INCOME TAX OFFICER & ORS. VS PRIMA TRANSFORMER PVT. LTD. & ORS. -(ITAT)

1. The captioned appeals have been filed at the instance of the respective assessees against the respective appellate orders of the Ld. CIT(A)-9, Ahmedabad [CIT(A) in short] arising in the respective assessment orders passed u/s. 143(3) (of Income Tax Act, 1961) r.w.s. 147 (of Income Tax Act, 1961) tabulated as under:-

Name of the assessee Assessment year CIT(A) order dated Assessment order dated M/s. Prima Transformer Pvt. Ltd 2007-08 14.12.2015 13.03.2015 -do- 2008-09 -do- -do- -do- 2009-10 -do- -do- Shri Vinod Vitthalbhai Patel 2007-08 -do- 10.03.2015 -do- 2010-11 -do- -do- Shri Mitin A. Patel 2007-08 -do- -do- -do- 2008-09 -do- -do- -do- 2009-10 -do- -do-

2. The issue involved for all assessee herein being interconnected, all the matters were heard together for disposal by common order.

3. We shall first take up the grievance of the Revenue in respect of Assessee - Prima Transformers Pvt. Ltd. in ITA No. 573/Ahd/2016 concerning A.Y. 2007-08 for adjudication purposes.

3.1. The grounds of appeal raised by the Revenue concerning assessment years 2007-08 read as under:- The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.25,00,0007- made on account of deemed divided u/s.2(22)(e) (of Income Tax Act, 1961). The Ld, CIT(A) has erred in law and on facts by not appreciating that M/s Prima Automation Pvt. Ltd., in which both Shri Mitin A. Patel and Shri Vinod V Patel were substantial shareholders holding more than 20% of the paid up capital, had advances loan of Rs.24 lacs to the assessee company in which Shri Mitin A. Patel and Shri Vinod V Patel were substantial shareholders and held more than 20% of the paid up capital and further, the lending company named Prima Automation India Pvt. Ltd. also had accumulated profit and therefore the provisions of section2(22)(e) (of Income Tax Act, 1961) r.w. Explanation 3(a) r.w. Circular No.495 of 22/09/1987 will be applicable in the hands of the assessee company. The Ld. CIT(A) has erred in law and on facts by not considering the aforesaid Circular No.495 of 22/09/1987 relating to deemed dividend. The case falls under the exception No. 8(b) of the Circular No. 21 of 2015 dated 10/12/2015 which states that "where Board's order, Notification, Instruction or Circular has been held to be illegal or ultra vires, or... appeal may be filed irrespective of the quantum of tax effect." On the facts and circumstances of the case, the Ld. Commissioner of Income Tax(A) ought to have upheld the order of the Assessing Officer. It is, therefore, prayed that the order of the Ld. Commissioner of Income Tax(A) may be set-aside and that of the Assessing Officer be restored.

4. The Revenue, in essence, is aggrieved by the order of the Ld. CIT(A) deleting the addition made in the hands of the assessee on account of deemed dividend under section 2(22)(e) (of Income Tax Act, 1961).

