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2025 (9) TMI 498
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....of lands at Rangareddyguda in the names of three companies of MSN group, which was not the subject matter of consideration and examination by the AO during the assessment proceedings u/s 143(3) r.w.s 153A for the instant assessment year. 3) The Ld. CIT(A) grossly erred in law in resorting to enhancement of the assessment u/s 251(1)(a) of the Act in respect of a "new source of income" represented by the on-money payments made to Sri. J. Anirudh Reddy over and above the on-money payments made for purchase of lands at Rangareddyguda in the names of three companies of MSN group, which was not the subject matter of consideration and examination by the AO during the assessment proceedings u/s 143(3) r.w.s 153A for the instant assessment year. 4) The Ld.CIT(A) ought to have appreciated that it is a settled law that the CIT(A) has no powers or jurisdiction to make enhancement of assessment in respect of new sources of income and the enhancement so made by him is unsustainable in law. 5) The enhancement of assessment in respect of both the issues by the Ld. CIT(A) is unsustainable in law as the same is not based on independent exercise of his quasi-judicial appell....
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....that on-money payments were made during the previous years relevant to A.Y 2017-18 and 2018-19. 11) Any other legal and factual ground that may be urged at the time of hearing of the appeal." ITA.No.472/Hyd./2025 - A.Y. 2017-2018 [Revenue Appeal] 3. The Revenue pleads the following grounds in it's instant appeal : 1. "Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) ought to have considered the fact that 150% of purchases were treated as trade advances while arriving at outstanding debit balances while calculating deemed dividend u/s 2(22)(e) of the Act? 2. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) ought to have appreciated the fact that the assessee is a common substantial shareholder in the hands of lending entities and borrowing entities and thereby deemed dividend provisions are attracted u/s 2(22)(e) in the hands of the assessee? 3. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in granting telescoping benefit of Rs. 9,08,21,099/- to the assessee without discharging the onus of proving nexus between cash receipts o....
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.... vide order dated 31.01.2025, has deleted the entire addition of deemed dividend of Rs. 149,98,02,505/- by following the order of the Hon'ble ITAT, Hyderabad dated 08.11.2024 in the group case of MSN Pharmachem Pvt. Ltd in ITA Nos.884 & 885/Hyd/2024 for A.Y 2019-20 and A.Y 2020-21, wherein addition made towards Dividend Distribution Tax on deemed dividend on similar set of facts has been deleted by the Hon'ble ITAT. However, during the course of the appellate proceedings, the CIT(A) issued an enhancement notice on 27.09.2024, proposing to enhance the assessment by making additions aggregating to Rs. 18,74,85,446/- towards unexplained investment u/sec. 69 of the Act. The additions to income by way of enhancement proposed in the said notice were addition of Rs. 11,50,56,875/- towards on- money payments made in cash to Sri. J. Anirudh Reddy & others for purchase of lands at Rangareddyguda in the names of three MSN group companies i.e., Dakshayani Horticulture Pvt Ltd, Mrinal Farms Pvt Ltd and Varenya Horticulture Pvt Ltd and addition of Rs. 7,24,28,571/- towards cash paid to Sri. J. Anirudh Reddy & others over and above the cash utilised for making the above mentioned on-money....
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.... said amount was paid in cash to the land owners. Shri J. Anirudh Reddy further stated that, he has received approximately Rs. 42.80 crores from Shri. M. Uday Kumar Reddy on various dates in installments of Rs. 50 lakhs to Rs. 3 crores each over a period of one year from June 2016 to July 2017. In response to Q.No.11, Shri J. Anirudh Reddy stated that, he received a total amount of approximately Rs. 63.80 crores for procurement of 440 acres of land for MSN Group of Companies and out of which Rs. 22.50 crores was received by RTGS and the balance amount of Rs. 41.30 crores was received by cash. The statement of Shri M. Udaya Kumar Reddy, in whose laptop the photo/scanned image of the 'agreement for sale' was found during the search, was also recorded u/s 132(4) of the Act on 25.02.2021. He was questioned regarding the contents of said agreement and statement from Shri J. Anirudh Reddy and in response to specific question, he confirmed the contents of agreement and also payment of cash. The statement of Shri MSN Reddy-the appellant was also recorded u/sec. 132(4) on 27.02.2021 and 27.04.2021. In question No.13 of his statement dated 27.02.2021, Shri. M. S. N. Reddy was called-upon to ....
