Sections 2(22)(e) not applies to loans from sister concern on commercial basis

Jayson Industries Vs ITO (ITAT Delhi)

Assessee firm has obtained loans from the sister concern on commercial basis. On facts it has emerged that the lender company has charged interest on advances made to assessee firm. The assessee has taken plea that the advances made by the lender company to the borrower assessee firm is not a loan/advance but is beset with the character of quid pro quo owing to charge of interest for the benefit of lender company. In the circumstances, the Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra vs. CIT, (2011) 338 ITR 538 (Cal.) has observed that advances given by lender firm was not for the individual benefit of the shareholder but for business purposes and therefore such transactions could not fall within the sweep of deeming fiction created under Section 2(22)(e) of the Act. This reason on a standalone basis is sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee firm. Similar view has been expressed in PCIT vs. Mohan Bhagwatprasad Agrawal, (2020) 115 taxmann.com 69 (Guj.). Also, the same view has been followed by the Co-ordinate Bench of the Tribunal in Smt. San geeta Jain vs. ITO in ITA No.1817/Kol/2009; Assessment Year 2006-07, order dated 11^th March, 2016. Hence, the loan obtained being not gratuitous in nature, do not fall within the mischief of Section 2(22)(e) of the Act.

FULL TEXT OF THE ORDER OF ITAT DELHI

The captioned Appeals arises from the respective orders of CIT(A) for different assessment years tabulated hereunder:

2. All the four appeals are interconnected pertaining to same assessee and have been heard together. We shall proceed with the captioned appeals hereunder:

ITA No.4446/Del/2016 (Assessment Year 2012-13)

3. The grounds of appeal raised by the assessee reads as under:

“1. That on the facts and circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) erred in upholding the addition of Rs.3,12,600/- out of Rs.10,43,211/- incurred on Moulds Manufacturing & Repair expenses, by applying section 40A(2)(b) of the Act.

1.1 That the Learned Assessing Officer as well as the Learned Commissioner of Income Tax (Appeals) failed to appreciate and distinguish the services rendered by the related party and other parties.

1.2 That the observation of the Learned Commissioner of Income Tax (Appeals) that the AO has compared the CNC / AMC changes for Moulds in the market, being factually incorrect and not based on any evidence, the disallowance made in assessment deserves to be deleted.

2. That on the facts and circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) erred in upholding the addition of Rs. 25,43,262/- u/s. 2(22)(e) of the Act, as deemed dividend.

2.1 That the Learned Commissioner of Income Tax (Appeals) as well as the Learned Assessing Officer ought to have held that the assessee not being a shareholder of the Lender company, no addition could be made to its income u/s 2(22)(e) of the Act.

3. WITHOUT PREJUDICE to ground no.s 2 & 2.1 above, the Learned Commissioner of Income Tax (Appeals) erred in holding that granting of loans was not “Substantial Business” of the lender.

4. That the lower authorities failed to appreciate the nature of appellants’ business and in holding the expenditure as personal in nature, without bringing any evidence on record that the same were personal in nature.”

3.1 Ground No.1 of the appeal of the assessee concerns disallowance of Rs.3,12,600/- by invoking Section 40A(2)(b) of the Act.

3.2 It is the case of the assessee that the actions of the Revenue authorities are misconceived on facts and law. The assessee contends that both Assessing Officer and CIT(A) misdirected themselves in making disallowances on factually incorrect premise. With reference to the P&L account and the submissions made before the CIT(A) on factual position, it was contended that the Assessing Officer has compared the expenses incurred and paid to the sister concern, Jaypee Tehnoplast Pvt. Ltd., with outside party, namely, Kalsi Mould and Dyes whereas the nature of services rendered by both the entities are wholly different. The assessee points out that the entity, namely, Kalsi Mould and Dyes tenders services in CNC (Computerized Numerical Milling Machine) segment whereas the sister concern has provided AMC services. With reference to the submissions made before the CIT(A), the assessee submits that the assessee is engaged in the business of manufacturing of plastic goods and has obtained services under AMC related to Mould Manufacturing and Repair Expenses from the related party and CNC Services from unrelated party and both the services are not comparable and thus cannot be the basis for determination of fair market value by invoking the provisions of Section 40A(2)(b) of the Act.

3.3 We find justification in the case made out on behalf of the assessee. While the assessee has demonstrated that the nature of services are different, the CIT(A) has confirmed the action of the Assessing Officer without taking cognizance of such facts. Secondly, the CIT(A) has observed that the Assessing Officer has made disallowance towards excessive payment to relative party under Section 40A(2)(b) on the basis of fair market value but however the source of fair market value is in unknown territory. Except for the comparison with the amount paid to Kalsi Mould and Dyes vis-à-vis amount paid to sister concern (Jaypee Technoplast Pvt. Ltd. which are stately engaged in rendering different services and also, one is time based on seamless basis while other is essentially service based, the comparison is rightly claimed to be unjustifiable. We thus find merit in the plea of the assessee for lack of sound basis for determination of ‘fair market value’ and consequent inapplicability of Section 40A(2)(b) in the facts of the case. We thus set aside the action of the Revenue Authorities and restore the stance of the assessee. Ground no.1 of the appeal of the assessee is allowed.

