TaxTMI 
TaxTMI 
2011 (10) TMI 628
X X X X Extracts X X X X
X X X X Extracts X X X X
.... pages 61 to 65. 5. On the other hand, the ld. Counsel of the assessee also stated that this issue is covered by the order of Tribunal for earlier year. 6. After considering the order of Tribunal for earlier year decided in ITA No. 910/JP/2009 vide order dated 07.05.2010, we noted that in earlier year also an addition of Rs. 4 lacs was made on account of packing material. The ld. CIT (A) confirmed the addition of Rs. 1 lac and the Tribunal following the order of earlier year i.e. for assessment year 2004-05 deleted the addition of Rs. 1 lac also which was sustained by ld. CIT (A). The findings of Tribunal have been recorded in para 9 of its order for assessment year 2005-06. Since facts are similar, therefore, we delete the addition of Rs. 1,00,000/- sustained by ld. CIT (A). 7. Ground No. 6 in appeal of the assessee is against confirming the invocation of provisions of section 41(1) of the IT Act and thereby confirming an addition of Rs. 64,215/-. 8. After considering the written submissions and perusing the material on record and taking into consideration the smallness of the amount, we are not inclined to interfere with the finding of ld. CIT (A) who confirmed this addition ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd Vs. DCIT 328 ITR 81 order dt. 12.08.2010 has held that Rule 8D is applicable from A.Y. 08-09 & the same can not be applied for earlier A.Y.'s but at the same time observed that AO is duty bound to compute the disallowance by applying a reasonable method having regard to the facts & circumstances of the case. After this order of Bombay High Court dt. 12.08.2010 various High Courts & the Tribunals have taken the following view in the matter of disallowance u/s 14A. (i) Minda Invsetment Ltd. Vs. DCIT 52 DTR 001 order dt. 13.10.2010 Disallowance under section 14A required finding of incurring of expenditure in relation to exempt income & where it was found that for earning exempted income no expenditure had been incurred, disallowance u/s 14A could not stand. (ii) DCIT Vs. Maharashtra Seamless Ltd. 52 DTR 005 order dt. 16.12.2010 In this case CIT(A) deleted the disallowance on the ground that assessee had maintained that interest expenditure was incurred in respect of borrowing on cash credit l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es. Hence, in the absence of any proximate relation of borrowed funds with investment in shares, no expenditure can be disallowed u/s 14A as per the decisions relied supra. Without prejudice to above, it is to be noted that Hon'ble ITAT Chennai Bench in Siva Industries & Holdings Ltd. Vs. ACIT 59 DTR 182 held that Section 14A is applicable when there is income which is taxable under the Act for the relevant A.Y. and there should also be income which does not form part of the total income under the Act during the relevant A.Y. If either one is absent, section 14A has no applicability. An investment which does not give rise to any income deemed to accrue or arise can not form part of total income. Thus, once there is no claim of income which does not form part of total income under the Act, there can not be any disallowance u/s 14A in relation to an investment which may or may not give rise to any income which does not form part of total income. In view of above, disallowance of Rs. 92,94,092/- made by the AO u/s 14A is unwarranted & be deleted." 12. On the other hand, the ld. D/R has placed reliance on the order of AO and it was submitted that though Rule 8D is not applicable a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h more than the investment in shares. This fact could not be controverted by ld. D/R by bring any positive material. Therefore, in our considered view no disallowance under section 14A is possible. However, the AO is free to examine this issue afresh, if in his mind the investment made in shares was not out of interest free funds/reserves available with the assessee. In view of these facts and circumstances, we dispose off the grounds of the assessee and department as above. 14. Ground No. 8 in appeal of assessee is against confirming disallowance of Rs. 13,098/- out of telephone expenses. 15. The AO disallowed telephone expenses @ 10% for extra commercial consideration. The ld. CIT (A) has confirmed the same. 16. After considering the written submissions and perusing the material on record, we find that this is a case of company and no material has been brought that how the expenses were incurred on telephone or not for commercial expediency. In case of Metallizing Equipment Co. P. Ltd., 70 TTJ 358, the Jodhpur Bench of the Tribunal has held that in case of company there cannot be disallowance on account of personal use of telephone. Similar view has been expressed in case of S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....addition of Rs. 50,00,000/-. Accordingly the same was deleted. 23. After considering the orders of the AO and ld. CIT (A) we find no infirmity in the finding of ld. CIT (A) who has deleted the addition following the order of Tribunal for earlier year where similar additions were made. Therefore, there is no reason to interfere with the finding of ld. CIT (A). Accordingly, we confirm the order of ld. CIT (A) in this respect. 24. Ground no. 2 has already been disposed off. 25. Ground No. 3 relates to deleting the addition of Rs. 25,000/- made on account of withdrawal of depreciation on the Wind Mill claimed. 