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....assessment year 2021-2022 in the cases of the eight group companies, depending on the year in which the sale deeds were registered. The aggregate addition made by the Assessing Officer in the assessments of 08 group cases with regard to the issue of on- money payments made for purchase of the lands at Rangareddyguda amounting to Rs. 32,66,77,750/-, which is same as the additional income disclosed by Sri. M. S. N Reddy in his statement dated 27.04.2021 and affidavit dated 05.07.2021. The additions so made u/sec. 69 of the Act in the assessment orders for the assessment year 2020-2021 or assessment year 2021- 2022 in the cases of the said group companies was deleted by the CIT(A) vide appellate orders dated 28.06.2024 on the reasoning that, said addition is not based on any incriminating material unearthed during the course of the search for the concerned assessment years, because, the on-money payments of Rs. 32,66,77,750/-for purchase of lands at Rangareddyguda were made in the months of June 2016 to July 2017 relevant to the assessment years 2017-2018 and 2018-2019. Accordingly, the learned CIT(A) observed that, the Assessing Officer may take appropriate action based on the eviden....
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....ng the previous years relevant to assessment years 2017-2018 and 2018-2019 and this fact has been confirmed by Sri J. Anirudh Reddy, Sri. M. Udaya Kumar Reddy and Sri. M.S.N. Reddy in their sworn statements recorded during the search. Therefore, considering the above, PCIT apportioned the on-money payments between assessment year 2017-2018 and assessment year 2018-2019 in proportion to the number of months falling in each assessment year out of the period from June, 2016 to July, 2017. Therefore, the PCIT observed that, since the Assessing Officer failed to consider the relevant on-money payment for above two assessment years, he has set-aside the assessment orders passed u/sec. 153C for assessment years 2017-2018 and 2018-2019 in the said 04 group companies and directed the Assessing Officer to reconsider the assessments in respect of on-money payments made for purchase of lands. Further, having regard to the observations of the learned CIT(A) in the appellate orders of the group companies for assessment year 2020-2021 and assessment year 2021-2022 in respect of the issue of cash payment of Rs. 10.14 crores, paid over and above the cash payment of Rs. 32.66 crores utilised for mak....
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....5/- made in respect of lands purchased at Rangareddyguda in the names of 03 group companies viz., (i) Dakshayani Horticulture Pvt Ltd, (ii) Mrinal Farms Pvt Ltd and (iii) Varenya Horticulture Pvt Ltd, which were not yet incorporated by the time the on-money payments were allegedly made between June 2016 to July 2017, having regard to the fact that Sri M.S.N Reddy and his family members are 100% owners of the said three companies and Sri M. Udaya Kumar Reddy had deposed in his sworn statement that, the on-money payments for the purchase of lands were made by Sri M.S.N Reddy and his family members. Further, the learned CIT(A) proposed to consider sum of Rs. 7.24 crores, out of the cash payment of Rs. 10.14 crores allegedly made over and above the cash payments for purchase of lands (Rs. 42.80 Crores minus Rs. 32.66 Crores considered in the hands of 8 group companies) as unexplained investment u/sec. 69 of the Act in the hands of the assessee for the assessment year 2017-18. 5.4. The assessee has filed his objections for proposed enhancement and submitted that the learned CIT(A) lacks jurisdiction to introduce 'new source of income' which were not considered by the Assessing ....
