TaxTMI 
TaxTMI 
2013 (4) TMI 779
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....dividend has been earned by the assessee, the AO directed the assessee to file a copy of accounts of M/s Nexo Industries Pvt. Ltd. (hereinafter referred to as 'the sister-company). The assessee was also required to furnish details of share-holding pattern of the Directors of the sister-company. The assessee replied and provided the requisite informations which were examined. The AO was of the opinion that the advance given to the assessee has to be considered as a deemed dividend under the provisions of section 2(22)(e) of the Income-tax Act, 1961 ( 'the Act' for short) in the hands of M/s Nexo Products (India) i.e. the Proprietor of Shri Amrik Singh. In the meantime, ld. Addl.CIT, Range-I, Ludhiana called for the records of this case and gave directions for investigation in terms of section 144A of the Act vide his letter dated 19.08.2008. The directions/lines of investigation for the guidance of the ld. Addl.CIT are in detail, which have been extracted in his order by the AO from pages 2 to 9 of his order, which are also being extracted for ready reference in our order as below : "1. The assessment records in the case of Sh. Amrik Singh, Prop. Nexo Products (India), A.....
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....nt is basically related to advancing / receiving money. The outstanding balance has been shown as an 'Advance' in the balance sheet drawn by the assessee himself. It is important to mention here that not only loans given by the Pvt. limited company but also the advances given are covered under the ambit of section 2(22) (e). Thus, the credit balance appearing in the account of M/s Nexo Inds. Pvt. Ltd. falls within the definition of advance or loan as envisaged in section 2(22) (e). 2.4 It is also important to investigate the actual utilization of the money advanced by M/s Nexo Inds. Pvt. Ltd. As per the Balance Sheet and P&L A/c and also the details filed the assessee, the advance has not been utilized for purchase /sale or manufacturing activity, but has been used for the substantial expansion of the business of the assessee by way of addition to Plant and machinery, building etc. There is no occasion for M/s Nexo Inds. Pvt. Ltd. to advance such a huge amount, when the purchases from its sister concern are going to be negligible. In fact the proprietorship concern of the assessee M/s Nexo Product (India) has fully utilized the advances in the manner it has liked for the....
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....come in the hands of the assessee is not exempt u/s 10(34) of the I.T. Act, 1961, simply because only those dividend which are referred to in section 115O are exempt u/s 10(34). Deemed dividend u/s 2(22) (e) is not a dividend declared by the domestic company u/s 115O of the I. T. Act. 2.9 The undersigned has also called for and perused the assessment records of the asses see for earlier years and it has been found that A.Y. 2005-06 also there is an outstanding advance of Rs. 67,77,0421- as on 31.03.2005 from M/s Nexo Inds. Pvt. Ltd.. The case has been completed under section 143(3) -and the copy of account of M/s Nexo Inds. Pvt. Ltd. is on record. The maximum credit balance in the account is on 7.3.2005 amounting to Rs. 2,48,89,404.79. Thus, the maximum credit balance outstanding amounting to Rs. 2,48,89,404.79, is to be treated as deemed dividend in the hands of the assessee for the A. Y. 2005-06. For the A.Y. 2004-05 also there is an advance of Rs. 69,49,203/-from M/s Nexo Inds. Pvt. Ltd. as on 31.03.2004. The A.O. is directed to take the necessary remedial action u/s 148/263 on the issue of deemed dividend u/s 2(22) (e) for these years also. 3.1 A perusal of the balance....
