DCIT 9(1), MUMBAI v. GHARDA CHEMICALS LTD, MUMBAI

ITA 916/MUM/2010 | 2002-2003
Pronouncement Date: 03-12-2010 | Result: Dismissed

Appeal Details

RSA Number 91619914 RSA 2010
Assessee PAN AAACG1255E
Bench Mumbai
Appeal Number ITA 916/MUM/2010
Duration Of Justice 9 month(s) 28 day(s)
Appellant DCIT 9(1), MUMBAI
Respondent GHARDA CHEMICALS LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 03-12-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted G
Tribunal Order Date 03-12-2010
Date Of Final Hearing 25-11-2010
Next Hearing Date 25-11-2010
Assessment Year 2002-2003
Appeal Filed On 05-02-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'G' BENCH MUMBAI BEFORE SHRI R.S. PADVEKAR JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 916/MUM/2010 (ASSESSMENT YEAR: 2002-03) DCIT RANGE 9(1) M/S. GHARDA CHEMICALS LTD. ROOM NO. 223 AAYAKAR BHAVAN JER MANSION W.P. WARD E ROAD M.K. ROAD MUMBAI 400020 VS. BANDRA (W) MUMBAI 400050 PAN - AAACG 1255 E APPELLANT RESPONDENT APPELLANT BY: SHRI PAVAN KUMAR VED RESPONDENT BY: MS. VASANTI PATEL O R D E R PER B. RAMAKOTAIAH A.M. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE CIT(A) XIX MUMBAI DATED 18.11.2009. 2. REVENUE HAS RAISED THE FOLLOWING GROUNDS: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.19 89 95 203/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DEEMED DIVID END U/S 2(22)E) OF THE INCOME-TAX ACT 1961 HOLDING THAT THE TRANSA CTIONS BETWEEN THE ASSESSEE COMPANY AND M/S. GUJARAT INSECTICIDES LTD. (GIL) (A SUBSIDIARY OF THE ASSESSEE COMPANY WHEREIN THE ASSE SSEE COMPANY HOLDS 75% OF SHARES) WERE NORMAL BUSINESS T RANSACTIONS NOT COVERED BY THE PROVISIONS OF SECTION 2(22)(E) O F THE INCOME-TAX ACT 1961. 2. WHILE DELETING THE SAID ADDITION THE LD. CIT(A) FAILED TO APPRECIATE THAT LENDING OF MONEY BEING NOT THE BUSINESS OF M/S GIL THE SAID TRANSACTIONS ARE NOT COVERED BY THE EXCLUSIONS PROV IDED IN SECTION 2(22)(E) OF THE INCOME-TAX ACT 1961. 3. THE LD. CIT(A) FURTHER FAILED TO APPRECIATE THAT ADVANCE FOR THE PURPOSE OF SECTION 2(22)(E) MAY BE EVEN BY WAY OF T RANSFER OF GOODS AND USE OF THE WORD ANY PAYMENT IN THE CONTEXT OF ADVANCE/LOAN SIGNIFIES THAT EACH OF THE PAYMENTS MADE WHEN THE P AYEE IS NOT ALREADY A CREDITOR CONSTITUTES ADVANCE [M.D. JINDA L VS. CIT 64 ITR 28 (CA;)] AND HENCE THE PAYMENTS MADE EVEN IN THE RUNNING ACCOUNT WHEN THE PAYEE HAS A DEBIT BALANCE ALL ALON G ARE HIT BY SECTION 2(22)(E). [CIT VS. P.K. BADIANI 76 ITR 369 (BOM)]. ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 2 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) ERRED IN HOLDING THAT THE REOPENING AND THE ISSUE OF NOTICE U/S. 147 WAS BAD IN LAW AND INVALID AS THE REOPENIN G IS ON ACCOUNT OF CHANGE OF OPINION BY FRESH APPLICATION OF MIND O N THE SAME SET OF FACTS WHICH IS BARRED BY PROVISO TO SECTION 147 AND IN NOT CONSIDERING DECISION IN THE CASE OF BAWABHAI SINGVS . DCIT (2001) 117 TAXMAN 12 (DEL). 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) ERRED TO INTERPRET EXPLANATION 1 TO SECT ION 147 WHEREIN IT IS HELD THAT PRODUCTION BEFORE THE ASSESSING OFFIC ER OF ACCOUNTS BOOKS OR OTHER EVIDENCE FROM WHICH MATERIAL EVIDENC E COULD WITH DUE DILIGENCE HAVE BEEN DISCOVERED BY THE ASSESSING OFFICER WILL NOT NECESSARILY AMOUNT TO DISCLOSURE WITHIN THE MEANING OF THE FOREGOING PROVISO. 3. GROUND NOS. 1 TO 3 PERTAIN TO THE ISSUE OF ADDITION UNDER SECTION 2(22)(E) AS DEEMED DIVIDEND. ON NOTICING THAT THE B ALANCE AVAILABLE AT ` 12.21 CRORES AS ON 31.03.2002 PAYABLE TO KM/S. GUJA RAT INSECTICIDES LTD. A SUBSIDIARY COMPANY WAS TO BE CONSIDERED AS DEEMED DIVIDEND THE A.O. REOPENED THE ASSESSMENT UNDER SECTION 147 AFTER FOU R YEARS FROM THE END OF THE ASSESSMENT YEAR AND ON EXAMINING THE ACCOUNTS F OUND THAT THE BOOK CREDIT AVAILABLE WITH THE ASSESSEE COMPANY WAS AT ` 19 89 95 203/- WHICH WAS BROUGHT TO TAX AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. THE CIT(A) CONSIDERED ISSUE BOTH ON MERITS AND THE JURI SDICTION FOR REOPENING THE ASSESSMENT AND HELD THAT ON MERITS THE ADDITION CAN NOT BE SUSTAINED FOLLOWING HIS OWN ORDER FOR A.Y. 2003-04 HOLDING TH AT THE TRANSACTIONS ARE ON-GOING TRADE TRANSACTIONS TOWARDS PURCHASE OF PRO DUCTS AND THE SAME HAS BEEN ARISEN ON NORMAL COURSE OF CARRYING ON BUSINES S. IT WAS HELD THAT THE ACTION OF THE A.O. IN TREATING THE PURCHASES MADE B Y THE ASSESSEE AS DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) WAS WITHOUT MERIT. ACCORDINGLY HE DELETED THE ADDITION ON MERITS. WITH REFERENCE TO REOPENING OF THE ASSESSMENT HE ALSO CONCURRED WITH ASSESSEES OB JECTION THAT INITIATION OF PROCEEDINGS UNDER SECTION 147 WERE NOT CORRECT AS T HERE IS NO ESCAPEMENT OF INCOME ON ACCOUNT OF FAILURE ON THE PART OF THE ASS ESSEE TO DISCLOSE MATERIAL FACTS AND THERE IS MERIT IN THE CONTENTION THAT REO PENING IS BASED ON CHANGE OF OPINION AS THERE WAS A SCRUTINY ASSESSMENT UNDER SECTION 143(3) ORIGINALLY. THE CIT(A) PLACED RELIANCE ON THE DECIS ION OF THE HON'BLE BOMBAY ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 3 HIGH COURT IN THE CASE OF CARTINI INDIA LTD. VS. AC IT & OTHERS REPORTED IN 224 CTR (BOM) 82. 