Case Law Details

Case Name : Shri Vinod Kumar Mittal Vs ITO (ITAT Jaipur)
Appeal Number : ITA No. 783/JP/2016
Date of Judgement/Order : 9/02/2018
Related Assessment Year : 2013-14
Courts : All ITAT (7595) ITAT Jaipur (242)

Shri Vinod Kumar Mittal Vs ITO (ITAT Jaipur)

The provision of S. 2(22)(e) along with its Explanations – 2 as stood at the relevant point of time, shall only mean that the expression “accumulated profits” shall only include all the profits of the company up to the date of distribution which are normal revenue profits. The words used are plain, clear and unambiguous that only the profits of the company are to be considered for this purpose. The said provision nowhere indicates that capital subsidy/grant should also be included/ considered within the expression “accumulated profits”.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The assessee has filed an appeal against the order of the ld.CIT(A), Ajmer dated 27-07-2016 for the Assessment Year 2013-14 raising therein following grounds of appeal.

“(1) (i) On the facts and circumstances of the case the learned CIT (Appeals) was not justified in sustaining addition of Rs.43,45,236/- treating the same as deemed dividend under sec. 2(22)(e) of the I.T.Act, 1961.

(ii) Both the lower authorities have erred in law and on facts of the case by not appreciating the facts that the transactions entered into are in the nature of current accommodation adjustments accounts/trade advances and are not in the nature of loan or advance and therefore the very provisions of section 2(22)(e) of the Act would not apply.

(iii) Both the lower authorities have erred in law and on facts of the case by not appreciating the facts that the appellant shareholder has not received any payment from the company for his individual benefit and therefore provisions of section 2(22)(e) of the Act cannot be invoked at all.

2. On the facts and circumstances of the case the learned CIT (Appeals) was not justified in confirming disallowance of interest expenses of Rs.46890/- inspite the fact that assessee have interest free loan and his own capital.

2.1 Apropos ground No. 1 of the assessee, the AO observed that the assessee was in receipt of Rs.14.47 crores from one M/s Dhanvarsha Oil Mills Pvt. Ltd. (“Dhanvarsha/the company” for short) in which he was having a substantial interest of shareholding with voting power of more than 24%. Since, as per the AO, this was a loan taken by the Pvt. Ltd. Co., the AO considered the same as a case of deemed dividend u/s 2(22)(e). The assessee submitted that it was in regular dealing with Dhanvarsha. Dhanvarsha is engaged in the manufacturing of edible oil whereas the assessee is engaged in the trading or oil, oil cakes etc. Therefore, there are continuous transaction of purchase and sale between the parties, not only in this year but in the previous year and later year as well. The assessee contended that the amount of Rs. 14.47 crores was the credit balance in the regular course of the regular course of the business dealings, but the AO rejected such contentions. Thus the AO made the addition of Rs. 49,74,429/- u/s 2(22)(2) of the Act in the hands of the assessee by observing as under:-

‘’Thus after considering all the facts of the case in its legality, an addition of Rs. 49,74,429/- {Rs. 36,87,000/-which is the reserve available with the company + Rs. 6,58,236/- profit brought forward from previous years + Rs. 6,29,193/- profit earned during the year)(restricted to the extent of accumulated profit of the company) being made to assessee’s total income u/s 2(22)(e) of the I.T. Act, 1961 being deemed dividend.”

2.2 Being aggrieved, the assessee carried the matter before the ld. CIT(A) who partly confirmed the action of the AO by observing as under:-

“4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. It is seen that there is no dispute about the fact that the appellant was the beneficial owner of shares holding not less than 10% of the voting power in M/s Dhanvarsha Oil Mill Pvt. Ltd., during the previous year relevant to A.Y.2013-14. The appellant has contended that since the advances accepted by the appellant from M/s Dhanvarsha Oil Mill Pvt. Ltd. were utilized by him for his business purposes, therefore, the advances received by the appellant from M/s Dhanvarsha Oil Mill Pvt. Ltd. can not be treated as dividend u/s 2(22)(e) of the I.T.Act. I have gone through the provisions of section 2(22)(e) and the decision relied upon by the appellant carefully. Neither in section 2(22)(e) nor any of the decisions relied upon by the appellant, it has been held that if the recipient of loan of advance is utilizing the amount of loan or advance for his business purposes, the loan or advance shall not be treated as dividend u/s 2(22)(e). Therefore, the contention of the appellant that amount received by the appellant as advance from M/s Dhanvarsha Oil Mill Pvt. Ltd. is not dividend u/s 2(22)(e), is not acceptable. However, the another argument of the appellant that the profit earned during the current financial year can not be treated as accumulated profit for the purpose of computing dividend u/s 2(22)(e), is not found acceptable, in view of the decision of Supreme Court in the case of CIT vs. V.Damodaran 13 CTR 0191. Hence, the amount of accumulated profit, for the purpose of computing deemed dividend u/s 2(22)(e)is restricted to Rs.43,45,236/- as against the accumulated profit computed by the AO at the Rs.49,74,429/-, by excluding the current year’s profit of Rs.6,29,193/-. As far as the amount appearing under the head “capital reserve” (Rs.36,87,000) is concerned, it is very much part of the accumulated profit for the purpose of computing the dividend u/s 2(22)(e). Accordingly, the addition made by the AO is reduced to Rs.43,45,236/- from Rs.49,74,429/-. The appellant gets relief of Rs.6,29,193/-.”

