By TIOL News Service

NEW DELHI, FEB 22, 2018: THE issue before the Bench is - Whether when the assessee diverted the sum received for procuring import licences for the purchase of shares and also giving loans to other entities, it is to be construed as deemed dividend u/s 2(22)(e). YES is the answer.

Facts of the case

The Assessee-company filed its return for the relevant AY. During the assessment proceedings, the AO noticed that the Assessee had shown one company named Ginza Industries Ltd. as sundry creditor in its balance sheet to which an amount of Rs. 17,40,20,000/- was due. In that regard the Assessee company was asked to furnish the information with date, mode and purpose with which the credit of Rs. 17,40,20,000/- had been in the account of Ginza in the books of accounts for each and every rupee. The Assessee replied that it had indulged in the business of sale and purchase of import licenses and it had tied up with Ginza for procurement of License worth Rs. 50 crores approx. and had asked for advance of Rs 20.00 crores for procurement of license. The Assessee also stated that one Adani Associates 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. However, the AO noticed that the Assesse held 17,67,642 shares of Ginza and accordingly, it was asked to furnish the details of share holdings and whether any share holders and Directors were common.

Subsequently, a survey u/s 133A of the Act was conducted at Ginza's office premises at Kolkata, with purpose to ascertain if the interest free advance of Rs. 17.4 crores given to the Assessee by Ginza was covered under the definition of "Deemed Dividend" in terms of Section 2(22) of the Act. Thereafter, the AO held that the advance made by the Ginza to the Assessee was covered within ambit of deemed dividend and made addition to the income of the Assessee. On Assessee's appeal, the CIT(A) allowed the appeal. On further appeal by Revenue, the Tribunal also upheld the decision of the CIT(A).

After hearing the parties, the High Court held that,

++ 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 Rs. 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 import licenses, by purchasing shares and giving further advances of Rs. 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 Rs. 6.16 crores to it in the ordinary course of business;

++ the Managing Director of Ginza stated that Ginza intended to purchase import licenses to the tune of Rs. 70-80 crores some of which were for its own use (worth Rs. 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 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.";

++ the CIT(A) completely brushed aside the AO's determination 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 had underwritten the amounts subject to payment of commission was also a public company;

++ 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 Rs. 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 Rs. 17.4 crores from 08.09.1994 and approximately Rs. 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;

++ the Ginza was not trading in import licences or even advance licences. Yet it wished to purchase license 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 Rs. 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 Rs. 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 Rs. 6.4 crores advanced to Adani Exports. The assessee also invested Rs. 8 crores by purchasing shares;

++ facts 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 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. Therefore, both the lower authorities 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 Rs. 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. For these reasons, the first question is answered in favour of revenue and against the assessee.

(See 2018-TIOL-331-HC-DEL-IT)