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.... have been utilized for the creation of fixed assets. 4. As per the AIR information there is receipt of contract payments amounting to Rs. 1,81,20,341/-, while in the trading account 'Labour Income' of Rs. 1,71,27,281/- only has been credited. Also as per the TDS certificate the 'Labour Income' earned by the assessee during the year under consideration is totaling Rs. 1,81,20,341/-. The A.O. is directed to take appropriate action as regards the suppression of 'Labour Income' earned by the assessee amounting to Rs. 9,93,060/-. 5. The AIR information reveals that the assessee has invested in the units of SBI mutual funds amounting to Rs. 80 lacs during the year under consideration. However, as per the details filed by the assessee only investment of Rs. 31 lacs has been reflected. The Balance sheet as on 31.3.2006 also reflects only an investment of Rs. 31 Lakhs. In this regard the A.O. should get the complete details of source of the balance investment made in the units of SBI mutual funds amounting Rs. 49 Lakhs and take appropriate action under the I. T. Act 1961. 6. The Profit and loss account reveals that only salary of Rs. 2,39,632/- has been pai....
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.... there are large number of discrepancies in the details filed by the assessee and the return pf income filed by the assessee. The A.O. should make in-depth investigation and make suitable enquiries in this case before finalization of the final assessment order." 3. From the above directions, it was found that the AO had to investigate into various aspects and, therefore, the assessee was given show cause notice on al l these issues raised in the directions issued u/s 144A by ld.ACIT. 4. The AO concentrated much on the issue of deemed dividend by giving it priority. The AO has enumerated various points on the basis of which he has proposed to treat such advances as deemed dividend in the hands of the assessee, which are as under : "1. There is an outstanding advance of^Rs.4,04,77,625/- as on 31.3.2006 received by the assessee Sh.Amrik Singh Prop. M/s Nexo Products from M/s Nexo Industries Pvt Ltd. 2. The copy of account of M/s Nexo Industries Pvt. Ltd. reveals that huge amount of money has been advanced to the proprietorship concern of the assessee. 3. The opening balance of advance is Rs. 67,77,042/- as on 1.4.2005 and the closing balance as on 31.03.06 is Rs. 4,04,7....
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....he had. Due to this M/s Nexo Industries Pvt. Ltd. proposed to provide the assessee additional machinery and incidental requirements for enhancement of job work capacity as the assessee had all other infrastructure facilities with him such as land, building power connection and experienced and specialized labour. So due to the business expediency M/s Nexo Industries-provided advances to the assessee for the import of specialized machinery from out of India and for meeting other incidental requirements required for doing job work. It was mutually agreed that assessee shall do the job work of M/s Nexo Industries exclusively and at lower rates than the market rate and it was further agreed that the amount of job work will be adjusted against the advances given by M/s Nexo Industries. Though there was great increase in the quantity of the job work done during this year and next year as against the quantity of the job work done in the previous year, however it was not to the expected level of M/s. Nexo Industries Pvt. Ltd. and this led to the differences between the parties. It is further submitted that as the assessee could not adjust the advances on account of not being able t....
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....dvanced, the AO finally has treated a sum of Rs. 6,79,62,621/- received as advance by the assessee from sister-company, has been treated as deemed dividend and has been added back to assessee's income under the provisions of section 2(22) (e) of the Act. In coming to the above conclusion, the AO has also ignored the submission of the assessee that a large sums of money was paid by sister-company directly to shareholders of machinery on behalf of the assessee and has held that in the case of Shri Amrik singh, the sister company has made payments for the purchase of machinery to the seller on behalf of the shareholder namely Shri Amrik Singh and thereby, the provisions of section 2(22) (e) are attracted. Ld. AO has also discussed objects behind section 2(22) (e) of the Act and the manner in which mischiefs are committed by various assessee's and that is why, this provision was enacted to curb addition, as has been held in the case of Navneet Lal C.Jhaveri V K.K.Sen (1965) 56 ITR 198 (207-208) (S.C). He has also discussed from the pattern of shareholding of the sister company that the same shareholder is controlling both the concerns. 6. Being aggrieved from the above findi....
