$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 01.02.2018
Pronounced on: 20.02.2018
+ ITA 637/2004
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Sh. Ruchir Bhatia, Sr. Standing
Counsel for Revenue.
versus
M/S PRASIDH LEASING LTD. ..... Respondent
Through: Sh. Ajay Vohra, Sr. Advocate with
Ms. Kavita Jha and Sh. Vaibhav Kulkarni,
Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A. K. CHAWLA
S. RAVINDRA BHAT, J.
1. The following questions of law arise in this appeal:
"1. Whether the Tribunal was right in holding that the advance
of a sum of `6.16 crores made by M/s Ginza Industries Ltd. to
the assessee cannot be taxed as deemed· dividend without
returning a finding that the lending of money was the
substantial part of the business of the said company (M/s Ginza
Industries Ltd);
2. Whether the Tribunal was right in holding that the Assessing
Officer had wrongly made disallowance of `43.50 paid by the
assessee to M/s Adani Associates towards guarantee
commission fee;
ITA 637/2004 Page 1 of 26
2. In this appeal under Section 260A of the Income Tax Act, 1961
(hereafter referred to as "the Act"), the Revenue is aggrieved and
challenges the order of the Income Tax Appellate Tribunal ("ITAT")
which held that amount of ` 6.16 crores which the assessee received from
M/s Ginza Industries Ltd. ("Ginza" hereafter) could not be taxable as
deemed dividend under Section 2 (22) (e) of the Act. ITAT too held that
the assessee was entitled to deduction of ` 43.50 lakhs paid as guarantee
fee to M/s Adani Associates (hereinafter referred to "Adani") for advance
received from Ginza.
3. The facts are that in the return of income filed by the assessee
company on 30.11.1995 Ginza (with its registered office at 133, Canning
Street, 3rd Floor, Room no. 17, Calcutta-700 001) was shown as sundry
creditor in its balance sheet to which an amount of ` 17,40,20,000/- was
due as at 30.03.1995. In this regard the assessee company was asked by
order sheet entry dated 09.09.1997 to furnish the information with date,
mode and purpose with which the credit of ` 17,40,20,000/- has been in
the account of Ginza Industries Limited in the books of accounts of the
assessee for each and every rupee. The assessee replied, stating that
during the year, it had indulged in the business of sale and purchase of
import licenses. It tied up with Ginza for procurement of License worth
` 50 crores approx. and had asked for advance of ` 20.00 crores for
procurement of license. It was also stated that Adani stood as guarantor to
Ginza, for the safe custody of the funds and in the Memo of their
agreement Adani was to be paid 2.5% as guarantee commission by it (the
assessee, Prasidh Leasing Ltd). The AO noticed, from the list of closing
stock of shares for the Financial year 1994-95 filed with the return of
ITA 637/2004 Page 2 of 26
income that the assesse held 17,67,642 shares of Ginza. Therefore, the
assessee company was asked to furnish the details of share holdings and
whether any share holders and Directors were common. Subsequently,
the assessee was asked to furnish particulars set out in a questionnaire.
4. A survey under Section 133A of the Act was conducted at Ginza's
office premises at Kolkata, on 06.02.1998. One of the purposes for this
survey was to ascertain if the interest free advance of ` 17.4 crores given
to the assessee company by Ginza was covered under the definition of
"Deemed Dividend" in terms of Section 2(22) of the Act. Summons were
later issued to Ginza to furnish further particulars.
5. The AO, by his order brought to tax certain amounts. He held that
the amount paid by Ginza fell within the description of the term "deemed
dividend" under Section 2 (22) (e) and found as follows:
In the case law cited above, it has been held that advances
towards purchase are not covered under section 2(22)(e). But
the fact in assessee's case is altogether different. These were no
purchase made by Ginza Industries Ltd. from the assessee to
show that purchase was the real motive for giving advances.
The copy of agreement and correspondences between the
parties shall be discussed subsequently. Right now it would be
important to find out whether purchase of license was the real
motive behind giving of advances.
If the advance was given really for purchase as the assessee
says, what was the need to have a guarantee. In the normal
business, where advances are given for purchases, the
purchases are generally made and the party does not ask for a
guarantee. Furthermore, the assessee had agreed to pay of
commission to Adani Associates @ 2.5% of the net advances
made which further substantiates that the motive for taking
ITA 637/2004 Page 3 of 26
advance for the assessee was not to supply the licenses to Ginza
Industries Ltd. but to enjoy the benefit of interest free advance.
The reason is that the assessee, if the agreement is considered
to be genuine, acknowledged that it stood benefited right at the
moment when advance was given. The assessee was to pay to
Adani Associates a commission of 2.5% on net of advance
which meant that the assessee admitted having been benefited
just by virtue of receiving the advance to such an extent that it
could pay a commission @ 2.5% out of its own resources. Now,
if the advance was really for purchases to be made for Ginza
Industries Ltd. and the assessee had no vested interest in the
amount of advance itself, why would it agree to pay the
commission. If purchases were not made, as it happened
assessee could not have gained anything if Ginza Industries
Ltd. had recalled its advance at a short notice of 3 days.
