TaxTMI 
TaxTMI 
2025 (2) TMI 1359
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....f 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. 94,55,036/- 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. 1,10,89,415/- 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. 10,84,916/- only on estimate basis at 10% of the gross unaccounted cash receipts from sale of spent solvents and scrap. 5. The LD.CIT(A) crossly erred in law in holding that A.Y. 2011-12 falls u....
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....rma") is one of the companies covered under Section 132 of the Income Tax Act, 1961, as part of the search. Consequent to search, notice under Section 153A of the Act was issued to the assessee on 04.04.2022. Thereafter, notice u/s 142(1) of the Act was issued the assessee calling for information. After considering the information submitted by the assessee, assessment was completed under Section u/s 153A of the Act interalia making addition of Rs. 1,10,89,415/- towards unaccounted sale of spent solvents and scrap for the year under consideration. 3.1. The assessee has filed an appeal against the assessment order passed by the AO for A.Y. 2011-12 and challenged the addition of Rs. 1,10,89,415/- made by the AO towards expenses incurred against unaccounted cash receipts from sale of spent solvents / scrap and also challenged the legal validity of notice issued u/s 153A for the assessment year 2011-12 in light of Explanation - 1 to Section 153A(1) of the Act and argued that the assessment year in question falls beyond the 'relevant assessment year or years' and therefore, notice issued u/s 153A and consequent assessment order passed by the Assessing Officer is bad-in-law and....
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.... Delhi High Court in the case of PCIT Vs. Ojjus Medicare Pvt. Limited reported in (2024) 161 taxmann.com 160 (Delhi). 8. The learned CIT-DR, on the other hand, supporting the orders of the LD.CIT(A) submitted that the Explanation - 1 defines the "relevant assessment year", the assessment year preceding the assessment year relevant to the previous year in which search is conducted or requisition is made which falls beyond six assessment years but not later than ten assessment years from the end of the assessment year relevant to the previous year in which such search is conducted or requisition is made. If we consider the date of search, the assessment year preceding the assessment year relevant to the previous year in which search is conducted starts from A.Y. 2020-21 and tenth assessment year will be A.Y. 2011-12. Therefore, the notice issued by the Assessing Officer u/s 153A(1)(a) for assessment year is in question and is as per the Explanation - 1 to Section 153A(1) and therefore, the argument of the assessee is devoid of merit and needs to be rejected. 9. We have heard the rival submissions, perused the material on record and gone through the orders of the authorities bel....
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....t in cases where any assessment or reassessment has abated under the second proviso), specify the class or classes of cases in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made and for the relevant assessment year or years: Provided also that no notice for assessment or reassessment shall be issued by the Assessing Officer for the relevant assessment year or years unless- (a) the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income, represented in the form of 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 aggregate in the relevant assessment years; (b) the income referred to in clause (a) or part thereof has escaped assessment for such year or years; and (c) the search under section 132 is initiated or requisition under section 132A is made on or after the 1st day of April, 2017. ....
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....sment year relevant to the previous year in which search is conducted which fall beyond six assessment years but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted. 11. In this legal background, if we examine the facts of the present case of the assessee, a search was conducted on 24.02.2021 and the previous year means the F.Y. 2020-21 and the relevant assessment year is A.Y. 2021-22. The "six assessment years" immediately preceding the said assessment years are A.Ys 2015-16 to 2020-21. The "relevant assessment year or years" has been defined in Explanation 1 to Section 153A(1) of the Act shall be counted from the end of the assessment year relevant to the previous year in which search is conducted i.e., from the end of A.Y. 2021-22. The terminal date of such A.Y. 2021-22 is 31.03.2022 and the assessment year which fall beyond six assessment years but not later than ten assessment years from such terminal date constitutes the "relevant assessment year "as per the definition in Explanation - 1 to Section 153A(1) of the Act. If we consider the terminal date of such A.Y. 2021-22 is 31.03.2022, the asses....
