TAURIAN ENGINEERING P.LTD,MUMBAI vs. JCIT (OSD) 4(3), MUMBAI

The facts of the case in brief are that the assessee filed its return of income on 29.9.2009 declaring a total income of Rs.1,04,61,860/-. The case of the assessee was selected for scrutiny and notices u/s 143(2) & 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO found that the assessee was a shareholder of M/s Taurian Iron and Steel Co.Pvt.Ltd(TISCPL) and had borrowed a sum of Rs.11,62,15,929/- from the said company. The AO issued a show cause to the assessee to show cause as to why the provisions of section 2(22)(e) should not be applied and the amount taken as loan should not be taken as deemed dividend within the meaning of section 2(22)(e) of the Act. It was replied by the assessee that a sum of Rs.10,26,20,000/- was received up to 11.8.2008 on which date the shareholdings by the assessee in TISCPL was 8.59% which was below the limits specified under section 2(22)(e) of the Act itself. The assessee also submitted a copy of ledger account of TISCPL for the financial year 2008-09, a copy of Bank account of State Bank of India of TISCPL, a copy of Demat account of the assessee on 14.10.2008 passed by TISCPL for approval of share transfer, a copy of share holding pattern of TISCPL as on 11.8.2008. The assessee stated that as on 11.8.2008, it was holding 624900 equity shares in TISCPL out of the total 7276090 shares which came to around 8.59% of the total share holding. Thereafter it purchased 641000 equity shares from Mrs. Arpita Bajla on 12.08.2008 and were transferred accordingly, whereupon the equity shareholding of the assessee in the said company went up to 17.40%. The assessee submitted before the AO that the provisions of section 2(22)(e) of the Act were not applicable in respect of Rs.10,26,20,000/- which were outstanding as on 11.8.2008 as on that date the percentage of shareholding was less than 10%. The said fact was corroborated by the demat statement of Mrs.Arpita Bajla testifying that the shareholding were 3 transferred on 12.8.2008. The total credits after 12.8.2008 were Rs.1,66,60,046/- which were given on various dates as under : 8.9.2009 Rs.75 lakhs 6.11.2008 Rs.3 lakhs 5.1.2009 Rs.25 lakhs 13.01.2009 Rs.6.75 lakhs; and Rs.54.50 lakhs were also credited as interest on the outstanding loan in the said account and the remaining entries on the credit side were Rs.1,77,279/- for travelling expenses, Rs.40,000/- for staff welfare expenses and Rs.7,550/- were also for travelling expenses. The ld. AO made the addition of Rs.1,09,75,000/- on account of deemed dividend under the provisions of section 2(22)(e) of the Act by rejecting the contention of the assessee that the advances by TISCPL to the assessee were on account of trade advances for the supply of machinery given in the ordinary course of business. The AO also disbelieved the contention of the assessee that the similar machinery was purchased in the financial years 2006-07 and 2007-08 and also in subsequent years. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A) who also confirmed the action of the AO by upholding the observations of the AO that the explanation given by the assessee was after thought as both the companies i.e assessee as well as TISCPL were interrelated companies and the whole exercise was stage managed, though the assessee might have supplied the machinery by way of sale in the earlier years and in the succeeding years. The relevant observations of the ld.CIT(A) are reproduced below : “2.4 I have carefully considered the submissions of the appellant and the finding of the AO. The appellant was share holder in the company M/s Taurian Iron and Steel Pvt Ltd. (TISPL) upto 11.8.2008, the appellant was holding 8.59% shares of this company up to 11.8.2008, the appellant

5 Thereafter, the appellant further purchases shares of this company on 11-12-08-2008 and therefore, the appellant’s shareholding in the said company increased, to 17.40%.'Therefore, any amount of loan/advance received by the appellant from this company after this date was subjected to provisions of-section 2(22)(e) of the Act. After 12./8/2008, the appellant further received amount /loan/advance totalling to Rs.1,66,60,046/- on different dates from the. above said company. The appellant argued before the AO that the above said advances were received by the appellant from the said company towards purchase of machineries. It was also argued that the said associate concern has also purchased similar kind of machineries from the appellant during earlier years for business purposes.

6 In respect of amount received totalling to Rs.1,09,75,000/- from the above said company, the appellant claimed that the same was received as advance for sale/supply of machineries to the said company. The AO made enquiries as to whether any machinery was sold during the year. In reply thereof; the appellant has filed a copy of fresh proposal dated 30/5/2009 of 200 TPH feeding Mobile Crushing and Screening machineries in place of order placed in earlier order. This facts show that the amount o Rs.1,09,75,000/- was not received by the appellant from the said company as advance against any confirmed order. However, only when further enquiries made by the AO, the appellant has procured a fresh proposal from its associate concern to give colour to advance received a by the appellant from the said associate concern as loan without any backing of supply order from the said company. In the facts and circumstances, the provisions of section 2(22)(e) of the Act were clearly applicable on this amount of Rs.l,09,75;000/- received by the appellant.

Without prejudice to the above facts and findings, if the appellant's argument appears to be genuine that the above said amount was received as advance for supply of machineries, there are number of decisions of Courts and Tribunals that the 5 provisions of section 2(22)(e) of the Act are not applicable on business transaction carried out in in normal course of business. In the facts and circumstances, it has to be examined as to whether the amount shown as advance i.e. Rs.l,09,75,000/ - was received by the appellant in the normal course of business as advance for supply of "machineries to the associate concern. The facts as stated earlier show that upto " 11/8/2008, the appellant had already received huge amount of Rs.10.26 crores from the above said associate. In view of the facts that the appellant had already received a huge amount from the associate concern, such associate concern could have placed order for supply of machineries against the amount already advanced to the appellant, There was no need-for the appellant to receive further amount from the associate concern for supply of machineries. The facts .and circumstances show that further amount of Rs.1,09,75,000/- was not received by the appellant on account of transactions in the normal course of business. In the facts and circumstances, the provisions of section 2(22)(e) of the Act were clearly applicable on the amount shown loan of Rs.1,09,75,000,/- received by the appellant from the associate concern. The AO was, therefore, therefore, justified in considering the same as deemed dividend in the hands of appellant u/ s. 2(22)( e) and thereby making addition of the same to the income of the appellant. This ground of appeal is, therefore, dismissed.”