4. THE LEARNED D.R. VEHEMENTLY ARGUED STATING THAT PRO VISIONS OF SECTION 2(22)(E) REFERRED TO THE WORD ANY PAYMENT WHICH I N THE CONTEXT CAN BE CONSIDERED AS ANY THE PAYMENT MADE INCLUDING BY WAY OF TRADE ADVANCES AND THERE IS NO DISTINCTION BETWEEN THE TRADE ADVAN CES AND OTHER ADVANCES. HE REFERRED TO THE JUDGEMENT IN THE CASE OF - M.D. JINDAL VS. CIT 64 ITR 28(CAL) AND ALSO HON'BLE BOMBAY HIGH COURT JUDGMENT IN THE CASE OF CIT VS. P.K. BADIANI 76 ITR 269 (BOM) TO SUBMIT THAT EVEN THE BUSINESS TRANSACTIONS ALSO ARE COVERED BY THE PROVISIONS OF SECTION 2(22)(E). IT WAS FURTHER SUBMITTED THAT THE EXCEPTION PROVIDED UNDER THE SECTION IS ONLY WITH REFERENCE TO LENDING OF MONEY IN ASSESSEES BUSINES S AND SINCE THE ASSESSEE IS NOT IN THE MONEY LENDING ACTIVITY ALL TRANSACTIO NS ARE COVERED BY THE PROVISIONS OF SECTION 2(22)(E). IT WAS HIS SUBMISSI ON THAT THE CIT(A) HAS ERRED IN TREATING THE TRANSACTIONS WITH THE ASSESSEE COMP ANY THE SUBSIDIARY M/S GUJARAT INSECTICIDES LTD. AS NORMAL COMMERCIAL TRAN SACTIONS NOT COVERED BY PROVISIONS OF SECTION 2(22)(E). 5. WITH REFERENCE TO GROUND NOS. 4 & 5 IT WAS HIS SUBM ISSION THAT THE DEEMED DIVIDENDS ARE TAXABLE UNDER THE HEAD OTHER SOURCES AND ASSESSEE HAS NOT DISCLOSED ANY INCOME THE HEAD OTHER SOURCE S WITH REFERENCE TO THE TRANSACTIONS AND SO THERE IS FAILURE ON THE PART OF THE ASSESSEE IN MAKING FULL AND COMPLETE DISCLOSURE AND ACCORDINGLY PROVIS IONS OF SECTION 147 ARE ATTRACTED. HE ELABORATED THE PRINCIPLES WHILE CONTE STING THE FINDINGS OF THE CIT(A) ON THE ISSUE. 6. IN REPLY THE LEARNED COUNSEL FOR THE ASSESSEE EXPLA INED THAT THE TRANSACTIONS WITH THE ASSESSEE AND THE SUBSIDIARY C OMPANY ARE BUSINESS TRANSACTIONS IN PURCHASE AND SALE OF GOODS AND RELI ED ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. RAJ KUMAR 318 ITR 462 WHICH IN TURN HAS FOLLOWED THE HON'BLE BOMBAY HIGH COURT JUDGEMENT IN THE CAST OF CIT VS. NAGINDAS M. KAPADIA 177 ITR 393. IT WAS HER SUBMISSION THAT PROVISIONS OF SECTION 2(22)(E) ARE NOT ATTRACT ED TO TRADE ADVANCES AND ACCORDINGLY THE CIT(A)S ORDER IS TO BE UPHELD. WIT H REFERENCE TO JURISDICTION ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 4 ALSO IT WAS HER SUBMISSION THAT THE ARGUMENTS OF TH E CIT D.R. ABOUT NON- DISCLOSURE WAS ONLY FOR THE FIRST TIME RAISED DURIN G THIS ARGUMENT WHICH WAS NOT THE CASE BEFORE THE A.O. SHE THEN REFERRED TO T HE REASONS RECORDED FOR REOPENING FOR THE ASSESSMENT YEAR TO SUBMIT THAT NO WHERE THE A.O. HAS MENTIONED THAT THERE IS FAILURE ON THE PART OF THE ASSESSEE IN MAKING FULL AND TRUE DISCLOSURE. SHE REFERRED TO PARA 5 IN PAGE 2 OF THE ASSESSMENT ORDER TO STATE THAT THE A.O. MENTIONED ON PERUSAL OF RECORD WHICH INDICATES THAT THE INFORMATION WAS AVAILABLE IN THE FILES OF THE A.O. ACCORDINGLY THERE IS NO FAILURE ON THE PART OF THE ASSESSEE. SINCE TH E ASSESSMENT WAS REOPENED AFTER FOUR YEARS AFTER