3. We have considered the facts of the case and rival submissions. We find that evidence exists on record that M/s Ronex International was habitually importing materials from Kaks. It is also a fact that this concern placed an order with the assessee for import of brass and plastic zippers as seen from pages 35 and 36 of the paper book. The Kaks was earlier carrying on the business of export of zippers, a line of business which was abandoned. However, in view of the aforesaid order, it placed the order with the assessee for which a resolution was passed by the Board of Directors, as required under the Companies Act. Acting on the order, the assessee imported the zips from Shanghai East Dragon Ziper Making Ltd. of the value of US$ 30400. The goods were cleared on 15.7.1999 as per debit advice of Syndicate Bank, placed in the paper book on page 43. It is also seen that further materials were imported from the aforesaid Chinese concern of the value of US$ 7000 and US$ 28500 on 10.10.1999 and 13.1.2000, which were cleared on 19.11.1999 and 14.2.2000 respectively. From Annexure “A” of the written submissions, it is clear that against the advance of Rs. 25.00 lakh received on 25.6.1998, the assessee has incurred expenditure of Rs. 9,74,556/-and Rs. 16,43,208/- on 24.6.1998 and 30.6.1998 respectively in respect of customs duty and the cost of materials. As against the aforesaid, there is no evidence on record that the order placed by Ronex International was bogus. Therefore, there is nothing on record to come to a conclusion that advance of money by Kaks to the assessee was a device for diverting the funds of the company for the benefit of the assessee- director.
3.1 Coming to various cases relied upon by the rival parties, the learned CIT(Appeals) had quoted the case of Ardee Finvest (P)Ltd. Vs. DOT (2001) 79 ITD 547 (Del). In that case, the assessee had received share application money for allotment of shares. The shares were allotted in accordance with the provisions contained in Companies Act, 1956. The amounts were initially reflected as advances in the accounts and later on adjusted towards allotment of shares. The accuracy of the accounts was not challenged by the revenue. There was nothing on record to show that the share application money was received with a view to defraud the revenue. The revenue treated the amount as loan and brought to tax the same u/s 2(22)(e). The Tribunal pointed out that application of section 2(22Xe) involves consideration of two factors, whether- (i) the payment is a loan, and (ii) at the date when the payment is made there are accumulated profits to the extent of the loan. The Tribunal finally came to the conclusion that for interpreting a deeming provision, it is necessary to find out the purpose for which the fiction was created. A wider meaning cannot be given than what is stated in the fiction. Coming to the facts of the case, it was held that undisputedly the amount received was in the nature of share application money, which could not be construed as loan and, thus, the deeming provision contained in section 2(22)(e) could not be applied. Coming to the facts of our case, there is ample evidence on record that Kaks had placed orders for supply of material to the assesses The advance was made for this transaction.
Acting on the order, the materials were imported for assembly of zippers, but the sale could not be effected due to defect in the quality of the goods. Failure to effect sale will not render a commercial transaction to be a transaction of loan or advance. Therefore, the ratio of the aforesaid case supports the case of the assessee. Hon’ble Calcutta High Court had also an occasion to deal with the provisions contained in the aforesaid section in the case of Nandlal Kanoria Vs. CIT(1980) 122 ITR 405. The Hon’ble Court pointed out that conclusion in the matter involves finding of fact on two counts -(i) factum of the payment by the company, and (ii) motive or intention of the company making such payment, namely, a benefit granted to the assessee. On the facts of that case, it was pointed out that the sum of Rs. 75,000/-paid by a company to Indira & Company did lead to a benefit at least to the extent of user of the borrowed funds and, thus, the amount was caught within the mischief of section 2(22)(e) of the Act. In the case of the second amount of Rs. 2.00 lakh, it was pointed out that two amounts from two different sources blended in the hands of Indira & Company and out of the blended fund, a sumofRs. 2.00 lakh was advanced to the assessee. This does not lead to a conclusion that the amount of Rs. 2.00 lakh was advanced by the company and, therefore, it could not be taxed u/s2(22)(e)of the Act. From this case, it becomes dear that what is to be seen is whether the company made an advance or a loan to the assessee so that the assessee could draw a benefit in the sense that the money remained with it without payment of interest. The facts of this case are quite different from the facts of that case. In this case, Kaks wanted to export zippers to M/s Ronex International, for which it had received a confirmed order. In order to fulfill the contract, it asked the assessee to supply the zippers, for which an advance was made. The transaction was commercial in nature involving the advance and purchase of material. It was not an advance simplicitor. In such a circumstance, it cannot be said that the advance was made for the benefit of the assessee. Hon’ble Bombay High Court had also an occasion to discuss the issue in the case of CIT Vs. Nagindas M. Kapadia (1989) 177 ITR 393. In that case, the assessee had a running account with Maganlal Chhaganlal Pvt Ltd., which disclosed cash payments by the company amounting to Rs. 1,31,672/- and Rs. 3,86,000/- in assessment years 1968-69 and 1969-70 respectively. These amounts were taxed by the ITO as dividend u/s 2(22Xe). The Tribunal found that payments other than Rs. 28,500/- and Rs. 10,000/- in these years were made as advances towards purchases to be made by the company from the assessee and, therefore, only the aforesaid amounts were held to be taxable u/s 2(22Xe). The Hon’ble Court confirmed the findings of the Tribunal by pointing out that the Tribunal was right in excluding the advances towards purchases to be made by the company from the assessee. We find that the advances made in this case are only for the purchases and the revenue has not shown that any amount was not towards the purchases. In any case, the customs -duty paid and the cost of material was more than the advance received by the assessee. Therefore, the ratio of this case supports the conclusion that the amount was not in the nature of. deemed dividend u/s 2(22)(e). We have already mentioned that this issue has been decided in favor of the assessee by the Tribunal for assessment year 2001-02. The assessment for this year was reopened on the basis of the findings given by the AO in his order for that year. That order does not survive in view of the decision of the Tribunal. Therefore, the order of the coordinate Bench also supports the case of the assessee.
3.2 Coming to the issue of the surrender made by the assessee, it may be mentioned that the surrender by itself is not enough to uphold an addition especially when complicated question of fact and law is involved. It is a fact that the assessee had received an advance from Kaks. This is a question of fact. However, whether the amount was dividend u/s 2(22Xe) or not is a question of law. An assessee is not expected to be well versed in law when it comes to dealing with the interpretation of a deeming provision. Therefore, in such a situation, a surrender made by the assessee under mistaken impression of law cannot be the sole ground for making the addition. It is a trite law to say that the principle of estoppel originated in the last contract and it has no application in the realm of fiscal statute, where the question has to be decided on proper appreciation of fact and the interpretation of law.