SANJAY DIGAMBAR MALVE,,NASHIK vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 1,, NASHIK

आदेश / ORDER PER ANIL CHATURVEDI, AM :

Assessee is an individual having income from salary, income from profession and other sources. Assessee electronically filed his return of income for A.Y. 2013-14 on 15.11.2013 declaring total income of Rs.2,27,13,060/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 02.03.2016 and the total income was determined at Rs.2,27,13,060/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who vide order dated 23.03.2017 dismissed the appeal of the assessee. Aggrieved by the order of Ld.CIT(A), assessee is now in apepal before us and has raised the following grounds :

“Disallowance u/s 14A r.w.r. 8D

1. The learned CIT(A) erred in confirming the addition of Rs. 2,51,677/- made by the A.O. u/s 14A r.w.r. 8D of the Income Tax Rules without appreciating that the said disallowance was not warranted on facts of the case.

2. The learned CIT(A) failed to appreciate that the assessee had not earned any exempt income in respect of the major tax free investments and hence, these investments ought to have been excluded while computing the average investments for the purpose of determining the disallowance u/s 14A r.w.r. 8D(2)(ii) and 8D(2)(iii) of the Income Tax Rules.

3. The learned CIT(A) erred in confirming the disallowance of Rs.1,82,945/- u/s 14A r.w.s. 8D(2)(ii) in respect of proportionate interest expenditure incurred for earning exempt income without appreciating that the interest free own funds available with the assessee to the tune of Rs.7.79 Crs. were far more than the tax free investments made by the assessee and in the absence of any nexus between borrowed funds and tax free investments, it could be safely presumed that the tax free investments were sourced out of own funds and therefore, there was no reason to make any disallowance u/r 8D(2)(ii) of the Income Tax Rules.

Addition u/s 2(22)(e)

4. The learned CIT(A) erred in holding that advances received by the assessee individual from the company, Ms. Kamal Infrabuild Pvt. Ltd., should be treated as deemed dividend u/s 2(22)(e) in the hands of the assessee to the extent of Rs.29,84,5811- i.e. to the extent of the accumulated reserves of the company as on 31.03.2013 and thereby confirming the addition of Rs.3,87,996/- over and above the addition u/s 2(22)(e) of Rs.25,96,585/- suo moto made by the assessee at the time of filing return

4.1 The learned CIT(A) failed to appreciate that for the purposes of computing the addition u/s 2(22)(e), the opening balance of accumulated profits of the company as on 01.04.2012 should have been considered and not the closing balance of accumulated profits as on 31.03.2013 and therefore, the addition u/s 2(22)(e) of Rs.3,87,996/- made by the A.O. was not justified.

4.2 Without prejudice to the above ground, the assessee submits that while computing the addition u/s 2(22)( e) for this year, the amount treated as deemed dividend in the earlier years should have been reduced from the accumulated profits of the company and there was no reason to make any addition ofRs.3,87,996/- in this year.

Additional Legal Claim

6. Without prejudice to the above ground, the assessee submits that while computing the addition u/s 2(22)(e) for this year, the amount treated as deemed dividend in the earlier years should have been reduced from the accumulated profits of the company and only the balance amount of accumulated profits of the company should have been treated as deemed dividend u/s 2(22)( e) and therefore, it is prayed that the A.O may please be directed to assess the correct total income after computing the addition u/s 2(22)( e) in accordance with the provisions of the Act.

7. The assessee prays that the above claims are purely legal in nature and all the relevant facts regarding the same are already on record and hence, in view of the ratio laid down by Hon'ble Bombay High Court in the case of CIT v. Pruthvi Brokers and Shareholders P. Ltd. [349 ITR 336], it is prayed that the above grounds may please be admitted and the same may be adjudicated on merits.

Addition u/s 23 on account of deemed rent- 8. The learned CIT(A) erred in confirming the addition of Rs. 1,21,800/- made by the A.O. u/s 23 by estimating the deemed rent in respect of the flat owned by the assessee at Pune without appreciating that the said addition was not justified.

4.1. During the course of assessment proceedings AO noticed that assessee had investments amounting to Rs.1.82 crores as on 31.03.2013 and had claimed interest expenditure of Rs.23,71,500/-.

AO was therefore of the view that assessee was utilizing interest bearing funds to maintain investments. The assessee was therefore asked to explain as to why the disallowance u/s 14A r.w. Rule 8D not be made, to which the assessee made submissions which were not found acceptable to the AO. AO thereafter by following the methodology prescribed under Rule 8D of I.T. Rules worked out the disallowance under Sec.14A of the Act at Rs.2,51,677/- and disallowed the same. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who upheld the order of AO.

Aggrieved by the order of Ld.CIT(A), assessee is now before us.

5. Before us, Ld.A.R. reiterated the submissions made before AO and Ld.CIT(A) and further pointing to the copy of the Balance-Sheet as on 31.03.2013 which was placed in the Paper Book submitted that the interest free funds in the capital account of the assessee is to the tune of Rs.7.78 crores as against the investments of Rs.1.37 crores meaning thereby that the interest free funds available with the assessee are far more than the investments and in view of the decision of Hon’ble Bombay High Court in the case of HDFC Vs. DCIT reported in 383 ITR 529, no disallowance of interest is called for. Ld. D.R. on the other hand supported the order of AO and Ld.CIT(A).

