Commercial advance was outside the purview of the deeming provision of section 2(22)(e)

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘A’ BENCH

BEFORE SHRI R.K. GUPTA, JM & SHRI A.N. PAHUJA, AM

ITA No.2858/Del/2012

Assessment year: 2008-09

Deputy CIT, Circle 1(1),

Room no.390,C.R. Building, IP

Estate, New Delhi

(Appellant)

V/s.

M/s Alpex Exports (P) Ltd.

B-79, Shival ik, Near Malviya

Nagar, New Delhi

(Respondent)

[PAN: AABCA 0842 N]

Assessee by Shri Tarun Kumar, AR

Revenue by Shri Neeraj Kumar,DR

Date of hearing 08-08-2012

Date of pronouncement 28-08-2012

O R D E R

A.N.Pahuja:-

 This appeal filed on 08th June, 2012 by the Revenue against an order dated 30th March, 2012 of the ld. CIT(A)-IV, New Delhi, raises the following grounds:-

1 “The ld. CIT(A) has erred on facts and in law in deleting addition of ``1,03,96,888/- on account of disallowance u/s 2(22)(e) of the Income-tax Act, 1961. The learned CIT(A) has totally ignored the reasons given by the Assessing Officer for application of section 2(22)(e). The assessee is trying to show the real transaction of loan/advance as receipt of share application money and allotment of share (which is not genuine activity); only as an afterthought.

2 That the appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground (s) of appeal at any time before or during the hearing of this appeal. “

2. At the outset, considering the nature of issue, the Bench rejected the request for adjournment on behalf of the assessee and proceeded to dispose of the appeal after hearing the representatives from both the sides.

3. Facts, in brief, as per relevant orders are that the return declaring income of ``4,29,40,331/- filed on 27.09.2008 by the assessee, engaged in the business of import and trading in yarn and knitting needles besides generation of wind power, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act 1961 (hereinafter referred to as the ‘Act’) issued on 17th August, 2009. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that Shri Ashwani Sehgal and Mrs. Monica Sehgal had 41.52% and 24.81% of the shareholding of the company while M/s Karsihma Machine Tools Pvt. Ltd. was reflected as sundry creditor to the tune of `1,67,42,661/-. To a query by the AO , the assessee replied that M/s Karishma Machine Tools Pvt. Ltd.[KMPTL] had invested `100 lacs by way of share application money besides advance of `63,58,573 against purchase of material and `3,96,888/- on account of advance against order. Since Mr. Ashwani Sehgal & Mrs. Monica Sehgal had 39.2% share holding each in M/s Karishma Machine Tools Pvt. Ltd. and the said company had reserves and surplus of `3,42,23,672.26, the AO show caused the assessee as to why the amount of `100 lacs by way of share application money as also advances of `63,58,573 and `3,96,888/- , be not taxed as deemed dividend u/s 2(22)(e) of the Act. In reply, the assessee submitted that share application money of ``1 crore was not covered within the meaning of provisions of sec. 2(22)(e) of the Act nor the aforesaid two advances. However, the AO did not accept the submissions of the assessee in view of decision in the case of Balotia Engg. Works Pvt. Ltd. vs. CIT, 275 ITR 399 (Jharkhand),holding that share application money part took the character of deposit. Since the share application money was deposited with the assessee on 20-12-2007 while shares were allotted only in July, 2010 i.e. after a period of more than 30 months in pursuance to the board resolution dated 22nd July, 2010, the AO concluded that the amount of ``1 crore was, in fact, advance and explanation regarding share application money was an afterthought, query having been raised much earlier regarding taxation of amount as deemed dividend . Accordingly, the AO brought to tax the amount of `1 crore and advance of `3,96,888/- as deemed dividend within the meaning of provisions of sec. 2(22)(e) of the Act while accepting the contentions of the assessee in respect of the amount of ``63,58,573/-.