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.... Aggrieved by the Order of the learned CIT(A), the Assessee as well as the Revenue are now in appeal before the Tribunal. 7. The first issue that came-up for consideration from grounds of appeal of Assessee and ground nos. 3, 4 and 5 of Revenue's appeal is, enhancement of assessment u/sec. 251(1)(a) of the Income Tax Act, 1961 and consequent addition towards alleged on-money payments made for purchase of lands at Rangareddyguda by group companies of the appellant and the benefit of telescoping out of income available to the assessee from unaccounted sales of spent solvents and scrap. The ld. Counsel for the assessee, CA MV Prasad, submitted that, the learned CIT(A) was erred in enhancement of income in terms of provisions of Sec. 251(1)(a) of the Act, without appreciating the fact that, the issues considered by the learned CIT(A) for the purpose of enhancement is altogether a new source of income which were not subject matter of consideration and examination by the Assessing Officer during the course of assessment proceedings for the assessment year 2017-2018 and consequently, such enhancement is not in accordance with law in view of well settled law that, the learned CIT(A) has....
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....order of the Income Tax Officer, even to enhance the assessment. The Hon'ble High Court however, held that, it would not be open to the AAC to introduce into the assessment new sources, as his power of enhancement should be restricted only to the income which was the subject-matter of consideration for purposes of assessment by the Income Tax Officer. Learned Counsel referring to the decision of Hon'ble Gujarat High Court in the cases of CIT vs. Jagdish Mills Ltd [1964] 51 ITR 266 (Gujarat) submitted that, in the above case, the Hon'ble Gujarat High Court has taken a similar view by following the ratio laid down by the Hon'ble Supreme Court in the case of Shapoorji Pallonji Mistry (supra). Learned Counsel for the Assessee referring to the decision of Hon'ble Delhi High Court in the case of CIT vs., Union Tyres [1999] 107 Taxman 447 (Delhi) submitted that, the first appellate authority is invested with very wide powers under section 251(1)(a) of the Act and once an assessment order is brought before the Authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee make a grievance and ranges over the whole asse....
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....e enhancement power of the CIT(A) extends to new sources of income which were not considered by the Assessing Officer during the course of the assessment proceedings is wholly misplaced and untenable. Further, going by the ratio laid down by the Hon'ble Supreme Court in the case of Shapoorji Pallonji Mistry (supra), it is very clear that, the power of enhancement of the Appellate Assistant Commissioner (AAC) is restricted only to the issues considered by the Assessing Officer in the assessment proceedings, but not extended to a new source of income. As regards the Judgment of the Hon'ble Supreme Court in the case of Nirbheram Deluram (supra), from which support was sought to be drawn by the learned CIT(A), it was submitted that, said case was whether the CIT(A) had the jurisdiction to direct enhancement of the income by hundi loan amounts of Rs. 2,30,000/- over and above the hundi loan amounts of Rs. 2,45,000/- added by the Assessing Officer in the assessment order ? The Hon'ble Supreme Court held that, having regard to its judgment in the case of Jute Corporation of India Ltd vs., CIT [1991] 187 ITR 688 (SC) that, the Hon'ble High Court was in error in holding that, the ap....
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.... the Assessing Officer or the learned CIT(A) to allege that there is a cash payment of on- money for purchase of lands. Further, the above 03 companies were not in existence at the time of alleged payment of on-money. Therefore, the enhancement of assessment by the learned CIT(A) on the issue of alleged on-money payment on the basis of statement of above persons, is incorrect and cannot be accepted. 10. CA MV Prasad, Learned Counsel for the Assessee referring to ground no.9 of assessee's appeal submitted that, assuming for a moment, the appellant has enhancement of assessment by the learned CIT(A) of alleged on-money payment for purchase of lands in the name of 03 companies is based on relevant evidences, but, the fact remains that, the appellant is having sufficient income in the form of cash handed-over to the assessee and it's family members from assessment year 2011-2012 to 2017-2018 amounting to Rs. 14,96,24,599/- as per the seized material and the cash utilized for making on-money payments for purchase of lands at Vemulanarva by MSN Group of companies during the assessment year 2016-2017 amounting to Rs. 3,90,87,500/-, still, there is a balance extent of cash of Rs. 11,05,....