COMPLETING THE ASSESSMENT OR IGINALLY UNDER SECTION 143(3) IT IS NECESSARY FOR THE A.O. TO RECORD A FIN DING THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE AND RELIED ON THE PRINC IPLES ESTABLISHED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BHAVESH DE VELOPERS VS. A.O. & ORS. 34 DTR 125 SHE FURTHER RELIED ON THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN LEVER LTD. VS. ACIT 268 ITR 339 FOR THE SAME PROPOSITION THAT THERE IS NO FAILURE ON THE PA RT OF THE ASSESSEE FOR REOPENING THE ASSESSMENT. SHE SUPPORTED THE ORDER O F THE CIT(A). 7. WE HAVE CONSIDERED THE ISSUE. AS FAR AS THE ISSUE O F JURISDICTION IS CONCERNED THE CIT(A) HAS CAME TO THE CONCLUSION TH AT THERE IS NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRUL Y ALL MATERIAL FACTS. THE FINDINGS OF THE CIT(A) IN PARA 5.1 ARE AS UNDER: - 5.1 THE ASSESSMENT WAS REOPENED IN ORDER TO BRING OUT TO TAX AN AMOUNT OF RS.19 89 95 203/- BEING VALUE OF GOODS RE CEIVED UNDER THE DEEMING PROVISIONS OF S. 2)22)(E) OF THE ACT. THE D ETAILS OF TRANSACTION WITH SUBSIDIARIES WERE DISCLOSED IN THE AUDITED ACC OUNTS FILED ALONGWITH THE RETURN. SPECIFIC DISCLOSE WAS MADE OF PURCHASE OF RS.19.89 CRORES IN THE NOTE. AS PER PAPER BOOK PAGE 17 A LETTER DATED 14.2.2005 WAS ISSUED BY THE AO CALLING UPON ASSESSEE INTERALIA TO GIVE DETAILS OF SALES/PURCHASE WITH NAME OF PARTY AND DETAILS OF PR ODUCT SOLD/PURCHASED. THEREFORE THE REASSESSMENT IS BASE D ON A RE- APPRECIATION OF FACTS AND CIRCUMSTANCES ALREADY ON RECORD. SINCE THE NOTICE HAS BEEN ISSUED BEYOND THE LIMITATION PERIOD OF 4 YEARS THE APPELLANTS CASE FALLS UNDER PROVISO TO S. 147 WHIC H ENABLE THE AO TO REOPEN ONLY IF THERE IS FAILURE ON PART OF THE ASSE SSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS. THE REASONS AS RECORDED D O NOT INDICATE THAT INCOME HAS ESCAPED ASSESSMENT ON ACCOUNT OF FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE MATERIAL FACTS. HENCE THERE IS MERIT IN THE CONTENTION OF THE APPELLANT THAT REOPENING IS BASED ON CHANGE OF OPINION. THIS ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 5 GROUND IS ALLOWED. RELIANCE PLACED ON DECISION OF T HE HON'BLE BOMBAY HIGH COURT REPORTED IN (2009) 224 CTR (BOM) 82. 8. IN ARRIVING AT THE ABOVE CONCLUSION THE CIT(A) ALS O RELIED ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF CARTINI INDIA LTD. VS. ACIT & OTHERS REPORTED IN 224 CTR (BOM) 82 WHER EIN IT WAS CONSIDERED THAT REOPENING OF ASSESSMENT BASED ON MATERIAL ALRE ADY CONSIDERED AND ADJUDICATED WOULD AMOUNT TO REVIEWING THE ASSESSMEN T ORDER BY RE- APPRECIATING THE MATERIAL ON RECORD WHICH IS NOT A DMISSIBLE UNDER SECTION 147. EVEN THOUGH THIS ISSUE