TaxTMI 
TaxTMI 
2019 (9) TMI 1229
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.... Pvt Ltd are in the nature of loans and advances only without appreciating the plethora of evidences filed before the AD & CIT(A) to demonstrate that the transaction was a commercial transaction. 3. That the CIT (A) failed to appreciate that the amount paid by its subsidiary M/s Advantage overseas Pvt Ltd was for a specific commercial purpose and was not in lieu of dividend and by virtue of this investment the profitability of ADPL was to increase due to assured return of 12 and 50 share in profit. 4. That CIT (A) erred in making an addition of Rs. 2,97,74,68,364/- under section 2(22) (e) of the Act without understanding the fact of the case and without appreciating that the amount payable to M/s Advantage overseas Pvt Ltd was taken for strategic investment purpose same was evident from agreement dated 12/10/2012 executed between both holding and its subsidiary company. 5. That CIT (A) erred in not proper interpreting and applying the CBDT Circular No. 19 of 2017 under the facts and circumstances which specially says that contributions given for commercial purpose falls outside preview of Section 2 (22) (e) of the Act. 6. That in the facts and ci....
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....e scrutiny vide letter dated 20.12.2017 served on 22.12.2017. Various details /explanations were called for vide the said Notice. ABC duly furnished the information called for to the extent possible given the paucity of time on 29th December 2017. The income was assessed at Rs. 297,16,45,750/- after making various additions. 4. During the course of assessment proceedings Ld. A.O. observed that the assessee company had shown huge amounts as unsecured loan from various parties including Rs. 428,50,73,821/- from M/s. Advantage Overseas Pvt. Ltd (In short AOPL) in which its share holding was 85%. The A.O. issued show cause to the appellant. After considering reply, the A.O. concluded that as the assessee company was holding more than 10% of the voting power of AOPL Pvt. Ltd and AOPL has accumulated reserve and surplus, provisions of section 2(22)(e) of the Act are attracted. The A.O. referred to the replies of the assessee that the company did not have any income other than investment in fixed deposit and also that the company was a holding company which invested in its subsidiary and did not have any other income. The Ld. A.O. referred to the submission of the assessee that it h....
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....lowance of interest on TDS of Rs. 60,43,900/- were made and the income was assessed at Rs. 2,97,16,45,750/-. 6. Aggrieved assessee preferred appeal before Ld. CIT(A) and failed to succeed on any of the grounds raised before him, as the observations of the Ld. A.O were duly confirmed by Ld. CIT(A) by further adding few judgments after explaining the ingredients of provisions of section 2(22)(e) of the Act. 7. Aggrieved assessee is in appeal before the Tribunal. During the course of hearing assessee made following submission with the request to admit additional evidence:- 1. The aforesaid Appeal filed by the Appellant! Applicant is fixed for hearing on 20.03.2018 before this Hon'ble Tribunal. 2. That the present Appeal has been filed against the order dated 07/12/2018 passed by CIT (A)-I where in Ld CIT (A) has dismissed the Appeal of the Appellant and sustained the addition made by the Ld. AO on account of deemed dividend under Section 2 (22) (e) of the Act. 3. That during the year under consideration, the Appellant Company has received funds from one of its subsidiary. company i.e. M/s Advantage overseas Private Limited (AOPL) in relation to ....
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....emand report from Ld. A.O. through Ld. CIT (DR). The remand report dated 9.7.19 was received which is placed on record and the observation of the Ld. A.O are reproduced below; F.No.DCIT(1)/BPL/ITAT/2019-20 Dated: 09.07.2019 To The Commissioner of Income Tax (DR), Income Tax Appellate Tribunal, CGO Building, 2nd floor, White Church Road, Indore 452001 Madam, Sub: Appellate proceedings in the case of Asian Business Connections Private Limited, Bhopal,ITA No.936/Ind/2018 for the A.Y. 2015-16 - reg.- Kind refer to the above subject and letter F.No.CIT(DR)/ITAT/ IND/ 2018-19/1149 dated 20.03.2019. In this regard, comments are desired in the case of Asian Business Connections Private Limited's application filed under Rule, 29 of Appellate Tribunal Rule, 1963. As additional evidence, the appellant has submitted return of income filed for AY 2018-19 along with audit report of t....
