The order of the Bench was delivered by
George George K. J.M.-This appeal of the Revenue is directed against the order of the CIT (A)-I, Bangalore dated 30.8.2012. The assesse company had also filed its Cross Objection. The relevant assessment year is 2006-07.
2. The only grievance of the Revenue is that the CIT(A) has erred in deleting the addition made by invoking the provisions of section 2(22)(e) of the Act. On the other hand, the assessee company has, in its cross objection, supported the order of CIT(A).
3. As the issue raised by the Revenue and the cross objection of the assessee are common, they were heard together and disposed of in this consolidated order.
4. Briefly stated, the facts of the issue are that the assessee company is engaged in the business of conversion of rough granite blocks/slabs into polished granite slabs, granite tiles and monuments. The assessee is 100% EOU, approved by the specific authority under the Act. While concluding the assessment for the assessment year under dispute, the AO disallowed, among others, the benefits of deduction u/s 10B of the Act and also made an addition u/s 2 (22)(e)of the Act. The basis of the addition of Rs. 10.47 lakhs as deemed dividend u/s 2 (22)(e) of the Act by the AO was that during the course of assessment proceedings, the AO found that Mr. Sandeep Wadhwa and Mr Vijay K Bhatia were holding shares with voting power of 75% and 25% respectively. M/s. Stone World Direct Export Pvt. Ltd [SWDEPL] is a sister concern in which Mr. Sandeep Wadhwa was holding 66.8% of voting rights. SWDPL had accumulated profits of Rs. 10.47 lakhs as on 31.3.2006 and it had also shown a credit balance of Rs. 21.24 lakhs as on 1.4.2005 and, thus, there was a debit of Rs. 40 lakhs on the same day, resulting in, an excess payment and also a credit balance of Rs. 45,97,558/- as on 31.3.2006. After having examined the accounts as well as the details furnished by the assessee, the AO was of the view that there was loan/advance within the meaning of s. 2 (22)(e) of the Act and, accordingly, treated the amount of accumulated profit of Rs. 10,47,834/- as deemed dividend.
4.1. Aggrieved, the assessee took up the issues, among others, before the CIT (A). During the course of appellate proceedings, the assessee had filed details of various bills and other evidences to prove the point that those were business transactions. After taking into account the new evidence produced by the assessee as well as the remand report of the AO on the same, the CIT (A) had deleted the addition made u/s 2 (22)(e) of the Act by the AO for the following reasoning, namely:
"(On page 10) I have considered the submission of the appellant and also the reasons given by the assessing officer in the assessment year (sic) order and the remand report. The assessing officer in his report has categorically stated that the transaction between the assessee and the sister concern are business transactions as per the evidence filed, however, he chose to rely on the decision of the Hon'ble High Court of Mumbai in the case of Badiyani (76 ITR 369), and submitted that the said amounts can be considered as 'loan or advance' within the meaning of section 2 (22)(e) of the Act. the factual submissions made by the assessing officer reveal that the transactions are of commercial in nature, therefore the conclusion arrived (at) by the assessing officer that these are loans or advances within the meaning of section 2(22)(e) is totally against the provisions of the said section. The heavy reliance on the decision of the Bombay High Court mentioned above is not justifiable as the ratio laid down by the High Court is different. The assessing officer chose to rely on the observation of the Court and the same do not apply to the present facts of the case. The Hon'ble High Court of Delhi in the case of V.S.Rajkumar (318 ITR 462) held that where advance which is in the nature of money transacted to give effect to a commercial transaction, the same cannot be treated as deemed dividend u/s 2(22)(e) of the Act. As the transaction in the instant case are undisputedly of commercial/business nature, then the provisions of section 2 (22)(e) are not applicable to the present case in view of the decision of Delhi High Court mentioned above............."
5. Aggrieved, the Revenue has come up before us with the present appeal. During the course of hearing, the learned DR submitted that the CIT (A) had erred in not appreciating the fact that the assessee received and was in possession of excessive funds throughout the year which was not a normal business practice and such a practice adopted was not in conformity with the commercial transactions in the open market. It was, further, contended that the CIT (A) also erred in not appreciating the fact that the facts of the instant case go to prove that the excess receipts were not made due to commercial or trade transactions but due to their common ownerships. It was also the view of the learned DR that the CIT (A) had failed to appreciate the fact that s. 2 (22)(e) of the Act not only covers loan transactions but also 'advances' with the exception of advance in the ordinary course of business where the lending of money was a substantial part of the business. It was, therefore, prayed that the findings of the CIT (A) be reversed and that of the AO be restored in so far as the issue of deemed dividend u/s 2 (22)(e) of the Act was concerned.