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....s within the purview of exemption. 8. In fact, I am prepared to sail along with the learned standing counsel and hold that if there is any ambiguity while construing a provision meant for rooting out or investigating evasion of tax, it must be resolved in favour of the revenue and against the assessee. Jurisprudentially speaking, the very object of law is to lay down norms for general behaviour and prescribe sanction to ensure their compliance. Unless sanction is strictly enforced, it will incentivise deviation. Even in criminal law, while when it comes to substantive offences, retrospective application is forbidden, contrary approach is adopted in matters of procedure. I agree with the submission that Section 153 A of the Income Tax Act is intended to unearth tax evasion. But I can endorse the stand of the respondent as regards computation of the period of ten years only if there is ambiguity or obscurity in Explanation-I. To me, there is absolutely no ambiguity. 9. Explanation-I is clear as to the manner of computation of the ten assessment years. It clearly and firmly fixes the starting point. It is the end of the assessment year relevant to the previo....
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....ings of Norman Doidge. It implies that contrary to settled wisdom, even brain structure can be changed. But not so when it comes to a provision in a taxing statute that is free of ambiguity. Such a provision cannot be elastically construed." 12. The appellant had also relied upon the decision of Hon'ble High Court of Delhi in the case of PCIT Vs. Ojjus Medicare Pvt. Limited (supra), wherein the Hon'ble High Court held that the significant difference between computation of relevant assessment year for identification of six assessment years and to construct a block of ten assessment years is that while "six assessment years" hinge upon the phrase "immediately preceding" six assessment year pertaining to search year, "ten assessment years" are liable to be computed or reckoned from the end of the assessment year relevant to year of search. The Hon'ble High Court by considering the ratio laid down by the Hon'ble Madras High Court in the case of A.R. Safiullah Vs, ACIT (supra) has held as under : "85. That then takes us to the principal question of identifying the point of origin for the purposes of computation of the six AYs' and the "relevant assessment....
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....s which would be pertinent for the purposes of the First Proviso to section 1530. 87. Assuming, therefore, that the handover of material gathered in the course of the search and pertaining to the non-searched person occurred between 01 April 2021 to 31 March 2022, the same would essentially constitute FY 2021-22 as being the previous year of search for the purposes of the non-searched entity. As a necessary corollary, the relevant AY would become AY 2022-23. AY 2022-23 would thus constitute the starting point for the purposes of identifying the six years which are spoken of in section 153C. The six AYs' are envisaged to be those which immediately precede the AY so identified with reference to the previous year of search. It would thus lead us to conclude that it would be the six AYS' immediately preceding AY 2022-23 which could have formed the basis for initiation of action under section 153C. Consequently, and reckoned backward, the six relevant AYs' would be :- Computation of the six-year block period as provided under section 153C of the Act No. of years AY 2021-22 1 AY 2020-21 2 AY 2019-20 3 AY 2018-19 4 AY 2017-18 5 A....
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....021-22 2 AY 2020-21 3 AY 2019-20 4 AY 2018-19 5 AY 2017-18 6 AY 2016-17 7 AY 2015-16 8 AY 2014-15 9 AY 2013-14 10 13. The above-mentioned decisions of Hon'ble High Courts of Madras and Delhi are squarely applicable to the facts of the present case. The "ten assessment years" from the end of the assessment year relevant to the previous year in which search was conducted in the case of the appellant in accordance with the definition in Explanation -1 to Section 153A(1) of the Act commences from A.Y. 2021-22 and ends with A.Y. 2012-13 and therefore, the notice issued u/s 153A of the Act for the instant assessment year i.e., A.Y. 2011-12 is clearly beyond the tenth year and it falls outside the scope of 'relevant assessment year'. Therefore, we are of the considered view that the notice issued u/s 153A of the Act and consequent assessment order passed by the Assessing Officer for the assessment year under consideration is bad-in-law, illegal, void ab initio and is liable to be quashed and thus, we quash the assessment order passed by the Assessing Officer u/s 153A of the Act dt. 31.03.2023 for A.Y. 2011-12. Thus, ground ....
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....d out at Rs. 18,76,02,606/-. The sworn statement recorded from Shri R. Buchi Reddy along with the Excel sheet data found in the pen-drive was confronted to Shri MSN Reddy, the Managing Director of the appellant and other group companies, and his statement on oath was recorded on 27.04.2021. In response to a specific Question No. 5, he stated that the 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 compan....