2.3 Before us, the ld. AR submitted the detailed submission as under:

1.1. Firstly, the entire case to be seen is whether the subjected amount so received by the assessee, up to the extent of Reserves & Surplus is in the nature of loan or advance in its true legal meaning in the context of Sec.2(22)(e).

1.2.1 Sec.2(22)(e) applies to any payment by a company to a substantial share holder by way of advance or loan. Where payment is made for business consideration, the same is not covered by deeming fiction of section 2 (22)(e). It being a deeming fiction needs to be construed strictly.

For applicability of this section, following conditions should be satisfied:-

(i) There should be a payment.

(ii) Payment should be of a sum.

(iii) Such payment should be byway of loan or advance.

Therefore, unless & until all the above conditions are satisfied, deeming fiction would not be attracted.

1.2.2 In view of the object of s. 2(22)(e), the word ‘advance’ has to be read in conjunction with the word ‘loan’— Usually a loan involves positive act of lending coupled with acceptance of money as loan by the other side and there is an obligation of repayment — On the other hand, the term ‘advance’ in its widest meaning may or may not include lending — Word ‘advance’ if not found in the company of or in conjunction with the word ‘loan’ may or may not include the obligation of repayment — Applying the rule of noscitur a sociis, 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 — Thus, 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 s. 2(22)(e).

1.3 In order to cover any amount within the provisions of Sec.2(22)(e), it is necessary that the amount involved should either be “loan or advance”.

(i) The word “advance” has not been defined. However, in case of CIT Vs. Raj Kumar (2009) 318 ITR 462 (Del)(DPB 1-10), it was held that applying the Rule of “Noscitur a Sociis” which means that the words in an Act of Parliament is to be constructed with reference to the words found in immediate connection with them, the word “advance” has to be read in conjunction with the word “loan”. Usually attributes of a loan are that

(i) it involves a positive act of lending coupled with acceptance by the other side of the money as loan (ii) generally carries an interest (iii) obligation of repayment. Therefore, the word “advance” which appears in the company of the word “loan” could only be such advance which carries with it an obligation of repayment. Thus, trade advances which is in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of section 2(22)(e)

(ii) The transaction of loan involves lending delivery by one party & receipt by another party of sum of money upon express or implied agreement to repay it with or without interest. In case of Bombay Steam Navigation Co. (P.) Ltd. 56 ITR 52, 57 (SC), it was held that a loan of money results in debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources & loan is only one of such source. Every creditor who is entitled to receive a debt cannot be regarded as a lender.

(iii) In case of Ardee Finvset (P.) Ltd. Vs. DCIT 79 ITD 547/70 TTJ 378 (Del.) (Trib.) it was held that

Loan means “a lending; delivery by one party to and receipt by another party of sum of moneys upon agreement, express or implied, to repay with or without interest. For a loan there must be a lender, a borrower, a thing loaned for use, as well as a contract between the parties for the return of the thing loaned. A loan contracted no doubt creates a debt, but there may be a debt without contracting a loan. In a loan the mind and intention of the two parties, the lender and the borrower must be ad idem.” The expression “advance” means something which is due to a person, but which is paid to him ahead of time when it is due to be paid. In the Dictionary of Accounts by Eric L. Kohler (5thEdn.), the expression “advance” was defined as payment of cash or the transfer of goods for which account must be rendered by the recipient at some later date. Loan & advances could only be considered “deemed dividend” for the purpose of section 2(22)(e).It is, therefore, sine qua non, to ascertain the correct nature of the payments. The chief ingredient of s. 2(22)(e) is that one should be shareholder on the date the loan was advanced to him. Where such ingredient is not established, the advance could not be taken as deemed dividend under s. 2(22)(e). It is settled rule of interpretation of a fiction that the court should ascertain for what purpose the fiction is created and after ascertaining the purpose, the court has to assume all facts which are incidental to give effect to that fiction. It will not be given a wider meaning than what it purports to do. Law dealing with fiction relates to that breach of jurisprudence which should be narrowly watched, zealously regarded and never to be pressed beyond its true limits. Taking into consideration the entire conspectus of the case, the receipt from H Ltd. was in the nature of share application money. It cannot be construed loan or advance. As such, the case of the assessee falls beyond the ken of s. 2(22)(e).—“

