JUDGMENT

Rajiv Shakdher, J

1. This is an appeal preferred by the Revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') against the judgment dated 09.03.2007 passed by the Income Tax Appellate Tribunal (hereinafter referred to as the 'Tribunal') in ITA No. 4125/Del/1999 in respect of assessment year 1996-97. The Revenue is aggrieved by virtue of the fact that by the impugned judgment the Tribunal has deleted an addition in the sum of Rs 12,28,517/- made by the Assessing Officer under Section 2(22)(e) of the Act.

2. At the time of admission of the appeal we had heard the matter extensively. By our order dated 22.04.2009 we admitted the appeal on the substantial question of law set out hereinbelow and had with the consent of counsel appearing for both parties heard the submissions with a view to finally adjudicate upon the same. The substantial question of law on which the appeal was admitted is as follows:

"Whether trade advances given to the assessee by CEI can be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961?"

3. For the purposes of adjudication of the appeal the following relevant facts require to be noted.

3.1 The assessee who is a proprietor of a concern by the name of M/s Premier Engineering Corporation is in the business of manufacturing customized kitchen equipment. The assessee is also the Managing Director and holds nearly 65% of the paid-up share capital of Continental Equipment India (Pvt.) Ltd. (in short 'CEI').

3.2 A substantial part of the business of the assessee, which is nearly 90%, is obtained through CEI. For this purpose CEI would pass on the advance received from its customers to the assessee to execute the job work entrusted to the assessee.

3.3 During the scrutiny of the return of the assessee for the assessment year in issue, the Assessing Officer on going through the balance sheet filed by the assessee along with the return discovered that the assessee owed a sum of Rs 14,59,770/- to CEI. Admittedly, this amount was shown by the assessee under the head "advances received from customers". The assessee was queried with respect to the nature of the receipt. In response thereto the assessee offered the following explanation that: nearly 90% of his sales was to CEI; its closing stock for the accounting period 31.03.1996 was equivalent to Rs 18,43,927/- which formed part of the sales made in the subsequent year to CEI; the advances received and shown under the head "advances received from customers" were trade advances received against future supplies which was backed by sales made immediately upon manufacture of the goods in issue; the advances received were not returned by cheque or otherwise; and in any event, Section 2(22)(e) of the Act did not bring within its ambit advances received against future supply of goods. In support of the last submission assessee placed reliance on the judgment of the Bombay High Court in the case of CIT vs Nagindas M. Kapadia, (1989) 177 ITR 393. The assessee also tried to distinguish the judgment of the Supreme Court with which he was confronted, that is, in the case of Miss P. Sarada vs CIT, (1998) 229 ITR 444.

3.4 The Assessing Officer however, was not convinced that the money received by the assessee was in the nature of an advance received by CEI from its customers which was passed on to the assessee towards execution of the job work entrusted to him for manufacture of customized kitchen equipment. The Assessing Officer was of the opinion that the money received by the assessee was in the nature of a loan given by CEI to the assessee who admittedly held more than 10% of the shares in CEI. Resultantly, the Assessing Officer concluded that the money received by the assessee was deemed dividend within the meaning of the provisions of Section 2(22)(e) of the Act. In view of the fact that the accumulated profits of CEI as on 31.03.1996 was a sum of Rs 12,28,517/- the addition was restricted to t