Instead it would have lost a few lacs of rupees on account of
commission to Adani Associates. The anomalies and
contradiction do not end here. There are a number of such
contradiction & which are discussed below. 1. The assessee
vide its letter dated 03.03.98 submitted, "the market of advance
licenses is such that spot payment and something advance
payments are required to block the desired deal. Therefore, M/s
Ginza Industries Ltd. were asked by the assessee company to
supply to it an advance, which may range up to Rs. 20 crores.
It would be interesting to see how the assessee had used or
parked its funds obtained as advance from Ginza Industries
Ltd. It purchased shares of different companies to the tune of
Rs. 8 crores. It gave a loan of 6.4 crores approx. to Adani
Finance & Investment Corporation Ltd. It also advanced load
to another 5-6 persons. Now on one hand the assessee says that
the business is such that one needs to make spot or advance
payments to block the deal. There is also a provision in the
agreement whereby Ginza Industries Ltd. could call back the
ITA 637/2004 Page 4 of 26
advance within 3 days. Now, the common sense would fell that
all these are not possible at the same time. The money from
advance is parked in investments in shares and loans and
advances to parties in Ahmedabad (Adani Finance) and
Calcutta (e.g. - Easter Housing Udyog, Marygold Estates etc.).
The assessee could be required to mobilize these funds within 3
days, if Ginza Industries Ltd. recalled it or within a day if it was
required to block deals in purchase of licenses. Would it be
possible for the assessee to sell off its shares and call all its
advances back in a day or two.
The answer is no. the payments from sale of shares could take
at least a 'week' depending on settlement period in stock
exchanges and it is not always possible to sell shares through
private placement especially if it is not pre-planned. Moreover,
no person takes a loan on interest which it may beasked to
repay in 2-3 days. So, the companies or persons to whom the
assessee advanced the loans did not obviously take the loan on
such an ad hoc basis. They must have taken the loan for some
period and even in case of an emergency could not be expected
to pay back in a matter of 2-3 days.
Any person who has so much liquidity that it can pay
back the loans within such a short period would not require a
loan at all. Only banks are expected to have such liquidity.
Furthermore, the rate of interest charged on these loans and
advances was approx. @ 12% per annum which clearly shows
that the loans were taken for medium to long term. Nobody
pays or take interest @12% on loans and advances which can
be called back within a short notice as short as 2-3 days. All
this goes on to show that the assessee company had invested the
funds with at least a medium term perspective. This shows that
the assessee could not have and did not have the intention to
purchase the shares.
ITA 637/2004 Page 5 of 26
6. The CIT (Appeals) whom the assessee approached, allowed the
plea that the amount could not have been treated as "deemed dividend"
holding as follows:
it is very clear that the moneys given by M/s Ginza Industries
Ltd. to the appellant company were given for the procurement
of licence as per the tripartite agreement dated 1.9.94. The AO
has tried to make much of the fact that no licence was
ultimately procured by the appellant company for Ginza and as
such this vitiates the entire agreements. This arguments, to my
mind, is misplaced. If no deal was struck at a competitive rate
acceptable to Ginza it doesn't mean that the purpose for t which
the moneys were advanced can be called in question. The
procurement of licences is a matter of performance and would
depend on so many factor, many of which would be beyond the
control of the appellant company, such as market sentiments
and unsettled conditions. The learned AR has raised a valid
point that as result of unstable condition in the lincene market
the parties were asking for higher rates and higher advances,
which M/s Ginza Industries Ltd. in the absence of the funds that
it would have secured as a result of the planned public issue,
could not come up with and, therefore, the deal had to be called
off. It is like an exporter traveling abroad in search of
contracts/orders and just because he fails to secure any
contract/ order the travelling expense being called in question.
The purpose behind a transaction and the results thereof do not
often go hand in hand. If that were not so all human endeavors
would lead to success but the story of real life is different. In
this case that intention in important and it is very clear form the
tripartite agreement and other evidence on record that the
purpose for moneys given by M/s Ginza Industries Ltd. to the
appellant company was to procure advance licences. Failure to
actually clinch any such deal does not in any way detract from
the purpose. 2.11(9) Keeping in view the facts and
ITA 637/2004 Page 6 of 26
circumstance of the case, as brought out in the preceding sub
paragraphs, the contention of the learned AR of the appellant
company that the issue is squarely covered in favour of the
appellant by the Hon'ble Bombay High Court decision in the
case of Nagindas M. Kapadia, 177 ITR 393, deserves to be
upheld. In the said judgement is has beheld that advance
towards purchases cannot be brought in the ambit of Section
2(22)(e). Therefore, it is clear that the AO erred in taxing Rs.