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.... company and if required for some payment. Therefore, it is clear that the manner in which the profits have been shown from the sale of investments in return of income by the appellant and Advantage Overseas Limited are not relevant to the deemed dividend transaction u/s 2(22)(e) of the Act and are meant to circumvent the provisions of section 2(22)(e) of the Act. Submitted for kind consideration. Yours faithfully, Sd/- (Rajat Singhai) Deputy Commissioner of Income Tax-1(1), Bhopal 9. From perusal of the above we find that the additional evidence mainly constitutes the Income Tax returns for Assessment Year 2018-19 along with the audit reports of the assessee as well as the subsidiary company i.e. M/s. AOPL, in support of the contention that the strategic investments made jointly during Assessment Year 2015- 16 finally gave profits and the same are equally shared by both the concerns and duly offered to tax. In our considered view since the additional evidence bear a direct nexus with the transaction carried out during the year under appeal, we are inclined to admit the additional evidence for adjudicating the issues raised in this appeal. 10. Ld....
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....ccepted subject to ABC agreeing on assured return of 12% p.a. instead of 8% p.a. • ABC in its board meeting dated 08Th October 2012 deliberated on the request of 12% assured returns of AOPL and agreed to the offer. • AOPL in its board meeting dated 11Th October 2012 accepted the offer of ABC to invest Rs. 850 crores. AOPL was eligible to 50% profits on sale of investment made, subject to assured return of 12% p.a. of the investment made. • The parties entered into an agreement dated 12Th October 2012 formalizing / recording their understanding. • On basis of the above agreement, AOPL advanced Rs. 428.00 crores to ABC (in AY 2015-16) in parts as and when called for by ABC. It is important to mention here that a) MOU was entered into on 11th Oct 2012 while the amount was received starting from 2/04/2014 i.e. as and when the investment was needed . b) Entire Amount of 423 crores was not given lump sum but was disbursed as an when investment was needed. c) The receipt of funds from subsidiary was immediately followed by investment i.e. no part was kept in the hands of appellant. d) The receipt of fu....
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....pany making the advance, such advance would be construed to give effect to a commercial transaction not falling within the ambit of section 2(22)(e). Contributions given for commercial expediency, business necessity and emergency needs resulting in financial accommodation between sister concerns cannot be considered as deemed dividend 1. The words "loan or advance" as used in the deeming provision has to be interpreted strictly. The word "loan" would mean the act of money lending which generally carries interest and there is an obligation of repayment. The word "advance" may or may not be interest bearing and may or may not carry an obligation of repayment. However, the word "advance" used in the section has to be associated with the word "loan". It is a well-established fact that associated words take their meaning from another word under the doctrine of noscuntur a sociis. 2. It is a well-established fact that every financial transaction cannot be a loan or advance. Commercial expediency, business necessity and emergency needs result in financial accommodation between sister concerns. These transfer of funds between sister concerns are in line with the ....
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....saction does not fall within the ambit of first leg of the definition i.e. "any sum by way of advance or loan" since the payment made by AOPL to ABC was for a business venture and not a loan per se. 2. In view of the above, this decision does not apply to the appellant's case. AO has wrongly relied on the decision of Supreme Court in the case of Smt. Tarulata Shyam vs CIT 1. In the said case, the Hon'ble Supreme Court held that any sum by way of advance or loan shall be deemed to be dividend irrespective of the fact that such advance or loan is entirely repaid during the year. Further, the loan or advance was given in the ordinary course of business was also not established. 2. The relevant para is reproduced below for ready reference. "For the foregoing reasons, it could be said that payment by a company not being a company in which the public were substantially interested within the meaning of section 23A of 1922 Act, of any sum by way of advance or loan to a shareholder, not exceeding the accumulated profits possessed by the company was to be deemed as his dividend under section 2(6A)(e) read with section 12(1B) of the 1922 A....
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....ce or loan shall be deemed to be dividend irrespective of the fact that such advance or loan would subsequently be adjusted against future payments. 2. In the case of the appellant, the transaction does not fall within the ambit of first leg of the definition i.e. "any sum by way of advance or loan" since the payment made by AOPL to ABC was for a business venture and not a loan per se. Therefore, the question whether the subsequent adjustment of such advance or loan against future payments would alter the position does not arise. 3. In view of the above, this decision does not apply to the appellant's case. The AO has wrongly relied on the decision of ITAT in the case of ITO vs Ajanta Cycles (P) Ltd. 1. In the instant case, the company had advanced funds to the director shareholder for the purpose of utilizing the same for the purpose of business. However, in the relevant year, the director had not utilized the funds for the purpose of business and further, no explanation was provided for the huge balance lying with the director and for not withdrawing such funds for the purpose of business. 2. The Income-tax Appellate tribunal, question....