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....ed that, in respect of balance amount of Rs. 10.14 crores alleged on-money paid by MSN Group to Sri J. Anirudh Reddy, there is no evidence on the utilization of the said fund. Therefore, directed the Assessing Officer to consider the remaining amount in appropriate hands and appropriate assessment year. Based on the said direction/observation, the PCIT has invoked jurisdiction u/sec.263 of the Act and apportioned the above amount in the hands of the assessee for both assessment years i.e., 2017-2018 and 2018-2019. Since the appellate proceedings are pending for the assessment year 2017-2018 before the learned CIT(A), the PCIT invoked 263 proceedings only for the assessment year 2018-2019. Therefore, the present proceedings initiated by the learned CIT(A) in terms of provisions of Sec. 251(1) of the Act is on sound basis and based on the relevant evidences. Therefore, the argument of the Counsel for the Assessee that, it is a new source of income, which is not part of assessment proceedings and cannot be subject matter of enhancement is devoid of merit and cannot be accepted. The Learned DR further referring to the entire assessment proceedings submitted that, the present case needs....
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....p from assessment year 2011-2012 to 2017-2018. Further, the learned CIT(A) had already an occasion of benefit of telescoping by considering the amount of cash received by the appellant for the assessment years 2016-2017 and 2017-2018 towards lands purchased by MSN Group. Therefore, the argument of the assessee that, further telescoping towards income claimed to have received way back in the year 2011-2012 to 2015-2016 is devoid of merit and cannot be accepted. 12.2. Further, the Learned DR referring to ground nos.4 and 5 of Revenue's appeal submitted that, the learned CIT(A) has allowed benefit of telescoping of an amount of Rs. 3,90,87,500/- again in the case of the assessee, ignoring the fact that, the same had already been granted in the cases of (i) Achyuta Laxmi Farms N Estates Pvt. Ltd., (ii) Laxmi Sindhuja Farms N Estates Pvt. Ltd. (iii) MLP Farms N Estates Pvt. Ltd. and (iv) SAAP Bio-tech Pvt. Ltd., for the assessment year 2016-17 which is not correct. Therefore, he submitted that, enhancement of assessment by the learned CIT(A) should be upheld. 13. We have heard both the parties, perused the material on record and the orders of the authorities below. The learned CIT....
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....ssessment and refer the case back to the Assessing Officer for making a fresh assessment;] (aa) in an appeal against the order of assessment in respect of which the proceeding before the Settlement Commission abates under section 245HA, he may, after taking into consideration all the material and other information produced by the assessee before, or the results of the inquiry held or evidence recorded by, the Settlement Commission, in the course of the proceeding before it and such other material as may be brought on his record, confirm, reduce, enhance or annul the assessment; (b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or to reduce the penalty; (c) in any other case, he may pass such orders in the appeal as he thinks fit. (1A) In disposing of an appeal, the Joint Commissioner (Appeals) shall have the following powers- (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment; (b) in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or....
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....that, though the appeal was confined in its subject-matter to a portion of the order, it would be open to the AAC to deal with the whole of the assessment order of the ITO, even to enhance the assessment. The Hon'ble High Court however further held that, it would not be open to the AAC to introduce into the assessment new sources, as his power of enhancement should be restricted only to the income which was the subject- matter of consideration for purposes of assessment by the ITO. 13.2. A similar view has been taken by the Hon'ble Bombay High Court in the case of Narrondas Manordass vs., CIT [1957] 31 ITR 909 (Bom.). The Hon'ble Gujarat High Court in the case of CIT vs., Jagdish Mills Ltd [1964] 51 ITR 266 (Gujarat) have also considered an identical issue and by following the ratio laid down by the Hon'ble Supreme Court in the case of Shapoorji Pallonji Mistry (supra) held that, AAC has no jurisdiction to assess a source of income which has not been processed by the ITO and which is not disclosed either in the returns filed by the assessee or in the assessment order, and, therefore, the AAC cannot travel beyond the subject-matter of the assessment. The Hon'ble D....