6,16,00,000/- as deemed dividend u/s 2(22)(e) of the Act. The
appellant company is entitled to a relief of Rs. 6,16,00,000/-.
7. The ITAT confirmed the conclusions of the CIT (A) and held as
follows:
13. After going through the facts, provisions of law and
finding of the Assessing Officer as well as of the CIT(Appeals),
we find that there is no dispute that the assessee company is a
shareholder having more than 10% equity and that anadvance
was given to the assessee. The content ion 0 f the assessee was
that the amount advanced was in the course of business and
hence cannot be treated as deemed dividend U/S 2(22)(e). We
further noted that even the Assessing Office raccepts in his
order somewhere that if it were in the course of business, no
deemed dividend could have resulted. However, the AO held
that there was no business transactions and all the transactions
entered into by assessee with M/s Ginza, along with other
companies from whom the import licences were to be
purchased, were involved just to save itself from the clutches of
section 2(22)(c). In our considered view. The CIT(Appeals) has
dealt with this objection at great length as he has considered all
the aspects of taking advance from MIs Ginza Industries for the
purpose of supply of import licences, as the assessee was not
dealing with import licences at that point of time, therefore, he
ITA 637/2004 Page 7 of 26
contacted one M/s Vimal Overseas and payment of handsome
amount i.e., of Rs. 8 crore was paid to this party directly to M/s
Ginza. Confirmation from M/s Vimal Overseas was filed. The
said confirmation of Vimal Overseas is placed on record,
whereby it was recorded
''This is to certify that the advance received [To M/s Prasidh
Leasing Limited/M/s Ginza Industries Limited during the
financial year 1994-95 as per the statement of account enclosed
with this letter was only for the supply of Import Export
Licences to them. "
forVimal Overseas
Dated: 28.5.98
Place: Delhi.
Sd/ Authorized Signatory"
14. We further noted that the CIT (Appeals) ascertained the
factual position by calling the details directly from M/s Adani
Associates, who is a leading company and found that M/s
Adani Associates was approached to be a Guarantor between
assessee and MIs Ginza, as it was acceptable to both. As a
guarantor M/s Adani Associates were to be paid 2.5%
commission of the amount received in advance on account of
purchase of import licence for M/s Ginza and accordingly a
sum of Rs. 43,50,000/- was payable to M/s Adani Associates. It
was further seen by the CIT(Appeals) that M/s Adani has shown
this amount as their income. The statement of the parties from
whom the import licences were to be purchased for M/s Ginza
Industries were also examined and found that the amount was
given directly by M/s Ginza Industries to the assessee for
purchase of import licenses. M/s Ginza Industries was to bring
a public issue and for that a detailed report was prepared. A
copy of that was prepared and the same is placed at pages 14 to
ITA 637/2004 Page 8 of 26
32 of the paperbook and in paragraph 32 of the notes at page
23 (Internal page 11 of the report) it has been clearly
mentioned that:
"Loans & Advances contains an advance of approx. Rs. 20
crores to Delhi based exporters, who will provide regular
advance licenses for duty free import of Polyester Yarn at a
concessional rate to the Company. In the event of the deal not
materializing, the party is to return the amount with int. @ 21
% p.a. before 28th February, 1995. This deal was entered into
so as to park the Company's surplus funds of a good return."
14.1 From this evidence it is clearly established that MIs Ginza
Industries, who was preparing for bringing a public issue, has
shown the advances given to assessee for the purpose of
purchase of import licences. Therefore, from these details it
cannot be said that there was any motive on part of the assessee
or MIs Ginza Industries to cover up the matter for saving the
assessee from the clutches of section 2(22)(e). Undisputedly,
M/s Ginza Industries is a limited company and no director or
shareholder are common in assessee company and of MIs
Ginza Industries. M/s Adani Associates is also a public limited
company and have no common shareholder or director. The
work of the assessee as well as of M/s Ginza Industries and
Adani Associates are totally different. The management is
different and objects are also different. The shares were
purchased by the assessee company by observing that M/s
Ginza IS an important company, whose public issue was
coming in near future, therefore, they purchased shares from
M/s Ginza directly and also from the market. The statement of
Managing Director of M/s Ginza were recorded by the
Assessing Officer and he had categorically stated that the
advance was given to the assessee for the purpose of purchase
ITA 637/2004 Page 9 of 26
of import license It is important to note here that when first
installment of advance was to Vimal Overseas, at that point of
time no shares of M/s Ginza Industries were purchased by
assessee company. More than Rs. 20 crores were advanced by
M/s Ginza Industries and the management of M/s Ginza
Industries and the management of assessee company were
different. Therefore, it cannot be said that M/s Ginza Industries
wants to save the' assessee from the clutches of section 2(22)(e)
by giving a colour of business transaction. A sum of Rs. 20
crore is not a small amount and there was 110 purpose other
than the business expediency for giving such a huge advance to
the assessee. Once the transaction were not materialized, as
M/s Ginza failed to bring the public issue, therefore thereafter
the total amount was returned to M/s Ginza. If by any reason
the business transaction could not been materialized, then it
cannot be said that there was any other motive other than
business expediency.