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....e would be considered. 1. In the case of the appellant, the transaction does not fall within the ambit of first leg of the definition i.e. "any sum by way of advance or loan" since the payment made by AOPL to ABC was for a business venture and not a loan per se. Therefore, the question of calculation of deemed dividend does not arise. 2. In view of the above, this decision does not apply to the appellant's case. - It is a pertinent question to be asked to the assessee as to whether the amounts advanced for investment qualifies as trade advance? The contributor has given a business advance to the appellant for further investments and not made investments in appellant. The said transaction cannot be classified as investments as the same is not backed by any underlying securities like shares, bonds etc. issued by the appellant. In view of the above, the same cannot be treated as Investments in the books of accounts of the contributor. Further, in view of the fact that the contribution by AOPL was for the purposes of a joint business venture, it is possible to contend that the said transaction can be classified as a Trade Advance as Business....
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....an intermediary company and no beneficial interest accrued to it. - In the instant case, ABC is entitled to benefits derived from investments made in the other companies from the funds received from AOPL. In this regard, we submit that - In the case of CIT vs Farida Holdings (P) Ltd (supra), even general loan from a subsidiary to the holding company for an onward loan to another subsidiary was held to not fall within the preview of Section 2(22)(e) of the Act. - In the appellant's case, the amount was given by AOPL under a business venture with specified consideration and timelines. Given this, it is submitted that the facts of the appellant are more commercially prudent and consequently, the aforesaid decision squarely applies to the appellant. Further, the AO has completely ignored the principles laid down in the other judicial pronouncements mentioned in the submissions. By relying on them, one of principles which emulates is that if the contributor is benefitting from the contribution made, provisions of section 2(22)(e) of the Act does not apply. - Bagmane Constructions [2015] 57 taxmann.com 120 (Karnataka) ....
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....e correctly explained as an advance to the related party by way of disclosure. Further, it is submitted that in the case law relied by the AO, it is held that "it is trite law that mere nomenclature of entry in the books of accounts is not determinative of the true nature of transaction". In fact, the appellant, vide submissions dated 18th July 2018 referring to the same Delhi High Court judgement, had highlighted that the nomenclature of the transaction in the financial statements is not relevant in determining the taxability of the transaction. However, the AO has not considered the submissions made by the appellant. Further to above, reference may be made to the Hon'ble Supreme Court judgement in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502 (SC) wherein, the Supreme Court held that "It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided accordi....
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.... Further, the AO has ignored the confirmation of the statutory auditor that they have examined the business venture agreement dated 12th October 2012 entered into between ABC and AOPL and the related documents. In view of above, it is submitted that the AO has expressed his personal view and hence his observations should be ignored. - The AO has wrongly stated that that this transaction should have also appeared in the notes to accounts of AOPL as it had contingent liability of additional amount to be paid to ABC on account of agreement of investment of Rs. 850 crores In respect of mention of the balance amount payable by AOPL to ABC under the head 'contingent liability', it is submitted that the amount payable by AOPL cannot be classified as 'contingent liability'. As per Accounting Standard (AS) 29 on Provisions, Contingent Liabilities and Contingent Assets, a contingent liability is: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) a presen....
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.... It is further submitted that the AO has ignored the confirmation of the statutory auditor wherein it is specifically mentioned that the amounts are correctly shown as 'trade advances' in the related party schedule of ABC and AOPL. - That the AO wrongly concluded that there appears to be a major mistake committed by the auditors on account of the new facts now presented by the assessee. Either the auditors were not presented with the agreement between ABC and AOPL or the auditors chose to remain silent on such major transaction undertaken. Also, whether minutes of meetings as now being presented were reported to the MCA has not yet been clarified [Emphasis added]. As evident from the observation of the AO itself (underlined above), it is submitted that the AO has indulged in complete conjecture and guess work. It is submitted that the AO has ignored the confirmation of the statutory auditor that they have examined the business venture agreement dated 12th October 2012 entered into between ABC and AOPL and the related documents. In respect of filing of minutes of meetings with the MCA, it is submitted that under the provisions of the Compa....