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....tax return filed by the assessee for the assessment year in question nor considered by the Assessing Officer in the proceedings before him. Therefore, in our considered view, the said orders which are subject matter of enhancement in the present proceedings are altogether new source of income which is beyond the scope of the learned CIT(A) in appeal in terms of Sec. 251(1) of the Income Tax Act, 1961. Though the legal position with regard to the limitation of the power of the learned CIT(A) to consider new source of income for the purpose of enhancement is well settled in view of the above Judgments, but, the learned CIT(A) rejected the contention of the assessee by following the very same decision rendered by the Hon'ble Supreme Court in the case of Shapoorji Pallonji Mistry (supra) and CIT vs., Nirbheram Deluram [1997] 224 ITR 610 (SC). The reliance sought to placed by the learned CIT(A) on the above Judgments is only misplaced and untenable because, as per the undisputable law laid down by the Hon'ble Supreme Court in the case of Shapoorji Pallonji Mistry (supra), it is very clear that, the power of enhancement of the AAC is restricted to only income which was subject matter of ....
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....Chamaria (supra) and subsequent Judgment in the case of CIT vs., Nirbheram Deluram (supra), has been examined by the Full Bench of Hon'ble Delhi High Court in the case of CIT vs., Sardari Lal & Co. (supra) and it was held that, the view expressed in Shapoorji Pallonji Mistry case and CIT vs., Rai Bahadur Hardutroy Motilal Chamaria case (supra), is still holds the field. The Relevant part of Full Bench decision of Hon'ble Delhi High Court is extracted as under : "6. A similar question has been examined by the Apex Court, as noted above, on several occasions. We do not think it necessary and appropriate to proliferate this judgment by making reference to all the decisions. A few of the important ones need to be noticed. One of the earliest decisions on first appellate authority is vested with all the wide powers of the Assessing Officer may have while asking the assessment, but the issue whether these wide powers also include the power to discover a new source of income was not commented upon. Consequently, the view expressed in Shapoorji Pallonji Mistry's case (supra) and Rai Bahadur Hardutroy Motilal Chamaria's case (supra) still holds feet." 13.3. The said issu....
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....e authority has the power under section 251 to discover a new source of income-was referred to a Full Bench. After examining the authorities holding the fielding on that issue, the learned Full Bench has held that the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the assessing officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147, or section 148, or even section 263 of the Act if requisite conditions are fulfilled. It is inconceivable, according to Sardari Lal, that in the presence of such specific provisions, a similar power is available to the first appellate authority. Eventually, Sardari Lal upheld the decision in Union Tyres. 51. Undeniably, the precedential position on the powers of the first appellate authority under section 251 undulates. There are seeming contradictions. But, as held by Union Tyres, and as affirmed on reference by Sardari Lal, there is a consistent judicial assertion that the powers under section 251 are, indeed, very wide; but, wide as they are, they do not go to the extent of displacing power....
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....rce of income, which were not considered by the Assessing Officer their assessability in the hands of the appellant-assessee during the course of assessment proceedings, in our considered view, the power exercised by the learned CIT(A) to enhance the assessment u/sec .251(1)(a) of the Income Tax Act, 1961, with regard to the two issues is impermissible in law and not sustainable. Therefore, we delete the enhancement of assessment made by the learned CIT(A), in the case of the assessee, on the issue of on-money payment made for purchase of lands at Rangareddyguda in the names of three MSN group companies i.e., (i) Dakshayani Horticulture Pvt Ltd, (ii) Mrinal Farms Pvt Ltd and (iii) Varenya Horticulture Pvt Ltd amounting to Rs. 11,50,56,875/-. Similarly, we delete the enhancement made by the learned CIT(A) towards part of on-money payment made over and above the on- money considered in the hands of 08 group companies proportionately to the extent of Rs. 7,24,28,571/-. 14. The next issue that came-up for consideration from ground no.2 of Revenue's appeal is deletion of addition made by the Assessing Officer towards deemed dividend u/sec.2(22)(e) of the Act, of Rs. 149,98,02,505/-. ....