15. In view of all these facts and circumstances and in view of
the detailed reasoning given by the CIT(Appeals) in his order,
which could not be controverted by the learned D.R, we are of
the considered view that CIT(Appeals) was justified in holding
that the transactions entered into by the assessee with M/s
Ginza; for business consideration. The findings of the
CIT(Appeals) are findings of fact, as the CIT(Appeals) has
dealt with each and every objection of the Assessing Officer
and then arrived at a conclusion that the transactions entered
by assessee with M/s Ginza were', for business consideration.
Once it is established that the transactions
16. We have confirmed the finding of the CIT (Appeals) that
this was a business transaction. therefore, we are not inclined
to consider the alternate submission of both sides in regard to
ITA 637/2004 Page 10 of 26
accumulative profits of Mis Ginza Industries for the purpose of
section 2(22)(e).
8. The revenue argues that the ITAT failed to notice that no import
licences were purchased and sold to Ginza. In fact there was no
transaction whatsoever between the assessee and M/s Ginza. It is
submitted that the alleged agreement between assessee and M/ s Ginza
was vague, ambiguous and did not specify the rate/discount on purchase
of import licenses. Giving interest free advance of ` 20 crores under such
an agreement cannot be regarded as a genuine business transaction.
9. It is argued that M/s Ginza did not need import licenses for self-
consumption. The so-called project was at a drawing stage and merely a
proposal. It did not materialize. It is rather odd and strange for M/s Ginza
to enter into an agreement for purchase of import licences and agree to
make payment in advance of ` 20 crores, when the alleged project, for
which these were to be required, was being visualized and uncertain. It is
argued that the impugned order erroneously relied upon the draft
prospectus/document in terms of which Ginza had given loan/advance of
approximately ` 20 crores to the assessee to provide regular advance
licences for duty free imports of polyester yarn at concessional rates and
in the event of the deal not materializing, the assessee was to return the
amount 'with interest @ 21% per annum before 28 th February 1995. It is
argued that in terms of the alleged agreement dated 1.9.1994, the assessee
was not liable to pay any interest and substantial amounts were paid by
M/s Ginza to the assessee even in the month of March 1995 though the
deal had not materialized.
ITA 637/2004 Page 11 of 26
10. It is argued that the agreement, dated 01.09.1994 was merely a
cover up and camouflage for giving loans and advances to the assessee by
Ginza to get over provisions of Section 2 (22) (e) of the Act. `20 Crores
was not a small amount, therefore justification for giving the same should
have been given. The onus was upon the assessee to justify and prove that
it was a genuine business transaction.
11. The Revenue argues furthermore that the ratio of the decision in
Navnit Lal. C. Jhaveri v. K.K. Sen 1965 (56) ITR 198 squarely applies. It
is submitted that the object of introducing Section 2(22)(e) of the Income
Tax Act, 1961 was to curb the tendency of passing-off what would be
"dividends" as loans or other advantages to shareholders. Learned
counsel also relied upon Tarulata Shyam v. CIT 1977 (108) ITR 345,
(where the court had held that the position reflected in the books at the
end of the year is not conclusive and that if funds are actually given by
the company to its shareholder, which answers the description under the
provision, it would be treated as "deemed dividend") to say that similarly
loans camouflaged as trading advances fall within the mischief of
"deemed dividend" provision. Lastly, he also relied upon the judgment of
this Court in CIT v. Sunil Chopra 242 CTR (Del) 498, where the true
nature of a transaction, discerned by the AO was upheld and th e ITAT's
reasoning set aside.
12. Sh. Ajay Vohra learned senior counsel appearing for the assessee
contended that the ITAT and the appellate Commissioner recorded
correct findings which do not need to be distributed. It was submitted that
the sum of ` 6.16 crores was given by Ginza to the assessee for legitimate
ITA 637/2004 Page 12 of 26
and genuine purpose, i.e. for procuring import licenses. Though the AO
recorded statements made on behalf of Ginza through its officials, the
crucial part (omitted by him but considered by the lower appellate
authorities) was that the company intended to set-up a manufacturing
facility and also intended to trade in import licenses. The assessee had
expertise and knowledge in the field of dealing with such licenses. No
doubt, the manufacturing facility proposed by Ginza was not set-up in the
assessment year or even later but the fact remained that it had geared up
all its resources to do so.
13. Learned senior counsel highlighted that the approach adopted by
the CIT(A) and ITAT accord with the principles enunciated by several
decisions which is that merely because amount is given by a company to
its shareholder, it would not fulfill the character of a deemed dividend.