WAS NOT ORIGINALLY CONS IDERED BY THE A.O. AT THE TIME OF ORIGINAL ASSESSMENT THE FACT THAT THE REASO NS DO NOT INDICATE THAT THERE IS FAILURE ON THE PART OF THE ASSESSEE TO FUR NISH FULLY AND TRULY ALL DISCLOSURES WOULD BRING IT WITHIN THE PURVIEW OF TH E JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BHAVESH DE VELOPERS VS. ACIT 34 DTR 125 RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THE COURSE OF ARGUMENT. THE REASONS FOR REOPENING IS EXTRACTED IN CIT(A)S ORDER AS UNDER: - WHILE COMPLETING THE ASSESSMENT PROCEEDINGS FOR A. Y. 2003-04 A.Y. 2005-06 & 2006-07 IT IS NOTICED THAT M/S. GHARDA C HEMICALS LTD. MADE TRANSACTIONS WITH ITS SUBSIDIARY COMPANY M/S. GUJAR AT INSECTICIDES LTD. WHEREIN THE ASSESSEE COMPANY IS HAVING 66.66% OF SH AREHOLDING. THE SAID TRANSACTIONS ARE ASSESSED AS DEEMED DIVIDEND A S PER PROVISIONS OF SECTION 2(22)(E) AMOUNTING TO RS.36.12 CR. RS.44.5 3CR. AND RS.25.45 CR. IN THE ASSESSMENT ORDERS FOR A.Y. 2003-04 2005-06 & 2006-06 RESPECTIVELY. IN THE F.Y. 2001-02 RELEVANT TO A.Y. 2002-03 THE A SSESSEE HAS MADE TRANSACTION WITH M/S. GUJARAT INSECTICIDES LTD. FOR AMOUNT OF RS.19 89 95 203/-. THE ASSESSEE COMPANY IS HAVING C LOSING CREDIT BALANCE OF RS.12.21 CRORES AS ON 31.3.2002 PAYABLE TO M/S. GUJARAT INSECTICIDES LTD. THESE TRANSACTIONS ARE REMAIN TO BE ASSESSED AS DEEMED DIVIDEND UNDER S. 2(22)9E) OF THE ACT. THERE FORE THE AFORESAID INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR A.Y. 2004-05 WITHIN THE MEANING OF PROVISIONS OF SECTION 147 OF THE I.T. ACT. 9. ON SIMILAR FACTS IN THE CASE OF BHAVESH DEVELOPERS (SUPRA) THE HON'BLE BOMBAY HIGH COURT HAS HELD AS UNDER: - SIGNIFICANTLY THE REASONS THAT HAVE BEEN DISCLOSED TO THE ASSESSEE DO NOT CONTAIN A FINDING TO THE EFFECT THAT THERE WAS A FAILURE TO FULLY AND TRULY DISCLOSE ALL NECESSARY FACTS NECESSARY FOR TH E PURPOSE OF ASSESSMENT. IN THESE CIRCUMSTANCES THE CONDITION P RECEDENT TO A VALID ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 6 EXERCISE OF THE POWER TO REOPEN THE ASSESSMENT AFT ER A LAPSE OF FOUR YEARS FROM THE RELEVANT ASSESSMENT YEAR IS ABSENT IN THE PRESENT CASE. THERE IS MERIT IN THE SUBMISSION WHICH HAS BEEN URG ED ON BEHALF OF THE ASSESSEE THAT AN EXCEPTIONAL POWER HAS BEEN CONFERR ED UPON THE REVENUE TO REOPEN AN ASSESSMENT AFTER A LAPSE OF FO UR YEARS. THE CONDITIONS WHICH ARE PRESCRIBED BY THE STATUTE FOR THE EXERCISE OF SUCH A POWER MUST BE STRICTLY FULFILLED AND IN THEIR ABSEN CE THE EXERCISE OF POWER WOULD NOT BE SUSTAINABLE IN LAW. THOUGH AN AT TEMPT WAS MADE ON BEHALF OF THE REVENUE TO URGE THAT THE ASSESSEE SHOULD BE RELEGATED TO THE ORDINARY REMEDY OF AN APPEAL AGAINST THE ORD