AI Drafter 
TaxTMI 
TaxTMI 
2025 (2) TMI 391
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.... "1. The order of the Ld. CIT(A) is erroneous on the facts of the case and contrary to the provisions of law. 2. The Ld. CIT(A) erred on facts and in law in not allowing the claim of additional deduction of expenditure of Rs. 13,30,291/- as evidenced by the entries of cash outflows in the names of the employees found in the seized material against the gross unaccounted cash receipts from sale of spent solvents and scrap of Rs. 35,29,191/- for arriving at the real income thereon. 3. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in failing to consider the notarized affidavits of the employees and labour contractors furnished as additional evidence which substantiate the additional claim of expenditure towards labour payments by corroborating and supplementing the entries of cash outflows in the names of the employees found in the seized material. 4. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing the deduction of expenditure to the extent of Rs. 3,52,920/- only on estimate basis at 10% of the gross unaccounted cash receipts from sale of spent solvents and scrap." 5. In the facts....
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....s return of income on 07.06.2022 for A.Y. 2013-14 declaring total income of Rs. nil. Subsequently, notices u/s 143(2) and 142(1) were issued and served on the assessee by the Assessing Officer. After examining the material on record and the information furnished, assessment was completed by the Assessing Officer u/s 153A of the Act, making addition towards sale of spent solvents and scrap of Rs. 35,29,191/-. 3.1. The assessee has filed an appeal against the assessment order passed by the AO for A.Y. 2013-14 and challenged the disallowance of the claim deduction of expenditure of Rs. 35,29,191/- made by the AO towards expenses incurred against unaccounted cash receipts from sale of spent solvents / scrap and also challenged the legal validity of assumption of jurisdiction by the Assessing Officer for issuance of notice u/s 153A of the Act. The LD.CIT(A), for the reasons stated in the appellate order dated 22.08.2024, partly allowed the appeal filed by the assessee wherein the LD.CIT(A) has allowed the deduction of expenditure to the extent of Rs. 3,52,920/- only on estimate basis at 10% of the expenditure incurred against unaccounted receipts from sale of spent solvent / scrap. ....
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.... spent solvents / scrap used for manufacturing of bulk drugs, after such reuse are categorized as hazardous waste and the same are required to be disposed of at the earliest. He further explained that he was given to understand that such waste is sold to local buyers, and some of the employees of the group companies have utilized such money for their own purposes, and the said money has not reached the respective companies. He further explained that the interest of the management in this regard is the quick disposal of such hazardous waste, and the management has not paid much attention to any other aspect. With regard to the sale of scrap, he explained that the same is generated out of dismantling of old building / units purchased by the companies and the proceeds from the disposal of such scrap have never reached the respective companies since the immediate disposal of such scrap for paving the way for further construction or development, is the priority of the management. However, considering the fact that the data was found in the registered office of the appellant company and in order to put a quietus to the issue, he stated that the cash receipts from the sale of spent solven....
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.... 22,84,403 28,30,031 - 6,95,78,745 2015-16 5,27,90,633 86,43,206 17,94,442 51,22,781 - 6,83,51,062 2016-17 4,55,32,945 1,28,39,052 - 14,20,467 47,71,521 - 6,45,63,985 2017-18 4,12,58,374 1,99,12,082 57,87,267 18,43,047 47,61,798 - 7,35,62,568 2018-19 6,77,03,448 1,74,25,120 93,97,572 26,08,388 61,56,891 - 10,32,91,419 2019-20 5,12,80,827 4,51,88,803 1,26,36,584 49,90,673 2,68,95,756 - 14,09,92,643 2020-21 5,12,22,731 3,27,38,075 1,02,22,479 48,55,404 2,67,81,999 - 12,58,20,688 2021-22 5,57,69,012 1,62,07,177 58,57,556 41,70,416 3,24,22,875 9,03,945 11,53,30,981 Total 45,52,39,617 18,45,03,085 4,39,01,458 2,59,09,243 11,32,72,843 9,03,945 82,37,30,191 5.2. During the course of assessment proceedings, in the written submissions furnished to the AO on 21-4-2022 in response to notice under Section 142(1) of the Act, the appellant reiterated the explanation furnished by MSN Reddy, the Managing Director of the appellant company, in the sworn statement dated 27-04-2021 and the affi....