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.... scrap is as follows: A.Y MSN Laboratories Pvt Ltd MSN Pharmachem Pvt Ltd Maithri Laboratories Pvt Ltd MSN Organics Pvt Ltd MSN Life Sciences Pvt Ltd API Chem Laboratories Pvt Ltd Total 2013-14 3,61,75,014 2,05,91,892 - 19,42,003 35,29,191 - 6,22,38,100 2014-15 5,35,06,633 1,09,57,678 - 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 8....
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..../ scrap. The appellant further contended that, out of the cash outflow as recorded in the same seized material, an amount of Rs. 17,63,52,315/- was in the name of MSN Reddy and his family members, which represents an amount drawn by the management out of unaccounted cash receipts from the sale of spent solvents / scrap and in respect 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. 1,10,89,415/- 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. 21. 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 a....
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....-12 as handling expenses. 23. Aggrieved by the order of the LD.CIT(A), the assessee and Revenue both are in appeal before us. 24. The Learned Counsel for the assessee Shri M.V. Prasad, C.A. submitted that the LD.CIT(A) has erred in allowing the deduction of expenditure to the extent of Rs. 10,84,916/- only on estimate basis at 10% of the gross unaccounted 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....
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....managing director of the assessee company in his sworn statement recorded on 27.04.2021 and the affidavit filed on 05.07.2021 during the course of search. Further, the appellant had also offered additional income towards unaccounted cash receipts from the sale of spent solvents / scrap in all four companies for the relevant assessment years and also filed 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 allo....
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.... appellant and other group companies have admitted additional income received from sale of spent solvents / scrap for the respective assessment years and filed returns in response to notices issued under Section 153A of the Act and paid taxes. Therefore, the issue of the additional claim of expenditure against unaccounted cash 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....
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....pon the nature of income. But it cannot be said that there is no expenditure required to be incurred to earn any income. Going by the above analogy, it is true that for handling hazardous waste like spent solvents / scrap, there needs to be various expenditures, such as handling charges, packing, salary and wages, transportation 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 in....
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....d by him to the head office employees for the purpose of further disbursal of the said cash to the workers by them and the said fact is noted in the Excel workbook by him, it has served the purpose, and there is nothing more to be recorded by him. This explains the reasons why there is no evidence of material regarding the actual 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 content....
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....fe handling of hazardous waste without any environmental impact. If we consider the other expenditure required for the disposal of spent solvents / scrap, in our considered view, the AO needs to consider transportation, packing, and other materials necessary for handling the disposal of spent solvents / scrap. Although there is 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 possi....
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.... condition precedent for assuming jurisdiction to issue notice u/s 153A for assessment years falling beyond six assessment years preceding the assessment year relevant to the previous year in which search was conducted as per the fourth proviso to section 153A(1) of the Act." 29. The learned counsel for the assessee, referring to date of search in the present case, submitted that admittedly, the assessment year in question is beyond six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted and therefore, for issuance of notice u/s 153A of the Act, the conditions prescribed in clauses (a), (b) and (c) are required to be fulfilled. This becomes very clear form the language employed in the 4th proviso which starts with phrase 'no notice for assessment or re-assessment shall be issued to the assessee for 'relevant assessment year or years' unless" followed by the enumeration of the specific conditions which need to be fulfilled. Unless the conditions laid down in clauses (a), (b) and (c) specified in the said forth proviso are cumulatively fulfilled, the Assessing Officer does not get jurisdiction to issue n....
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....satisfaction note' recorded by the Assessing Officer does not bring out the fulfilment of the conditions laid down u/s 153A of the Act is devoid of merit and needs to be rejected. 32. We have heard the rival submissions, perused the material on record and gone through the orders of the authorities below. Admittedly, the assessment year in question falls under the 'relevant assessment year or years' because going by the date of search in the present case on 24.02.2021, the assessment years in question i.e., A.Ys. 2011-12 to 2014-15 falls beyond six assessment years and within ten assessment years. Once an assessment year falls beyond six assessment years and within ten assessment years, then for assumption of jurisdiction and issuance of notice u/s 153A of the Act, the conditions laid down in clause (a) to (c) of 4th proviso to Section 153A(1) of the Act requires to be satisfied. As per 4th proviso to Section 153A(1) of the Act, the Assessing Officer can assess or reassess the total income of the assessee, provided the Assessing Officer has in his possession books of accounts or other documents or evidence which reveal that the income, represented in the form of "asse....