1.4 In CIT v/s Srinivasan (K) (1963) 50 ITR 788 (Mad HC) has defined that “advances means something which is due to a person but which is paid to him ahead of the time when it is due to be paid”.

2. Application on the facts of the present case:

2.1 Applying the above principles in the facts of the present case, the following important feature emerges:

1. There appears frequent receiving and giving of the amounts between the assessee and Dhanvarsha or vice versa.

2. Secondly, there is no interest payment by either of the parties on such receiving/giving or on debit/credit balance on any of the day during the previous year.

3. Similar position prevailed in the past 5-7 years as also in the later years.

2.2 The purpose and the object was that the assessee together with Dhanvarsh and other proprietary of the assessee (M/s V. M. Enterprises) constituted a group. As and when the assessee needed the fund to pay off the debts because of the purchases made by the assessee to third parties, it obtained funds from the said company. Similarly the said company too, as &when it needed the funds (and naturally with a view to stop the charging of the interest in the OD A/c), got back the funds from the assessee and put them in the bank. This is a common feature that in the group concerns, there are used to be frequent inter transfers of the fund between the parties as and when needed. Since no interest has been paid what comes out is that there was no receipt/repayment of any loan and rather it was in the nature of a running/current A/c being maintained by both the parties for their business convenience and in the irrespective business interest. The fact of there being shortage/requirement of the fund in the case of the assessee, is fully proved from a chart (PB 111­113). We may show, through a few examples, that there was scarcity of the funds in the bank as also in the cash in hand therefore, the assessee had to obtain the funds. At the same time the company also needed the funds to stop the interest and therefore, whenever the assessee was having plenty of funds, the company took back the same.

2.3 In the present case the transaction between assessee and M/s Dhanvarsha is not in the nature of loans or advances by any stretch of imagination, as evident that in the year under consideration assessee required temporarily more funds for its business and therefore M/s Dhanvarsha as a temporary accommodation provided Rs.14.48 crores to the company. This amount was paid back by the assessee to the company. Thereafter, when the company was in need of the fund, the assessee paid sum to the company. Copy of the account of assessee in the books of M/s Dhanvarsha is also submitted (PB 4-11). From this copy of account it can be noted that in A.Y.2009-10 also company gave temporary accommodation of Rs.14.48 Crores which was repaid back by the company. All these facts shows that VKM in course of business, on occasions, remained short of funds and therefore, in business interest, Dhanvarsha provided funds to VKM. Thus such receipts were in the ordinary course of business and under business expediency

2.4 In these facts & circumstances of the case, only because on various dates assessee has received Rs.14.48 Crores from Dhanvarsha, the same can’t be considered as a loan or advance particularly when the amount so received by the assessee is with reference to meet its temporary needs. Thus,the transaction between assessee and Dhanvarsha is a mutual, open, current/running account which is not a loan or advance as envisaged u/s 2(22)(e).

2.5 The contention that what went between the appellant & Dhanvarsha was nothing but mere accommodation/adjustment entry between the two entities is directly covered by the decision of the Hon’ble Gujrat High Court in CIT v/s Schutz Dishman Bio-tech Pvt. Ltd. DBITA No.958 & 959/2015 (DPB 11-14) vide order dated 21.12.2015 wherein, it was held as under:

“4. It can thus be seen that the Commissioner as a matter of fact found that the payments were not in the nature of current adjustment. There was movement of fund both ways on need basis. The transactions in the nature of loans and advances are usually very few in number whereas in the present case, such transactions are in the form of current accommodation adjustment entries. The Commissioner therefore, held that the transactions were not in the nature of loans and advances. The revenue carried the matter in appeal. The Tribunal concurred with the view of the CIT (Appeals) and held that amounts were not in the nature of Inter Corporate Deposits and were therefore, not to be treated as loans or advances as contemplated in section 2(22)(e) of the Act.