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....ct of the said amount, no deduction has been claimed in the hands of the group companies. The appellant further contended that, in the case of the assessee for the instant assessment year, an amount of Rs. 35,29,191/- was spent on various expenses against the unaccounted cash receipts. To corroborate and supplement the entries of cash outflows in the seized material, the appellant furnished notarized affidavits of various employees of the group who were involved in the process of collection of cash towards sale of spent solvents / scrap and disbursement of the same to the concerned workers and the labour contractors who have deployed such workers. 6.2. The LD.CIT(A), after considering the submissions of the assessee and also taken note of the Excel data sheet found on the pen-drive, allowed partial relief towards the additional claim of expenditure against unaccounted cash receipts from sale of spent solvents / scrap to the extent of 10% gross receipts on estimation basis by holding that the expenditure shown in the seized material containing entries of cash inflow towards unaccounted cash receipts from sale of spent solvents / scrap as well as cash outflow entries showing handl....
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....ccounted cash receipts from sale of spent solvents and scrap without appreciating the fact that income cannot be earned without incurring any expenditure. The Learned Counsel for the assessee further submitted that the LD.CIT(A), having held that the entries in the seized material represents the cash inflow towards unaccounted cash receipts and that the cash outflow represents the amounts spent towards various expenditure as expended by the very same seized material but erred in allowing the additional claim of expenditure only to the extent of 10% of the gross cash receipts from sale of spent solvents / scrap on estimate basis by considering only one element of cost involved in the disposal of scrap without considering the other elements of cost like transportation, handling, and disposal of hazardous waste. The LD.CIT(A), referring to seized material found in the form of an Excel sheet, submitted that except few occasions, the amounts received from the sale of spent solvents / scrap have been given back for further disposal of hazardous waste, as additional wages, to employees who were involved in the disposal of said scrap. The AO conveniently ignored one part of the seized docu....
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....a revised return in response to notice under Section 153A of the Act and paid taxes on the said unaccounted income. Therefore, the claim of the assessee towards expenditure during the course of assessment proceedings and appellate proceedings is only an afterthought without there being any evidence to suggest that the amount received from the sale of spent solvents / scrap has been utilized for making payments to employees. Although the appellant has obtained a notarized affidavit from the employees, if you go by the seized document, it clearly shows the cash inflow towards unaccounted cash receipts from the sale of spent solvents / scrap and also the cash outflow towards various payments made to MSN Reddy and other Directors of the appellant and other companies. From the above, it is very clear that the LD.CIT(A) has rightly allowed 10% of the receipt as expenditure incurred against unaccounted cash receipts, considering the nature of the material and the risk involved in the disposal of the said hazardous waste. Therefore, CIT-DR submitted that the order of the LD.CIT(A) should be upheld. 10. We have heard both parties, perused the material available on record and gone through....
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....receipts from sale of spent solvents / scrap needs to be considered in light of the incriminating material found during the course of the search, statements recorded from the persons who handled the issue, and MSN Reddy, the Managing Director of the appellant company, as well as the subsequent additional evidence filed by the assessee before the LD.CIT(A), including the notarized affidavits from the employees who are involved in the disposal of the said hazardous waste. 10.1. There is no dispute regarding the fact that the Excel sheet in the seized material contains entries of cash inflow represents unaccounted cash receipts from the sale of spent solvents / scrap, as well as cash outflow represents cash payments made in the name of various persons. The AO considered one part of the entries contained in the seized material, which includes cash inflow representing unaccounted cash receipts from sale of spent solvents / scrap, however, he conveniently ignored the other part of the entries contained in the very same incriminating material, which represents cash outflow in the name of various employees. Since the cash inflow and outflow are recorded in the very same incriminat....
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.... and materials required for the quick disposal of the said hazardous waste. In the present case, although there is no direct evidence for incurring any expenditure, including salary and wages, transportation, and other materials required for the quick disposal of waste material, but the entries contained in the seized material clearly indicate that the appellant has incurred certain expenditure for handling and disposal of hazardous waste. This fact is further fortified by the entries in the very same seized material, where the cash outflow represents cash payments made in the name of various employees of the head office, who in turn had clearly admitted in their notarized affidavits that they have disbursed the amounts received out of unaccounted cash receipts from sale of spent solvents / scrap for the purpose of making higher payments to employees, who involved in handling and disbursal of hazardous waste. Therefore, in our considered view, the LD.CIT(A), having noticed the fact that the process involved in handling and disbursal of hazardous waste is cumbersome and also involves a certain amount of expenditure, but erred in allowing deduction of 10% on estimation basis from una....