26. The AO disallowed depreciation on foundation and room @ 80%. He estimated this addition at Rs. 25,000/-. The ld. CIT (A) deleted the disallowance by observing that similar disallowance was made for assessment years 2003-04 to 05-06 and the Tribunal has allowed this issue in favour of the assessee. 27. Since the ld. CIT (A) has allowed the issue following the order of Tribunal for earlier, therefore, there is no reason to interfere with the finding of ld. CIT (A). Accordingly we confirm the order of ld. CIT (A) in this respect also. 28. Ground No. 4is against deleting ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....etween assessee and various other companies are akin to loan and advances. Further reliance was placed on the decision of Hon'ble Madras High Court reported in 259 ITR 507. 32. On the other hand, the ld. Counsel of the assessee placed reliance on the order of ld. CIT (A). Reliance was also placed on the written submissions filed here before the Tribunal. It was submitted that these are similar submissions as were made before ld. CIT (A). It was further explained that one has to see the volume of transaction. The AO has picked up certain transactions in some cases and ignored others. It was a trading account only as transactions related to purchase and sales of the respective party. This was a running account maintained by the assessee in respect to the company with whom the purchases and sales transactions are entered. Attention of the Bench was drawn on the details placed on record. It was further submitted that this is not a case that all the time there was a credit balance but there was a debit balance also which was more than crores of rupees. Attention of the Bench was drawn on page 12 of order of ld. CIT (A) where such debit entries have been recorded. 33. We have heard riv....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... (v) Utilization of cash credit limit of M/s Saurabh Agrotech (P.) Ltd. Similar is the position in respect of the entries in the debit side of the account. From the perusal of ledger account of M/s Saurabh Agrotech (P.) Ltd. in the books of the assessee company (PB 33-48) it is to be noted that the nature of transactions between them are business transactions inter se. It is a mutual, open, current, running & trade account running into 16 pages containing around 800 entries. The account is continuously moving & even on one single day there are as many as 20 transactions. On some day the balance is in credit & on some other day the balance is in debit as is evident from the daily balancing statement placed at PB 29-32. These transactions are in respect of purchase or sale or composite payment received from the parties against sale or composite payment made to the parties against purchase or transfer of amount where there is availability of limit etc. Such mutual, open, current, running & trade account transactions made in normal course of business can by no stretch of imagination partake the character of a payment by way of loans or advances. The deeming provisions of law conta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....moneys upon agreement, express or implied, to repay with or without interest. For a loan there must be a lender, a borrower, a thing loaned for use, as well as a contract between the parties for the return of the thing loaned. A loan contracted no doubt creates a debt, but there may be a debt without contracting a loan. In a loan the mind and intention of the two parties, the lender and the borrower must be ad idem." The expression "advance" means something which is due to a person, but which is paid to him ahead of time when it is due to be paid. In the Dictionary of Accounts by Eric L. Kohler (5th Edn.), the expression "advance" was defined as payment of cash or the transfer of goods for which accounting must be rendered by the recipient at some later date. Loan and advances could only be considered "deemed dividend" for the purpose of section 2(22)(e). It is, therefore, sine qua non, to ascertain the correct nature of the payments. In the present case the assessee company received application money for the allotment of shares. There is nothing on record to indicate that application money was received or allotment of shares was made contrary to the provisions of Companies Act, 19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch account are not payment by way of loans or advances & therefore section 2(22)(e) is not attracted. The gist of these decisions is as under:- NH Securities Ltd. Vs. DCIT 11 SOT 302 (Trib.) (Mum.) (2007) As per the Schedule to the Limitation Act, 1963 and as per Articles 1 & 19 thereto, the limitation period prescribed in the case of mutual, open and current account is three years from the close of the year in which the last item is admitted or proved as entered in the account. On the other hand, in case of a loan, the limitation period is three years from the date on which the loan is made. This throws light on the characteristic feature of a running account and a loan account in a subtle manner. The Limitation Act, 1963 recognizes the running character of a mutual, open and current account by taking the last acknowledged transaction as the starting point of limitation. But in case of the loan, once for all and single transaction, that single transaction itself is the starting point of the limitation. This statutory distraction reflected in the Limitation Act, 1963 is a pointer towards the basic difference between a running account and a loan account. Whenever payments made....