4. On appeal, the assessee contended before the ld. CIT(A) that the aforesaid amounts were not covered within the definition of deemed dividend u/s 2(22)(e) of the Act and relied upon a number of decisions in Ardee Finvest (P) Ltd. DCIT; 79 ITD 547 (Del),CIT Vs. Sunil Chopra in I.T.A. No.106/2011, dated 27.4.2011; VLS Foods (P) Ltd. Vs. ACIT, (2010) 128 TTJ (Del.)(UO) 1;CIT Vs. Raj Kumar, 318 ITR 462,;CIT Vs. Shri Satyanarayan Nuwal In I.T.A. 19/2009, dt. Of order 17.9.2010 ;CIT Vs. Creative Dyeing and Printing (P) Ltd., 318 ITR 476(Del.), and CIT Vs. Arvind Kumar Jain in I.T.A. No.589/2011, dated 30.9.2011(Del.). In the light of these decisions, the ld. CIT(A) deleted the addition,holding as under:

“6.2 I have carefully considered the assessment order and the submission made by the learned AR along with the documents placed on record as part of the paper book. It is seen that the break up and nature of advances received from KMTPL along with documentary evidences were duly produced by the appellant before the Assessing Officer during the assessment proceeding. The appellant has furnished copy of share application form dt. 20.12.2007 filed by KMTPL clearly indicating the amount of `` 1 crore and the cheque numbers etc. for purchase of 50,000 shares of the appellant company, copy of related share certificate no.01/10-11 dt. 22.07.2010, copy of the audited balance sheet, ledger accounts etc. of the appellant company and KMTPL for the year ended 31.3.2008 duly showing the receipt of the above amounts as chare capital/advance against orders, copy of Board Resolution dt. 22.7.2010 of the appellant company allotting 50,000 share KMTPL, copy of list of allottees, copy of receipt no.GAR7 of MCAS and Form No.2 showing the above allotment of shares, copy of bank statement with Indusland Bank, New Delhi Branch maintained by the appellant company and 10B, Vasant Vihar Branch maintained by KMTPL showing the payments and receipts of the above amounts, copy of the Income Tax return of KMTPL for assessment year 2008-09 etc. in support of its contention. In view of the aforesaid documentary evidence, it is abundantly clear that the impugned amounts were received by the appellant company from KMTPL on account of share application money and advance against orders. It is settled law that commercial advance and advance for business transaction is outside the purview of the deeming provisions of section 2(22)(e) of the Act. The Assessing Officer has also himself accepted the receipt of ``63,58,573/- against purchase of material, while he has rejected the other two amounts on account of share application money and advance against orders under similar facts and circumstances without assigning any valid reason. In view of the above, the impugned addition of ``1,03,96,888/- cannot be sustained either on facts or in law. The same is, therefore, deleted.”

5. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A) . The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the findings in the impugned order.

6. We have heard both the parties and gone through the facts of the case. The issue before us is as to whether the amount of `1 crore on account of share application money and `3,96,888/- by way of advance against order received by the assessee from M/s Karishma Machine Tools Pvt. Ltd., could be taxed in the hands of the assessee, by way of deemed dividend in terms of provisions of sec. 2(22)(e) of the Act. The AO brought to tax the amount of `1 crore in the hands of the assessee in the light of decision in Balotia Engg. Works Pvt. Ltd. (supra) and did not adduce any reason in support of the amount of `3,96,888/- .On appeal, the ld. CIT(A) ,on the basis of copy of share application form dated 20.12.2007 filed by KMTPL for purchase of 50,000 shares of the assessee company, copy of related share certificate no.01/10-11 dated 22.07.2010, copy of the audited balance sheet, ledger accounts etc. for the year ended 31.3.2008 of the assessee company and KMTPL copy of Board Resolution dated 22.7.2010 of the assessee company allotting 50,000 share to KMTPL, copy of list of allottees, copy of receipt no.GAR7 of MCAS and Form No.2 showing the allotment of shares, and copy of the Income Tax return of KMTPL for assessment year 2008-09, concluded that the amount was actually received by way of share application money from KMPTL. Accordingly, the ld. CIT(A) concluded that commercial advance and advance for business transaction is outside the purview of the deeming provisions of section 2(22)(e) of the Act. In order to bring within the ambit of provisions of sec. 2(22)(e) of the Act, the amount of loan or advance paid by a company should be made to any of

the following three persons viz. :

i) a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power; or

ii) any concern in which, such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern); or

iii) a shareholder, for his behalf, or for his individual benefit, to the extent to which the company in either case possesses accumulated profits.