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....ual disbursement of cash by the head office employees to the workers. Having regard to the limited purpose of maintaining the said excel workbook, it is not correct to draw any adverse conclusion regarding the absence of evidence in the seized material regarding the actual disbursement of the cash by the head office employees to the workers. It is in this background of said circumstances only that the head office employees have submitted the notarized affidavits stating that the cash handed over to them periodically by the cashier has been fully utilized for making payments to the workers involved in collection and disposal of spent solvents / scrap needs to be accepted. The said notarized affidavits hold evidentiary value. However, the AO, in the remand report, even though not disputing the veracity of the said notarized affidavits or discrediting its contents or bringing any other material on record to disprove the contents of the affidavits, has simply rejected the arguments made by the assessee regarding the expenditure incurred for handling the said scrap. We further noted that the cash outflow represents payments made to various employees are in the name of few employees, and....
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.... no direct evidence for incurring these expenditures, the possibility of incurring these expenditures cannot be ruled out. This fact is further strengthened by the disbursal of the cash received from sale of spent solvents / scrap to various employees which accounted for 80% of the total amount received from sales, which is evident from the affidavits filed by the employees, wherein they claimed that the amount received from the head office has been utilized for making payments and incurring other expenditures. Although there is no direct evidence for incurring 80% of the amount towards expenditure, going by the nature of the material, in our considered view, there needs to be certain amount of expenditure for other expenses like transportation, packing etc. Since there is no direct evidence regarding other expenditures, in our considered view, the only possible way is to estimate a reasonable amount of expenditure against unaccounted receipts from sale of spent solvents / scrap. Therefore, considering the fact that the appellant has already disbursed 80% of the amount received from unaccounted cash receipts in the name of various employees, and also going by the nature of the mate....
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.... that in the present case, admittedly, the Assessing Officer issued notice u/s 153A of the Act on the basis of "Satisfaction Note" and as per the said 'satisfaction note', the Assessing Officer referred to the incriminating material pertains to unaccounted receipts from sale of spent solvents and scrap. However, the 'satisfaction note' recorded by the Assessing Officer does not bring out the fulfilment of the conditions laid down in 4th proviso to Section 153A(1) of the Act. Further, the Assessing Officer considered the noting in the material found during the course of search which contains unaccounted receipts from sale of spent solvents and scrap, amounts given to the Director of the appellant company and considered that amount given to the directors as 'advances' within the meaning of "asset" as defined in clause (a)(o) of 4th proviso to Section 153A of the Act, but the fact remains that the 'satisfaction note' recorded by the Assessing Officer in light of incriminating material found during the course of search does not bring out the fulfilment of conditions for issuance of notice and thus, notice issued for the assessment years in question is invalid and consequent assessment ....
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.... Act, it is undisputedly clear that, if the Assessing Officer has in his possession, the books of accounts or other documents or evidence which reveals that the income represented in the form of an "asset", which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in the aggregate in relevant assessment years, then the Assessing Officer shall assume jurisdiction by issuance of notice u/s 153A and assess or re-assess the total income of the assessee. 17. In the present case, going by the 'satisfaction note' recorded by the Assessing Officer for issuance of notice u/s 153A of the Act for assessment year in question, we find that the Assessing Officer recorded satisfaction in light of incriminating material found during the course of search which reveals unaccounted receipts from sale of spent solvents and scrap and also advances given to various directors of the appellant company. Further, based on the said incriminating material, the appellant company has disclosed the additional income for the relevant assessment years and also filed an affidavit confirming the declaration of the additional income for the relev....
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....the facts of the case, we are of the considered view that the notice issued u/s 153A of the Act for the assessment years in question and consequent assessment order passed by the Assessing Officer is valid and in accordance with the provisions of Section 153A(1) of the Act and 4th proviso provided therein. Thus, the grounds taken by the assessee challenging the legal validity of the assumption of jurisdiction by the Assessing Officer is hereby rejected. Thus, ground no.5 is dismissed. 20. In the result, the appeal of the assessee in ITA No.1067/Hyd/2024 is partly allowed. ITA No.1068/Hyd/2024 for A.Y. 2014-15 21. The first issue that came up for our consideration from ground nos.2 to 4 of assessee's appeal is addition made by the Assessing Officer towards unexplained cash receipts from sale of spent solvents and scrap and partially sustained by the LD.CIT(A). We have considered an identical issue in assessee's own case for A.Y. 2013-14 in ITA No.1067/Hyd/2024. But for figures, the facts considered by us and reasons given in para nos.10 and 11 shall mutatis and mutandis apply to this appeal as well. Therefore, for similar reasons, we direct the Assessing Officer to allow de....