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....as retracted from the statement and has also disputed the additions made by the Assessing Officer towards amounts received as unaccounted receipts from sale of spent solvents and scrap, but fact remains that the Tribunal, in appellant's own case for earlier assessment years has considered the issue of assessment of unaccounted receipts from sale of spent solvents and scrap and, after considering the relevant facts, has estimated the profits from receipts of unaccounted sale of spent solvents and scrap by allowing 60% deduction towards expenditure and treated balance 40% unaccounted cash receipts as income of the assessee. If we consider the profits estimated from unaccounted cash receipts from sale of spent solvents and scrap which becomes the income of the appellant. Therefore, in our considered view, the profits estimated from sale of unaccounted spent solvents and scrap becomes income represented in the form of an "asset" being the advances given to the directors and other parties and therefore, the 'satisfaction note' recorded by the Assessing Officer, in light of said incriminating material constitutes fulfillment of the conditions laid down for issuance of notice ....
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....mpany and also filed details of opening balance and sales made during the relevant financial year, purchases made from the above two companies, payments made and received from the above two companies and closing balances. The assessee had also explained the nature and necessity of payments made to the above two group companies and submitted that the appellant company and the other two group companies i.e., MSNL and MSNO, are engaged in the same line of business of manufacture and sale of Active Pharmaceutical Ingredients (APIs). The appellant company and the recipient company have carried out trading transactions of both purchases and sales made with each other in the course of said business. The appellant company has made payments in respect of purchases made from the above two companies and also received payments in respect of sales made to the above two companies, and submitted that these transactions are in the course of the normal business of the assessee and have business exigency or commercial expediency. 37. The AO, after examination of the ledger accounts of the recipient company, observed that the basic ingredients of 'deemed dividend' as defined under section ....
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....961 in respect of the said deemed dividend under Section 2(22)(e) in the hands of the common substantial shareholder, in view of the amendment made to Section 115Q with effect from 01.04.2018, making dividend distribution tax applicable to deemed dividends also. Since no dividend distribution tax has been paid as deemed dividend by the appellant company, the AO made addition towards deemed dividend under Section 2(22)(e) of the Act and computed dividend distribution tax for both the assessment years. 39. Being aggrieved by the assessment order, the assessee filed an appeal before the LD.CIT(A) and challenged the addition made towards deemed dividend u/s 2(22)(e) and consequent dividend distribution tax under Section 115Q of the Act in the hands of the assessee in respect of the excess payments made to MSNL and MSNO as deemed dividend taxable under Section 2(22)(e) of the Act and contended that commercial transactions between two associated or group companies in the ordinary course of business are not covered under the provisions of Section 2(22)(e) of the Act. The assessee further contended that the AO, having noticed the fact that the appellant and the other two companies are e....
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....nd there is a fixed date by which payments and receipts must be settled. However, in the present case, during the assessment year 2019-20, the appellant has purchased Rs. 1. 95 crores from MSNL and made sales of Rs. 100.52 crores, and consequently, the appellant had to receive a balance amount of Rs. 98.57 crores. However, against total receivable of Rs. 156 crores, (Rs.98.57 crores + opening balance of Rs. 53.43 crores), the appellant paid further amounts to MSNL, and the peak of such debit in the guise of trading account reaches Rs. 299.95 crores as on 31-03-2019 against the opening balance of Rs. 53.43 crores. Therefore, this account of MSNL in the books of the appellant company cannot be termed as a Current Account as the actual sales and purchase transactions have significantly deviated from trade transactions, with payments that reached a peak of Rs.299.95 crores and hence, the payments so made cannot be termed as trade transactions. 41. The LD.CIT(A) further observed that the appellant has also failed to establish any business exigency or need for making huge payments when compared to purchases or sales. Although there are purchase / sale transactions existing between the....
