MADISON TEAMWORKS FILM PROMOTIONS AND ENTERTAINMENT PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX- 10(2)(2), MUMBAI, MUMBAI

During the course of hearing, the Ld.AR submitted that the assessee had originally accepted the assessment order on the ground of addition of Rs. 55 lakhs u/s 2(22)(e) of the Act as deemed dividend and contested the assessment only on the ground of mismatch of income vis-à-vis form 26AS of Rs.20,28,653/- by filing an appeal before the Ld.CIT(A). The Ld.CIT(A) provided a substantial relief by reducing the addition of Rs. 20,83,653/- to Rs. 8,829/- only. Further, in its appeal, the assessee didn‟t take any ground on addition u/s. 40A(3) of Rs.48,784/- given the quantum involved.

It was submitted that subsequently, when the assessment of Mr. Sam Balsara, a common shareholder in both the assessee-Company (MATES) and Madison Communications Private Limited, was reopened u/s. 147 of the Act, the same amount of Rs. 55 lakhs on account of deemed dividend was again taxed in the hands of Mr. Sam Balsara, as deemed dividend.

It was submitted that the assessee-company, realizing the issue of taxation twice on the same amount, filed a revision application u/s. 264 of the Act before the Ld.PCIT to revise the assessment order of MATES and prayed for deleting the addition u/s.2(22)(e) of Rs. 55 lakhs, as the amount had already been assessed in the hands of Mr. Sam Balsara in his personal assessment. However, the Ld.PCIT disposed off the revision petition without deciding the issue on merit and without providing any relief to the assessee. While deciding the matter, it was observed by the Ld.PCIT that the assessee had not waived its right to appeal before Ld.CIT(A), and also rejected the petition of the assessee for inordinate delay in filing revision application. Subsequently, the assessee filed an appeal for the second time before the Ld.CIT(A) on 24-12-2019 against the assessment order passed u/s. 143(3) dated 30-10-2015 on the ground of deemed dividend u/s 2(22)(e) of the Act which was not contested by the assessee initially when it filled appeal u/s. 246A of the Act. This appeal filed for the second time with new grounds of appeal, was dismissed by the Ld.CIT(A) being not maintainable, for the reason that an appeal before Ld.CIT(A) filed multiple times with new grounds of appeal cannot be admitted as per law. It was accordingly submitted that on the first occasion, the assessee didn‟t file any appeal on the issue of deemed dividend and on the second occasion, though a specific ground was raised but the appeal was held not maintainable by the Ld.CIT(A) and in light of the same, it was submitted that the findings of the AO in the penalty order that the Ld.CIT(A) has not disputed the findings made by the AO in the assessment proceedings that the assessee-company‟s transactions with its related concerns are covered by the provisions of section 2(22)(e) of the Act is factually incorrect. At the same time, it was submitted that as far as quantum proceedings are concerned, the same has attained finality and the amount has already been brought to tax in the hands of the assessee and separately, in the hands of the common shareholder.

In this regard, the Ld.AR has placed reliance on the following judicial precedents:

It was submitted that, in view of the above judicial precedents, the law is very clear now and clearly the deemed dividend is not taxable in the hands of the recipient company (ie. the assessee Company) and can be taxed only in the hands of the registered shareholder and hence the penalty on the same cannot survive.

It was further submitted that in view of the aforementioned Apex Court's judgement, an assessment order u/s. 147 of the Act has also been passed in the case of the common shareholder, wherein the AO has relied on the said Apex Court's decision in the case of CIT v. Madhur Housing and Development Company (Civil Appeal No. 3961 of 2013, dated 5th October, 2017) and has charged the very same amount of Rs. 55 lakhs to tax as deemed dividend in the common shareholder's assessment for the AY. 2013-14 (which was already taxed in the hands of the assessee- company). It was submitted that the common shareholder respectfully accepting the Hon'ble Supreme Court's decision discharged the tax liability arising due to the said addition. As can be seen from above, the same income is taxed twice Le, once in the hands of assessee-company and once in hand of the common shareholder. In view of the above facts and Hon'ble Apex Court‟s ruling, the deemed dividend (though not challenged) is clearly not taxable in the hands of the assessee-company and hence, prayed to delete the penalty.

Further, on the issue of levy of penalty on disallowance u/s 40A(3) of the Act, it was again submitted that though the assessee didn‟t appeal against the addition u/s. 40A(3) of Rs.48,784/- given the quantum involved, at the same time, there is no basis for levy of penalty u/s 271(1)(c) as mere disallowance doesn‟t automatically leads to levy of penalty.

Per contra, the Ld. DR is heard, who has relied on the order passed by the AO as well as that of the Ld. CIT(A).