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.... specific issue to be mentioned. It was further submitted that the incriminating material found at the CMD's premises clearly established the nexus with the appellant and proved the undisclosed investment in the Bibinagar land. The DR contended that under Section 153A, the AO is empowered to assess total income based on any incriminating material, even if it is found at a third party's premises, as long as it pertains to the appellant. The ld.DR further submitted that the reliance on Abhisar Buildwell was misplaced, as the facts of the present case involved specific incriminating material linking the appellant to the undisclosed income. 27. We have heard the rival submissions, perused the material on record and gone through the orders of the authorities below. In the present case, the satisfaction note recorded under Section 153A, though not explicitly mentioning the issue of "on-money" payments but provides the basis for assuming jurisdiction, which is valid under the law. The AO is empowered to assess total income based on incriminating material found during the search, even if the issue is not specifically referenced in the satisfaction note. The material found at the CMD....
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....have considered an identical issue in assessee's own case for A.Y. 2013-14 in ITA No.1067/Hyd/2024. But for figures, the facts considered by us and reasons given in para nos.10 and 11 shall mutatis and mutandis apply to this appeal as well. Therefore, for similar reasons, we direct the Assessing Officer to allow deduction of 60% of cash receipts towards expenditure against income of the assessee and treat balance 40% cash from sale of spent solvents and scrap as income of the assessee. Accordingly, the grounds 2 to 4 of the assessee are partly allowed. 26. The next issue that came up for our consideration from Ground No.5 to 5.3 of assessee's appeal and ground nos.4 and 5 of Revenue's appeal for A.Y. 2019-20 is the addition made on account of deemed dividend (dividend distribution tax in the hands of the appellant). During the course of search operation at the premises of MSN Group Companies, books of accounts were found and seized vide Annexure A/MSN/Off/HD3. On verification, the AO found that there was a substantial amount of debit balance outstanding from M/s. MSN Laboratories Pvt. Ltd (hereinafter referred to as "MSNL") and M/s. MSN Organics Pvt. Ltd (hereinafter referred to....
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....e appellant company, have been satisfied. The AO analyzed the details of the opening balance, sales, purchases, receipts, payments, and closing balance in the affidavit of the two recipient companies and observed that the appellant has paid an excess amount to MSNL and MSNO in comparison to the amounts payable to the recipient company by aggregating the sales and payments made to the recipient companies and subtracting the purchases made and payments received from the recipient companies. Further, the AO, having regard to the Board's Circular No.19/2017 dated 12-6-2017 observed that the transactions between the appellant company and the other two recipient companies are in the nature of commercial transactions would not fall under the ambit of the word "advance" as defined under Section 2(22)(e) of the Act. However, keeping in view the flexibility required in practical business situations, the AO treated the payments made by the assessee company to the above two companies to the extent of 150% of the purchases made from the recipient companies as the payments made in the ordinary course of business, and the payments made in excess of 150% of the purchases as payments having no nexu....
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....as erred in applying the provisions of Section 2(22)(e) r.w.s. 115Q of the Act towards excess payments made by the assessee to the above two companies, ignoring the fact that the said transactions are purely commercial transactions between the two companies. The appellant has also challenged the findings of the AO with regard to the re-characterization of transactions between the appellant company and the other two companies as loans and advances as defined under Section 2(22)(e) without appreciating the fact that current account transactions between the two groups in the normal course of business of the assessee cannot be treated as 'loans or advances' for the purpose of Section 2(22)(e) of the Act. The assessee further contended that the provisions of Section 2(22)(e) r.w.s. 115Q of the Act do not attract when payments to the recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder. 30. The LD.CIT(A), after considering the relevant submissions of the assessee and also following certain judicial pronouncements and taking into consideration the reasons given by the AO, observed that excess payments to ....