ER OF THE ASSESSMENT A PETITION UNDER ART. 226 OF THE CONSTITUTION WOULD BE MAINTAINABLE FOR QUESTIONING REOPENING OF THE ASSESSMENT IN A CASE A S THIS WHERE THE PRECONDITIONS FOR THE EXERCISE OF THE POWER HAVE NO T BEEN FULFILLED. FOR THE REASONS AFORESAID RECOURSE TO THE POWER UNDER S. 147 CANNOT BE SUSTAINED ON A MERE CHANGE OF OPINION THERE BEING NO FAILURE ON THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL F ACTS NECESSARY FOR ASSESSMENT. THE BASIC CONDITION PRESCRIBED BY THE S TATUTE FOR THE EXERCISE OF THE POWER HAS NOT BEEN FULFILLED. 10. THE PRINCIPLES ESTABLISHED BY THE HON'BLE BOMBAY HI GH COURT EQUALLY APPLY TO THE PRESENT CASE. THE REASONS DO NOT DISCL OSE ANY FINDING THAT THERE IS FAILURE ON THE PART OF THE ASSESSEE. SINCE THE A SSESSMENT UNDER SECTION 143(3) WAS ORIGINALLY DONE AND AS THERE IS NO FINDI NG OF FACT THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE IN DISCLOSING F ULLY AND TRULY ALL MATERIAL FACTS THE REOPENING PER SE IS BAD IN LAW. ACCORDIN GLY THE GROUND 4 & 5 REJECTED. 11. EVEN ON MERITS THERE IS NO CASE FOR THE REVENUE. IN FACT THE CIT(A) HAS ANALYSED THIS ISSUE ELABORATELY AND CAME TO A CONCL USION THAT PROVISIONS OF SECTION 2(22)(E) ARE NOT ATTRACTED IN THE CASE OF N ORMAL BUSINESS TRANSACTIONS. THE SAME PRINCIPLE WAS UPHELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. RAJ KUMAR 318 ITR 462 WHEREIN THIS ISSUE WAS ELABORATELY DISCUSSED AS UNDER: - SECTION 2(22)(E) OF THE INCOME-TAX ACT 1961 SHOW S THAT A PAYMENT WOULD ACQUIRE THE ATTRIBUTES OF A DIVIDEND WITHIN T HE MEANING OF THE PROVISION IF THE FOLLOWING CONDITIONS ARE FULFILLED : (I) THE COMPANY MAKING THE PAYMENT IS ONE IN WHICH THE PUBLIC ARE NOT SUBS TANTIALLY INTERESTED ; (II) MONEY SHOULD BE PAID BY THE COMPANY TO A SHARE HOLDER HOLDING NOT LESS THAN TEN PER CENT. OF THE VOTING POWER OF THE COMPANY. IT WOULD MAKE NO DIFFERENCE IF THE PAYMENT WAS OUT OF THE AS SETS OF THE COMPANY OR OTHERWISE ; (III) THE MONEY SHOULD BE PAID EITHE R BY WAY OF AN ADVANCE OR LOAN OR IT MAY BE 'ANY PAYMENT' WHICH THE COMPAN Y MAY MAKE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SHAR EHOLDER OR ALSO TO ANY ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 7 CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE IS SUBSTANTIALLY INTERESTED ; AND (IV) THE LIMITING FACTOR BEING THAT THESE PAYMENTS MUST BE TO THE EXTENT OF ACCUMU LATED PROFITS POSSESSED BY SUCH A COMPANY. THE IMMEDIATE PRECURSOR TO SECTION 2(22)(E) IS FOUN D IN SECTION 2(6A) OF THE INDIAN INCOME-TAX ACT 1922. THE PURPOSE OF INSERTION OF SUB-CLAUSE (E) TO SECTI ON 2(6A) IN THE 1922 ACT WAS TO BRING WITHIN THE TAX NET MONIES PAID BY CLOSELY