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.... funds. Given this, there was anyways no question of AOPL investing directly in companies identified by ABC. Given this, it is submitted that the sweeping observation made by the AO should be completely ignored. The said investment was not made by AOPL directly because : a) The investment by AOPL (the subsidiary ) would have been a huge risk to the balance sheet, given that it is in the business of Agri trade where continuous banking support in the form of LOC issuance is required and any short term dip in the value of investment would have had to be marked as mark-to market loss thereby directly affecting the banking transactions of LOC which are based on credit risk rating. b) It had not investment in its books earlier or in future and had no expertise in strategic investments. Its had only FDR's in its books and nothing else. c) The Appellant had been negotiating with the seller since 2012 and had considerable expertise in strategic investments and to turn over the seller to a completely different buyer does not happen in business negotiations. d) The appellant assumed all the risk in its balance sheet which protected the subsidiary f....
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....m-Trib) 16. Saamag Developers (P) Ltd V Assistant Commissioner of Income Tax (2018) 90 taxmann.com 20 (Delhi-Trib) 17. Commissioner of Income Tax Kottayam V Malayala Manorama Co. Ltd (2018) 89 Taxmann.com 252 (Kerala) 18. Commissioner of Income Tax, Chennai V Raj Kumar (2009) 181 taxmann.com 156 (Delhi) 19. Commissioner of Income Tax V Arvind Kumar Jain (2012) 18 Taxmann 132 (Delhi) 20. Ishwar Chand Jindal V Assistant Commissioner of Income Tax (2015) 61 Taxmann.com 428 (Delhi-Trib.) 21. Assistant Commissioner of Income Tax-3(1), Indore V Pravin C Pandya (2013) 38 taxmann.com 408 (Indore-Trib.) 13. To demonstrate that the transaction is a business transaction ABCPL filed the following evidences before the lower authorities:- i. Memorandum of Association of ABC. ii. Memorandum of Association of AOPL. iii. AOPL's Board Resolution for the board meeting held on 25th September 2012. iv. AOPL's Board Minutes for the board meeting held on 25th September 2012. v. ABC's Board Resolution for the board meeting held on 3rd October 2012. vi. ABC's Board Minutes for the board meeting he....
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.... Infrastructure Private Limited on 19th July 2017. As per the terms of the agreement dated 12th October 2012 entered into between the appellant and AOPL, AOPL is eligible to receive 50% of profits earned by the appellant from the investment. Calculation of profit on sale of shares of CSJ Infrastructure Private Limited by the Appellant and share of profit of AOPL thereon was also filed. ii. Further, computation of advance tax of FY 2017-18 of the appellant considering his share of profits as income was also filed before the Ld. CIT(A). In respect of AOPL, the company has, after considering the 50% share of profit on disinvestment, estimated that no advance tax is due for AY 2018-19. iii. Form 26AS of the appellant reflecting the advance tax paid and taxes deducted at source by their payers was also filed iv. On perusal of the above details, it will be observed that the Appellant and AOPL has duly paid taxes on their respective share of profits. Thus in all aspects the transaction is a commercial transaction which does not result in any deemed divided u/s 2(22)(e). 14. As regards the last ground against the disallowance of registry fees paid for....
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....ny such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits." 21. 'Dividend' in its ordinary connotation means the sum paid to or received by a shareholder proportionate to his shareholding in a company out of the total sum distributed. As held by Hon'ble Supreme Court in Bharat Insurance vs Cl'I', 53 ITR 108 (SC), the definition as per this clause is an inclusive one implying that any receipt by a shareholder which is 'dividend' under general law would be taxable as such under this Act, even if it falls outside the purview of this definition or is not attributable to the company's 'accumulated profit'. 22. The concept of deeming certain payments or loans or advances to substantial shareholders as income was introduced with the object of curbing tax evasion. Upto 31-5- 1997 dividend was taxed in the hands of the recipient of the dividend. However many closely held companies never declared any dividend and accumulated profits in the company itself. Since no dividend was declared the same could not be taxed. ....