5.1. On the other hand, the learned AR had strongly supported the findings of the CIT (A) on the issue. It conclusion, it was pleaded that as there was no any infirmity in the stand of the CIT (A) warranting interference.
6. We have carefully examined the rival submissions, perused the relevant case records and also the case laws on which both the parties have placed their strong reliance. At the out-set, we would like to point out that at the time of assessment proceedings, the AO, based on the details made available at that relevant time by the assessee, came to the conclusion that there was loan/advance within the meaning of s. 2 (22)(e) of the Act and, accordingly, treated the amount of accumulated profit of Rs. 10.47 lakhs as deemed dividend. However, during the course of appellate proceedings, the CIT (A) sought a report from the AO, based on the new evidence advanced by the assessee before him. In compliance, the AO had, in his remand report, stated that "The details now supplied with regard to various transactions appearing in the document and the copies of the commercial invoices filed have also been considered. The claim made by the assessee that it has (a) regular business transactions of trading, purchase /sales of material with M/s Stone World Direct Exports has also been considered. The transactions now explained are of course business transactions as per the copies of the invoices filed..." [Source: On page 9 of CIT(A)'s order]. While adjudicating the issue, the CIT (A) had explicitly made out a case that 'The factual submissions made by the assessing officer reveal that the transactions are of commercial in nature, therefore, the conclusion arrived (at) by the assessing officer that these are loans or advances within the meaning of section 2 (22)(e) is totally against the provisions of the said section'. [Refer: Page 10 of CIT (A)'s order]. The CIT (A) had also distinguished the case law on which the AO, in his remand report, sought to place strong reliance, with an observation that the decision of the Bombay High Court in the case of Badiyani (76 ITR 369)is not justifiable as the ratio laid down by the High Court is different.
6.1. We have also perused the judgment of the Hon'ble Delhi Court in the case of CIT v. Raj Kumar reported in (2009) 318 ITR 462 (Del) which is directly on the issue under consideration. For appreciation of facts, the issue before the Hon'ble Court, in brief, was that the assessee was engaged in the business of manufacturing of customized kitchen equipment. He was also the M.D. of a company - CEI and held nearly 65% of the paid up share capital thereof. A substantial part of the business of the assessee was obtained through CEI and for that purpose CEI was passing on the advance received by it from its customers to the assessee to execute the job-work entrusted to him. The AO had, however, noticed that the assessee owed certain amount to CEI which had been shown by the assessee under the head 'advances received from customers' and asked the assessee to explain the nature of receipt. It was explained by the assessee that the advances received and shown under the head 'advances received from customers' were trade advances received against the future supplies which were backed by sales made immediately upon manufacture of goods in issue; that the advances received not returned by cheque or otherwise, and in any event, s. 2 (22)(e) did not bring within its ambit advances received against the future supply of goods. The AO, however, held that the money received by the assessee from CEI was in the nature of deemed dividend under the provisions of s. 2 (22)(e). On an appeal, the CIT (A) held that the amounts received by the assessee from CEI were with respect to purchase of materials and the same could not be brought within the ambit of s. 2 (22)(e) of the Act. On revenue's appeal, the Tribunal sustained the order of the CIT (A). On the Revenue's appeal, the Hon'ble Court has held as under:
" 10.9. Keeping the aforesaid rule in mind, we are of the opinion that the word 'advance' which appears in the company of the word 'loan' could only mean such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to a commercial transactions would not, in our view, fall within the ambit of the provisions of section 2 (22)(e) of the Act....."
6.2. Above all, the assessing officer had, in his remand report to the appellate authority, fairly conceded that (at the cost of repetition) "The details now supplied with regard to various transactions appearing in the document and the copies of the commercial invoices filed have also been considered. The claim made by the assessee that it has (a) regular business transactions of trading, purchase /sales of material with M/s Stone World Direct Exports has also been considered. The transactions now explained are of course business transactions as per the copies of the invoices filed..."
6.3. In view of the facts and circumstances of the issue as discussed above and also in conformity with the judgment of the Hon'ble Delhi High Court (supra), we are of the opinion that the CIT (A) was justified in deleting the addition made u/s 2 (22)(e) of the Act by the assessing officer. It is ordered accordingly.
Cross Objection No.53/Bang/2013 - by the assessee:
7. At the out-set, we would like to point out that the issue of addition made u/s 2 (22)(e) of the Act has since been adjudicated in favour of the assessee in Revenue's appeal (supra), the cross objection of the assessee on the same issue becomes superfluous. Accordingly, the assessee's cross objection is dismissed as infructuous.
8. In the result:
(i) the Revenue's appeal is dismissed; & (ii) the Cross Objection of the assessee is dismissed as infructuous.
The order pronounced in the open court on 29th November, 2013.