2016 (4) TMI 382 - AT - Income Tax

Appellate Tribunal rules advances as trade, not dividends under Income Tax Act

The Appellate Tribunal allowed the appeal filed by the assessee, holding that the advances received were in the nature of trade advances for machinery ... Deemed dividend u/s 2(22) - 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? - Held that:- During the year the assessee received amounts on various dates aggregating to ₹ 1,09,75,000/- and supplies could not be made as the purchase orders were changed and replaced with fresh proposal of 200 TPH feeding Mobile Crushing and Screening machineries. The fact is also corroborated that during the year under consideration as the sale and supplies came down drastically as stated elsewhere in this para. The assessee had duly provided interest on money borrowed and also treated the trade advance against the sale of machinery accordingly however the AO as well as the CIT(A) held the trading advances to be covered under the deeming provisions of section 2(22)(e) of the Act. In view of the foregoing facts, we are of the considered opinion that money received by the assessee which was engaged in the manufacturing and sale of machinery and more particularly when in the earlier and subsequent years the sale of machineries were made to the said concern by the assessee from whom the money towards the supply of machinery were taken could not fall within the meaning of section 2(22)(e) of the Act. In the catena of decisions relied on by the assessee the ratio laid down is that the advances taken against the supply are not covered by the provisions of section 2(22)(e) of the Act. We, therefore, hold that order of CIT(A) confirming the order of AO is wrong and cannot be sustained and accordingly delete the addition - Decided in favour of assessee. Issues Involved:1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.2. Confirmation of addition of Rs. 1,09,75,000 as deemed dividend under Section 2(22)(e).Issue-wise Detailed Analysis:1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961:The main issue raised in the grounds of appeal by the assessee is against the upholding of the provisions of Section 2(22)(e) of the Income Tax Act, 1961. 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 Assessing Officer (AO) issued a show cause notice to the assessee to explain why the provisions of Section 2(22)(e) should not be applied, deeming the loan as a dividend. The assessee replied that Rs. 10,26,20,000 was received up to 11.08.2008 when the shareholding was 8.59%, below the 10% threshold specified under Section 2(22)(e). The AO, however, made an addition of Rs. 1,09,75,000 on account of deemed dividend, rejecting the assessee's contention that the advances were trade advances for machinery supply in the ordinary course of business.2. Confirmation of Addition of Rs. 1,09,75,000 as Deemed Dividend:The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO's action, stating that the explanation given by the assessee was an afterthought and that both companies were interrelated, making the whole exercise appear stage-managed. The CIT(A) observed that the appellant's shareholding in TISCPL increased to 17.40% after purchasing additional shares on 12.08.2008, making any loan/advance received after this date subject to Section 2(22)(e). The CIT(A) noted that the appellant received Rs. 1,66,60,046 after 12.08.2008, and the amount of Rs. 1,09,75,000 was not received against any confirmed order but was procured later to give the advance a color of a business transaction.The CIT(A) further stated that if the appellant's argument that the amount was received as an advance for machinery supply was genuine, it should be examined whether the amount was received in the normal course of business. The CIT(A) concluded that the provisions of Section 2(22)(e) were applicable as the appellant had already received a significant amount from the associate concern, and there was no need to receive further amounts for machinery supply.Final Judgment:The Appellate Tribunal found that the assessee was holding 8.59% of the total shareholding of TISCPL as on 11.08.2008, and the shareholding increased to 17.40% on 12.08.2008. The Tribunal noted that the assessee had been a regular supplier of machinery to TISCPL in earlier and subsequent years. The Tribunal observed that the advances received during the year were against purchase orders that were later replaced with fresh proposals, and the sales were made in the subsequent year. The Tribunal held that the money received by the assessee, engaged in manufacturing and selling machinery, could not be treated as deemed dividend under Section 2(22)(e) as the advances were in the nature of trade advances.The Tribunal relied on various judicial precedents to conclude that advances received against supply are not covered by Section 2(22)(e). Consequently, the Tribunal deleted the addition of Rs. 1,09,75,000 and allowed the appeal filed by the assessee.Order Pronounced:The appeal filed by the assessee was allowed, and the addition of Rs. 1,09,75,000 was deleted. The order was pronounced in the open court on 8th March, 2016.