“15. It is clear that for the first time in the case of HDFC Bank Ltd. (Supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities and Power Ltd. (Supra) with regard to investment in tax free securities coming out of assessee’s own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd.(Supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (Supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (Supra) on the above issue has also been accepted by the Revenue inasmuch as even though they have filed an appeal to the Supreme Court against that order on the other issue therein, viz., broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities and Power Ltd. (Supra) in its application to Section 14A of the Act. Therefore, the issue which arose for consideration before the Tribunal had not been decided by this Court in Godrej and Boyce Manufacturing Co. Ltd. (Supra). It arose and was so decided for the first time by this Court in HDFC Bank Ltd. (Supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, impugned order has proceeded on a fundamentally erroneous basis as the ratio decidendi of the order in Godrej and Boyce manufacturing Co. Ltd. (Supra) had nothing to do with the rest of presumption canvassed by the petitioner before the Tribunal on the basis of the ratio of the decision of this Court in HDFC Bank Ltd. (Supra).

appeal. On both the dates, when the orders were passed by the Assessing Officer and CIT(A), the authorities did not have the benefit of the order of this Court in HDFC Bank Ltd. (Supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. (Supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds. Consequently, we do not find any merit in the above submission made at the hearing on behalf of the Revenue.”

8.1. During the course of assessment proceedings, AO noticed that assessee was a major shareholder in M/s. Kamal Infrabuild Pvt. Ltd., (KIPL) from which the assessee had received loan and as per the books of accounts, the assessee had received Rs.83,77,846/- from KIPL. AO was of the view that since the amount was advanced to shareholder by closely held company from the accumulated profits, provisions of Sec.2(22)(e) of the Act become applicable. The assessee was therefore asked to explain as to why the amounts received by the assessee not be treated as deemed dividend u/s 2(22)(e) of the Act to which assessee inter-alia submitted that assessee has already considered the amount of Rs.25,96,585/- as deemed dividend which was 87% of the accumulated profits. It was therefore submitted that no further addition is called for. The submissions of the assessee were not found acceptable to the AO. AO was of the view that since the reserves of M/s. Kamal Infra Build Pvt. Ltd., as on 31.03.2013 was to the extent of Rs.29,84,581/-, the entire amount should be considered as deemed dividend. He accordingly treated the differential amount of Rs.3,87,996/- (Rs.29,84,581/- - Rs.25,96,585/-) as deemed dividend income u/s 2(22)(e) of the Act. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who upheld the order of AO.

Aggrieved by the order of Ld.CIT(A), assessee is now before us.

9. Before us, Ld.A.R. reiterated the submissions made before AO and Ld.CIT(A) and further submitted that the opening balance of accumulated reserves of M/s. Kamal Infra Build Pvt. Ltd., as on 31.03.2012 was Rs.13,61,710/- and the balance as on 31.03.2013 was Rs.29,84,581/-. He submitted that while computing the income assessee, had considered the closing balance of accumulated profits as on 31.03.2014 of Rs.29,84,581/- and since assessee was holding 87% shares in it, he considered 87% of such accumulated profits of amounting to Rs.25,96,585/- which was offered to tax u/s 2(22)(e) of the Act.

Stock Holding Pvt. Ltd., (2015) 64 Taxmann.com 138 (Guj) and the decision of Pune Tribunal in the case of Smt. Chhaya Valmik Nikhade Vs. ACIT in dated 07.06.2019 (He also placed on record the copy of the aforesaid decision). In support of his contention of the Reserves, he pointed to the copy of the audited Balance-Sheet in the Paper Book. He thereafter submitted that if the opening balance of the Reserves is considered, then the quantum of deemed dividend u/s 2(22)(e) of the Act would work out to Rs.13,61,710/- as against the amount of Rs.25,96,585/- that was offered by the assessee in the return of income. He thereafter submitted that due to misinterpretation of the legal provision, the assessee had offered a higher price amount of Rs.25,96,585/- as deemed dividend in the return of income filed by the assessee. He thereafter submitted that where the amount is not liable to tax then the same cannot be assessed to tax because the same has been wrongly offered to tax by the assessee in the return of income. He therefore submitted that the AO be directed to grant relief of the excess amount of deemed dividend offered to tax by the assessee. Ld. D.R. on the other hand, supported the order of AO and Ld.CIT(A).

The aforesaid contention of the assessee has not been controverted by the Revenue. It is a settled proposition of law that no tax can be levied or recovered without authority of law for which reference can be made to the decision of Hon’ble Apex Court in the case of CIT Vs. Shelly Products and another as noted by the Hon’ble Delhi High Court in the case of Vijay Gupta Vs. CIT and another reported in (2017) 291 CTR 517 wherein it was observed that if an assessee by mistake or inadvertence or on account of ignorance included in his income any amount which is exempted from payment of income tax or is not income within the contemplation of law, the assessee may bring the same to the notice of the assessing authority which if satisfied may grant the assessee necessary relief and refund the tax paid in excess, if any. Considering the totality of the facts and in view of the aforesaid decisions, we are of the view that the deemed dividend u/s 2(22)(e) of the Act be worked out on the basis of the opening balance of KIPL as on 01.04.2012. We thus direct accordingly. Thus, the grounds of the assessee are allowed.