The ld. AR submitted before us that these advances aggregating to Rs. 1,09,75,000/- were received on various dates during the year in the ordinary course of business against the sale and supplies to be made to M/S TISCPL against the supply orders dated 12.08.2008 for 200 TPH Primary Module and 07.12.2008 for 200 TPH VSI Module and were in the nature of trade advances and therefore the conclusions drawn by the lower authorities were wrong and contrary to the facts of the case in view of the fact that the assessee had been a regular supplier of machines and materials to M/S TISCPL. However, M/s TISCPL requested for cancelling the earlier purchase orders and therefore, no sales/supplies could not be made during the year against the said advances, however, as per revised supply order sales were made in subsequent year. In order to cover any advance,. received by the assessee under the provisions of section 2(22)(e) of the Act the primary condition is of holding of more than 6 10% in equity capital of the of the company advancing the money on or before the date of advance and the deeming provisions of section 2(22)(e) of the Act are not applicable to the advances given in the ordinary course of business. In the present case the assessee was a regular supplier of machines and materials to M/S TISCP and the assessee had sold machinery and other materials items to M/S TISCPL in the financial year 2006-07 of Rs. 52,06,477/- and 2007-08 of Rs.1,64,84,748. 27. Even during the current financial year 2008-09 the sales to the M/S TISPCL were Rs. 5,06,184/- and in subsequent financial year the total sales to the said company were Rs. 3,49,99,934/- and freight charges of Rs. 4,75,000/- . The ld counsel drew out attention to the copies of ledgers accounts in respect of M/s TISCPL, bills and vouchers, supply orders filed in the paper book. The ld counsel submitted that the orders placed in financial year 2008-09 could not mature and ultimately replaced with fresh orders fulfilled in the next financial year. The ld vehemently submitted that trading advances wrongly treated as deemed dividend. In support of his arguments the ld. AR placed reliance on the following decisions : a) CIT V/s Nagindas M Kapadia (1989) 177 ITR 393 (Bom); b) Bombay Oil Industries Ltd V/s DCIT (2009) 28 SOT 383(Mum); c) CIT V/s Ambassador Travells (P) Ltd ((2009) 318 ITR 376) (Del); d) NH Securities Ltd V/s DCIT (2007) 11 SOT 302 (Mumba); e) CIT V/s Raj Kumar (2009) 318 ITR 462(Del); f) CIT V/s P K Badiani (1970) 76 ITR 369) (Bom); g) Anilkumar Agarwal V/s ITO (2011)138 TTJ 175) Mum); and h) Kedarnath Jute Mfg. Co.Ltd V/s CIT (1971) 82 ITR 363(SC)

Per contra the ld DR relied heavily on the orders of authorities below and submitted that the deeming provisions of section 2(22)(e) of the Act were clearly applicable and were rightly invoked by the AO. The ld DR argued that the assessee had in fact taken advances from TISPCL and contention of the assessee that these were taken for supply of machinery

We have considered the rival contentions and perused the materials available before us and find from the records that the assessee was holding 8.59% of the total shareholding of the company as on 11.8.2008 and on 12.8.2008, the assessee brought 641000 shares from Mrs. Arpital Bajla thereby the total holding of the assessee company in the company shot up to 17.40%. The assessee had taken from TISCPL Rs.75 lakhs on 8.9.2009; Rs.3 lakhs on 6.11.2008; Rs.25 lakhs on 5.1.2009 and Rs.6.75 lakhs on 13.1.2009, besides other credits in the account of TISCPL such as interest of Rs.54,50,011/- being interest on loan which was standing as on 11.8.2008 i.e. prior to the date on which the assessee increased its holding to more than 10%. We also note from the record before us that the assessee had sold the machinery to TISCPL during the financial years 2006-07 and 2007-08 which is also apparent from the copies of ledger accounts, sale bills filed in the paper books as pages 54 to 59 and 65-A. The assessee sold machines worth Rs. 52,06,477/- during FY 2006-07 as per page no 54 of PB and Rs. 1,64,84,748.27 during FY 2007-08 page no 62 of PB . Even during the current financial year 2008-09 the sales to the M/S TISPCL were Rs. 5,06,184/- page no 68 of the PB and in subsequent year the total sales to the said company were Rs. 3,49,99,934/- and freight charges of Rs. 4,75,000/- page no 70 and 71 of the PB. Thus this proves beyond doubt that the assessee was selling and supplying machines and materials to TISPCL on regular basis. Now, the issue before us is whether the advances received by the assessee after 11.8.2008 were towards purchases of plant and machinery or could be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. During the year the assessee received amounts on various dates aggregating to Rs. 1,09,75,000/- and supplies could not be made as the purchase orders

The appeal filed by the assessee is allowed. Order pronounced in the open court on 8th March, 2016 (C.N. Prasad) (Rajesh Kumar) न्याययक सदस्य / Judicial Member ऱेखा सदस्य / Accountant Member भुंफई Mumbai; ददनधंक Dated : 8.3.2016 SRL,Sr.PS