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....usiness and does not fall under 'loans or advances' for the purpose of Section 2(22)(e) of the Act. The Learned Counsel for the assessee further submitted that the LD.CIT(A) failed to appreciate that there is a two-way movement of funds between the appellant company and the recipient companies and the said 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 under Section 2(22)(e) of the Act. The Learned Counsel for the assessee further submitted that the LD.CIT(A) failed to appreciate the fact that payments made to recipient companies, who is not a shareholder of the appellant company, do not come under the purview of deemed dividend under Section 2(22)(e), since the same have been utilized for the purpose of business of the recipient companies and no part of the said payments were utilized / diverted for the benefit of substantial shareholders. The Learned Counsel for the assessee took us to relevant documents, including ledger accounts of the two companies in the books of accounts of the appellant, and argued that if you go by the nature of transactions involvin....
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....hat, in order to invoke provisions of Section 2(22)(e), two factors must be considered: whether the payment was a loan or advance and whether on the date of payment there existed accumulated profits. Unless the transactions are in the nature of loans and advances, the provisions of Section 2(22)(e) cannot be invoked. In this regard, he relied upon the following judicial precedents placed at page 9 of the written submissions: 1) CIT vs. India Fruits Ltd [2015] 53 taxmann.com 307 (Andhra Pradesh) (PB-I: Pg 78-79). 2) CIT vs. Creative Dyeing & Printing Pvt Ltd [2009] 318 ITR 476 (Delhi) (PB-I: Pg 80-82) 3) CIT vs. Ambassador Travels Pvt Ltd [2009] 318 ITR 376 (Delhi) (PB-I: Pg 83) 4) CIT vs. Raj Kumar [2009] 318 ITR 462 (Delhi) (PB-I: Pg 84-88). 5) CIT vs. Nagindas M Kapadia [1989] 177 ITR 393 (Bombay) (PB- I: Pg 89) 6) Jamuna Vernekar vs. CIT [2021] 432 ITR 146 (Karnataka) (PB- I: Pg 90-91) 7) CIT vs. Amrik Singh [2015] 56 taxmann.com 460 (P & H) (PB-I: Pg 92-93). 8) CIT vs. Atul Engineering Udyog [2014] 51 taxmann.com 569 (Allahabad) (PB-I: Pg 94-96). 45. Per contra, Shri B. Bala Krishna, CIT-DR supporting the order o....
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....on by both sides. The addition towards deemed dividend for 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 Put. Ltd and M/s MSN Organics Put. Ltd, in the books of the appellant company as on 31.03.2019. The appellant company and two group companies MSN Laboratories Put. Ltd and MSN Organics Put. 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....
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.... the assessment years 2019-20 and 2020-21 under consideration are summarized 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) 5....
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....beneficial owner of shares holding not less than 10% of the voting 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 li....
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....e course of carrying out purchases in the normal course of the business and which result in closing debit 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....
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.... the Act. Though, the Assessing Officer and LD.CIT(A) have taken cognizance of the said circular and applied the same to the appellant'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 reasona....
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....ntion of the binding decision of the Hon'ble Supreme Court cited above and the same is untenable on facts and in law. Having accepted the factum of purchases and payment of trade advances against 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 aris....
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....ency for making huge payments to MSN Laboratories Put. Ltd is revealed by this crucial fact also in addition to the explanation furnished in the preceding paragraph. Therefore, the payments made by the appellant to MSN Laboratories Put. 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 curren....
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....he nature of loan or deposit but merely adjustments based on large number of adjustment entries occurring in the accounts between the entities, application of section 2(22)(e) would not arise. Similarly, Hon'ble Calcutta High Court in the case of CIT Vs. Gayatri Chakraborti [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 betwee....
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....ner for the benefit of the common substantial shareholder. The business expediency/ exigencies in making the said payments to the recipient companies had already been explained in earlier part of this order. The funds received from appellant company have been wholly used 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 ....
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....holding 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 Hon'ble High Court held that the intention of the legislature 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. Put. Ltd. and Ary....
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....older 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 ultimately used for the benefit of the shareholder. It is not the case of the Assessing Officer in the reasons recorded for reopening 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 respectiv....
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....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 the business purposes of the recipient companies as already discussed above. The relevant funds have not been utilized by 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 hereinab....