TaxTMI 
TaxTMI 
2011 (5) TMI 857
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..../s. Swati Energy and Projects P. Ltd. (SEPL), as well as a partner in M/s. M/s. Sujyoti Enterprises. He has substantial interest in both concerns. One Mr. Manish Dedhia, is an employee of M/s. Swati Energy and Projects P. Ltd. He is also the proprietor of M/s. Power Service Corporation. M/s. Swati Energy & Projects P. Ltd., has given an advance to M/s. Power Service Corporation (PSC), for the purchase of goods on October 24, 2005. The advance was of Rs. 1,40,00,000. On the very same day, i.e., October 24, 2005, M/s. Power Service Corporation, gave a loan of an amount of Rs. 1,40,00,000 to M/s. Sujyoti Enterprises. M/s. Sujyoti Enterprises, has given back the money to M/s. Swati Energy and Projects P. Ltd. on October 24, 2005 itself. The assessee as well as Mr. Manish Dedhia, claimed that the amount of Rs. 1,40,00,000, was advanced against the purchase orders. It is also stated that the purchases had ultimately taken place. M/s. Sujyoti Enterprises, is mainly in the business of taking deposits and giving finance and that Mr.Manish Dedhia, has deposited the amount of Rs. 1,40,00,000, received by him as an advance for purchase of goods with M/s. Sujyoti Enterprises as deposit carrying....
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....rectly in M/s. Sujyoti Enterprises, where the director of the company, i.e., the assessee is a partner." Thereafter, he relied on the judgment of the hon'ble Supreme Court in L. Alagusundaram Chettiar v. CIT [2001] 252 ITR 893 (SC), and Mrs. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC), and came to a conclusion that the provisions of section 2(22)(e) of the Income-tax Act, 1961 (for short "the Act"), are attracted in the instant case. At paragraph 5.11, he referred to the order of the Commissioner (Appeals) in the case of M/s. Sujyoti Enterprises, wherein it was observed that this amount has to be taken in the hands of the partner of the firm Mr. Pravin Bhimshi Chhada. He assessed the amount of Rs. 1,40,00,000, as deemed dividend under the provisions of section 2(22)(e) of the Act. Aggrieved, the assessee carried the matter in appeal, wherein he challenged the validity of reopening as well as the application of the provisions of section 2(22)(e). The Commissioner (Appeals), vide paragraph 7.2 of his order, observed as follows : "7.2 Coming to the merit the appellant has said that the transaction of Rs. 1.40 crores given to Shri Manish Dedhia by Swati Energy....
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....dditional evidence by the appellant, during the appellate proceedings only interest accrued and paid also. This amount has not been reflected as advance in sales account in the assessment year 2007-08 where already the only advance of Rs. 2,00,000 is appearing on January 17, 2006 against the sales made on January 21, 2006 for Rs. 2,56,500. In view of this fact at the end of the third assessment year this advance has been squared up from sales bill and entries with zero closing balance, the whole purpose being served by them. 7.3 Having found that the advance made where vide in the nature of loan bearing interest and not advance for any material supplied only because the account of its employee Shri Manish Dedhia, proprietary concern was utilised to give the amount to the appellant, partner of Sujyoti Enterprises, the provisions of section 2(22)(e) are clearly attracted as decided by the hon'ble Supreme Court in L. Alagusundaram Chettiar v. CIT [2001] 252 ITR 893 (SC) wherein the apex court held as under : 'Loan of large amount was advanced by the company to a low paid employee who in turn advanced the same to the managing director (the assessee). It was he....
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....r not and whether the amount given to M/s. Power Service Corporation is a loan or not. He submits that the goods were actually supplied by M/s. Power Service Corporation to M/s. Swati Energy and Projects P. Ltd. He further submits that interest has been paid on the amount deposited by M/s. Power Service Corporation with M/s. Sujyoti Enterprises and M/s. Power Service Corporation has offered to tax, the interest income earned from M/s. Sujyoti Enterprises and in the hands of M/s. Sujyoti Enterprises, the interest paid was allowed as expenditure. It was further submitted that the compensation was paid for delay in supply of goods by M/s. Power Service Corporation to M/s. Swati Energy and Projects P. Ltd. He points out that the purchases have been accepted by the Revenue. Learned counsel filed paper book containing 416 pages and drew the attention of the Bench to the statement of Mr. Manish Dedhia from pages 6 to 10 and affidavit filed by Mr. Manish Dedhia at pages 11 to 15 and submits that Mr. Manish Dedhia was consistent in his statement and had confirmed the facts stated by the assessee and it is not correct to say that the transaction was not genuine. He referred to the assesse....
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.... Bench decision in Asst. CIT v. Bhaumik Colour P. Ltd. [2009] 313 ITR (AT) 146 (Mumbai) ; 118 ITD 1 [SB]. He submits that the Commissioner (Appeals) accepted this position. He submits that thought he Commissioner (Appeals) had deleted the addition of Rs. 1,40,00,000, the assessee has filed the appeal disputing the observations made by the Commissioner (Appeals) that M/s. Power Service Corporation is a conduit. Aggrieved by these findings, an appeal was filed. Learned counsel submits that these observations have to be expunged in the case of M/s. Sujyoti Enterprises, for the reasons already submitted and addition of Rs. 1,40,00,000 under section 2(22)(e) in the case of Mr. Pravin Bhimshi Chhada, has to be deleted. The learned Departmental representative, Mr. S. S. Rana, on the other hand, submits that all the basic requirements of section 2(22)(e) have been satisfied in this case. He relied basically on the order of the Assessing Officer and pointed out that Mr. Manish Dedhia, was a small time accountant with M/s. Swati Energy and Projects P. Ltd. He took this Bench to question 9 of the statement of Mr. Manish Dedhia, wherein he stated that he works between 3 p.m and 7 p.....