3.4 In the result, Ground No.1 of the appeal of the assessee is allowed.

4. Ground No.2 concerns addition of Rs.25,43,262 under Section 2(22)(e) of the Act.

4.1 Briefly stated, the assessee (partner firm) obtained loan from the sister concern, namely, M/s. Jaypee Technoplast Pvt. Ltd. One of the partners of the firm, Ms. Anita Jain holding profit sharing ratio of 25% in the firm (recipient of loan) is also holding 14.52% shares in the lender company, namely, M/s. Jaypee Technoplast Pvt. Ltd. The assessee firm herein obtained loan of Rs.32 lac from the company as on 31.03.2012. The Assessing Officer invoked the provisions of Section 2(22)(e) on these facts and made an addition of Rs.25,43,262/- i.e. to the extent of accumulated profits lying as reserve and surplus of the lender company with reference to Section 2(22)(e) of the Act.

4.2 Before the CIT(A), the assessee contended that the assessee-firm has taken the loan on commercial terms and paid interest @ 12% to the lender company. It was further pointed out that the substantial business of the lender company was to advance loan and therefore, Section 2(22)(e) has no applicability in the facts of the case. The CIT(A) however confirmed the additions made by the Assessing Officer. The CIT(A) rejected the contention of the assessee that the main business of the lender company is plastic manufacturing which cannot be equated with the substantial business.

4.3 Before us, the plea taken on behalf of the assessee is summarized hereunder:

(i) the loan has been obtained by the assessee on payment of interest in ordinary course of business of lending by the lender company.

(ii) the ‘substantial business’ need not be ‘main business’ of the assessee in the light of the judgments in the case of CIT vs. Parle Plastic Ltd., (2011) 332 ITR 63 (Mum) and CIT vs. Bharat Hotels Ltd., (2019) 410 ITR 417 (Del).

(iii) the assessee firm in itself has neither invested its own funds in the lender company directly or through its partners nor the assessee firm is a shareholder of the lending company and thus the ratio of judgment of Hon’ble Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. (2012) 340 ITR 14 (Del) and the ratio of judgment of Hon’ble Apex Court in the case of Madhur Housing and Development Company, (2018) 401 ITR 152 (SC) shall squarely apply and thus no addition is permissible in the absence of the assessee firm being neither registered shareholder nor a beneficial shareholder in the lender company.

4.4 On careful consideration of the facts and arguments narrated above, we notice at the outset that the assessee firm has obtained loans from the sister concern on commercial basis. On facts it has emerged that the lender company has charged interest on advances made to assessee firm. The assessee has taken plea that the advances made by the lender company to the borrower assessee firm is not a loan/advance but is beset with the character of quid pro quo owing to charge of interest for the benefit of lender company. In the circumstances, the Hon’ble Calcutta High Court in the case of Pradip Kumar Malhotra vs. CIT, (2011) 338 ITR 538 (Cal.) has observed that advances given by lender firm was not for the individual benefit of the shareholder but for business purposes and therefore such transactions could not fall within the sweep of deeming fiction created under Section 2(22)(e) of the Act. This reason on a standalone basis is sufficient to exclude the applicability of Section 2(22)(e) of the Act on the money received by the assessee firm. Similar view has been expressed in PCIT vs. Mohan Bhagwatprasad Agrawal, (2020) 115 taxmann.com 69 (Guj.). Also, the same view has been followed by the Co-ordinate Bench of the Tribunal in Smt. San geeta Jain vs. ITO in ITA No.1817/Kol/2009; Assessment Year 2006-07, order dated 11^th March, 2016. Hence, the loan obtained being not gratuitous in nature, do not fall within the mischief of Section 2(22)(e) of the Act. We thus opine that the action of the Assessing Officer runs counter to the mandate of Section 2(22)(e) of the Act on this score alone. Hence, we are not inclined to examine other limbs of arguments raised on behalf of the assessee.

4.5 In the result, Ground No.2 of the appeal of the assessee is allowed.

ITA No.2406/Del/2018 (Assessment Year 2014-15)

5. As per its grounds of appeal, the assessee has challenged the addition of Rs.8,60,006/- under Section 2(22)(e) of the Act.

5.1 The facts of the issue being similar to the Ground No.2 of the appeal in ITA No.4446/Del/2015, the observations made in ITA No.4446/Del/2015 shall apply mutatis mutandis to the facts of this case. Hence, we see no justification in additions made under Section 2(22)(e) of the Act.

5.2 In the result, the appeal of the assessee is allowed.

ITA Nos. 6640/Del/2019 (Assessment Year 2012-13) and  9595/Del/2019 (Assessment Year 2014-15)

6. Both these appeals concern imposition of penalty of Rs.8,82,462/- (Assessment Year 2012-13) and Rs.3,50,000/-(Assessment Year 2014-15) under Section 271(1)(c) of the Act in consequence of quantum additions discussed in ITA No.4446/Del/2016 (Assessment Year 2012-13) and ITA No.2406/Del/20 18 (Assessment Year 2014-15).

7. In our considered opinion, the penalty imposed under Section 271(1)(c) cannot survive for twin reasons;

(i) the quantum additions itself is devoid of merit.

(ii) the issue involved, at any rate, is highly debatable and thus no case of any concealment of income/furnishing of inaccurate particulars of income per se could be successfully made out by the Revenue.

8. The penalty imposed by the Revenue are thus reversed and cancelled.

9. In the result, both the appeals of the assessee are allowed.

10. In the combined result, all the four captioned appeals of the assessee are allowed.

Order pronounced in the open Court on 29/07/2022.