Whilst the AO is justified in examining the issue, he has to also take into
account commercial realities such as that quite often amounts are given in
the usual course of proceedings towards procurement of services or
purchases made. Often times, there is delay in the fulfillment of the
contract, i.e. supplies to be made or the services to be rendered. Ipso
facto, this would not convert a genuine transaction into a suspect one
attracting deemed dividend clause. Learned counsel relied upon the
judgment of this Court in CIT v. Creative Dyeing and Printing Private
Limited 2009 318 ITR 476; CIT v. Atul Engineering Udyog 2015 228
Taxmann 295 (All) and CIT v. Nagindas. M. Kapadia1997 (177) ITR
393. He also relied upon the circular issued by the CBDT which clarified
that amounts advanced by a company through a concern and adjusted
ITA 637/2004 Page 13 of 26
against dues for job work done or by a company to its shareholder to
install plant or machinery at its premises; amounts given as floating
security deposit by a company to its sister concern or shareholder for use
of electricity generators etc. were of trading transactions. The Circular
stated that it is, a settled position that trade advances, which are in the
nature of commercial transactions would not fall within the ambit of the
word advance` in section 2(22)(e) of the Act. Accordingly, henceforth,
appeals may not be filed on this ground by Officers of the
Department......
14. It was submitted that as far as the second question with respect to
the disallowance of ` 443.50 lakhs to M/s. Adani Associates is
concerned, the concurrent findings are based upon appreciation of
evidence by lower appellate authorities. Learned senior counsel
particularly relied upon the observations of the CIT(A) who had recorded
that the payment of guarantee fee in fact reinforced the genuineness of the
transaction, i.e. advance given to the assessee by Ginza. It was submitted
that the AO needlessly rejected the explanation given by the assessee in
this regard.
Analysis and findings.
Reg Point no.1.
15. Section 2(22)(e) of the Income Tax Act, 1961 reads as follows:
2. In this Act, unless the context otherwise requires,--
XXXX XXXX XXXX
(22) dividend" includes--
ITA 637/2004 Page 14 of 26
XXXX XXXX XXXX
(e) any payment9 by a company, not being a company in which the
public are substantially interested, of any sum (whether as
representing a part of the assets of the company or
otherwise) 10[made after the 31st day of May, 1987, by way of
advance or loan9 to a shareholder9, being a person who is the
beneficial owner of shares (not being shares entitled to a fixed rate
of dividend whether with or without a right to participate in
profits) holding not less than ten per cent of the voting power, or to
any concern in which such shareholder is a member or a partner
and in which he has a substantial interest (hereafter in this clause
referred to as the said concern)] or any payment by any such
company on behalf, or for the individual benefit, of any such
shareholder, to the extent to which the company in either case
possesses accumulated profits11 ;
16. The challenge, to a para materia provision, (i.e. 2(6A) of the
repealed Act of 1922) was repelled by the Supreme Court in Navnit
(supra). In Navnit (supra), the Supreme Court noted that there could be
three kinds of payments, i.e. payments made to the shareholder by a
company by way of advance or loan; (b) payments made on behalf of the
assessee and (c) payments made for the benefit of the assessee. The Court
then analyzed the para materia provision and said that 5 conditions are to
be met for its applicability; firstly that the company should be one in
which the public is not substantially interested within the meaning of the
expression in law, in the year in which loan is advanced. Secondly, the
buyer should be a shareholder at the date when the loan was advanced
regardless of the extent of shareholding. Thirdly, the loan to the
shareholder by the company can be deemed to be dividend only to the
ITA 637/2004 Page 15 of 26
extent to which it is shown that the company possessed accumulated
profit at the date of the loan; fourthly, the loan should not be advanced by
the company in its ordinary course of business and lastly that the loan
should remain outstanding at the instance of the shareholder's previous
year in relation to the concerned assessment year. The Supreme Court
also clarified the fourth condition by importantly holding that in other
words, this provision would not apply to cases where the company which
advances the loan to its shareholder carries on the business of money
lending itself;
17. In the present case, the assessee held shares in Ginza. However,
the extent of shareholding was not in terms of the statutorily prescribed
limits. It reached that level on 11.11.1994; by then Ginza had advanced
` 12,31,50,000/- (which was concededly not taken into account by the
AO). Undisputedly, Ginza was not a company in which the public was
not substantially interested because Floral Commercial Pvt. Ltd. held
more than 50% of its shares as on 31.03.1994. That concern is itself a
private company. During 1994-95, shares were sold by Floral
Commercial Pvt. Ltd. and others, which resulted in the company's status
as remaining unaltered in which the public was not substantially
interested. The assessee's total holdings amounted to 17,67,642 shares.