5. The issue is substantially one of appreciation of facts. When the CIT(Appeals) as well as Tribunal concurrently held that looking to large number of adjustment entries in the accounts between two entities, the amounts were not in the nature of loan or deposit, but merely adjustments, application ofsection 2(22)(e) of the Act would not arise. Consequently, no question of law arises. Tax appeals are dismissed.”

2.6.1The ld. CIT(A) rejected the contention in para 4.3 pg 8 by simply mentioning that neither the provision nor the decisions cited, have held that the recipient of the loans and advances though utilized for its business purpose yet the same shall not be treated as deemed dividend. In fact, the ld. CIT(A) has not at all understood/ purportedly ignored that the very purpose of introducing Sec. 2(22)(e) was to stop avoidance of tax liability u/s 115O by distributing the dividend under the guise of loans & advances meant for the benefits of the recipient shareholders. However, in the facts of the present case, where there is a frequent giving (of the amounts) and receiving back how it can be said that the amounts given were meant for the benefit of the recipient shareholders (so as to be treated as deemed dividend) when, the same recipient shareholder had also been giving the amounts to the same company time to time as and when needed. It is not at all a case where the amounts were given to the recipient shareholder for a long period.

2.6.2The AO was wrong to state in the assessment order that he himself had accepted in principle that Sec. 2(22)(e) if attracted in this case and this allegation was specifically denied before the ld. CIT(A) in his WS (pg 7 pr 4.2) nor it was so in letter dated 28-01-2016 to AO (PBP 14-16) otherwise there is no estoppels.

2.7 On this aspect, also kindly refer our detailed submissions filed before the ld. CIT(A) and reproduced in his order, particularly at page 6 & 7

2.8 Supporting Case Laws: For this reliance is placed on the following cases:-

(I) CIT v/s Creative Dyeing & Printing P Ltd. 318 ITR 476 (Del HC) it was held that

“Amount advanced to the assessee company by another company having common directors not being a loan but an advance f or business transaction which is to be adjusted against the moneys payable by the latter to the assessee company in the subsequent years, same did not fall within the definition of deemed dividend under s. 2(22)(e).”

(2) Mtar Technologies (P) Ltd. v/s ACIT 39 SOT 465 (Hyd Trib)

(3) CIT v/s Ambassador Travels (P) Ltd. 318 ITR 376 (Del HC)

(4) DCIT v/s Lakra Brothers (2007) 106 TTJ 250 (Chand. Trib) (DPB 41­47), it was held that

“The important words in the section are loan or advance and for the individual benefit of such shareholders. The loan is something different from debt. For a loan there must be a lender, borrower as well as a contract/agreement between the parties for the return of the loan amount. Every sale of goods on credit does not amount to a transaction of loan. In the case of assessee, there was a debit balance on account of the advance paid by AEPL and this was purely advance during the ordinary course of business for business expediencies. It cannot be said that there was intention of the company to give a loan. AO has never doubted the sequence of market service, exhibition at hotel and execution of orders in pursuance of the advance. It would have been a different story if AEPL would have made the payment by way of loan or advance to the partners of the assessee not for the purpose of business, but for their individual benefit. No specific defect has been pointed out in the conclusion of the CIT(A). The same is upheld.— Lakhmichand Muchhal vs. CIT (1961) 43 ITR 315 (MP) and CIT vs. Saurashtra Cement & Chemical Industries Ltd. (1975) 101 ITR 502 (Guj) relied on.”

(5) Sri Satchindananad S. Pandit v/s ITO 19 SOT 213(Mum Trib)

(6) In the case of ACIT v/s Shri Narayan J. Pagrani in ITA No. 7480/Mum/2011 vide order dated 13.08.2014 (DPB 48-51) wherein, it was held that “——————– the accumulated profits of company for the purposes of

2(22)(e)by taking the accumulated profits of earlier years as well as current year profits before tax, as reduced by capital investment subsidy of Rs 30 lacs, Income tax paid of Rs 3,32,000/-,Dividend distribution tax of Rs.63,514/- and prior period expenses of Rs.5,85,474/-and only thereafter to make the addition, to the extent of such accumulated profits, in hands of the appellant u/s 2(22)(e) of the Act.”

