Sanjeev Gupta, Hisar vs Department Of Income Tax

BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No. 898/Del/2011 Assessment year : 2006-07 DCIT, Hissar Vs. Sanjeev Gupta, C/o M/s. Telmos Electronics, Jindal Chowk, Delhi Road, Hissar GIR / PAN:AHSPG8891J (Appellant) (Respondent) Appellant by : Shri brr Kumar, Sr. DR. Respondent by : Shri K. Sampath, Adv. Date of hearing : 26.03.2015 Date of pronouncement : 08.04.2015

ORDER

PER T.S. KAPOOR, AM:

This is an appeal filed by Revenue against the order of Ld. CIT(A) dated 07.12.2010. The Revenue is aggrieved with the action of Ld. CIT(A) by which he had deleted the addition made by A.O. u/s 2(22)(e) of the act. The revenue is further aggrieved by the deletion made by Ld. CIT(A) which the A.O. had made on account of low withdrawal for house hold expenses.

2. At the outset, Ld. D.R. invited our attention to the assessment order and submitted that admittedly, the assessee was hit by the provisions of Section 2(22)(e) of the act as the assessee was holding about 44% of shares of the company and company was having sufficient reserves. He submitted that the assessee had made a false story stating that he had received advance from the company for purchase of a property as the company M/s. Telmos Automobiles (P) Ltd. form whom assessee had received advance could have 2 ITA No.989/Del/2011

directly negotiated the deal with the firm from which the assets were proposed to be purchased as both the parties were related parties. He submitted that it is not understandable as to how, the assessee first received amount from company and then on behalf of the company, paid the same to proposed seller. Regarding 2nd addition on account of low withdrawals for household expenses, Ld. D.R. relied upon the order of A.O.

3. On the other hand, Ld. A.R. submitted that the transaction was entered into after the company had passed a Board resolution and by the Board resolution, the assessee was authorized to deal with Smt. Pratibha Gupta who happened to be a partner in the firm Telmos Electronics from which the property was to be purchassed. The Ld. A.R. further submitted that the assessee had received the amount for further payments to the partnership firm for purchase of property and, therefore the transaction was conducted in a normal course of business. Moreover it was submitted that within a few days, the amount was refunded back as due to some dispute, the transaction could not be carried out. Ld. A.R. submitted that all these submissions were made to A.O. also but he did not accept the same whereas Ld. CIT(A) relying upon certain case laws, has accepted the contention of the assessee. Regarding 2nd ground of appeal, Ld. A.R. relied upon the order of Ld. CIT(A).

4. We have heard rival parties and have gone through the material placed on record. We find that Ld. CIT(A) has relied upon the order of ITAT, Delhi Bench in Sunil Sethi Vs DCIT wherein he observed that facts were similar therefore has allowed relief to the assessee. Moreover, we further find that Ld. CIT(A) has made a finding of fact that the resolution passed by the Board of the company had clearly authorized the assessee to deal on 3 ITA No.989/Del/2011

behalf of the company. On 1st ground, Ld. CIT(A) had allowed relief to the assessee by holding as under:

"4. I have considered the issue and the submissions made by the AR. It is not in dispute that a resolution was passed by the company M/s Telmos Automobiles (P) Ltd. on 2.2.2006 authorizing Sh. Sanjeev Gupta to enter into any agreement contract or to execute deed or document in the name and on behalf of the company with any of the partner (s) of the firm M/s Telmos Electronics for purchase of factory land and building bearing plot no. 97-P of Industrial Area, Sector 27-28, Delhi Road, Hisar. He was further authorized to withdraw funds from time to time from the company, in his name as deemed proper and most beneficial to the company in order to pass the consideration of the deal for purchase of above mentioned land and building.

4.1 As per the above mentioned resolution of the company, an agreement dated 2.2.2006 was entered between M/s Telmos Electronics, represented by Smt. Pratibha Gupta, partner and M/s Telmos Automobiles (P) Ltd. represented by Sh. Sanjeev Gupta, Director. The facts clearly indicate that ~ 17.00 lacs was withdrawn by Sh. Sanjeev Gupta from the company in order to pass the consideration as earnest money to the firm M/s Telmos Electronics. As the deal did not materialize, the advance was remitted back to the company within a few days. The above mentioned transactions cannot be held either to be a loan or an advance by the company to Sh. Sanjeev Gupta.