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.... as against the addition of Rs. 6,79,62,621/- made by the AO u/s 2(22)(e) of the Income Tax Act, 1961, thereby allowing relief of Rs. 4,87,66,131/- to the assessee. 2. That the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs. 25,91,099/- made by the AO in view of Explanation 8 to section 43(1) of the Income Tax Act, 1961. 3. That the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs. 4,12,850/- made by the AO on account of capitalization of loan processing charges. 4. That the order of the Ld. CIT(A) be set aside and that of the A.O. be restored. 5. That the appellant craves leave to add or amend any ground of appeal before it is finally disposed off." 9. We have careful ly considered the rival submissions with regard to facts and legal position on the impugned issues. We have also circumspected the entire record avai lable before us. We have careful ly treaded through the provisions and the relevant precedents thereto. In the given facts and circumstances, it would be desirable to take up the issue on merits prior to issue raised on legality whereby directions given u/s 144A of the Act have been challenged. The facts of the....
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....High Court rendered in the case of Pradeep Kumar Malhotra V CIT reported in 338 ITR 538 (Cal ), a copy of this judgement is enclosed at pages 8-13 of assessee's Paper Book. He argued that there was a closing balance of Rs. 4,04,77,625/- as on 31.3.2006 but the AO has added business advances given for expansion of M/s Nexo (India) Pvt. Ltd. to the assessee to the extent of Rs. 6,79,62,622/- in assessment year 2006-07 u/s 2(22) (e) of the Act. In this regard, he has relied on pages 3-4 of ld. CIT(Appeals) 's order. He, further, argued that during the year under appeal , job work done for the company M/s Nexo (India) Pvt. Ltd. , by the appellant was of Rs. 1,71,27,281/- as against job work of Rs. 42,90,726/- done in the period relevant to assessment year 2004-05 wherein even due to this business arrangement, the sales of the company enhanced from Rs. 55.13 Crores to Rs. 84.82 Crores during the year under consideration. Ld. AR has enclosed a chart in his Paper Book at page 62 towards which he has invited our attention. He has final ly argued that there being no advance or deposit as per the provisions of section 2(22) (e) of the Act, which was received by the assessee, being eviden....
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....are is not entitled in the event of liquidation to participate in the surplus assets ; [(ia) a distribution made in accordance with sub-clause (c) or subclause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;] (ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; 1[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in th....
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....mulated profits' has been defined vide Explanation 2 with reference to clauses (a) (b) (d) & (e) . Since we are concerned with clause (e) of section 2(22) of the Act, Explanation 2 would be relevant. In this Explanation 'accumulative profits' are defined as 'shall include al l prof its of the company upto the date of distribution or payment referred to in sub-clause (e). Vide Explanation 3, it is provided that a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such concern. We have found it for a fact that the appellant has a proprietory concern, which is engaged in the business of doing job work of annealing, drawing and forging. This job work is being done by the assessee exclusively for M/s Nexo Industries (P) Ltd. ( sistercompany) of which the assessee is a Director. It is found that Board of Directors of the sister-company, in the year 2003 decided to expand their business and since there was a great demand for the products manufactured by them in the international market as well as domestic market, because of its high quality pro....
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....s agreed to adjust the aforesaid payments made by the party of first part with the payment due for the job work done by it to the maximum extent. That party of the second part has also agreed to charge 10% less than the market value from the party of the first part for the job work done by it. That the party of first part has right to inspect the books and records of party of second part for compliance of the terms & conditions of this agreement. That in case the party of the second part fails to satisfy the party of the first part as regards quality of job work done or in respect of the quantum of the job work done or adjustment of payments made then the party of the first part shall have the right to repossess the entire machinery provided to the party of second part at book value and in case the value of machinery is not sufficient to liquidate the entire outstanding, then party of the first part can exercise any other alternative course of action including taking over the other machinery of the party of second part. That incase of any dispute arising between the parties to this deed with regards to the terms and conditions of the agreement the same shall be referred to th....