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....er; thus, the said payments fall under the deeming provisions of Section 2(22)(e) of the Act. Therefore, considering the nature of transactions between the parties, the quantum of payment, and also by considering the CBDT Circular No.19/2017 dated 12-6-2017 coupled the details of amount paid by the appellant to the recipient companies, by allowing 200% of purchases as normal payments in the ordinary course of business, and excess payments over and above 200% have been treated as loans and advances for the purpose of Section 2(22)(e) of the Act, and directed the Assessing Officer to rework the deemed dividend under Section 2(22)(e) and also compute the dividend distribution tax under Section 115Q of the Act. 32. Aggrieved by the order of the LD.CIT(A), the appellant is in appeal before us. 33. The Learned Counsel for the assessee Shri M.V. Prasad, C.A. submitted that the LD.CIT(A) erred in sustaining additions made by the AO towards deemed dividend under Section 2(22)(e) and the consequent dividend distribution tax under Section 115Q, without appreciating the fact that the transactions between the appellant company and two other associated concerns are trade advances, which ar....
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....cision of the Hon'ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT reported in (2020) 425 ITR 435 (Gujarat), submitted that any payment made by a company in which a shareholder has shareholding exceeding 10% of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the Legislature is to tax funds ultimately received by a shareholder holding not less than 10% of voting power in the company, where such funds have been routed through different modes / concerns and used for the benefit of the shareholder. In the present case, the amounts paid by the appellant company to the two associated companies are for their business requirements, including deployment of working capital, purchase of new assets, and financial support in furtherance of their business activities. Therefore, these transactions cannot be considered as loans and advances for the purpose of Section 2(22)(e) of the Act. The Learned Counsel for the assessee further referred to the decision of the Hon'ble Supreme Court in the case of CIT Vs. Muk....
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....ases. Therefore, the Assessing Officer came to the conclusion that any amount paid in excess of 150% / 200% of purchases should be treated as loans and advances, and thus, rightly computed the excess amount paid by the appellant company to the two companies and invoked the provisions of Section 2(22)(e) read with Section 115Q of the Act. Therefore, he submitted that the order of LD.CIT(A) should be upheld. 36. We have heard both parties, perused the material available on record and gone through the orders of the authorities below. We find that, the issue on similar facts has already been decided in favour of the assessee by the decision of the ITAT Hyderabad Benches, in the case of MSN Pharmachem Private Limited for the A.Y 2019-20 in ITA No.884/Hyd/2024, wherein the Tribunal has directed the Assessing Officer to delete the addition made u/s 2(22)(e) and consequent levy of Dividend Distribution Tax u/s 115-O r.w.s. 115Q of the Income Tax Act, 1961 for A.Ys. 2019-20 and 2020-21 in the hands of the assessee. The relevant findings of the Tribunal are as under: "15. We have heard both parties, perused the materials available on record and gone through the orders of the auth....
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....the purchases from the excess payments and such balance excess payments were treated as payments made by way of 'advances or loans' on the reasoning that they have no relation to the trading transactions between the companies. In this connection, the AO noted that the appellant company is not engaged in the business of finance and that no interest was charged in respect of such 'advances or loans'. The said amounts of excess payments were accordingly held to be constituting deemed dividend u/s 2(22)(e) in the hands of Sri. M.S.N.Reddy, who is the common substantial shareholder in the appellant company and the recipient companies. The deemed dividend worked out by the AO amounted to Rs. 241,53,50,035/- in the case of payments made to MSN Laboratories Pvt Ltd and Rs. 1,53,47,177/- in the case of payments made to MSN Organics Pvt Ltd. The aggregate deemed dividend worked out for Asst. Year 2019-20 amounted to Rs. 243,66,97,212/-. Similar working has been made for Asst. Year 2020-21 and worked out deemed dividend of Rs. 266,76,84,647/-. The details of the recipient companies and the payments made to them by the appellant company in excess of 150% of the purchases, which has been treate....
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....ellant failed to pay dividend distribution tax, in the assessment order passed u/s 153A in the case of the appellant company. On first appeal filed by the assessee, the LD.CIT(A) upheld the inference of deemed dividend drawn by the AO in the assessment order. However, the LD.CIT(A) allowed partial relief with regard to the working of the quantum of deemed dividend by holding that payments made to the extent of 200% of purchases can be considered to have been made as per normal commercial practice and excess payments made over and above 200% of purchases should be considered as "loans or advances" falling within the ambit of deemed dividend u/s 2(22)(e) of the Act. Accordingly, the LD.CIT(A) reduced an additional amount of 50% of the purchases from the excess payments computed by the AO and the balance excess amount has been treated as "advance or loan" constituting deemed dividend. 17. The provisions of section 2(22)e) of the Income Tax Act, 1961 deals with 'Deemed Dividend'. As per the provisions of section 2(22)(e) of the Act, deemed dividend defined to mean, any payment by a company, not being a company in which the public are substantially interested, of any sum by way....