2.9 Other Supporting Case Law: In Krishna Kr. Pathak (HUF) vs. ITO (2004) 90 TTJ 940 (KolTrib) (DPB 15-17) held as under:

“The assessee(HUF) and the Karta of the assessee(HUF) were maintaining current account with each other and the transactions between them were in the nature of temporary adjustment/accommodation and there was no cash loan or deposit by the Karta of the assessee (HUF). The Department has not disputed the submission of the assessee (HUF) that no interest was paid or payable or received by either side. By passing the journal entry by the Karta of the assessee (HUF) on account of expenditure incurred by him for giving gifts to relatives on behalf of the assessee (HUF) does not amount to loan or deposit within the meaning of s. 269SS and as such, no penalty is leviable under s. 271D. Accordingly, the penalty is cancelled.—Shrepak Enterprises vs. Dy. CIT (1998) 60 TTJ (Ahd) 199 : (1998) 64 ITD 300 (Ahd), Muthoot M. George Bankers vs. Asstt. CIT (1993) 47 TTJ (Coch) 434 : (1993) 46 ITD 10 (Coch), Dillu Cine Enterprises (P) Ltd. vs. Addl. CIT (2002) 80 ITD 484 (Hyd) and Sun Flower Builders (P) Ltd. vs. Dy. CIT (1997) 61 ITD 227 (Pune) relied on.”

Karnataka Ginning & Pressing Factory v/s JCIT (2001) 72 TTJ 0307 (Mum Bench) – Temporary advance is not loan deposit.

Thus, the movement of the funds between the two group concerns was need based hence, such transactions were in the form of current accommodation adjustment entries and not being in the nature of loan & advance Sec.2(22)(e) was wrongly invoked.

3. Capital subsidy is not accumulated profit:

3.1 It is further submitted that the facts are not denied that the Reserves &Surplus including the b/f and current year profit totaling to Rs.49,74,429/-included the amount Rs.36,87,000/-received on account of a Capital Subsidy in the preceding year. Kindly refer the Audited Balance Sheet note: reserves and surplus (PB 1-2), and also reproduced at pg 8 top of the CIT(A) order. It is submitted that the provisions of Sec. 2(22)(e) can be applied only to the extent of the accumulated profits, which are revenue in nature and not otherwise.

3.2.1 In this case the Ministry of Food Processing Industries, New Delhi vide their letter dated 09.09.2008 (A.Y.2009-10)(PB 104) sanction grant-in-aid of Rs.18,43,500/- to the appellant “for setting up of edible oil plant as mentioned in the enclosed this (annexure I) as grant-in-aid under the scheme of setting up/modernization/explanation/technology up gradation”. Further such grant-in-aid was subject to various terms & conditions as were mentioned in annexure II. Thereafter, the said Ministry again vide their letter dated 10.05.2012 (A.Y.2013-14) (PB 101-103) has paid the second installment of the grant-in-aid of Rs.18,43,500/- to the appellant (out of the total grant-in-aid of Rs.36.87 lakhs) for the said very purpose and the same was also subjected to similar terms & conditions as mentioned in Annexure II. Such grant is continuously being shown by the company in its Balance Sheet.

3.2.2 It is very pertinent to note that in the case of Dhanvarsha the revenue has rather treated such amount as a capital subsidy therefore, no addition has been made in the assessment made for A.Y.2009-10 wherein part of the subsidy was received and again in A.Y.2013-14 where the other part was received. Of course, during the course of the assessment proceedings, this issue arose and was discussed at length hence, the assessee also submitted material in support of its contention that the subjected amount was a capital subsidy and was not revenue in nature which was accepted by the concerned AO after due satisfaction. The said company has never shown the amount of such subsidies as a credit to its Profit & Loss a/c in any of the preceding/succeeding/current years meaning thereby the company also treated the same to be of revenue nature. Kindly refer w/s dated 30-01-16 given to the AO by the company (PBP 17)

4.3.1 Another aspect to be considered is that the provisions of The Companies Act, 1956 r/w the relevant rules, the declaration and distribution of the dividend is subjected to certain limitations in as much as it can be declared and distributed only out of the operating profit only but never out of the capital subsidies. In that view of the legal position and restrictions put by the law, there cannot be any presumption of the distribution of dividend much less deeming as dividend which, otherwise is not permissible by the statute.

4.3.2 It is useful to refer to the definition of the expressions “accumulated profits”,“as provided in Explanation 1 & 2 to Sec. 2(22)”, reading as under:

“Explanation 1.—The expression “accumulated profits”, wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.

Explanation 2.—The expression “accumulated profits” in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up to the date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.”