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....t the same Rs. 1.40 crores which was received from M/s. Power Service Corporation, was again transferred into the account of M/s. Swati Energy and Projects P. Ltd. by M/s. Sujyoti Enterprises, on the same date, i.e., October 24, 2005. Hence, the claim of the assessee that M/s. Power Service Corporation was engaged in the business is not correct, given the fact that the amount of Rs. 1.40 crores originated from the account of M/s. Swati Energy and Projects P. Ltd. was ultimately received back into its own account on the same date, i.e., January 24, 2005, through the accounts of M/s. Power Service Corporation and M/s. Sujyoti Enterprises. The same is also established by the ledger accounts filed by the assessee." (ii) This shows that the transaction was a circuitous transaction and the money which initially belonged to M/s. Swati Energy and Projects P. Ltd., was returned to the same company on the very same day through M/s. Power Service Corporation and, thereafter, M/s. Swati Energy and Projects P. Ltd. As on October 24, 2005, there is no net outflow of funds from M/s. Swati Energy and Projects P. Ltd. When there is no net outflow, there is no intention to give the money....
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.... any benefit from M/s. Swati Energy and Projects P. Ltd. to M/s. Sujyoti Enterprises or to its partner Mr. Pravin Bhimshi Chhada. Such a circuitous entries passed, in our humble opinion, cannot be considered as either loans or advances so as to attract section 2(22)(e). The co-ordinate Bench of the Tribunal in G. MJ. Thampy (I. T. A. No. 1275 to 1277/Mum./2009, order dated August 25, 2010) vide paragraphs 23 to 25, held as follows : "23. Coming to the assessment year 2004-05, a look at the ledger copy clearly shows that the amounts received from the company by the sole proprietary concern on September 13, 2003 and on September 15, 2003 of Rs. 2.5 crores each were simultaneously and instantaneously transferred back to the proprietary concern. The assessee has not derived any benefit whatsoever from this transaction. When the admitted fact is that both assessee and the company are having an open and mutual current account and that the financial transactions between the two entities are mutual transactions done out of commercial expediency and business necessity, each and every transaction cannot be considered as a loan or an advance. When an amount is not kept in the sole pr....
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.... Air Travels Association. The guarantee amount was calculated by taking the total turnover as reduced by the amount of paid up share capital and reserves. It is well known that, higher amount of bank guarantee, higher is the fixed deposits that are required to kept with the bankers to obtain guarantee, as the bank insists on adequate margin. Higher amount of fixed deposits involves blocking of substantial funds. The company for its own purposes, routed the amount through the proprietary concern, with an intention to increase its paid up of share capital and to minimise the instance of bank guarantee to be provided to International Air Travels Association and consequently reduce the blocking of funds. The question to be answered is, can this be called a loan or an advance. The money is not gone out of the coffer of the company, nor has 'Riya Travels' used the amount for its purposes. A loan or advance pre-supposes the money of the company is out of the company, for being used by the other person for its use. When the money is simply circulated and has come back to the coffer of the company, simultaneously, we find difficulty in accepting the theory that a person has len....
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....s examine as to whether based on the aforesaid tests the said rule of construction 'noscitur a sociis' ought to be applied 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 terms, that is, advance or loan are related to the 'accumulated profits' of the company ; (iii) and last but not the least the purpose behind insertion of the term 'advance' was to bring within the tax net payments made in guise of loan to shareholders by companies in which they have a substantial interest so as to avoid payment of tax by the shareholders. 10.9 Keeping the aforesaid rule in mind we are of the opinion that 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 advance which are in the nature of money transacted to give effect to commercial transaction would not, in our view, fall within the ambit of the provisions of section 2(22)(e) of the Act. This interpretation would allow the rule of purposive construction with noscitur a sociis, as was done by the Supr....
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....r. The undisputed fact is that, the machinery was ultimately supplied. It is not a case where M/s. Power Service Corporation took a loan and has repaid the same. He took a trade advance and supplied machinery. There is no repayment in cash with interest. Though the fact that Mr. Manish Dedhia, was an accountant with the assessee-firm drawing small amounts as salary, prompts us to agree with the findings of the Assessing Officer, we are also influenced by the fact that the money was not returned but machinery was ultimately supplied. In any event, we restrain ourselves from giving a definite finding on this issue as it would not make a difference. (vi) Looking at the issue from any angle, if it is held that the loan was given to the partnership firm in which the shareholders were having substantial interest through a conduit, i.e., M/s. Power Service Corporation, then, as the money was returned on the very same day to the company, it cannot be said that a loan still exists. We have to take the transaction to the logical conclusion. If, on the other hand, it is said that this is a trade advance given to M/s. Power Service Corporation, which had ultimately supplied machinery to the....