REJI ABRAHAM vs. THE DEPUTY COMMISSIONER OF I

1 In the High Court of Judicature at Madras Dated : 24.6.2019 Coram : The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.348 of 2019 Mr.Reji Abraham ...Appellant Vs The Deputy Commissioner of Income Tax, Corporate Circle 1(1), Chennai-34. ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961 against the order dated 11.9.2018 made in ITA No.1132/Chny/2018 on the file of the Income Tax Appellate Tribunal Chennai 'C' Bench for the assessment year 2013-14. For Appellant : Mr.A.S.Sriraman For Respondent : Mrs.R.Hemalatha, SSC Judgment was delivered by T.S.SIVAGNANAM,J This appeal, filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, the Act), is directed against the order dated 11.9.2018 passed by the Income Tax Appellate Tribunal, Chennai 'C' Bench (for brevity, the Tribunal) in ITA No.1132/Chny/2018 for the assessment year 2013-14. http://www.judis.nic.in 2 2. The Revenue has filed this appeal by raising the following substantial questions of law : “i. Whether the provisions of Section 2(22)(e) of the Act would get attracted in the absence of accumulated profits as statutorily defined in the provisions of the Companies Act, 1956/2013 while overlooking the admitted position of non commencement of business by the entity advancing money to the other entity out of the profits earned from sale of land ? ii. Whether the Appellate Tribunal is correct in interpreting the provisions of Section 2(22)(e) of the Act while ignoring the components of the profits available for distribution of dividend, which would negate the applicability of the conditions prescribed for taxing the deemed dividend pertaining to the transaction between the two entities in view of the holding of substantial share holding by the appellant ? And iii. Whether the provisions of Section 2(22)(e) of the Act would get attracted for taxing the advances given by M/s.Tuticorin Power Company Limited to M/s.Aban Ventures Limited in the course of their business in the hands of the appellant solely on the ground of substantial share holding in both the companies?” 3. We have heard Mr.A.S.Sriraman, learned counsel for the appellant - assessee and Mrs.R.Hemalatha, learned Senior Standing Counsel appearing http://www.judis.nic.in 3 for the respondent - Revenue. With consent of the learned counsel on either side, the main appeal itself is taken up for final disposal. 4. The only issue, which falls for consideration is as to whether Section 2(22)(e) of the Act would get attracted in the instant case. 5. Before we go into the substantial questions of law, we have to decide as to whether the assessee had adequate opportunity to substantiate their contention before the Assessing Officer when there was an allegation against the assessee that M/s.Aban Ventures Private Limited (for short, M/s.AVPL) has been used as a conduit to subvert the funds to the assessee. 6. The assessment for the year under consideration (2013-14) was completed under Section 143(3) of the Act vide order dated 29.2.2016. One of the issues pertains to deemed dividend under Section 2(22)(e) of the Act. The Assessing Officer held that the assessment in respect of M/s.AVPL for the year 2013-14 revealed that a deemed dividend as envisaged under Section 2(22)(e) of the Act was routed through the assessee, who holds more than 30% of shares in M/s.AVPL and one M/s.Tuticorin Power Company Limited (for short, M/s.TPCL). The Assessing Officer found that it could be clearly found that the assessee was the prime stakeholder in both the companies namely M/s.AVPL and M/s.TPCL and that the transaction of Rs.1.4 Crores was done without any business expediency and only because of the assessee holding substantial shares in both the companies. 7. The Assessing Officer further held that the ultimate beneficiary of http://www.judis.nic.in 4 the transaction in question ought to be the assessee, as the recipient company has been utilized as conduit to subvert the funds to the assessee. Thus, the Assessing Officer concluded that M/s.AVPL was utilized as a conduit to transfer the funds from M/s.TPCL to the assessee. Accordingly, a sum of Rs.1.40 Crores was assessed as a deemed dividend under Section 2(22)(e) of the Act in the hands of the assessee under the head 'income from other sources'. 8. The assessee – appellant preferred an appeal before the Commissioner of Income Tax (Appeals)-1, Chennai-34 [for short, the CIT(A)]. In the memorandum of grounds of appeal, the assessee stated that the Assessing Officer was wrong in presuming that M/s.AVPL was used as a conduit company, that the statement of the Assessing Officer that the assessee was the ultimate beneficiary of the transaction between the two companies was wrong in as much as the assessee had not been benefited by the transfer of funds by M/s.TPCL to M/s.AVPL, that the Assessing Officer was wrong in presuming that M/s.AVPL was used as a conduit company to transfer funds from M/s.TPCL to the assessee, which was factually incorrect and that the assessee had not been benefited by the transfer of Rs.1.40 Crores by M/s.TPCL. 9. Before the CIT(A), the assessee further contended that the Assessing Officer ought to have accepted the contention of the assessee that M/s.TPCL had not lent money to the assessee through M/s.AVPL, that the http://www.judis.nic.in 5 amounts advanced by M/s.TPCL were utilized by M/s.AVPL for its own purposes and that it was not correct to state that the AVPL was used as a conduit company to transfer the funds of M/s.TPCL to the assessee. The assessee also contended that the Assessing Officer was wrong in holding that the transaction of Rs.1.40 Crores was done without any business expediency and only because of the assessee holding substantial shares in both the companies and that there was no income tax law or any other law that can interfere with the decision of business expediency of a company. 