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....below:- "If this purpose is kept in mind then, in our view, the word (advance' has to be read in conjunction with the word 'loan'. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of repayment. On the other hand, in its widest meaning the term (advance' mayor may not include lending. The word (advance' if not found in the company of or in conjunction with a word (loan' mayor may not include the obligation of repayment. If it does then it would be a loan .... "(p. 166) 29. In this background, the facts of the case are that the appellant received a loan of Rs. 428.50 crore from its subsidiary company AOPL In which it was having 85 shareholding. In the year under consideration, in the balance sheet of the shareholder ABC (assessee) it was shown as Long term borrowings and in the balance sheet of the company AOPL, it was shown as Short Term Loans and Advances. The appellant relying upon an MoU between ABC and AOPL dated 12.10.2012, contended that it was decided between the two com....
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....017 to contend that contributions given for commercial purpose fall outside preview of section 2(22)(e). The aforesaid circular is reproduced below:- Section 2(22) clause (e) of the Income Tax Act, 1961 (the Act) provides that "dividend" includes any payment by a company, not being a company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. 2. The Board has observed that some Courts in the recent past have held that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22) (e) of t....
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....pany could fulfil an export order; a floating security deposit given by a company to its sister concern against the use of electricity generators belonging to the sister concern etc. It may be seen that the nature of transaction here is entirely different and can in no way be treated as a normal trade advance as the appellant company is not engaged in any trade transactions with AOPL in routine in its normal course of business. From the illustrative transactions given in the circular, it can be inferred that only transactions such as where the subsidiary company was a dealer say of a cement producing holding company and gives some trade advance in its normal course of business, then such transaction would not be covered with in the ambit of section 2(22)(e). Here it was not a trade advance that was extended by AOPL to ABC but was parking of its surplus funds with the ABC. Therefore, in the facts of the case, the circular was clearly not applicable. 35. The appellant has relied upon CIT vs. Maduari Chettiar Karthikeyan [2014] 45 taxmann.com 274, the High Court held as follows:- " ... assessee had executed work for the company in the nature of construction of buildi....
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....end in the hands of the shareholders, money in the form of an advance or loan. " "If this purpose is kept in mind then, in our view, the word "advance' has to be read in conjunction with the word "loan '. Usually attributes of a loan are that it involves positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries an interest and there is an obligation of re-payment. On the other hand, in its widest meaning the term "advance' mayor may not include lending. The word "advance' if not found in the company of or in conjunction with a word "loan' mayor may not include the obligation of repayment. If it does then it would be a loan. Thus, arises the conundrum as to what meaning one would attribute to the term "advance'. The rule of construction to our minds which answers this conundrum is noscitur a sociis. The said rule has been explained both by the Privy Council in the case of Angus Robertson v. George Day (1879) 5 AC 63 by observing "it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them"....
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.... against trading transactions. Clearly, this is not the case here as per the undisputed facts the amount was given under an obligation of repayment and in the transaction, the appellant ABC was clearly a beneficiary. 40. In any case, even if the argument of the assessee is considered for argument sake that some investment agreement indeed happened, which remained to be accounted for in the balance sheet and notes to accounts; from the judgment of Hon'ble High Court of Delhi in Arvind Jain case (supra), it is clear that such advance was in the nature of loan as discussed in the judgment as AOPL was eligible for 50 share of profits arising from the gain on the investments made by ABC subject to minimum assured return of 12 p.a. The same transaction has been categorized very differently in the balance sheets of ABC and AOPL. ABC is showing it as long term borrowings, where as AOPL is showing it as short term loans and advances. However, leaving that aside, from the judgment of Hon'ble High Court of Delhi, it is clear that the advance received by ABC from AOPL, as the same has been categorized as short term loans and advance by AOPL, is in the nature of advanc....
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....he ABC. Further, the appellant could not show that the investment ultimately made by ABC was made in the joint name of AOPL and ABC, if the same was a genuine strategic investment made in partnership. Further, the appellant could not rebut the finding of A.O. in the remand report by showing genuineness by way of any independent filing that an agreement existed which was subsequently shown as investment agreement. It is observed that even if we consider the investment agreement, the provisions of section 2(22)(e) are squarely applicable. 44. Another argument has been raised that the A.O. did not consider the accumulated profits as on the date of transaction. It is observed that the A. O. has taken the correct figure of accumulated profits as even during appeal the appellant could not rebut the figure as it submitted during appeal that "Currently, the appellant is unable to extract the accumulated profits as on the date when the payments were made to the shareholder and therefore we have not pressed this ground further. JJ 45. It is further observed that the following case laws relied upon by the A.O. are fully applicable to the facts of the case. ....