X X X X Extracts X X X X
X X X X Extracts X X X X
....course of business can not be treated as loans or advances. Therefore, payments made by a company in the course of carrying on of its regular business through a mutual, open & current account to a related party does not come under the purview of section 2(22)(e). CIT Vs. Ambassador Travels (P.) Ltd. 318 ITR 376 (Del.) (HC) Assessee engaged in the business of travel agency entered into certain business transactions with M/s Holiday Resort (P) Ltd. & M/s Ambassador Tours (India) (P.) Ltd. As a result of these business transactions, there were some financial transactions but the AO came to the conclusion that because of the shareholding pattern, these financial transactions would fall in the category of deemed dividend u/s 2(22)(e) of the I.T. Act. This view was upheld by CIT(A). Tribunal was of the view that there is nothing on record to show that the amount considered by the AO were in any manner advances or loans in the account of the assessee. Being a travel agency, it had regular business dealings with the above two concerns dealing with holiday resorts & tourism industry. Therefore, since the transactions were normal business transactions, they can not be described as loans ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld be said to have been largely influenced by the same individual. In other words, the decision to give and the decision to take rested with either the same group of people or with the same individual. In such circumstances of the case, it is held that the transactions inter se between the sister concerns and the assessee cannot partake of the nature either "deposit" or "loan", though interest might have been paid on the same. Expecting for the transfer of funds being witnesses in the books of account of the concerned firms, no material is on record to show issue of receipt or pronote in evidence of accepting a deposit or accepting a loan. Therefore, the transactions as are found in the books of accounts of the assessee cannot be termed as deposits or loans as understood in common parlance. It only represents diversion of funds from one concern to another depending upon the exigencies of the business. These findings has been approved by Rajasthan High Court in case of CIT Vs. Maheshwari Nirman Udhoyg 302 ITR 201. DCIT Vs. Lakra Brothers 106 TTJ 250 (Chand.) (Trib.) The important words in section are loan or advance & for the individual benefit of such shareholders. Loan is som....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... shares in the assessee-company. P, in order to increase its export business and to compete with the international standards in garments exports proposed modernization and expansion of the plant and machinery of the assessee-company. The assessee-company being unable to invest such a large amount, P agreed to invest 50% of the project cost, the rest of the 50% to be arranged by the shareholders/directors of the company. The funds advanced were to be adjusted against the dues payable by P to the assessee-company in subsequent years for the job work of printing and dyeing to be done by the assessee for P. The Assessing Officer held that the amount paid to the assessee-company was a deemed dividend under section 2(22)(e) of the Income-tax Act, 1961. The Tribunal held that it was an advance for a commercial purpose to the assessee-company by its sister concern P and not a deemed dividend under section 2(22)(e) of the Act. On appeal, it was held that the amounts advanced for business transaction between the assesseecompany and P did not fall within the definition of deemed dividend under section 2(22)(e). The transaction of cheque received & cheque paid in present case, in the normal ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee company and Saurabh Agrotech (P) Ltd are the same. Both the companies are engaged in the crushing of mustard seed, purchase and sale oil and oil cake. Both the companies are having the business transaction inter-se, which fact has remained undisputed. It is found on verification of the account and on fact that the account of the assessee with the Saurabh Agrotech (P) Ltd is a running, current, open and trade account. The business transactions entered into between the assessee company and Saurabh Agrotech (P) Ltd has been routed through the said account. The assessee company does not have any other account except the account considered by the Assessing Officer. This is single and consolidated account, wherein the trade transaction has been passed through, therefore it is a business and trade account. Now the question arises, whether, the provision section 2(22)(e) of the Income-Tax. Act' 1961 are attracted upon the business of trade transaction. In this regard learned counsel has rightly placed the reliance upon the decision of Hon'ble Delhi High Court in the case of CIT V/s Raj Kumar (2009) TIOL 247 (Del.) "Trade advance which are in the nature of money transacted to gi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ITR 201 (Rajasthan) wherein it has been held that the transaction inter se between the, sister concerns and the assessee could not partake the nature of either "deposit" or "loan" even though the interest might have been paid on the same and the same view have been upheld by Income Tax Appellate Tribunal, Bench-Jaipur, Jaipur in the case of Income Tax Officer v/s Mahavir Stores, Alwar ITA No. 1834 & 1835/JP/981 dated 23.11.1993. Therefore considering all the above fact and latest case laws on the subject it is categorically held that the transaction of assessee company with the Saurabh Agrotech (P) Ltd, is the business and trade transaction entered into the normal course of business and the provision of section 2(22)(e) are not applicable thereupon and the addition of Rs. 1,84,15,499/- u/s 2(22)(e) of the Income-Tax Act' 1961 is deleted. Since I have deleted the addition of Rs. 1,84,15,499/-, therefore my finding upon the issue of deduction of tax liability, the depreciation as per the income tax and possess accumulated profit have remained merely of academic interest therefore, no finding thereupon have been given." 35. After considering the above findings of ld. CIT (A) and ....