We have heard the rival contentions and perused the material available on record. The matter under consideration relates to levy of penalty u/s 271(1)(c) of the Act as to whether there is concealment of particulars of income or furnishing of inaccurate particulars of income in relation to a specified loan transaction amounting to Rs. 55 lakhs received by the assessee company from MCPL wherein both the assessee-company and MCPL have a common shareholder by name of Mr Sam Balsara, who owns 72.5% and 87.38% shares in the assessee-company and MCPL respectively and the fact that MCPL had accumulated profits as on 31st March 2013. The said loan transaction has been characterized and brought to tax by the AO as deemed dividend invoking provisions of section 2(22)(e) of the Act in the hands of the assessee company. The assessee didn‟t challenge the addition initially, however, later on, the assessee seeks to challenge the same and moved an application before the Ld.PCIT u/s 264 and thereafter, appeal before the Ld.CIT(A), however without any success. The quantum proceedings have thus attained finality and are not under any further challenge. It is a settled legal proposition that assessment and penalty proceedings are separate proceedings and merely addition alone in the quantum proceedings cannot be a basis for levy of penalty and the conditions specified therein need to be satisfied before levy of penalty. In the penalty proceedings, the AO has merely referred to the fact the quantum proceedings have attained finality without specifying as to how the assessee has furnished inaccurate particulars of income and has gone ahead and levied the penalty u/s 271(1)(c) of the Act.

Further, we find that during the appellate proceedings against the levy of penalty, the assessee has submitted that even though the addition has been made in its hands, however, basis the decisions of the Tribunal and Courts, the said amount cannot be brought to tax in its hands and therefore, penalty should not be leviable and reference was specifically drawn to the decision of the Special Bench of the Tribunal in case of Bhaumik Colours (P) Ltd, Hon‟ble Bombay High Court decision in case of Universal Medicare (P) Ltd and Hon‟ble Supreme Court decision in case of Madhur Housing and Development company affirming the decision of the Hon‟ble Bombay High Court in case of Madhur Housing and Development Corporation and Hon‟ble Delhi High Court in case of CIT vs Ankitech (P) Ltd. It was also brought to the notice of Ld.CIT(A) that basis the decision of Hon‟ble Supreme Court decision in case of Madhur Housing and Development company, the AO has reopened the case of the common shareholder and brought the said amount to tax as deemed dividend in his hands. The Ld.CIT(A) has summarily rejected the submissions so made and has held that the levy of penalty is consequential in nature and since the addition has been confirmed, the levy of penalty was confirmed by him without elaborating as to how the assessee has furnished inaccurate particulars of income and the matter calls for levy of penalty and that too, on face of various decisions brought to his notice wherein it has been held that deemed dividend cannot be taxed in the hands of loan recipient entity but taxable in the hands of common shareholders having substantial interest in both entities.

In our considered opinion, there is clearly no legal and justifiable basis for levy of penalty u/s 271(1)(c) in the instance case for the reason that the AO has failed to specify as to how the charge of furnishing inaccurate particulars of income is satisfied in the instant case. The loan transaction and the factum that the assessee and MCPL are group concerns having common shareholder with substantial holding is apparent on the face of the financial statements read with notes to accounts. The AO referring to the same has called for further information and explanation from the assessee during the course of assessment proceedings and basis examination thereof, has brought the loan amount to tax as deemed dividend. The fact that loan transaction has been re- characterized and taxes as deemed dividend cannot be held as furnishing of inaccurate particulars of income where all relevant facts were available on record as part of audited financial statements and/or called for during the assessment proceedings.

Secondly, equally relevant to note is that the decision of Special Bench of the Tribunal in case of Bhaumik Colours (P) Ltd, Hon‟ble Bombay High Court decision in case of Universal Medicare (P) Ltd and Madhur Housing and Development company were rendered well before the passing of the assessment order u/s 143(3) dated 30-10-2015 and date of issuance of first show-cause u/s 271(1)(c) on 30-10-2015 and decision of the Hon‟ble Supreme Court in case of Madhur Housing and Development company was rendered on 05-10-2017 well before passing of the penalty order u/s 271(1)(c) on 28-03-2019 and therefore, the assessee has strong basis to rely on these decisions to submit that the amount of loan transaction cannot be brought to tax in its hands as deemed dividend u/s 2(22)(e) of the Act.

The fact that the AO has went ahead and taxed the amount as deemed dividend in the hands of the assessee and the assessee didn‟t challenge initially or couldn‟t challenge successfully later on and accepted its fate of the closure of the quantum proceedings cannot disturb the legal basis so held by the Coordinate Bench and the Hon‟ble Courts that the amount cannot legally be brought to tax in its hands and has to be brought to tax in the hands of the common shareholders. Interestingly, the AO of the common shareholder seeks to rely on the very same decision rendered by the Hon‟ble Supreme Court in case of Madhur Housing has reopened the case of the common shareholder and has brought the same amount to tax as deemed dividend in the hands of the shareholder.

We therefore find merit in the contention advanced by the Ld.AR that where the Courts have held the amount as not taxable in the hands of the assessee, there is legally and justifiably no basis for levy of penalty u/s 271(1)(c) of the Act.

Further, on the issue of disallowance u/s 40A(3), we find that mere fact that the amount has been disallowed cannot lead to levy of penalty as the AO has again failed to satisfy how the assessee has furnished inaccurate particulars of income.

In light of aforesaid discussion and in the entirety of facts and circumstances of the case, the penalty so levied u/s 271(1)(c) amounting to Rs. 18,89,032/- is hereby directed to be deleted.

In the result, the appeal of the assessee is allowed.