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2018 (2) TMI 1532
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....ggrieved and challenges the order of the Income Tax Appellate Tribunal ("ITAT") which held that amount of Rs. 6.16 crores which the assessee received from M/s Ginza Industries Ltd. ("Ginza" hereafter) could not be taxable as deemed dividend under Section 2 (22) (e) of the Act. ITAT too held that the assessee was entitled to deduction of Rs. 43.50 lakhs paid as guarantee fee to M/s Adani Associates (hereinafter referred to "Adani") for advance received from Ginza. 3. The facts are that in the return of income filed by the assessee company on 30.11.1995 Ginza (with its registered office at 133, Canning Street, 3rd Floor, Room no. 17, Calcutta-700 001) was shown as sundry creditor in its balance sheet to which an amount of Rs. 17,40,20,000/- was due as at 30.03.1995. In this regard the assessee company was asked by order sheet entry dated 09.09.1997 to furnish the information with date, mode and purpose with which the credit of Rs. 17,40,20,000/- has been in the account of Ginza Industries Limited in the books of accounts of the assessee for each and every rupee. The assessee replied, stating that during the year, it had indulged in the business of sale and purchase of import licen....
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....dustries Ltd. but to enjoy the benefit of interest free advance. The reason is that the assessee, if the agreement is considered to be genuine, acknowledged that it stood benefited right at the moment when advance was given. The assessee was to pay to Adani Associates a commission of 2.5% on net of advance which meant that the assessee admitted having been benefited just by virtue of receiving the advance to such an extent that it could pay a commission @ 2.5% out of its own resources. Now, if the advance was really for purchases to be made for Ginza Industries Ltd. and the assessee had no vested interest in the amount of advance itself, why would it agree to pay the commission. If purchases were not made, as it happened assessee could not have gained anything if Ginza Industries Ltd. had recalled its advance at a short notice of 3 days. Instead it would have lost a few lacs of rupees on account of commission to Adani Associates. The anomalies and contradiction do not end here. There are a number of such contradiction & which are discussed below. 1. The assessee vide its letter dated 03.03.98 submitted, "the market of advance licenses is such that spot payment and something advance....
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....his goes on to show that the assessee company had invested the funds with at least a medium term perspective. This shows that the assessee could not have and did not have the intention to purchase the shares." 6. The CIT (Appeals) whom the assessee approached, allowed the plea that the amount could not have been treated as "deemed dividend" holding as follows: "it is very clear that the moneys given by M/s Ginza Industries Ltd. to the appellant company were given for the procurement of licence as per the tripartite agreement dated 1.9.94. The AO has tried to make much of the fact that no licence was ultimately procured by the appellant company for Ginza and as such this vitiates the entire agreements. This arguments, to my mind, is misplaced. If no deal was struck at a competitive rate acceptable to Ginza it doesn't mean that the purpose for t which the moneys were advanced can be called in question. The procurement of licences is a matter of performance and would depend on so many factor, many of which would be beyond the control of the appellant company, such as market sentiments and unsettled conditions. The learned AR has raised a valid point that as result of unstabl....
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....d into by assessee with M/s Ginza, along with other companies from whom the import licences were to be purchased, were involved just to save itself from the clutches of section 2(22)(c). In our considered view. The CIT(Appeals) has dealt with this objection at great length as he has considered all the aspects of taking advance from MIs Ginza Industries for the purpose of supply of import licences, as the assessee was not dealing with import licences at that point of time, therefore, he contacted one M/s Vimal Overseas and payment of handsome amount i.e., of Rs. 8 crore was paid to this party directly to M/s Ginza. Confirmation from M/s Vimal Overseas was filed. The said confirmation of Vimal Overseas is placed on record, whereby it was recorded ''This is to certify that the advance received [To M/s Prasidh Leasing Limited/M/s Ginza Industries Limited during the financial year 1994-95 as per the statement of account enclosed with this letter was only for the supply of Import Export Licences to them. " forVimal Overseas Dated: 28.5.98 Place: Delhi. Sd/ Authorized Signatory" 14. We further noted that the CIT (Appeals) ascertained the factual position by calling ....