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....ayments to two recipient companies. 19. The appellant has made three-fold arguments. The first and foremost argument of the appellant is that all the transactions between the appellant company and the recipient group companies have been made in the ordinary course of the business carried on by them and they do not come under the purview of deemed dividend u/s 2(22)(e) of the Act, as they cannot be characterized as 'loans or advances'. Admittedly, these group companies are engaged in the same line of business of manufacturing and sale of Active Pharmaceutical Ingredients (API). The appellant company and the recipient companies have carried out trading transactions of purchases and sales with each other in the course of the said business. These group companies have made payments in respect of purchases made by them from the other group companies and received payments in respect of sales made by them to other group companies. This is evident from the summary of transactions between the appellant company and the recipient companies, i.e., MSN Laboratories Pvt Ltd and MSN Organics Pvt Ltd for both assessment years. From the above, it is undisputedly proved that these are trade ....
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....g that the amount advanced for business transaction between the assessee-company and the company P was not such to fall within the definition of the deemed dividend under section 2(22)(e). [Para 12]" 20. Similar view has been expressed by various Courts in CIT Vs. Creative Dyeing & Printing Pvt Ltd [2009] 318 ITR 476 (Delhi), CIT Vs. Ambassador Travels Pvt Ltd [2009] 318 ITR 376 (Delhi), CIT Vs. Raj Kumar [2009] 318 ITR 462 (Delhi), CIT Vs. Nagindas M Kapadia [1989] 177 ITR 393 (Bombay), Jamuna Vernekar Vs CIT [2021] 432 ITR 146 (Karnataka),CIT Vs. Amrik Singh [2015] 56 taxmann.com 460 (P & H),and CIT Vs Atul Engineering Udyog [2014] 51 taxmann.com 569 (Allahabad). This legal position is further fortified from the CBDT Circular No.19/2017 (Pg No.77 of PB-I), where it has been clarified that trade advances in the nature of commercial transactions would not fall within the ambit of the provisions of section 2(22)(e) of the Act and that such views have attained finality. The CBDT, therefore, 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 ....
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....t in the case of Hero Cycles (P) Ltd Vs.CIT [2015] 379 ITR 347 (SC) (Pg No.97-99 of PB-I), wherein it was held that the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The Hon'ble Apex Court further held that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The Hon'ble Court further held that the authorities must not look at the matter from their own viewpoint but that of a prudent businessman. The said ratio laid down by the Hon'ble Supreme Court in the context of reasonableness of the expenditure laid out for the purpose of business is applicable with equal force in respect of reasonableness of the quantum of trade advances given against purchases. We, therefore, are of the considered view that the action of the AO/CIT(A) in holding that amounts paid upto 150% / 200% of the purchases alone can be considered as reasonable quantum of trade advances in contravention of the binding decision of the Hon'ble Supreme Court cite....
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....t company that export sales constitute a significant portion of its total sales (Pg No 17 of PB-I). The appellant is making the export sales by taking marketing services from the foreign subsidiary companies promoted by MSN Laboratories Pvt Ltd namely, MSN Pharmaceuticals Inc, USA, MSN Laboratories Europe Ltd and Mega MSN Pte Ltd, Singapore (Pg No.37 of PB-I). The sales commission paid to such foreign subsidiary companies is debited to P&L A/c (Pg No.18 back side of PB-I). These facts clearly bring out the large-scale dependency of the appellant on MSN Laboratories Ltd for effecting its export sales. We further noted from the funds flow statement regarding the utilization of the funds given by the appellant company to MSN Laboratories Pvt. Ltd (page No.75 of PB-I), where there is utilization of such funds by way of investment in foreign subsidiaries of MSN Laboratories Pvt. Ltd to the extent of Rs. 60 crores during the year, apart from utilization towards working capital and acquisition of fixed assets of the business (for setting up new units/expansion of existing units). The business expediency for making huge payments to MSN Laboratories Pvt. Ltd is revealed by this crucial fact....