5. When the matter was called for hearing, the Ld. Authorised Representative for the assessee in the captained Revenue appeal submitted at the very outset that the assessee has received a sum of Rs.25 lakhs in aggregate from M/s. Prima Automation Pvt. Ltd. which is alleged to be in the nature of deemed dividend within the meaning of section 2(22)(e) of the Income Tax Act, 1961. The Ld. Authorised Representative submitted that the AO on the basis of share holding details of the assessee company, observed that Shri Mitin A. Patel and Shri Vinod V Patel both holds 44% of the share holding of a lender company (Prima Automation) and also owns 42.5% shares of the assessee company. The Assessing Officer (AO) accordingly noted that both these individuals have substantial interest in the both companies i.e. the borrower (assessee) as well as the lender company. It was further noted by the A.O. that in view of the huge accumulated profits held by lender company far in excess of the amount lent, the borrower-company i.e. assessee is susceptible to tax in view of section 2(22)(e) (of Income Tax Act, 1961). In these facts, the Ld. Authorised Representative submitted that it is an admitted fact that the assessee company is not a share holder of the lender company nor is the lender company a share holder of the assessee company. The Authorised Representative accordingly contended that since the basic condition of recipient of the money to be a ‘share holder’ is not satisfied at the first instance, question the applicability of section 2(22)(e) (of Income Tax Act, 1961) in the hands of the assessee does not arise at all. The Ld. Authorised Representative accordingly submitted that the CIT(A) has appreciated the facts in perspective and in accord with plethora of judicial precedents available on the issue and accordingly found no justification for such additions. The Ld. Authorised Representative thereafter pointed out that the identical issue arose in the case of the DCIT vs. M/s. Corrtech Energy Limited ITA No. 113/Ahd/2013 where the Co-ordinate bench of Tribunal has taken a view in favour of the assessee in sync with the decision of various High Courts including judgment of Hon’ble Gujarat High Court in Corrtec Energy Limited. The Ld. Authorised Representative submitted that in view of the judgment of Hon’ble Gujarat High Court in its order dated 24.03.2014 in Tax Appeal No. 238 of 2014 relevant to A.Y. 2009-10 in the case of Corrtech Energy Limited and host of other similar judgements of other Courts, the issue is no longer res integra and therefore no interference with the order of the Ld. CIT(A) is called for.

7. The Ld. Departmental Representative, on the other hand relied upon the order of the Ld. CIT(A). It was contended that conditions of ‘substantial interest’ stipulated under s.2(22)(e) have been satisfied by the common shareholder and therefore additions made in the hands of Assessee being receipt of loan/advances is fully justified.

8. We have considered the rival submissions. The substantive issue that arises for consideration in the instant case is applicability or otherwise of mischief of section 2(22)(e) (of Income Tax Act, 1961) in the facts of the case. Section 2(22)(e) (of Income Tax Act, 1961) seeks to trigger taxability of loans/advances paid by a closely held company in certain circumstances. The assessee company in the instant case has received an amount of RS. 25 lakh from lender (Prima Transformers Pvt. Ltd.). It is the case of the assessee that it is not the share holder of the lender company and therefore the chargeability of income does not arise in the hands of the assessee having regard to the language employed in the deeming provisions of section 2(22)(e) (of Income Tax Act, 1961). The Assessing Officer, on the other hand, has contended that the assessee-company as well as the lender-company are interconnected and has common shareholders holding ‘substantial interest’ in both the companies contemplated under s.2(22)(e) of the Act. It was therefore claimed that mischief of deeming fiction to section 2(22)(e) (of Income Tax Act, 1961) is clearly attracted. We are in agreement with the contention of Mr. Pipara that where the assessee company was not a share holder of the lender- company per se, then notwithstanding a fact that both the companies have common share holder having substantial interest in both the companies, the taxability of deemed dividend in terms of provisions of s.2(22)(e) of the Act would not arise in the hands of the recipient- company (assessee) which is not the registered share holders of the lender company.

9. We find that the aforesaid proposition of law has been judicially decided in favour of the assessee by the Hon’ble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd. (supra). We also find that similar view has been taken by the Hon’ble Bombay High Court in the case of CIT vs. India Capital Market Pvt. Ltd. (2016) 387 ITR 510 (Bom.) and other long line of judicial precedents. Consequentially, the issue is no longer res integra. In the absence of assessee holding the shares in lending-company, the money received by assessee is thus not qualified to be taxed as ‘deemed dividend’ in the hands of assessee-company. Hence, we do not see any reason to interfere with the order of the Ld. CIT(A) absolving the assessee from the clutches of s.2(22)(e) of the Act. Thus, we decline to interfere with the relief granted by the CIT(A).

