जोिग�दर �सह �सह याियक सद#य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; �दनांकDated : 09.05.2016. 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 6

559/M/11 & 4922/M/12+C.O.Gharda chemicals