4.2 Hon'ble Delhi High Court in the case of CIT Vs Raj Kumar (supra) discussed at length regarding the meanings of 'loan' and 'advance' and held as under:-

"Section 2 (22) (e) of the IT Act, 1961 shows that a payment would acquire the attributes of dividend within the meaning of the provision if the following conditions are fulfilled: (i) the company making the payment is one in which the public are not substantially interested;

(ii) money should be paid by the company to a shareholder 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 assets of the company or otherwise; (iii) the money should be paid either by way of an advance or loan or it may be "any payment" which the company 4 ITA No.989/Del/2011

may make on behalf of or for the individual benefit of any shareholder or also to any 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 accumulated profits, possessed by such a company.

The purpose of insertion of sub-clause (e) to section 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 guise of loans and advances to avoid payment of tax. Therefore, sub-clause (e) of section 2 (22) (e) of the 1961 Act, which is in pari material with sub-clause

(e) of section 2 (6A) of the 1922 Act, plainly seeks to bring within the tax net, accumulated profits which are distributed by closely held companies to its shareholders in the form of loans. The purpose of being that persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding the payment of taxes by having these companies pay or distribute, what would legitimately be dividend in the hands of the shareholders' money in the form of an advance or loan. The word "advance" has to be read in conjunction with the word "loan". Usually attributes of a loan are that it involves the positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries interest and there is an obligation of repayment. On the other hand, in its widest meaning the term "advance" mayor may not include lending. The word "advance" if not found in the company of or in conjunction with a word "loan" mayor may not include the obligation of repayment. It 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 construction which answers this conundrum is noscitur a sociis. The rule has been 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 construction to construe words in an Act of Parliament with reference to the words found 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 have 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 5 ITA No.989/Del/2011

used found in a group totally "dissimilar" or is there a "common thread" running through them; (iii) the purpose behind inserting of the term. In the instant case (i) the term "advance" has undoubtedly more than one meaning depending on the context in which it is used;

(ii) both the terms, that is, "advance" or "loan" are related to the accumulated profits of the company; and (iii) the purpose behind the insertion 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 have a substantial interest so as to avoid payment of tax by the shareholders. The word "advance" which appears in the company of the word "loan" could only mean such advance which carries with it an obligation of repayment. Trade advances which are in the nature of money transacted 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 Hon'ble High Court held that trade advances which are in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provision of section 2 (22) (e) of the IT Act. In the present case, the appellant withdrew money from the company to give effect to the resolution passed by the company dated 2.2.2006 for entering into an agreement with M/s Telmos Electronics for the purchase of the property. This can be termed as trade advance which is in the nature of money transacted to give effect to a commercial transaction. Therefore, the ratio of the Hon'ble Delhi High Court is squarely applicable to the appellant. "

4.3 Further, the decision of Hon'ble ITAT Delhi in Sunil Sethi Vs DCIT (supra) is directly on all fours with the facts of the appellant wherein it was held that:

"The only basis on which the invocation of section 2 (22) was contested was that the amount given to the assessee was neither loan nor advanced and it was not for the individual benefit of the shareholder. It had been the contention of the assessee that a Rs. 30 lakhs was given to him for the purpose of making advance with respect to certain land dealings which were proposed to be entered into by the company through the assessee. The assessee was a director in the company and could lawfully execute certain agreements on behalf of the company, if he was so authorized. The sum of Rs.30 lakhs was given by way of imprest to enter into a transaction which 6 ITA No.989/Del/2011