10. Before the CIT(A), it was further contended that the Assessing Officer failed to prove that the loans given by M/s.TPCL to M/s.AVPL resulted in any benefit to the assessee, that the Assessing Officer failed to appreciate the fact that there was only capital reserve in the balance sheet of M/s.TPCL, which could not have been distributed to the shareholders as dividend, that the Assessing Officer failed to give opportunity to the assessee to explain his case in spite of making a request by his authorized representative and that the Assessing Officer ought to have accepted the contention of the assessee that the same amount had already been taxed in the hands of M/s.AVPL and the addition made would amount to double taxation. 11. The CIT(A), vide order dated 26.2.2018, dismissed the appeal filed by the assessee. Aggrieved by that, the assessee filed an appeal before the Tribunal and raised a contention that the CIT(A) failed to appreciate the factual matrix and that the sustenance of the assessment of deemed dividend http://www.judis.nic.in 6 in the hands of the assessee was wrong, erroneous, unjustified, incorrect and not sustainable in law. However, by the impugned order, the Tribunal dismissed the appeal filed by the assessee. 12. We have carefully considered the orders passed by both the CIT(A) as well as the Tribunal. 13. To be noted, in paragraph 2 of the order passed by the CIT(A), the brief facts of the case were set out, in which, it had been stated that a sum of Rs.1.4 Crores as deemed dividend was a loan received by the assessee from M/s.AVPL. 14. We posed a question to the Revenue as to what was the material, which was available with the Assessing Officer to come to a conclusion that it was a loan received from M/s.AVPL. 15. The learned counsel for the assessee has pointed out that a perusal of the balance sheet would reveal that it was the assessee, who extended the loan to M/s.AVPL and not vice versa. 16. The Revenue is not able to place any material, which was referred to by the Assessing Officer to state that the amount was received by the assessee from M/s.AVPL. 17. Thus, there appears to have been a factual error, which had been committed. In paragraph 3 of the order passed by the CIT(A), the grounds raised by the assessee were fully extracted verbatim. The grounds, which we have referred to above also find a place. In our considered view, no exercise http://www.judis.nic.in 7 was done by the CIT(A) to examine as to how the Assessing Officer came to the conclusion that M/s.AVPL was used as a conduit to transfer the funds from M/s.TPCL to the assessee, when the assessee specifically stated that no such transaction took place. 18. We find that the order passed by the CIT(A) is a mere academic exercise without examining the factual position. This error, which had crept in the order passed by the CIT(A), was pointed out before the Tribunal. Nevertheless, the Tribunal referred to the decision of the Hon'ble Supreme Court in the case of CIT Vs. Mukundray K.Shah [reported in 290 ITR 433] and rejected the case of the assessee. In our considered view, the allegation against M/s.AVPL is quasi criminal in the sense that M/s.AVPL was used as a conduit to transfer funds to the assessee. If such is the allegation, then it is the duty of the Assessing Officer to render a finding based on the material, which was placed on record by the assessee and explain the nexus in the transaction before holding that the assessee was benefited on account of the transaction and that M/s.AVPL was used as a conduit. We find that this factual finding is missing in the assessment order, the correctness of which was not tested by the CIT(A) nor did the Tribunal undertake such an exercise though the assessee raised such a ground. 19. We will be well justified in terming the orders passed by both the CIT(A) as well as the Tribunal to be perverse and unsustainable. That apart, the assessee specifically raised a contention before the CIT(A) that he did not http://www.judis.nic.in 8 have adequate opportunity to explain his case before the Assessing Officer. This ground has not been dealt with by the CIT(A). Thus, considering these facts, we are of the opinion that the matter should be remanded to the CIT(A) for a fresh consideration so as to enable the assessee to place all the records before the CIT(A) to vindicate himself and establish his contention that M/s.AVPL was not used as a conduit to transfer the funds, that no part of the amount fell into the kitty of the assessee and that he was not benefited by such transactions. 20. In the result, the above tax case appeal is allowed, the orders passed by both the CIT(A) as well as the Tribunal are set aside and the matter is remanded to the CIT(A) for a fresh consideration only on the above issue. The substantial questions of law are left open. No costs. 24.6.2019 Internet : Yes To The Income Tax Appellate Tribunal, Chennai 'C' Bench RS http://www.judis.nic.in 9 T.S.SIVAGNANAM,J AND V.BHAVANI SUBBAROYAN,J RS TCA.No.348 of 2019 24.6.2019 http://www.judis.nic.in