HELD COMPANIES TO THEIR PRINCIPAL SHAREHOLDERS IN THE GU ISE OF LOANS AND ADVANCES TO AVOID PAYMENT OF TAX. THEREFORE SUB-CL AUSE (E) OF SECTION 2(22) OF THE 1961 ACT WHICH IS IN PARI MATERIA WIT H SUB-CLAUSE (E) OF SECTION 2(6A) OF THE 1922 ACT PLAINLY SEEKS TO BRI NG WITHIN THE TAX NET ACCUMULATED PROFITS WHICH ARE DISTRIBUTED BY CLOSEL Y HELD COMPANIES TO ITS SHAREHOLDERS IN THE FORM OF LOANS. THE PURPOSE BEING THAT PERSONS WHO MANAGE SUCH CLOSELY HELD COMPANIES SHOULD NOT A RRANGE THEIR AFFAIRS IN A MANNER THAT THEY ASSIST THE SHAREHOLDE RS IN AVOIDING THE PAYMENT OF TAXES BY HAVING THESE COMPANIES PAY OR D ISTRIBUTE WHAT WOULD LEGITIMATELY BE DIVIDEND IN THE HANDS OF THE SHAREHOLDERS' MONEY IN THE FORM OF AN ADVANCE OR LOAN. THE WORD 'ADVANC E' HAS TO BE READ IN CONJUNCTION WITH THE WORD 'LOAN'. USUALLY ATTRIBUTE S OF A LOAN ARE THAT IT INVOLVES THE POSITIVE ACT OF LENDING COUPLED WITH A CCEPTANCE BY THE OTHER SIDE OF THE MONEY AS LOAN : IT GENERALLY CARRIES IN TEREST AND THERE IS AN OBLIGATION OF REPAYMENT. ON THE OTHER HAND IN ITS WIDEST MEANING THE TERM 'ADVANCE' MAY OR MAY NOT INCLUDE LENDING. THE WORD 'ADVANCE' IF NOT FOUND IN THE COMPANY OF OR IN CONJUNCTION WITH A WORD 'LOAN' MAY OR MAY NOT INCLUDE THE OBLIGATION OF REPAYMENT. IF IT DOES THEN IT WOULD BE A LOAN. THUS ARISES THE CONUNDRUM AS TO WHAT MEANING ONE WOULD ATTRIBUTE TO THE TERM 'ADVANCE'. THE RULE OF CONSTR UCTION WHICH ANSWERS THIS CONUNDRUM IS NOSCITUR A SOCIIS. THE RULE HAS B EEN EXPLAINED BOTH BY THE PRIVY COUNCIL IN THE CASE OF ANGUS ROBERTSON V . GEORGE DAY [1879] 5 AC 63 BY OBSERVING 'IT IS LEGITIMATE RULE OF CONSTR UCTION TO CONSTRUE WORDS IN AN ACT OF PARLIAMENT WITH REFERENCE TO WORDS FOU ND IN IMMEDIATE CONNECTION WITH THEM' AND THE SUPREME COURT IN THE CASE OF ROHIT PULP AND PAPER MILLS LTD. V. COLLECTOR OF CENTRAL EXCISE AIR 1991 SC 754 AND STATE OF BOMBAY V. HOSPITAL MAZDOOR SABHA AIR 1960 SC 610. THE PRINCIPLES WITH REGARD TO THE APPLICABILITY OF THE RULE OF CONSTRUCTION ARE BRIEFLY AS FOLLOWS : (I) DOES THE TERM IN ISSUE HAV E MORE THAN ONE MEANING ATTRIBUTED TO IT I.E. BASED ON THE SETTING OR THE CONTEXT ONE COULD APPLY THE NARROWER OR WIDER MEANING ; (II) ARE THE WORDS OR TERMS USED FOUND IN A GROUP TOTALLY 'DISSIMILAR' OR IS THERE A 'COMMON THREAD' RUNNING THROUGH THEM ; (III) THE PURPOSE BEHIND INSERTING O F THE TERM. IN THE INSTANT CASE (I) THE TERM 'ADVANCE' HAS UNDOUBTEDLY MORE THAN ONE MEANING DEPENDING ON THE CONTEXT IN WHICH IT IS USE D ; (II) BOTH THE TERMS THAT IS 'ADVANCE' OR 'LOAN' ARE RELATED TO THE ACC UMULATED PROFITS OF THE COMPANY ; AND (III) THE PURPOSE BEHIND THE INSERTIO N OF THE TERM 'ADVANCE' WAS