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....ount unlike the transactions in the nature of 'loans or advances' to a shareholder or to a concern in which the shareholder has substantial interest, the movement of funds in a current adjustment/ accommodation account is in either direction on a need basis. Therefore, transactions which are in the nature of current adjustment account transactions cannot be termed as 'loans or advances' falling within the ambit of deemed dividend u/s 2(22)(e) of the Act. 23. The appellant, in support of the aforesaid contention places reliance on several judicial decisions. In the case of CIT Vs. Schutz Dishman Bio-tech Pvt Ltd in Tax Appeal Nos. 958 & 959 of 2015 (Pg No.100-101 of PB-I), the Hon'ble Gujarat High Court held that where there is movement of funds on a need basis, unlike transactions in the nature of loans or advances which are usually few in number, such transactions are in the form of current adjustment accommodation entries. The Hon'ble Court held that when the CIT(A) and Tribunal have concurrently held that the amounts are not in the nature of loan or deposit but merely adjustments based on large number of adjustment entries occurring in the accounts between the entities,....
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....able to the transactions between the appellant company and recipient companies, as the said transactions bear the character of current adjustment account transactions due to two-way movement of funds on a need basis. Thus, the addition made by the AO towards deemed dividend in the hands of the appellant for the purpose of levy of dividend distribution tax to the extent upheld by the LD.CIT(A) is not warranted and therefore, deleted for this reason also. 24. The third and final proposition canvassed by the appellant is that deemed dividend not attracted when payments to recipient company were utilized for its business and not diverted to or utilized for the benefit of the common substantial shareholder. In this regard, we find that the payments made by the appellant company to the two recipient companies during the year do not come under the ambit of deemed dividend u/s 2(22)(e), as the said funds have been used by the recipient companies for the purpose of their business and they have not been diverted to or utilised in any manner for the benefit of the common substantial shareholder. The business expediency/exigencies in making the said payments to the recipient companies....
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....part of the said funds has been diverted to the common substantial shareholder. Consequently, there is no scope for obtaining any direct or indirect benefit by the common substantial shareholder from the said funds. Therefore, in our considered view, it is not legally tenable to consider the payments made by the appellant company to the recipient companies as 'deemed dividend' in the hands of the common substantial shareholder for the purpose of levy of dividend distribution tax in the hands of the appellant company, in the absence of any benefit derived by such shareholder from the said payments. 25. In support of this contention, the appellant placed reliance on the decision of the Hon'ble Gujarat High Court in the case of Jayesh T Kotak Vs. DCIT [2020] 425 ITR 435 (Gujarat) (Pg No.140-146 of PB-I), wherein it was held in the light of the decision of the Hon'ble Supreme Court in the case of CIT Vs. Mukundray K. Shah [2007] 290 ITR 433 (SC) that any payment made by a company in which a shareholder has shareholding exceeding 10% of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit ....
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....exceeding 10 per cent of the voting power. According to the respondent, the question as to whether or not the amount had travelled to the petitioner is a matter to be decided at the stage of evaluation at during the course of the re-assessment proceedings. Evidently, therefore, the Assessing Officer has not recorded any satisfaction that the amount paid by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd. had been paid for the benefit of the petitioner. In the opinion of this court, in the light of the decision of the Supreme Court in Mukundray K. Shah (supra), any payment made by a company in which a shareholder has shareholding exceeding 10 per cent of the voting power to any concern in which such shareholder has substantial interest, would be deemed to be dividend in his hands if any benefit from such transaction has been received by such shareholder. The intention of the legislature is to tax funds ultimately received by a shareholder holding more than 10% voting power in the company, which have been routed through different modes/concerns. What needs to be taxed as deemed dividend is the amount ultimat....
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....y the Hon'ble Gujarat High Court in the case of Jayesh T Kotak (supra) which has since been affirmed by the Hon'ble Supreme Court. The decision rendered by the Hon'ble Gujarat High Court in the said case that receipt of benefit by the shareholder on account of payment made by the company in which he holds voting power of not less than 10% is a sine qua non for regarding such payment to be deemed dividend is with specific reference to the limb of section 2(22)(e) dealing with "payments by way of loans or advances made by a company in which the shareholder has not less than 10% voting power to a company/concern in which such shareholder has substantial interest". Therefore, in our considered view, the said decision is squarely applicable to the facts of the appellant's case where the transactions forming the subject matter of examination of the applicability of provisions of deemed dividend in the assessment order are the payments made by the appellant company to the recipient company in which the appellant holds not less than 10% and 20% of the voting power respectively. In the case of the appellant, it is undisputed that the payments made by the appellant company have been used for....