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....er annum to AOPL, assessee received amounts on various dates during the year totalling to Rs. 428.51 crores (approx). Since the assessee company was holding more than 10% of voting power of AOPL, Ld. A.O made addition for deemed dividend u/s 2(22)(e) of the Act of accumulated profits at the year end at Rs. 297.75 crores (approx.). While making addition Ld. A.O observed that the amount has been shown as loan to the assessee by AOPL and in the audited financial statement ABCPL has shown the amount under the head unsecured loans and not as trade advance/credit payable. He also concluded that the alleged transactions is not a business transaction and it is purely a loan given by the subsidiary company to its holding company and provisions of Section 2(22)(e) are squarely applicable. 18. On the other hand Ld. Counsel for the assessee referred to the consistent submissions made before the lower authorities and before us that the alleged transactions was a commercial transaction carried in the regular course of business for earning profit. It was submitted that AOPL was having accumulated surplus over a period of time and in order to use the idle funds for earning maximum return for it....
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....er the end of the previous year ending next before the 1st day of April, 1933 , whether such accumulated profits have been capitalised or not; (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) 5 made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; but" dividend" does not include-- (i) a distribution made in accordance with sub- clause (c) or sub- clause (d) in respect of any share issued for full cash consideration, where the holder....
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....orities have invoked provisions of Section 2(22)(e) of the Act which provides that "dividend" includes any payment made by the company not being the company in which the public are substantially interested, of any sum by way of advance or loan to a shareholder company being a person who is the beneficial owner of shares holding not less than 10% of voting power. The assessee company is a holding company of various subsidiary companies including AOPL. AOPL was having accumulated profits and it gave amount to the assessee company i.e. ABCPL for the alleged strategic investment. ABCPL is having 99.90% of equity shares of AOPL as on the last date of the year under appeal so there is no dispute to the fact that the assessee is a shareholder having more than 10% of the voting rights. It has received the sum from the subsidiary company having accumulated reserve and surplus. Since the amount was shown as loan by AOPL to ABCPL and in the financial statement of ABCPL the amount received from AOPL has been shown as unsecured loans, the impugned addition u/s 2(22)(e) of the Act for the deemed dividend of Rs. 297.75 crores (pprox.) was made by the Ld. A.O and the same was confirmed by Ld. C....
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.... case. In the financial statements the alleged amount received by ABCPL from AOPL though has been shown as unsecured loan but in the notes of accounts it has been mentioned that there are transaction with the related party. In Schedule XIV of the audited balance sheet of ABCPL for financial year 2014-15 placed at page 145 to 151 at point No.12 the related party disclosures as required under Accounting Standard 18 have been duly disclosed along with the opening balance, trade advance received during the year, amount repaid during the year and closing balance. So on one hand the alleged amount received as loan is appearing under the head "long term borrowing" as a loan repayable on demand on the other hand in the very same set of audited financial statement the amount received from AOPL has been shown as trade advance. So the basis of revenue authorities making the addition merely for showing the amount as unsecured loan has no merit. Various judgments relied on by the revenue authorities on this point has been fairly rebutted by the Ld. Senior Counsel for the assesssee in the written submission reproduced in the earlier part of this order which we find to be in order. 25. So now ....
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....ies Act 1956 and other rules made therein to maximise returns for the shareholders. It also resolved that Mr. Maneesh Kumar Singh (Director) of the company be appointed to find out the investment opportunity for the company. • On 3.10.2012 in the meeting of Board of Directors of the assessee company i.e. ABCPL it was decided to prepare detailed proposal to be provided to AOPL for the investment of Rs. 850 crores to be invested in identified options in consideration for 50% share of profit subject to minimum assured return of 8%. • The detailed business proposal for strategic investment was prepared by ABCPL to be provided to AOPL running in 44 pages (placed on paper book page 213 to 257). In this proposal information is provided for various securities including real estate, the past history of the revenue generated in this market, details of various projects undertaken by various companies. Details also provided for various market players in the real estate sector and the plan for making the strategic investment. • On 8.10.2012 in the meeting of Board of Directors of ABCPL the proposal of AOPL of giving minimum assured return of 12% in place o....