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.... M/s Ginza IS an important company, whose public issue was coming in near future, therefore, they purchased shares from M/s Ginza directly and also from the market. The statement of Managing Director of M/s Ginza were recorded by the Assessing Officer and he had categorically stated that the advance was given to the assessee for the purpose of purchase of import license It is important to note here that when first installment of advance was to Vimal Overseas, at that point of time no shares of M/s Ginza Industries were purchased by assessee company. More than Rs. 20 crores were advanced by M/s Ginza Industries and the management of M/s Ginza Industries and the management of assessee company were different. Therefore, it cannot be said that M/s Ginza Industries wants to save the' assessee from the clutches of section 2(22)(e) by giving a colour of business transaction. A sum of Rs. 20 crore is not a small amount and there was 110 purpose other than the business expediency for giving such a huge advance to the assessee. Once the transaction were not materialized, as M/s Ginza failed to bring the public issue, therefore thereafter the total amount was returned to M/s Ginza. If by ....
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.... per annum before 28th February 1995. It is argued that in terms of the alleged agreement dated 1.9.1994, the assessee was not liable to pay any interest and substantial amounts were paid by M/s Ginza to the assessee even in the month of March 1995 though the deal had not materialized. 10. It is argued that the agreement, dated 01.09.1994 was merely a cover up and camouflage for giving loans and advances to the assessee by Ginza to get over provisions of Section 2 (22) (e) of the Act. Rs. 20 Crores was not a small amount, therefore justification for giving the same should have been given. The onus was upon the assessee to justify and prove that it was a genuine business transaction. 11. The Revenue argues furthermore that the ratio of the decision in Navnit Lal. C. Jhaveri v. K.K. Sen 1965 (56) ITR 198 squarely applies. It is submitted that the object of introducing Section 2(22)(e) of the Income Tax Act, 1961 was to curb the tendency of passing-off what would be "dividends" as loans or other advantages to shareholders. Learned counsel also relied upon Tarulata Shyam v. CIT 1977 (108) ITR 345, (where the court had held that the position reflected in the books at the end of th....
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....d upon the circular issued by the CBDT which clarified that amounts advanced by a company through a concern and adjusted against dues for job work done or by a company to its shareholder to install plant or machinery at its premises; amounts given as floating security deposit by a company to its sister concern or shareholder for use of electricity generators etc. were of trading transactions. The Circular stated that "it is, a settled position that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word 'advance' in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department.....". 14. It was submitted that as far as the second question with respect to the disallowance of Rs. 443.50 lakhs to M/s. Adani Associates is concerned, the concurrent findings are based upon appreciation of evidence by lower appellate authorities. Learned senior counsel particularly relied upon the observations of the CIT(A) who had recorded that the payment of guarantee fee in fact reinforced the genuineness of the transaction, i.e. advance given to the assessee by Ginza. It was submitte....
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....relation to the concerned assessment year. The Supreme Court also clarified the fourth condition by importantly holding that in other words, this provision would not apply to cases where the company which advances the loan to its shareholder carries on the business of money lending itself; 17. In the present case, the assessee held shares in Ginza. However, the extent of shareholding was not in terms of the statutorily prescribed limits. It reached that level on 11.11.1994; by then Ginza had advanced Rs. 12,31,50,000/- (which was concededly not taken into account by the AO). Undisputedly, Ginza was not a company in which the public was not substantially interested because Floral Commercial Pvt. Ltd. held more than 50% of its shares as on 31.03.1994. That concern is itself a private company. During 1994-95, shares were sold by Floral Commercial Pvt. Ltd. and others, which resulted in the company's status as remaining unaltered in which the public was not substantially interested. The assessee's total holdings amounted to 17,67,642 shares. On 11.11.1994, a direct allotment of 6,77,000 shares was made in favour of the assessee. It was then that it became interested in Ginza in exce....