10. In the result, appeal of the Revenue in ITA No. 573/Ahd/2016 stand dismissed.

11. The appeal of the Revenue in ITA No. 574/Ahd/2016 and 575/Ahd/2016 concerning A.Y. 2008-09 & 2009-10 also stands on the same footing with A.Y. 2007-08. The assessee are not a shareholder of lending-company and other facts are also similar. The facts being similar, our view in A.Y. 2007-08 shall apply mutatis mutandis to other appeals noted above for parity of reasons Revenue appeal in ITA No. 573/Ahd/2016 & 574/Ahd/2016 are also dismissed.

12. We shall now turn to other appeals in ITA No.576/Ahd/2016, 577/Ahd/2016, 578,579,580/Ahd/2016 concerning applicability of s.2(22)(e) and consequent additions in the hands of share holders holding substantial interest in both lender as well as borrower company.

13. We shall first advert to ITA No. 576/Ahd/2016 relevant concerning A.Y. 2007-08 where provisions of section 2(22)(e) (of Income Tax Act, 1961) was invoked in the hands of share holders; namely Shri Vinod V Patel holding substantial interest in both companies.

13.1. Briefly stated, the assessee (Shri Vinod Vitthalbhai Patel) is stated to be shareholder holding substantial interest in the lender- company - Prima Automation (India) Pvt.Ltd. as well as borrower company namely Prima Transformer Pvt.Ltd. The lender-company has lent an amount of Rs.25 lakhs to the borrower-company. The AO in the course of the scrutiny assessment has accordingly assessed the aforesaid amount of loans/advances given by the lender-company to the borrower company as deemed dividend on protective basis as per section 2(22)(e) (of Income Tax Act, 1961) while fixing the tax liability on borrower-company on substantive basis.

13.2. In the first appeal, the CIT(A) deleted the aforesaid addition of Rs.25 lakhs in the hands of the assessee on the ground that the assessee himself has not received the impugned loans/advances from the lender company. The assessee not being recipient of the loan cannot be taxed under s.2(22)(e) of the Act notwithstanding a common shareholder holding ‘substantial interest’ in lending-company and borrower-company both. For this proposition, the CIT(A) relied upon the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Daisy Packers Pvt.Ltd. 220 Taxman 331 (Guj.) which in turn relied upon the decision of the Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. 340 ITR 14 (Delhi). The CIT(A) observed that the assessee (Shri Vinod Vitthalbhai Patel) who is the shareholder of lender-company has not received any loan from the lender-company. The protective additions therefore were not found justified by the CIT(A). The relevant operative para of the order of the CIT(A) read as under:-

“5.2. I have carefully considered the rival contentions and case laws relied upon by the appellant and observations made by the A.O. in the assessment order. It is observed that the AO has made the addition u/s.2(22)(e) (of Income Tax Act, 1961) on protective basis to protect the interest of Revenue. It is a matter of fact that the company namely Prima Automation Pvt.Ltd., had given a loan of Rs.25 lacs to Prima Transformers Pvt.Ltd. It is also a matter of fact that Prima Transformers Pvt.Ltd. is not a registered shareholder of Prima Automation Pvt.Ltd. No loan has been received by the appellant i.e. Shri Vinod V.Patel from Prima Automation Pvt.Ltd. The provisions of sec.2(22)(e) (of Income Tax Act, 1961) in respect of deemed dividend are applicable in case of a registered shareholder as decided in several judgments. There is a direct judgment of jurisdictional Hon’ble Gujarat High Court in the case of CIT Vs. Daisy Packers Pvt.Ltd. (TA No.212 of 2010) apart from other judgments relied upon by the appellant. In the present case, the appellant who is the shareholder of Prima Automation Pvt.Ltd. has not received any loan from Prima Automation Pvt.Ltd. Hence, on the facts and circumstances of the case as well as considering the legal position, the addition of Rs.25,00,000/- in the hands of the appellant as deemed dividend u/s.2(22)(e) (of Income Tax Act, 1961) on protective basis made by the A.O. is not justified. Accordingly the A.O. is directed to delete the same. Thus, this ground of appeal is allowed.”