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.... AUSIN Software Pvt. Ltd Rs. 5.00 crores (c) Equity share in Carnival Finance Pvt. Ltd Rs. 31.00 Crores (d) Equity share in Leela Software Pvt. Ltd Rs. 206.70 crores. (e) Equity share in L&T Realty Ltd Rs. 180.36 crores. In the above list apart from increasing the shareholding in AOPL, no other new investment is made in the subsidiary companies of ABCPL. All the other investments are independent strategic investments mainly in real estate sector. • The above investments along with other investments in subsequent years were sold during financial year 2017-18 giving surplus amount/income over and above the investments made amounting to Rs. 574.80 crores (Approx). This amount was shared equally at Rs. 287.40 crores (Approx.) each by both AOPL and ABCPL. • In the audited balance sheet for financial year 2017- 18 the income from sale of investment at Rs. 287.40 crores (Approx.) has been shown by both the ABCPL and AOPL under the head "other income" and duly offered to tax . This fact is verifiable from the additional evidence filed by the assessee on 15.3.2019 placed at page 36 to 67. 26. So the transaction which started f....
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.... interested shareholders as loans or advance and not as dividend at a fixed rate per equity share to avoid paying dividend distribution tax, then the provision of Section 2(22)(e) comes into play. 30. But in case where the amount is advanced to the substantial interested shareholder as a part of the business transaction then the situation changes. In the provision of section 2(22)(e) under the list of items which are not to be included as dividend are such advance or loan given by the company to its shareholder in its ordinary course of business which cannot be treated as dividend. In the instant case we find that business deal strucked in September 2012 when the idea of strategic investment came in the mind of board of directors of AOPL to maximise the return on the idle funds which were mainly invested in bank fixed deposits. ABCPL by no cannon can be treated as a company having no regular business activity. ABCPL is a holding company having various subsidiary companies under it including AOPL. It also holds 99.90% shares in AOPL as on 31.3.2015. So indirectly it is eligible for 99.90% of the retained earnings/accumulated surplus of AOPL. There was no bar for ABCPL to get the ....
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....es. The result came up in financial year 2017-18 which may have been profit or loss i.e. not the concern at this stage because the business may end up in loss also. However AOPL was able enough to get a minimum assured return of 12% along with the repayment of original amount advanced to ABCPL. So the crux of the transaction is that the original amount of accumulated reserves and surplus of AOPL came back to it during financial year 2017-18 along with handsome profits which were further added to the accumulated reserve and surplus of the AOPL available for distribution of dividend to its shareholders. 33. So we can safely conclude that the entire transaction of giving trade advance/loan by AOPL out of its reserve and surplus to its holding company AOPL was a commercial transaction carried out in the ordinary course of business. Since the contributor is benefited from the advance which was utilised for the specific purpose of business as agreed between the contributor company and the receiving shareholder, thus cannot be treated as contribution given in lieu of dividend or to avoid dividend distribution tax. 34. We find that Hon'ble Madras High Court in the case of CIT V/s ....
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.... must be made applicable, wherein the dividend is paid in the guise of loan/advance to avoid tax. But to apply the provisions of section 2(22)(e) of the Act, an honest attempt is to be made to understand, whether the impugned amount is a loan or advance within the meaning of sub section. 39. In the light of the above judicial proceedings we observe that the revenue authorities should invoke provisions of Section 2(22)(e) of the Act only in case when loans and advances are given to substantial shareholder in the garb of avoiding dividend distribution tax or with the intention to not to share the dividend with the non substantial shareholders. The statute has clearly identified various types of situations about the payments which are to be included in the category of dividend and has also excluded the payments under the circumstances where payments are given for business purposes, or as enumerated in the provision itself, then the deemed dividend provision should not be applied. Revenue authorities should refrain from using the provisions of Section 2(22)(e) of the Act as a tool for maximising the tax collection rather they should use the powers to keep a check of such distributio....