On 11.11.1994, a direct allotment of 6,77,000 shares was made in favour
of the assessee. It was then that it became interested in Ginza in excess of
10%; its shareholding increased to more than 10%. The AO's order in
this case was based upon extensive and painstaking enquiry. He found
that the assessee used the amount which Ginza had given it to procure
ITA 637/2004 Page 16 of 26
import licenses, by purchasing shares and giving further advances of `6.4
crores to various entities at 12% per annum. The AO inferred that this
circumstance undermined the assessee's contention that Ginza advanced
the amount of ` 6.16 crores to it in the ordinary course of business and
observed as follows:
It would be interesting to see how the assessee had used or
parked its funds obtained as advance from Ginza Industries
Ltd. It purchased shares of different companies to the tune of
Rs.8 crores. It gave a loan of Rs.6.4 crores approx to Adani
Finance & Investment Corporation Ltd. It also advanced loan
to another 5-6 persons. Now on one hand the assessee says that
the business is such that one needs to make spot or advance
payments to block the deal. There is also a provision in the
agreement whereby Ginza Industries Ltd. could call back the
advance within 3 days. Now, the common sense would tell that
all these are not possible at the same time. The money from
advance is parked in investments in shares and loans and
advances to parties in Ahmedabad (Adani Finance) and
Calcutta (e.g. Easter Housing Udyog, Marygold Estates etc.).
The assessee could be required to mobilize these funds within 3
days, if Ginza Industries Ltd. recalled it or within a day if it was
required to block deals in purchase of licenses. Would it be
possible for the assessee to sell off its shares and call all its
advances back in a day or two. The answer is no. The payments
from sale of shares could take at least a week` depending on
settlement period in stock exchanges and it is not always
possible to sell shares through private placement especially it if
is not pre-planned. Moreover, no person takes a loan on
interest which it may be asked to repay in 2-3 days. So, the
companies or persons to whom the assessee advanced the loans
did not obviously take the loan on such an ad hoc basis. They
ITA 637/2004 Page 17 of 26
must have taken the loan for some period and even in case of an
emergency could not be expected to pay back in a matter of 2-3
days. Any person who has so much liquidity that it can pay back
the loans within such a short period would not require a loan at
all. Only banks are expected to have such liquidity.
Furthermore, the rate of interest charged on these loans and
advances were approx. @ 12% per annum which clearly shows
that the loans were taken for medium to long term. Nobody
pays or take interest @ 12% on loans and advances which can
be called back within a short notice as short as 2-3 days. All
this goes on to show that the assessee company had invested the
funds with at least a medium term perspective. This shows that
the assessee could not have and did not have the intention to
purchase the said advance licenses for Ginza Industries Ltd.
18. The statement of the Managing Director of Ginza the company
was recorded. He stated that Ginza intended to purchase import licenses
to the tune of ` 70-80 crores some of which were for its own use (worth
` 30-40 crores) and the rest was to be used for trading. According to the
statement the assessee had offered to obtain license which was to be 10-
15% lower than the market rates and eventually the rates offered by it
were not beneficial even though better than the prevailing market rates.
The AO also held after considering the statements made on behalf of
Ginza by its MD and eliciting further details from the assessee that Ginza
claimed that it was intending to launch projects like yarn, steel and
chemicals which never took off. Ginza was into production of items that
needed domestic inputs. It was also held that Ginza MD upon being asked
whether materials had been procured: in 1994-95 or subsequently steel,
yarns or chemicals against any import licences, his answer was no`. In
fact the total import of Ginza from FY 1991-92 till FY 1996-97 has only
ITA 637/2004 Page 18 of 26
been for a value of Rs. 20 lakhs. All of this goes on to indicate that Ginza
was never in a position to procure any import items against licences
inhouse.
19. The AO also held on the other hand the answer of Sh. Setiha, who
dealt with licences on behalf of the company was also of an evasive
nature and his failure to comply to the queries dated 18.03.1998 to
establish existence of employees competent to dealt with licenses, as
stated by him, also proves that Ginza did not have any intention or scope
by way of knowledge or expertise to deal with the premium market for
buying and selling advance licenses.
20. The CIT(A) completely brushed aside the AO's
determination/findings and in fact made light of them by stating that
whether or not any license was ultimately procured by the assessee for
Ginza was not relevant and was in fact "misplaced". The CIT(A) was of
the opinion that absence of procurement of licenses because of lack of
competitive rates acceptable to Ginza could not have led to the inference
that the transaction fell within the description of Section 2(22)(e); and
that procurement of licenses is a matter of performance and it depended
on many factors most of which would be beyond the control of the
assessee. The ITAT endorsed this finding, also adding that Ginza had
prepared itself to bring-up the issue and had shown as advances given to
the assessee for the specific performance of advance licenses. It held that
the assessee's motives or that of Ginza would have been doubted. The
ITAT was also impressed by the fact that there were no common directors
of Ginza in the assessee company and that even Adani Associates which
ITA 637/2004 Page 19 of 26
had underwritten the amounts subject to payment of commission was also
a public company.