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....rieved by the order of the learned CIT(A), the Revenue is now in appeal before the Tribunal. 18. Shri B Bala Krishna, learned CIT-DR submitted that, the learned CIT(A) ought to have considered the fact that 150% of purchases were treated as trade advances while arriving at outstanding debit balances for the purpose of computing loans or advances in terms of provisions of Sec. 2(22)(e) of the Act, to make the addition towards deemed dividend in the hands of the assessee. The learned CIT-DR further submitted that, the Assessing Officer after considering relevant transactions between intra group companies had given fair amount of 150% of total purchases or sales as trade advances and the remaining amount of advance has been treated as loans or advances within the meaning of section 2(22)(e) of the Act. The learned CIT(A) without considering the relevant facts simply held that, payments in excess of 200% of sales should be considered as loans and advances for the purpose of Sec. 2(22)(e) of the Act. The learned CIT-DR further submitted that, the learned CIT(A) erred in deleting the addition made by the Assessing Officer towards deemed dividend by following the decision of ITAT, Hyde....
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....or the purpose of levy of dividend distribution tax has been made by considering the debit balance outstanding in the accounts of two group concerns i.e., M/s MSN Laboratories Pvt. Ltd and M/s MSN Organics Pvt. Ltd, in the books of the appellant company as on 31.03.2019. The appellant company and two group companies MSN Laboratories Pvt. Ltd and MSN Organics Pvt. Ltd (referred to as recipient companies) are engaged in the same line of business of manufacture 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. The appellant company has made payments in respect of purchases made from the recipient companies and received payments in respect of sales made to recipient companies. During course of assessment proceedings, the AO analyzed the details of opening balance, sales, purchases, receipts, payments and closing balance in the accounts of the two recipient companies and observed that they are in receipt of excess amounts from the appellant company in comparison to the amounts receivable by them against the trading transact....
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....d in the table given below: Particulars A/c of MSN Laboratories Pvt Ltd in the books of the appellant A/c of MSN Organics Pvt Ltd in the books of the appellant Amount (Rs.) Amount (Rs.) Opening debit Balance 57,44,33,690 0 Add: Sales 100,52,08,397 54,74,844 Add: Payments (net of rent) 298,63,99,230 14,79,63,266 Less: Purchases 1,95,03,644 53,36,102 Less: Receipts 154,70,02,126 13,00,86,779 Closing debit balance 299,95,35,547 1,80,15,229 Excess payments during the year (sales + payments - purchases - receipts) 242,51,01,857 1,80,15,228 Less: Additional 50% of purchases in addition to 100% of purchases considered above 97,51,822 26,68,051 Balance excess payments treated as "advance or loan" constituting deemed dividend 241,53,50,035 1,53,47,177 Aggregate deemed dividend for AY 2019-20 243,06,97,212 Particulars A/c of MSN Laboratories Pvt Ltd in the books of the appellant. Amount in (Rs.) Opening debit balance 299,95,35,547 Add: Sales 100,43,24,928 Add: Payments (net of rent) 506,40,05,020 Less: Purchases 2,13,45,020 Less: Rec....
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.... power, or to any Concern in which such shareholder is member or partner and in which he has a substantial interest 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. The term 'Concern' has been defined which includes 'a company' also. Therefore, in the present case, the conditions prescribed for invoking the provisions of Section 2(22)(e) of the Act is primarily satisfied to the extent the appellant company and other two companies are having common share holder Shri MSN Reddy, who is holding more than 10% voting power in all the three companies and further, the appellant company is having accumulated profits which is in excess of the amount of advance computed by the Assessing Officer. However, whether the transactions between the appellant company and the other two companies are trade advances which are carried out in the normal course of business of all the companies or any loan or advances which fall within the ambit of Section 2(22)(e) of the Act has to be seen in light of nature of transaction between the parties. 18. There is no dispute....
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....bit balance in the account of the recipient company in the books of payer company and thus, these trade advances in the ordinary course of business cannot be regarded as payment of 'loans or advances' to the recipient company, since the same are undeniably in the nature of commercial transactions. It is a settled position of law that trade advances given in the normal course of business on account of trading transactions cannot be treated as 'loans or advances' so as to constitute deemed dividend u/s 2(22)(e) of the Act. This legal position is fortified by the decisions in the case of CIT Vs. India Fruits Ltd [2015] 53 taxmann.com 307 (Andhra Pradesh), where it has been held as under: "The finding of facts arrived at by the Tribunal was that the transaction in question was a business transaction and it would have benefited both, the assessee-company and the company P. In fact, the revenue had also conceded that the amount was not a loan but only an advance because the amount paid to the assessee-company would be adjusted against the entitlement to moneys of the assessee-company payable by P in the subsequent years. [Para 10] The revenue contended that since the co....