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.... expected to have such liquidity. Furthermore, the rate of interest charged on these loans and advances were approx. @ 12% per annum which clearly shows that the loans were taken for medium to long term. Nobody pays or take interest @ 12% on loans and advances which can be called back within a short notice as short as 2-3 days. All this goes on to show that the assessee company had invested the funds with at least a medium term perspective. This shows that the assessee could not have and did not have the intention to purchase the said advance licenses for Ginza Industries Ltd." 18. The statement of the Managing Director of Ginza - the company was recorded. He stated that Ginza intended to purchase import licenses to the tune of Rs. 70-80 crores some of which were for its own use (worth Rs. 30-40 crores) and the rest was to be used for trading. According to the statement the assessee had offered to obtain license which was to be 10-15% lower than the market rates and eventually the rates offered by it were not beneficial even though better than the prevailing market rates. The AO also held - after considering the statements made on behalf of Ginza by its MD and eliciting further ....
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.... held more than 10% shares. The public were not substantially interested in these companies. The AO held that the amount was deemed dividend. Except for grating relief to the extent of Rs. 38.81 lakhs, the CIT(A) held the balance amounts to be deemed dividends. The ITAT reversed these findings holding that the assessee's business involved brokerage from real estate and they were for investment in the real estate. The ITAT's findings were reversed by this Court on the basis of the following reasoning: "8. From the order of the Tribunal, it may be seen that it has only commented upon the finding recorded by the AO. Before proceeding further to see the reasoning of the Tribunal, we may note the background of the proceedings before the AO. The AO recorded that during the course of assessment proceedings, the assessee in reply to show cause notice furnished his response. With regard to the amount of Rs. 34,75,780/- received from M/s National Capital Region Electronics Pvt. Ltd., the assessee stated that the said amount was received against sale of property in terms of agreement dated 18th September, 2003. Here it may be noted that the companies are closely-held companies in which the....
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....nd of the assessee under Section 2(22)(e)." 22. The Board circular and the line of reasoning adopted by the various High Courts, including this Court relied upon by the assessee in this case undoubtedly indicate that the trading transactions or advances would fall outside the mischief of sums that are to be treated as deemed dividends. To this extent, there can be no dispute. Nevertheless, as to whether amounts advanced by a company to a company in which the public does not have any substantial shareholding or in which the public is not interested to a shareholder, to an entity or individual holding shares in excess of 10% amounts to a trading transaction or falls within the aspect and, therefore, deemed commercial, there can be no bright line test. The Revenue has to conduct a fact-based inquiry each time such contention is urged by the assessee. The facts and circumstances of this case show that Ginza advanced substantial amounts (which were confined by the AO to only Rs. 6.16 crores since that was the extent of payment made by Ginza after the assessee characterized the Rubicon threshold of 10% as a shareholder in it from out of its available surplus). The AO's decision, that ....
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....erm deposits and also for the purpose of yielding income, i.e. by investing with the object of trading in shares. 25. In these circumstances, both the lower authorities, in the opinion of the Court overlooked that the real intent of Ginza in advancing the sums it did to the assessee was to share its profit by way of deemed dividend. The sum of Rs. 6.16 crores clearly fell within the description of "deemed dividend" under Section 2(22)(e) of the Act like in the case of Sunil Chopra (supra). For these reasons, the first question is answered in favour of revenue and against the assessee. Regarding Question no.2 26. This question relates to the disallowance made in respect of Rs. 43.5 lakhs claimed by the assessee as commission. On this aspect, this Court notices that the entire tripartite agreement between the assessee, Ginza and Adani was rejected, because its basis, including the assurance of a commission to the extent of Rs. 43.5 lakhs payable to Adani, was held to be false. The AO was of the opinion that the agreement was of a self-serving nature and meant for purposes other than of business intended. The AO took into account the fact that even though the amounts could be re....