21. The decision of this Court in Sunil Chopra (supra) is illuminating.
There, the assessee had received advances substantially, worth ` 1.4
crores from each company in which he held more than 10% shares. The
public were not substantially interested in these companies. The AO held
that the amount was deemed dividend. Except for grating relief to the
extent of ` 38.81 lakhs, the CIT(A) held the balance amounts to be
deemed dividends. The ITAT reversed these findings holding that the
assessee's business involved brokerage from real estate and they were for
investment in the real estate. The ITAT's findings were reversed by this
Court on the basis of the following reasoning:
8. From the order of the Tribunal, it may be seen that it has
only commented upon the finding recorded by the AO. Before
proceeding further to see the reasoning of the Tribunal, we may
note the background of the proceedings before the AO. The AO
recorded that during the course of assessment proceedings, the
assessee in reply to show cause notice furnished his response.
With regard to the amount of Rs.34,75,780/- received from M/s
National Capital Region Electronics Pvt. Ltd., the assessee
stated that the said amount was received against sale of
property in terms of agreement dated 18th September, 2003.
Here it may be noted that the companies are closely-held
companies in which the only Directors are none other than the
family members of the assessee. The AO recorded the said
agreement to be sham and rightly so, inasmuch as the
agreement was executed on 18th September, 2003 and the
handing over of the property was to be done before 31st
December, 2008. In any case, this property was still being
ITA 637/2004 Page 20 of 26
reflected in the balance sheet of the assessee as on 31st March,
2005, even though the agreement was entered on 18th
September, 2003. The CIT(A) also disbelieved the claim of the
assessee on this count. The Tribunal in this regard has
recorded that the assessee was claiming this advance for
investment in his books of accounts and the AO has not
disputed this. Apparently, this was a perverse recording by the
Tribunal inasmuch as it has been seen that AO and CIT(A) have
categorically recorded this transaction as colourable device. It
is unbelievable that an agreement was executed on 18th
September, 2003 and the payment was made, but the possession
of the property was to be handed over after more than five
years. Even the property continued to be reflected in the
balance sheet of the assessee after two years of the agreement.
Similarly, in respect of Rs.27,90,125/- shown as loan/advance
from M/s TSM Polymers Pvt. Ltd., the assessee had replied to
the AO that this was received against sale of property under the
terms of the agreement dated 18th September, 2003. With
regard to this entry also, the Tribunal made a sweeping
observation that the assessee was claiming these as advance for
investment in his books of accounts and this aspect was not
disputed by the AO. He also observed that the business of the
assessee is earning brokerage from the business of real estate
and this demonstrated that he had taken the money in the line of
his business. The observation of the Tribunal that the AO had
not brought any contrary material on record was equally
perverse and against the facts recorded by the AO. In this
regard also, it may be noted that though the agreement was
executed on 18th September, 2003 for the sale of the property,
but the property continued to be reflected in the balance sheet
of the assessee as on 31st March, 2005. The AO rightly
recorded both these aspects to be not covered by the exception
to deemed dividend as contemplated under Section 2(22)(e).
ITA 637/2004 Page 21 of 26
Consequently, he rightly held these transactions as sham and
treated them as deemed dividend of the assessee under Section
2(22)(e).
22. The Board circular and the line of reasoning adopted by the various
High Courts, including this Court relied upon by the assessee in this case
undoubtedly indicate that the trading transactions or advances would fall
outside the mischief of sums that are to be treated as deemed dividends.
To this extent, there can be no dispute. Nevertheless, as to whether
amounts advanced by a company to a company in which the public does
not have any substantial shareholding or in which the public is not
interested to a shareholder, to an entity or individual holding shares in
excess of 10% amounts to a trading transaction or falls within the aspect
and, therefore, deemed commercial, there can be no bright line test. The
Revenue has to conduct a fact-based inquiry each time such contention is
urged by the assessee. The facts and circumstances of this case show that
Ginza advanced substantial amounts (which were confined by the AO to
only ` 6.16 crores since that was the extent of payment made by Ginza
after the assessee characterized the Rubicon threshold of 10% as a
shareholder in it from out of its available surplus). The AO's decision,
that the profit available for distribution for the concerned AY (including
accumulated profit for FY 1993-94) were to the tune of ` 17.4 crores
from 08.09.1994 and approximately ` 18.16 crores from 20.09.1994. This
finding, in the considered view of this Court is significant; it has
remained undisturbed; neither the CIT(A) nor the ITAT have adversely
commented on it or even reversed it.