13.3. The CIT(A) accordingly reversed the action of the AO and deleted the additions so made on protective basis by holding that the assessee not being the recipient of the loan is not hit by section 2(22)(e) (of Income Tax Act, 1961).

13.4. Aggrieved, the Revenue is in appeal against the action of the CIT(A).

13.5. The Ld.AR for the assessee in the revenue’s appeal, firstly submitted at the outset that the conclusion drawn by the CIT(A) is in consonance with the decision of Hon’ble Gujarat High Court in the case of Daisy Packers (supra) and the decision of the Hon’ble Supreme Court in the case of CIT vs. Madhur Housing and Development Company in Civil Appeal No.3961 of 2013 & Ors. judgement dated 05/10/2017 where the Hon’ble Apex Court has confirmed the Delhi High Court Ruling in CIT vs. Ankitech Pvt.Ltd. (2012) 340 ITR 14. Secondly, the Ld.AR submitted that apart from the fact that the assessee herein is not the recipient of the loan and thus covered by Ankitech Pvt.Ltd.(supra), the nature of transactions between the borrower-company and lender- company are commercial in nature. In elaboration, the Ld.AR adverted our attention to the ledger account demonstrating transactions between the lender and borrower company and contended that the transactions between the two-companies were continuous and mutual and at some instance there are receivable amounts, whereas in other instances there were payable amounts between the two-companies. It was thus asserted that such transactions in the nature of open, mutual and current account between the two-companies engaged in similar line of business and are in essence towards facilitation of business in contrast to the expression ‘loans and advances’ simplicitor contemplated under s.2(22)(e) of the Act. The Ld.AR submitted that having regard to the aim and object of the deeming fiction under s.2(22)(e) of the Act, the transactions of such nature where there is inflow as well as outflow of money having regard to the business exigency is outside the scope of provisions of section 2(22)(e) (of Income Tax Act, 1961). The Ld.AR thus submitted that the case of the revenue falls on this alternative grounds also. The Ld.AR pointed out that the Circular No.19/2017 dated 12/06/2017 issued by the CBDT also envisage that trade advance in the nature of commercial transactions would not fall within the ambit of provisions of section 2(22)(e) (of Income Tax Act, 1961). The Ld.AR exhorted that the transactions being commercial in nature between the lender and borrower-companies were also duly taken before the lower authorities. It is a different matter that this alternative contention was not adjudicated by the CIT(A) while granting relief on the substantive ground that the assessee is not the beneficiary of the loan and thus not susceptible to section 2(22)(e) (of Income Tax Act, 1961). Thirdly, the Ld.AR contended that the assessee being a shareholder of the lender-company as well as borrower-company has provided bank guarantee on behalf of the lender-company in the course of carrying on of its business. Therefore, apart from the transactions being commercial in nature, the element of quid pro quo do exists between the lender-company Prima Automation and borrower-Prima Transformer. The Ld.AR thereafter raised fourth alternative ground that such protective additions in the hands of the assessee could not have been made on protective basis merely to protect the interest of the revenue in the proceedings carried out under s.147 of the Act. In elaboration, the Ld.AR submitted that a protective assessment inevitably implies a case of probable escapement. Thus, a firm belief which is indispensible for invoking s.147 of the Act is found absent in the action of the AO. The Ld.AR accordingly submitted that the appeal of the revenue is required to be dismissed on any or all of the four grounds pointed out above.

13.6. The Ld.DR, on the other hand, relied upon the order of the AO and contended that either the borrower-company or the assessee (being a common shareholder) is required to be taxed for receipt of advance from the lender-company in terms of section 2(22)(e) (of Income Tax Act, 1961).

14. We have carefully considered the rival submissions. The short question in controversy is whether the assessee-company, a common shareholder in the lender-company as well as the borrower-company can be said to be hit by the provisions of section 2(22)(e) (of Income Tax Act, 1961) for the loans/advances granted by the lender-company to the borrower-company.