6.1 We find that the AO relied upon decision in M/s Bhalotia Engineering Works Pvt. Ltd. (supra) wherein it was held that receipt of share application monies in cash, in violation of provisions of section 269SS of the Act should be treated as “deposit” with the consequence that the assessee would be liable for penalty under Section 271D of the Act. The AO in the said case did not examine whether the share application money can be treated as “loan” or “deposit” within the meaning of provisions of sec. 269SS of the Act nor the Addl. CIT. The ld. CIT(A) found as a fact that the shares were subsequently allotted to the applicant-companies as shown by the form filed before the Registrar of Companies. Neither the AO nor the Additional CIT took the trouble to examine this aspect while imposing the penalty and merely relied on the judgment of the Hon’ble Jharkhand High Court (supra). Similar is the situation in the instant case. The AO did not even attempt to examine as to whether or not the share application money can be treated as “loan” or “advance” within the meaning of provisions of sec. 2(22)(e) of the Act. There is nothing on record to show that these transact ions were at tached with certain condit ions or st ipulat ion as to period of repayment , rate of interest , manner of repayment , etc. so as to t reat the said t ransact ions as loans or advances. Moreover, the Revenue have not placed before us any material, suggest ing that the transact ions were actually in the nature of loans or advances. In these ci rcumstances, the reliance on the decision in M/s Bhalotia Engineering Works Pvt. Ltd. (supra),in our opinion, is totally misplaced. Hon’ble Madras High Court in CIT Vs. Rugmini Ram Ragav Spinners Private Ltd. (2008), 304 ITR 417 held that the money in cash by a company towards allotment of shares, was neither a loan nor a deposit. In Baidya Nath Plastic Industries (P) Ltd. and Ors vs K.L. Anand (1998) 230 ITR 522, Hon’ble Delhi High Court pointed out the distinction between a loan and a deposit while observing that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement while in the case of a deposit it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it. This judgment was cited in Director of Income Tax (Exemption) vs ACME Educational Society (2010) 326 ITR 146 (Del) and it was held that a loan grants temporary use of money, or temporary accommodation, and that the essence of a deposit is that there must be a liability to return it to the party by whom or on whose behalf it has been made, on fulfillment of certain conditions. In CIT vs. Sunil Chopra, Hon’ble jurisdictional High Court in their decision dated 27.4.2010 in ITA no.106 of 2011 held that share application money could not be construed as loan or advance within the meaning of sec. 2(22)(e) of the Act. In CIT vs. I.P. India Pvt. Ltd., Hon’ble jurisdictional High Court in their decision dated 21.11.2011 in ITA no. 1192/2011 concluded that the receipt of share application monies for allotment of shares in the assessee-company could not be treated as receipt of loan or deposit. In the light of view taken by the Hon’ble jurisdictional High Court in the aforesaid decisions, especially when the ld. CIT(A) found as a fact that the amount of `1 crore was indeed received by the assessee from KMPTL as share application money, we are not inclined to interfere with the findings of the ld. CIT(A).

6.2 As regards advance of `3,96,888/- against order, the AO did not record any reasons to tax the amount by way of deemed dividend. On appeal, the ld. CIT(A) concluded that commercial advance was outside the purview of the deeming provisions of section 2(22)(e) of the Act. Hon’ble jurisdictional High Court in Raj Kumar(supra) following the view in CIT vs. Nagindas M Kapadia,177 ITR 393(Bom.) held that the trade advance which is in the nature of money transacted to give effect to a commercial transaction does not fall within the ambit of the provisions of sec. 2(22)(e) of the Act. Similar view was taken in Creative Dyeing & Printing (P) Ltd.(supra) and Arvind Jain(supra). In the light of these decisions, especially when the Revenue have not placed before us any material, controverting the aforesaid findings of the ld. CIT(A) so as to enable us to take a different view in the matter, we are not inclined to interfere.

6.3. In view of the foregoing, ground no.1 in the appeal is dismissed.

7. No additional ground having been raised before us in term of residuary ground no.2 in the appeal, accordingly, this ground is dismissed.

8. No other plea or argument was made before us.

9. In the result, appeal is dismissed.

Order pronounced in open Court

                                                           Sd/-                 Sd/-

                                               (R.K. GUPTA) (A.N. PAHUJA)

                                          (Judicial Member) (Accountant Member)

NS

Copy of the Order forwarded to:-

1. Assessee

2. Deputy CIT, Circle 1(1), Room no.390,C.R. Building, IP Estate, New Delhi

3. CIT (A) concerned

4. CIT-IV, New Delhi

5. DR, ITAT,’A’ Bench, New Delhi

6. Guard File.

BY ORDER,

Deputy/Asstt.Registrar

ITAT, Delhi