ITA 637/2004 Page 22 of 26
23. The second significant aspect in this Court's opinion is that Ginza
was not trading in import licences or even advance licences. Yet it wished
to purchase license inter alia stating that it needed them for importing
steel, yarn and other equipment necessary to set-up a project. A closer
look would reveal that its imports never took place. Ginza's stand was
that it wished to trade substantially to the extent of around `40 crores in
import licences and that the assessee had in overall procured licenses at a
competitive rate of 10-15 % less than the prevailing market rate. Even if
all these facts were assumed to be correct, two important aspects are
undeniable first that one of the objects of procuring import license, i.e.
self importation of equipment and for self consumption was never
fulfilled. No significant imports were made. Secondly, in fact hardly any
import licenses were procured (although the ITAT returned a finding with
respect to payments made directly to Vimal Enterprises.), in fact an
amount of ` 8 crores was paid directly by Ginza to Vimal. The last
significant aspect is that even though the assessee claimed that Ginza
could recall its amounts within three days in terms of the agreement, it
had committed itself to long term lending and investment. Substantial
amounts were advanced to commercial entities at 12%, including ` 6.4
crores advanced to Adani Exports. The assessee also invested ` 8 crores
by purchasing shares.
24. These facts analyzed meticulously by the AO, in this Court's
opinion, were completely overlooked by the lower appellate authorities
who virtually made short work of the findings recorded with respect to
the applicability of Section 2(22)(e). All indications were that the
ITA 637/2004 Page 23 of 26
assessee was sanguine and assured about the nature of the amount given
by Ginza, i.e. that it could use it for its own purposes as it did by
advancing substantial amounts at commercial rates of interest) which
could not be conceivably attributable to short term deposits and also for
the purpose of yielding income, i.e. by investing with the object of
trading in shares.
25. In these circumstances, both the lower authorities, in the opinion of
the Court overlooked that the real intent of Ginza in advancing the sums
it did to the assessee was to share its profit by way of deemed dividend.
The sum of ` 6.16 crores clearly fell within the description of "deemed
dividend" under Section 2(22)(e) of the Act like in the case of Sunil
Chopra (supra). For these reasons, the first question is answered in
favour of revenue and against the assessee.
Regarding Question no.2
26. This question relates to the disallowance made in respect of `43.5
lakhs claimed by the assessee as commission. On this aspect, this Court
notices that the entire tripartite agreement between the assessee, Ginza
and Adani was rejected, because its basis, including the assurance of a
commission to the extent of `43.5 lakhs payable to Adani, was held to be
false. The AO was of the opinion that the agreement was of a selfserving
nature and meant for purposes other than of business intended. The AO
took into account the fact that even though the amounts could be recalled
within three days, in fact they were lying with the assessee for long
periods and never advanced for the purpose of purchase of licenses. The
ITA 637/2004 Page 24 of 26
guarantee commission supposed to have been paid was intended to
further the object of Section 2(22)(e). The AO concluded as follows:
From the above discussion, it has also been clearly
established that the tripartite agreement has been created to
suit the self interest and the consequent payment of 43.5 lacs
has been shown to have been made as a cover up exercise and
hence cannot be taken as the payment made for the purposes of
business. This issue had also been discussed in the show cause
notice dated 23.3.1998 which has been discussed earlier in the
order. The claimed payment of 43.5 lacs made to Adani
Associates as guarantee commission is therefore being
disallowed because the same has not been for the purpose of
business not for self serving moreover to create a cover up for
escaping the provision of Section 2(22)(e) of the Income Tax
Act, 1961, resulting in an addition of Rs.43.5 lacs.
Subsequently the AO proceeded to discuss the issue further and
ultimately brought to tax the said amount of ` 43.5 lakhs.
27. The CIT (A) and the ITAT deleted the disallowance holding that
the original transaction of advance was genuine and a trading one and
furthermore that the commission was paid through payment channels in
terms of the tripartite agreements. It was also observed that there was no
interrelationship between the assessee and Adani or for that matter the
other company with which the license arrangements were sought to be
entered into directly.
28. This Court is of the opinion that since the commission payment
was premised upon the assessee's claim about the genuineness of the
underlying transaction, i.e. that it was an advance, the findings on
ITA 637/2004 Page 25 of 26
Question No.1 logically would result in the second question too being
answered in the revenue's favour.
29. The AO's findings are based upon facts. In the opinion of the
Court, the facts also pointed to a significant detail that seems to have
escaped the notice of lower appellate authorities, i.e. that after obtaining
substantial sums, the assessee even made over a substantial part of it
`6.14 crores to Adani to whom it paid `43.5 lakhs as commission for the
standing guarantor. The latter payment in the light of the transactions
previously discussed strain ones' credibility and does not accord with
prudent commercial practice. For these reasons the Court is of the opinion
that the findings of the lower authorities are based upon a
mis-appreciation of circumstances and are, therefore, unreasonable, and
are premised on an erroneous appreciation of the facts and the law.
The disallowance of `43.5 lakhs was just and warranted.
30. The second question of law is too answered in favour of revenue
and against the assessee. In view of the findings in favour of the revenue,
the appeal has to succeed. It is accordingly allowed. There shall be no
order as to costs.
S. RAVINDRA BHAT, J
A. K. CHAWLA, J
FEBRUARY 20, 2018
ITA 637/2004 Page 26 of 26
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