14.1. The assessee has raised four defense to support the conclusion of the CIT(A), namely (i) the assessee (common shareholder in lender- company and borrower company) is not the recipient of loan and therefore not susceptible to the provisions of section 2(22)(e) (of Income Tax Act, 1961) in view of the decision of the Hon’ble Gujarat High Court in the case of Daisy Packers(supra) and Hon’ble High Court in the case of Anitech (P) Ltd.(supra) as approved by Hon’ble Supreme Court in Madhur Housing; (ii) the transactions between the lender-company and borrower-company are commercial in nature for facilitation of business and therefore covered by the beneficial interpretation rendered by CBDT Circular No.19/2017; (iii) the assessee has provided bank guarantee to the lender for facilitation of its business and therefore the receipt of loan/advance is an act of quid pro quo and (iv) the protective additions under s.147 of the Act in the hands of the assessee is not sustainable in law having regard to the phraseology of substantive provisions of section 147 (of Income Tax Act, 1961).

14.2. On perusal of the CIT(A), we find that the CIT(A) has reversed the action of AO and granted relief to the assessee on first parameter itself i.e. the assessee not being a recipient of the loan cannot be taxed under the deeming fiction of section 2(22)(e) (of Income Tax Act, 1961). The CIT(A) has not addressed the issue on other alternative grounds. We find that the first defense of the assessee is legal in nature and is supported by the decision of the Hon’ble Gujarat High Court in the case of Daisy Packers (supra) and the decision of Hon’ble Delhi Court in the case of Ankitech (P) Ltd.(supra) as approved by Hon’ble Supreme Court in Madhur Housing. The decision continues to hold the field as on date although issue has been referred to larger bench by the Hon’ble Supreme Court.

14.3. We shall now advert to the second alternative plea raised on behalf of the assessee that the transactions are open, mutual and current and are in the nature of trade advances. The plea taken in this regard before lower authorities have not been rebutted. Thus, in view of the CBDT Circular, the trade advances stand excluded from the ambit of section 2(22)(e) (of Income Tax Act, 1961).

14.4. We now next turn to another plea of the assessee that the advances made by the lender-company to the borrower-company is not a loan/advance simplicitor but is beset with the character of quid pro quo owing to the personal guarantees of the shareholder for benefit of the lender-company.

14.5. We also take note of the fourth plea on behalf of the assessee that a protective assessment under s.147 of the Act to merely safe-guard the interest of the Revenue is not sustainable in re-assessment proceedings under s.147 of the Act. A protective assessment impliedly means that the AO is not sure about the escapement in the hands of this assessee but merely seeks to cover the possible revenue loss. This, in our view, is contrary to the mandate of section 147 (of Income Tax Act, 1961) which provides that it is incumbent upon the AO to have positive belief towards escapement (in contrast to probable escapement) based on the material available on record. Clearly, the action of the AO runs counter to the mandate of section 147 (of Income Tax Act, 1961). Notably, the case of escapement of income qua assessee herein is not finally ascertained even at the assessment stage pursuant to notice for re-opening under s.147/148 of the Act.

15. Hence, in view of the discussion noted hereinabove, we find merit in the plea of the assessee on all counts. Therefore, we find no justifiable reason to interfere with the conclusion drawn by the CIT(A).

16. In the result, appeal of the Assessee in ITA No.576/Ahd/2016 for AY 2007-08 is dismissed.

17. The Revenue has filed similar appeals in ITA Nos.577, 578, 579 & 580/Ahd/2016 against the captioned assessees for different assessment years as captioned.

18. The issue involved as well as the facts in all the other four appeals are identical. Therefore, the conclusion drawn in ITA No.576/Ahd2016 shall apply mutatis mutandis to ITA Nos.577 to 580/Ahd/2016 (supra). Thus all the other appeals in ITA Nos.577 to 580/Ahd/2018 are also dismissed.

19. In the combined result, all the eight appeals of the revenue are dismissed.

This Order pronounced in Open Court on 02/ 04/2018

Sd/- Sd/-

( S.S. GODARA ) ( PRADIP KUMAR KEDIA )

JUDICIAL MEMBER ACCOUNTANT MEMBER