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.... and to meet other allied expenses. Thus, it is found that the credit balance is not due to any loan or advance but it has resulted as a consequence of a genuine business transaction only. It is found from the records that most of the advances received from the sister-concern were utilized for purchase of machinery and to meet incidental expenses. Before this agreement, the assessee possessed machinery worth Rs. 32,67,863/- as against possessed during the relevant period worth Rs. 4,16,71,227/- and the advances outstanding as on the date were Rs. 4,04,77,625/-. This factual matrix supports the contention of the assessee that the advances were used in the purchase of machinery as per the terms of the agreement. It is found that there is no personal benefit to the assessee from this arrangement but the assessee has suffered therefrom. In that view of the matter, provisions of section 2(22) (e) would not be attracted. The advances are found to have been given to other shareholders including the Managing Director, whose shareholding is to the tune of 55%. Most of the decisions rel ied on by ld. AR support his case. The decision of Delhi Bench of ITAT in the case of ACIT V Global Age....
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.... in the present case is whether credit balances in the accounts of SIPL & KIPL can be construed as "advance" or "loan" by these companies. In so far as other ingredients as required to be fulfilled under S. 2(22)(e) are concerned, there is no dispute raised before us. The ITAT also provided guidance on the meaning of loan' and 'advance'. The observations of the ITAT in this regard are reproduced for ready reference: In our consideration opinion, security deposit received by the assesseecompany can neither be treated as loan or advance for the purposes of S. 2(22)(e). A loan is granted for temporary use of money or temporary accommodation. In the instant case, such basic features which characteristics, a loan transaction are conspicuous by their absence. Therefore, the security deposit, in the instant case, cannot be construed as a loan. Reliance is placed on the decision of Delhi High Court in (2000) 161 CTR (Del) 432 : (2000) 244 ITR 358 (Del) (supra) cited by the learned counsel before us. Similarly, with regard to advance, the word connotes something that precedes, something paid in advance before it is due. The second important feature of advance is that it do....
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...., otherwise in the course of business etc. would go out of the purview of section 2(22) (e) of the Act. The decision of Hon'ble Delhi High Court rendered in the case of CIT V Shri Raj Kumar in ITA No. 1130/2007, it has been held that the word 'advance' which appears in the company of the word ' loan' for the provisions of section 2(22) (e), could only mean such advance which carried with it an obligation of repayment. Likewise, the Hon'ble Mumbai High Court in the case of Nagindass M.Kapadia, similar view has been taken. The Hon'ble jurisdictional Bench of ITAT Chandigarh in the case of DCIT V Lakra Brothers reported in 106 TTJ 250, it has been held that the advance given during the ordinary course of business for business expediency could not be covered under the provisions of section 2(22) (e) of the Act. 16. From the above narrated facts, the business expediency is amply proved on record. It is also a fact that the agreement has not been reported or doubted by the AO but the AO has taken his view because the assessee's concern was not pursuing the business of money lending. The sister-concern has taken over the entire business of the assessee when the asses....
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....hat the entire amount added in this account, by treating as deemed dividend by the AO has been deleted. Consequently, the ground raised by the assessee is al lowed the ground raised by the revenue in this regard is dismissed. 20. Now coming to Ground NO.1 of assessee's appeal . This pertains to making of assessment order, on the basis of directions issued by the Addl . Commissioner without granting effective hearing to the assessee, is based on the grounds that the ld. ACIT, Ludhiana called for the records of this case and gave directions in the nature of lines of investigation u/s 144A of the Act. These directions have been quoted verbatim by the AO in his order. The order has been passed by the AO in the line of these directions only. The main objection of the assessee, in this regard is that without hearing the assessee, the ACIT gave directions dated 19.08.2008 u/s 144A of the Act. The objection of the ld. AR is that the AO should not have taken guidance from these directions which are liable to be vacated as ACIT is not authorized to pass such an order because only the JCIT is only authorized to pass such order u/s 144A of the Act. The ld. CIT(Appeals) has rejected t....