The said explanation nowhere indicates that any amount of subsidy received on capital account is also to be included/considered within the expression “accumulated profits”. Thus, the legislature having provided specific definition of the expression “accumulated profits” wherein, there is no inclusion of the capital subsidy hence, it cannot be presumed that to make the deeming fiction workable u/s 2(22)(e), the scope of the expression “accumulated profits” should be enlarge even to the extent to include a capital subsidy which, otherwise by its very nature is not a profit much less a revenue profit/and than an accumulated profits.

4.4 The ld. CIT(A) however, rejected such contention summarily in para 4.3 pg 9 at simply saying that “……………. as the amount appearing under the head ‘capital reserve’ (Rs.36,87,000/-) is concerned, it is very much part of the accumulated profit for the purpose of computing the dividend u/s 2(22)(e)………………… ”. This was submitted to AO also vide w/s dated 28-01-16 (PBP 16) who made no adverse comments.

4.5 Covered Issue: This issue is directly covered on similar facts in the case of DCIT v/s Rajasthan Wires (P) Ltd. (003) 81 TTJ 0673 (JP Trib) (DPB 3140)wherein, it was held that

“Dividend—Deemed dividend under s. 2(22)(e)—Accumulated profits—Loan from S Ltd., a company in which assessee is holding substantial interest and voting power—Amount outstanding in the name of assessee in the books of S Ltd., under the head ‘loans and advances’ had to be treated as advance/loan to shareholder as envisaged under s. 2(22)(e)—In the absence of production of books of account or any other reconciliation, the contention that the amount was paid for expenses cannot be accepted—Expln. 2 to s. 2(22) clarifies that the words “accumulated profits” also include current profits of the company upto the date of distribution or payment referred in s. 2(22)(e)—Unabsorbed depreciation and losses as per IT Act cannot be allowed to be set off against the accumulated profits arrived at after making provision of depreciation and charging expenses—Further, capital receipts cannot be said to be earned profits available for distribution—Capital reserve on account of state capital investment subsidy, lab equipment subsidy and ISI subsidy provided by the State Government cannot be included in accumulated profits— Since the Revenue has not treated the amount of subsidy as revenue receipt nor the amount has been credited as profits in the accounts of S Ltd. in any of the earlier years, the contention that the amounts of subsidy were capital receipts has to be accepted—Thus, the subsidy amount cannot be termed as capitalized profits of the company—Only the current year’s profit could be treated as deemed dividend on the facts of the case”

Hence, the entire amount of capital subsidy of Rs.36,87,000/- cannot be treated as accumulated profits for the purpose of Sec.2(22)(e) and hence, kindly be deleted therefrom.

4.6 Also kindly refer our details submissions filed before the ld. CIT(A) and reproduced in his order.

5. In case of difference of opinion, the view favourable to assessee must be adopted in assessment. Kindly refer CIT v/s Vegetable Products (1973) 88 ITR 192 (SC), ACIT & ors. v/s Velliappa textiles ltd. & ors. (2003) 184 CTR 193 (SC).

Hence the impugned addition kindly be deleted in full.”

2.4 On the other hand, the ld. DR strongly relied on the orders of the authorities below.

2.5 We have heard the rival contentions and perused the materials available on record. From a careful perusal of the provision, it is clear that in order to attract the provisions of Section 2(22)(e) of the Act, it should be in the nature of loan or advance. On this aspect, we have gone through the various decisions cited by the ld.AR. We have also gone through the ledger accounts of the assesse and M/s Dhanvarsha Oil Mills Pvt. Ltd. in their respective books of accounts of the relevant year, copies placed at Paper book Pg. No. 4 to 11, and a chart placed at Pg. 111 to 113. We find that the facts of the present case establishes that it was a transaction of loan or advance. Hence, this plea of the assessee has no merit . However, the alternative argument of the ld. AR was that the provisions of Section 2(22)(e), if at all to be applied, could be applied only to extent of the accumulated profits which means only the revenue/operating profit and not a capital subsidy/grant. Whereas, in this case, out of the total subjected receipts of Rs. 43.45 lacs, Rs. 36.87 lacs was an amount, received by the assesse in the preceding year i.e A.Y 2012-13 and in this year, was on account of a capital subsidy. On this aspect, our attention was drawn towards a note in the Audited Balance Sheet as on 31.03.2013 and the breakup of the Reserve & Surplus placed at Pgs 1-2 of the paper book, which reads as under.