TO BRING WITHIN THE TAX NET PAYMENTS MADE IN THE GUISE OF LOAN TO SHAREHOLDERS BY COMPANIES IN WHICH THEY HAV E A SUBSTANTIAL INTEREST SO AS TO AVOID PAYMENT OF TAX BY THE SHARE HOLDERS. THE WORD ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 8 'ADVANCE' WHICH APPEARS IN THE COMPANY OF THE WORD 'LOAN' COULD ONLY MEAN SUCH ADVANCE WHICH CARRIES WITH IT AN OBLIGATI ON OF REPAYMENT. TRADE ADVANCES WHICH ARE IN THE NATURE OF MONEY TRA NSACTED TO GIVE EFFECT TO A COMMERCIAL TRANSACTION WOULD NOT FALL WITHIN THE AMBIT OF THE PROVISION OF SECTION 2(22)(E) OF THE ACT. THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURING C USTOMIZED KITCHEN EQUIPMENT. THE ASSESSEE WAS ALSO THE MANAGI NG DIRECTOR AND HELD NEARLY 65 PER CENT. OF THE PAID-UP SHARE CAPIT AL OF C. A SUBSTANTIAL PART OF THE BUSINESS OF THE ASSESSEE WHICH WAS NEA RLY 90 PER CENT. WAS OBTAINED THROUGH C. FOR THIS PURPOSE C WOULD PASS ON THE ADVANCE RECEIVED FROM ITS CUSTOMERS TO THE ASSESSEE TO EXEC UTE THE JOB WORK ENTRUSTED TO THE ASSESSEE. THE ASSESSING OFFICER WA S OF THE OPINION THAT THE MONEY RECEIVED BY THE ASSESSEE WAS IN THE NATUR E OF A LOAN GIVEN BY C TO THE ASSESSEE WHO ADMITTEDLY HELD MORE THAN 10 PER CENT. OF THE SHARES IN C. THE ASSESSING OFFICER CONCLUDED THAT T HE MONEY RECEIVED BY THE ASSESSEE WAS DEEMED DIVIDEND WITHIN THE MEANING OF THE PROVISIONS OF SECTION 2(22)(E). THE COMMISSIONER (APPEALS) REV ERSED THE ORDER OF THE ASSESSING OFFICER. THE TRIBUNAL SUSTAINED THE DECIS ION OF THE COMMISSIONER (APPEALS). ON APPEAL : HELD THAT THE TRADE ADVANCES GIVEN TO THE ASSESSEE BY C COULD NOT BE TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E). 12. THE HON'BLE DELHI HIGH COURT IN FACT FOLLOWED THE P RINCIPLES ESTABLISHED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. NAGINDAS M. KAPADIA 177 ITR 393. THE SAME PRINCIPLES WERE AL SO REITERATED BY THE HON'BLE DELHI COURT IN THE CASE OF CIT VS. AMBASSAD OR TRAVELS P. LTD. 318 ITR 376. IN VIEW OF THESE PRINCIPLES WE ARE OF THE VIEW THAT THE COMMERCIAL TRANSACTIONS BETWEEN TWO COMPANIES COULD NOT BE BRO UGHT WITHIN THE PURVIEW OF THE PROVISIONS OF SECTION 2(22)(E). ACCO RDINGLY ON MERITS ALSO WE FIND NO CASE TO INTERFERE WITH THE ORDER OF THE CIT (A) ON THIS ISSUE. THE GROUNDS 1 2 & 3 ARE THEREFORE REJECTED. 13. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD DECEMBER 2010. SD/- SD/- (R.S. PADVEKAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 3 RD DECEMBER 2010 ITA NO. 916/MUM/2010 M/S. GHARDA CHEMICALS LTD. 9 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XIX MUMBAI 4. THE CIT IX MUMBAI CITY 5. THE DR G BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.