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....ed assessee's Ground No. 1 to 6 holding that the alleged transaction of giving advance by AOPL to ABCPL was for commercial purpose and in the ordinary course of business which do not fall within the category of deemed dividend as provided u/s 2(22)(e) of the Act and no addition of deemed dividend of Rs. 297.75 crores (Approx.) was called for but still for academic purpose will like to adjudicate this alternate ground. 43. We observe that as per the audited balance sheet of AOPL the accumulated reserve and surplus as on 31.3.2014 was Rs. 38.76 crores and the closing balance on 31.3.2015 is Rs. 297.75 crores. Ld. A.O after applying provisions of Section 2(22)(e) has confirmed the addition for deemed dividend to the extent of closing balance of reserve and surplus of Rs. 297.75 crores. Ld. Senior Counsel for the assessee has contended that both the lower authorities have erred in taking the closing balance of reserve and surplus balance because in understanding of section 2(22)(e) of the Act which provides that the accumulated profits shall include only the profits up to the date of such payment. 44. However before coming to such conclusion we will like to go through the decisio....
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....gislature has taken into account the fact that whereas the profits from business for the current year may not be determinable in the middle of the year, there are certain sources of income, the income from which is capable of determination which, according to the legislative intent, should also be taken into account while determining the accumulated profits on the day of advancing the loan. The company is a person. It may carry on business and may also derive income from various other sources. For example, the company may sell an asset from which capital gains are derived. If the capital gain is derived before the date of advancement of the loan, that profit shall have to be taken into account in determining the accumulated profits notwithstanding the fact that such an event has taken place in the middle of the year. It is so as the determination of capital gains is not to wait till the end of the previous year. Similarly, there can be income from other sources also such as receipt of dividend income or interest which may not have to wait for determination at the end of the year. Similarly, some subsidy may be received from the Government which may be taxable on receipt basis. Such....
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..... Therefore, whereas the aforementioned adjustments and other adjustments as may be permissible in law are to be made, accordingly, accumulated profits worked out on each day of loan or advance is made to the shareholder. All the profits that have not accrued to the company advancing the loan up to each day of advance/loan have to be taken into account in working out the accumulated profits within the meaning of section 2(22)(e ). But since the business profits of the company accrue only at the end of the year, the current year's business profits are not to be included. Therefore, in the interest of justice, the issue was restored to the file of the Assessing Officer for the purpose of working out the accumulated profits on each day of advancing the loan to the appellant and apply section 2(22)(e ) to such loans subject to the maximum of accumulated profits up to the date of advancement of the loan." Thus in light of the aforesaid decision the computation of accumulated profits has to be redone by excluding current years' profits. 45. From perusal of the above decision we find that for making addition u/s 2(22)(e) of the Act the amount of accumulated profit nee....
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....o Rs. 100 crores for which ROC expenses of Rs. 85,53,900/- was incurred. However only share capital of Rs. 37 crores only was issued during the year which means that against total expenses of Rs. 85,53,900/- for increase in share capital from Rs. 5 crores to Rs. 100 crores, the actual share capital issued was of Rs. 37 crores only. 49. In these circumstances the total amount of ROC fees needs to be disallowed also needs to be examined in the light of the decision of Co-ordinate Bench. Ld. CIT(A) confirmed the disallowance of the ROC expenses by referring to various judgments of Hon'ble Apex Court observing as follows; "48. The A.O. observed that the appellant had claimed amount of Rs. 85,55,900/- as ROC expenses which was Roc fees and stamp duty incurred towards increase in authorized share capital of the company from Rs. 5crore to Rs. 100 crore. Relying upon decisions in the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC), in Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5 (SC) and followed in CIT v. Kodak India Ltd. [2002] 253 ITR 445/120 Taxman 498 (SC), the A.O. held that the expenditure for enhancing ....
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....l the lower authorities. On appeal to Supreme Court: Held Though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retains the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Hence, expenditure incurred by the assessee was capital expenditure. 52.In Punjab State Industrial Development Corpn. Ltd. vs CIT, [1997] 93 Taxman 5 (SC), the Apex Court ruled that amount paid by company to ROC, as filing fee for enhancement of capital base of company was capital expenditure. The head note published in taxmann.com is as below:- Facts The assessee-company claimed certain amount paid to the Registrar of Companies as filing fee for enhancement of capital base, as the revenue expenditure. The assessee's claim was allowed by the Assessing Officer but the Commissioner exercising power under section 263 disallowed the same. On appeal, the Tribunal upheld the Commissioner's ord....