Reserve & Surplus

It is noticed that the Ministry of Food Processing Industries, New Delhi vide their letter dated 09.09.2008 (A.Y.2009-10)(copy placed at PB 104) sanctioned a grant-in-aid of Rs.18,43,500/- to the assessee “for setting up of edible oil plant as mentioned in the enclosed this (annexure I) as grant-in-aid under the scheme of setting up/modernization/explanation/technology up gradation”. Further such grant-in-aid was subject to various terms & conditions as were mentioned in annexure II. Thereafter, the said Ministry again vide their letter dated 10.05.2012 (A.Y.2013-14) (PB 101-103) has paid the second installment of the grant-in-aid of Rs.18,43,500/- to the assessee (out of the total grant-in-aid of Rs.36.87 lakhs) for the said purpose and the same was also subjected to similar terms & conditions as mentioned in Annexure II. Such grant is continuously being shown by the company in its Balance Sheet as a capital receipt under the head of Reserve and Surplus. A perusal of the Audited P&L account for the year ending 31.03.2013 does not show any credit on this account. Therefore, the grant of Rs. 36.87 lakhs appears to be a part of Reserve & Surplus in the Audited Balance Sheet of the company this year, as also in the preceding year. From the perusal of the letter addressed by the AR of the company to the AO, it is also noticed that the scrutiny assessment proceedings of M/s Dhanvarsha for the same year i.e A.Y 2013-14 were also going on simultaneously wherein, the same AO considered the receipt of the said amount of the subsidy (of balance of Rs.18,43,500/- received this year) as of capital nature and hence no addition appears to have been made on that account. It is not the case of the AO that the receipt of capital subsidy in A.Y. 2009-10 or in A.Y. 2013-14 was considered as revenue in nature and additions were made in the hands of the said company. The ld. DR could not deny from these facts nor he could show if the provisions of the Companies Act read with relevant rules, permits the consideration of the capital subsidy/grant as a part of eligible profit to be declared as a dividend. When asked the ld. AR denied that a capital subsidy cannot be distributed as dividend. The provision of S. 2(22)(e) along with its Explanations – 2 as stood at the relevant point of time, shall only mean that the expression “accumulated profits” shall only include all the profits of the company up to the date of distribution which are normal revenue profits. The words used are plain, clear and unambiguous that only the profits of the company are to be considered for this purpose. The said provision nowhere indicates that capital subsidy/grant should also be included/ considered within the expression “accumulated profits”. We are in full agreement with the decision of the coordinate bench cited by the ld. AR in the case of DCIT v/s Rajasthan Wires (P) Ltd. (003) 81 TTJ 0673 (JP Trib) (copy placed at Pg 31-40 of the decision paper book) wherein, a similar controversy was involved and it was held that

“….Further, capital receipts cannot be said to be earned profits available for distribution—Capital reserve on account of state capital investment subsidy, lab equipment subsidy and ISI subsidy provided by the State Government cannot be included in accumulated profits— Since the Revenue has not treated the amount of subsidy as revenue receipt nor the amount has been credited as profits in the accounts of S Ltd. in any of the earlier years, the contention that the amounts of subsidy were capital receipts has to be accepted—Thus, the subsidy amount cannot be termed as capitalized profits of the company—Only the current year’s profit could be treated as deemed dividend on the facts of the case”

In our considered opinion, the amount of capital subsidy of Rs. 36.87 lakh could not be considered as a accumulated profit and is out of the preview of the S. 2(22)(e) of the Act. Accordingly, the ld. CIT(A) was not justified in holding that the amount of capital subsidy was a part of accumulated profited to be considered as deemed dividend under S. 2(22)(e) of the Act. Therefore, for this reason also, the addition made of the deemed dividend to this extent was not justified. Thus the alternate plea of the assessee is allowed.

3.1 Apropos the Ground No. 2 of the assessee, the brief facts of the case are that the assesse had advanced Rs. 7,32,000/- interest free to one Shri Neeraj Kumar, who is son in law of the assessee, out of which Rs. 1,71,000/- were repaid. When asked as to why interest paid of Rs. 46,890/- should not be disallowed, it was stated that such interest free advance was made out of the capital of the assessee which was more than Rs. 40 lakhs. Hence, no part of interest could be disallowed. However, the AO rejected the contention saying that it was for the assessee to prove that the same was paid out of the capital because the assessee had raised interest bearing unsecured loans also. Hence, if the assesse was having sufficient fund, no prudent man like the assessee would go for interest bearing loans which shows shortage of funds with the assessee and that the assesse himself has accepted that Shri Neeraj Kumar was relative of the assessee who needed the funds for the purchase of a house. The subjected advance were not made for the business purposes as the assessee diverted his interest free funds to interest free loans. Hence, the AO made disallowance of Rs. 46,890/- u/s 37(1) of the Act.