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....nt's case keeping in view the trading transactions between the appellant company and recipient companies, which resulted in debit balance in the account of the recipient companies at the end of the year, but both authorities have misdirected themselves in holding that payments made to the recipient companies in excess of 150% or 200% of purchases from such company cannot be treated as 'trade advances' in the nature of commercial transactions. The AO has wrongly treated the payments in excess of 150% of the purchases as 'loans or advance' and wrongly held the same to be deemed dividend u/s 2(22)(e) of the Act. Similarly, the LD.CIT(A) has wrongly treated the payments in excess of 200% of the purchases as 'loans or advance' and wrongly upheld the same to be deemed dividend u/s 2(22)(e) of the Act. In our considered view, the said approach of the AO/CIT(A) is arbitrary and the same is not founded on any settled principle laid down by the Courts or on any stipulation conveyed by the Board through a circular regarding the reasonableness of the quantum of trade advances. The AO/CIT(A) has not revealed the basis on which they arrived at the threshold of 150%/200% of purchases for acceptin....
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....st the purchases, the AO/CIT(A) could not have imposed an imaginary and artificial limit on the quantum of payments that can be regarded as trade advances by sitting in the arm-chair of the businessman. Therefore, we are of the considered view that the entire amount of payments made against purchases has to be regarded as 'trade advances' without any artificial limitation on the quantum of such trade advances. As a result, the amounts paid to recipient company in excess of 200% of the purchases also have to be regarded as 'trade advances' which are in the nature of commercial transactions only and they cannot be characterized as 'loans or advance' constituting deemed dividend within the meaning of section 2(22)(e). The addition made by the AO and upheld by the CIT(A) towards deemed dividend is therefore wholly untenable and needs to be deleted. 21. We further noted that the transactions of payments made by the appellant to the recipient companies have arisen due to business exigencies and the said transactions therefore bear commercial character. The appellant company and the recipient companies are associate concerns of the same group with a common Managing Director and s....
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....boratories Pvt. Ltd which are evidently imbued with business expediency cannot be considered to be falling under the ambit of "advance or loans" under section 2(22)(e) so as to constitute deemed dividend. Further, the provisions of deemed dividend are not attracted in the facts of the case for the instant assessment years as the basic ingredient to invoke the said provisions that payments by way of 'advance or loans' have been made by the appellant company to the recipient companies in which Sri. M. S. N. Reddy is the common substantial shareholder, is non- existent. Therefore, in our considered view, the addition made by the AO, to the extent upheld by the CIT(A), towards deemed dividend u/s 2(22)(e) in the hands of the appellant for the purpose of levy of dividend distribution tax without the satisfaction of the said basic condition laid down in the section is unwarranted and untenable. 22. The second limb of argument of the appellant is that current adjustment account transactions do not represent 'loans or advance' for the purpose of deemed dividend. We, find that there is a two-way movement of funds between the appellant company and the recipient companies as per the ....
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....aborti [2018] 407 ITR 730 (Calcutta) (Pg No.102-104 of PB-I) held that the transactions between the shareholder and the company were in the nature of current account and the provisions of section 2(22)(e) would not be applicable, where there were transactions of giving money by the company to the shareholder and vice versa in the account. Further, the ITAT, Mumbai held in the case of Ravindra R Fotedar Vs. ACIT [2017] 85 taxmann.com 314 (Mumbai) (Pg No.105-111 of PB-I) that where the movement of funds is in both ways on need basis between the two companies in which the assessee held substantial interest, the transactions are in the form of current accommodation entries and the amount in question could not be regarded as deemed dividend. In another case of Neha Home Builders Pvt Ltd Vs. DCIT [2018] 98 taxmann.com 465 (Mumbai-Trib) also (Pg No.112-116 of PB-I), the ITAT, Mumbai held that when the transactions between group companies were current and inter banking accounts containing both receipt and payment entries, same could not be regarded as loans and advance, as contemplated under section 2(22)(e) and no addition could be made as deemed dividend. Similar view was expressed by th....