was for the benefit of the business of the company, i.e acquisition of a premises required for the purpose of business of the company. Such payment was made in pursuance of a resolution passed by the company a copy of which was also placed on record. It was not the case of the revenue that such resolution did not happen or it was an afterthought story. No material had been brought on record to suggest that what was explained by the assessee was incorrect. The sum had been treated as deemed dividend simply for the reason that it was given to the assessee. The transaction was in the ordinary course of the business of the company, and there was no intention on the part of the company to give a loan or advance to the assessee for his individual benefit. It has been demonstrated that in the bank account of the assessee, in which the said amount of Rs.30 lakhs was credited, was always having balanced more than Rs.30 lakhs. So even for a short period the assessee had not derived any benefit or it could not be said that the said amount was given to the assessee by the company for his individual benefit. The amount was lying in the bank account of the assessee which was not utilized at all for any purpose. It was, therefore, clear that the real intention of the company was to purchase the premises and there was no other hidden purpose. It could not be the case of the revenue that returning of the amount was an afterthought as the amount returned by the assessee within a short span of a week. There was no material on record to suggest that the transaction of the company with the assessee was in anyway arranged to give any benefit to the assessee. The amount was paid for a very short period for specific purpose and there was documentary evidence on record to substantiate the explanation of the assessee that the amount was given for the business purpose of the company, i.e. to purchase a suitable business premises and the assessee could validly act on behalf of the company as the said act of the assessee would be in accordance with the authority held by him through resolution of the board of directors of the company. Thus, Rs.30 lakhs could not be considered to be deemed dividend in the hands of the assessee. The provisions of section 2 (22) (e) were not applicable [para 11]".

4.4 The case laws relied upon by the AO are distinguishable on facts and therefore not applicable to the appellant. In view of the above, the addition made by the AO of Rs.11,81,185/ - is deleted and the grounds of appeal are allowed."

7 ITA No.989/Del/2011 5. From the above finding of Ld. CIT(A), we find that Ld. CIT(A) has relied upon the case law of ITAT Delhi Bench in the case of Sunil Sethi Vs DCIT wherein there was similar facts as in the case of assessee. We further find that the transaction was entered into on the basis of duly passed Board's Resolution and moreover, the assessee had returned the amount within a few days as there occurred certain dispute with regard to proposed transaction. We further find that the transaction was on account of written agreement wherein the company had proposed to purchase property for Rs.88 lacs. The sale agreement is placed at paper book pages 9-10. Paper book page 12 is a certificate from Union Bank of India wherein the bank had certified that Rs.17 lacs was debited from the account of the company to the account of assessee on 27.02.2006 and 28.02.2006 and on 29.03.2006, the same was returned back by the assessee. We find that Ld. CIT(A) has passed a speaking and well reasoned order in which, we do not find any infirmity. Therefore, Ground No.1 & 2 are dismissed.

6. As regards ground No.3, we find that Ld. CIT(A) has deleted the addition by holding as under:

"5. With regard to the addition of Rs.1.00 lac on account of low house withdrawals, contested in ground no. 5 of the appeal, the AR submitted that the appellant along with other members of the family i.e. parents and elder brother is residing in own house at a small town at Hisar. The father and elder brother have contributed Rs.1.5 lacs and Rs.1.3 lacs respectively towards joint messing and house hold funds. The complete details of the family members along with monthly expenses were furnished to the AO but the AO made an ad hoc addition of Rs.1.0 lac without any basis.

5.1 I have considered the issue and the submissions made by the AR. The AO estimated the monthly expenditure at Rs.20,000/-. However the withdrawals made by the father and brother have been ignored on the ground that they have their own families. The AO appears to have missed the fact that it is a joint family with joint 8 ITA No.989/Del/2011

messing and house hold funds. Having regards to the facts of the case, combined withdrawal of Rs.4.2 lacs by the entire family towards house hold expenses appears reasonable and therefore addition made by the AO is deleted and the ground of appeal is allowed."

7. We find that Ld. CIT(A) has recognized the fact that assessee was living in a joint family. Therefore, the withdrawals made by father and brother of assessee cannot be said to be for meeting the personal expenses of their families. In view of the above, we do not find any force in the contention of Ld. D.R. regarding ground No.3 and, therefore, same is dismissed. Ground No.4 is general in nature and do not require any adjudication.

8. In view of above appeal filed by revenue is dismissed.

9. Order pronounced in the open court on 08th April, 2015.

Sd./- Sd./- ( DIVA SINGH) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER th Date: 08 April, 2015 Sp Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

9 ITA No.989/Del/2011 S.No. Details Date Initials Designation 1 Draft dictated on 27/3 Sr. PS/PS 2 Draft placed before author 27,30, Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 8/4 Sr. PS/PS 6 Kept for pronouncement 8/4 Sr. PS/PS 7 File sent to Bench Clerk 8/4 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order