3.2 Being aggrieved, the assessee carried the matter before the ld. CIT(A) who also confirmed the disallowance made by the AO by observing as under:-

“5.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. The assessee has not furnished any fund flow statement to substantiate his claim that advances of Rs.7,25,000/- given to Shri Naresh Kumar Jain was out of his own capital or interest free funds available with him. Interest paid is allowable under section 36(1)(3), only if, the interest is paid in respect of capital borrowed for the purpose of business only. The assessee has not furnished any evidence to show that the advance of Rs.7,32,000/- given to Shri Naresh Kumar Jain was for business purposes, or the advances were given out of the interest free funds available with him. Therefore, the disallowance of interest of Rs.46,890/- made by the AO is hereby confirmed.”

3.3 Now the assessee is in appeal before us. During the course of hearing, the ld.AR of the assessee submitted detailed written submission and relied upon case laws. He submitted that the assessee is having interest free funds much larger than the interest free advances. Hence, a presumption would arise that interest free loans & advances were be only out of interest free funds and not out of interest bearing borrowings. The AO has not denied the facts that the assessee was having interest free funds being capital more than Rs. 40 lacs and loans to the extent of Rs.95,71,170/-, as against which the alleged interest free loan was of Rs.7,92,300/- only which is much lower than the interest free funds. This Hon’ble Bench has also been taking a consistent view to this effect and replied upon ACIT v/s Ram Kishan Verma (2012) 143 TTJ 1 (Jp), which was affirmed by the Hon`ble Rajasthan High Court vide para 12 & 14 in the case of CIT v/s Ram Kishan Verma (2016) 132 Taxman 107 (Raj.) (DPB 18-25). He further submitted that a comparatively recent decision in the case of Hero Cycle P. Ltd vs. CIT (2015) 128 DTR 1/379 ITR 347 (SC) also directly supports the case of the assessee and similar view has been taken recently, after following the above decisions in M/s Allen Career Institute in ITA No.10/JP/13 for A.Y.2009-10 vide order dated 29.09.2017 (extract only DPB 26-30 in para 25 & 40). However, the ld. CIT(A) has ignored the annual statement of accounts and these basic admitted facts available on record. The assessee is not even required to prepare a fund flow statement to this effect. The ld.AR of the assessee thus prayed for deletion of disallowance in full.

3.4 On the other hand, the ld. DR strongly relied on the orders of the authorities below.

3.5 We have carefully considered the rival submissions with reference to the material available on record and also in the light of the various case laws cited at bar. The facts are not denied that the assessee was having a capital of more than Rs. 40 lakh. This contention was raised before the AO vide letter dated 28.10.2015 filed to the AO, copy of which is placed at Pg 12 of the assessee’s paper book. Thereapart, the assessee was having interest free loan to the extent of Rs. 95,17,170/- (Page 9 of ld. CIT(A) order). These submissions were made before the AO and CIT(A) both, as appearing from the respective orders wherein the relevant part of the submissions have been reproduced. As against this, the subjected interest free loan was only to the extent of Rs. 7,92,300/-. This facts were not denied by the ld. DR. A survey of the various case law cited shows that when the assessee is having mixed funds i.e interest free and interest bearing both and when the assessee is having interest free funds larger than the interest free advances, a presumption would certainly arise that interest free loans & advances to the relatives were made only out of interest free funds. The Hon’ble apex court in the case of Hero Cycle P. Ltd vs. CIT (2015) 128 DTR 1/379 ITR 347 (SC), held that

Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors.”

The Coordinate Bench in the case of ACIT v/s Ram Kishan Verma (2012) 143 TTJ 1 (Jp) has also held that “There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more.” Accordingly, in this case also, in absence of anything to the contrary, as per the settled legal position, a presumption can be drawn that advance given of Rs. 7,92,300/- to Shri Neeraj Kumar were out of the huge interest free capital of Rs. 40 lacs, which was many times more. In view of this, we do not agree with the observation of the ld. CIT(A) that the appellant failed to substantiate his claim by a fund flow statement. Thereapart, such interest free fund could be utilized by the assessee for any purpose whatsoever as held by the Hon’ble jurisdiction High Court in the case of ACIT v/s Ram Kishan Verma (supra) and also by Hon’ble Apex Court in Hero Cycle P. Ltd vs. CIT (supra).Hence, the CIT(A) was not justified in confirming the disallowance and the same is directed to be deleted. Thus Ground No. 2 of the assessee is allowed.

4.0    In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 9-02-2018.

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