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....by the recipient companies for meeting the working capital requirements of the business, financing the acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subsidiaries). The funds have not been diverted to the common substantial shareholder or were not utilised for the benefit of said shareholder. The details of the utilisation of the funds by the two recipient companies are submitted at Pg No.75-76 of PB-I, which were submitted to the LD.CIT(A) during the appellate proceedings. The said statements are prepared on the basis of the cash flow statement forming part of the audited financial statements of the recipient companies, the copies of which were furnished to the AO during the assessment proceedings. It may be seen from the perusal of the said statements that the funds received from appellant company have been fully subsumed in the funds utilised by the recipient companies during the year for the purpose of working capital, acquisition of fixed assets of the business (setting up new units/expansion of existing units), investment in subsidiaries and loans to related parties (subs....
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....ture is to tax funds ultimately received by a shareholder holding not less than 10% voting power in the company, which have been routed through different modes/concerns. The Hon'ble High Court held that what needs to be taxed as deemed dividend is the amount ultimately used for the benefit of the shareholder. The relevant portion of the said decision is extracted below: "7.11 Examining the facts of the case in the light of the above legal and statutory position, this case relates to the second mode of payment envisaged under clause (e) of section 2(22) viz. to any concern in which such shareholder is a member or a partner and in which he has substantial interest. From the reasons recorded it emerges that according to the Assessing Officer unsecured loans have been extended by M/s J.P. Infrastructure Limited to its sister concerns, viz. Gujarat Mall Management Co. Pvt. Ltd. and Aryan Arcade Pvt. Ltd. and that the petitioner held 27.49% shares in M/s J.P. Infrastructure Limited; 50% shares in Gujarat Mall Management Co. Pvt. Ltd.; and 29% shares in Aryan Arcade Pvt. Ltd., which according to him had to be treated as deemed dividend in the hands of the shareholder and taxed ac....
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....ning the assessment that the petitioner has received any amount as holder of substantial shares from the loan giver company or the loan receiver company. Therefore, in the absence of any benefit having been received by the petitioner, there was no obligation cast upon him to disclose such transactions." 26. Further, the SLP filed by the Revenue against the said decision of the Hon'ble Gujarat High Court has been dismissed by the Hon'ble Supreme Court by stating that it does not find any ground to interfere with the impugned order passed by the High Court, as reported in DCIT Vs. Jayesh T Kotak [2021] 130 taxmann.com 170 (SC) (Pg No.147 of PB-I). Therefore, in our considered view, it is now a settled law that the payment made by the payer company to the recipient company, in which there is a common shareholder holding not less than 10% and 20% of the voting power respectively, would be deemed to be 'dividend' in the hands of such shareholder only if any benefit from such transaction has been received by such shareholder or the amount is ultimately used for the benefit of the shareholder. This settled legal principle has been judicially laid down having regard to the intenti....
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.... the recipient companies for the benefit of the common substantial shareholder. In view of the said incontrovertible fact and having regard to the decisions of the Hon'ble Gujarat High Court and Hon'ble Supreme Court in the case of Jayant T Kotak (supra), we are of the considered view that the payments made by the appellant company to the recipient companies during the year do not fall under the scope of deemed dividend u/s 2(22)(e) of the Act. Therefore, 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 for this reason also and thus, deleted. 28. In this view of the matter and considering facts and circumstances of this case and also, by following ratios of various Courts/Tribunals discussed hereinabove, we are of the considered view that the transactions between appellant Company and two other recipient Companies do not come under the provisions of section 2(22)(e) of the Income tax Act, 1961 and consequently, the AO/CIT(A) is erred in levying dividend distribution tax in the hands of the assessee for both assessment years. Thus, we....