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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal has been filed by the assessee challenging the impugned order dated 31/10/2019, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by learned Commissioner of Income Tax (Appeals)–52, Mumbai, [“learned CIT(A)”], for the assessment year 2014–15.
In this appeal, the assessee has raised following grounds:
“1. The Learned CIT(A) has erred in making addition of Rs. 1,02,25,291/- as deemed dividend U/s 2(22)(e) of I.T. Act, 1961 in the hands of Appellant.
Joseph Mudaliar ITA No.7199/Mum./2019
The Learned CIT(A) failed to appreciate that– a) The balance of Jaya Jewellery Pvt. Ltd. As on 31 March 2014, in the Appellant's books, is advance towards supply of Material & Reimbursement of statutory due paid on behalf. b) Learned CIT(A) has wrongly treated advance against business transaction as deemed dividend U/s 2(22)(e). 3. Without prejudice to above, The Learned CIT(A) has made the 100% addition of advance against business transaction made by Jaya Jewellery Pvt. Ltd to Alex Jewellery Pvt. Ltd in the hands of appellant as deemed dividend U/s 2(22)(e). however appellant is holding only 50% shareholding in Jaya Jewellery Pvt. Ltd. Moreover Alex Jewellery (P) Ltd is not the share holder of Jaya Jewellery P. Ltd. 4. The Learned CIT(A) has erred in disallowing Rs. 79,24,051/- as cost of improvement of Shop B1 at Mayur Tower. However same was offered by appellant as undisclosed income before income tax settlement commission for AY 2006-07 during A.Y. 2011-12. 5. The Learned CIT(A) has erred in making disallowance of interest of Rs.1,79,996/– U/s 14A of I.T. Act, 1961. The Learned CIT(A) fail to appreciate that appellant has own sufficient interest free fund to make investment in tax free securities. 6. The Learned CIT(A) has erred in setting off the business loss of the year against capital gains instead of income from other sources. 7. The Learned CITIA) erred in charging interest U/s 234A, 234B, 234C of the I.T.Act, 1961.”
The assessee is an individual and is having wholesale and retail trading business of imitation jewellery. The assessee is the proprietor of M/s Joseph Enterprises and Sri Jaya Jewellery having shop/showroom at Chennai, Hyderabad, Madurai and Mumbai. The assessee is also a partner in three partnership firms namely, M/s Metro Bangles, M/s Arun Plastics and M/s Alex International. For the year under consideration, assessee filed his return of income on 07/10/2014. Subsequently revised return was filed on 04/11/2014, wherein total income of Rs. 8,18,060 was declared and current year‟s loss is
Joseph Mudaliar ITA No.7199/Mum./2019 shown at Rs. 1,50,20,296. The assessee has shown remuneration and interest on capital from M/s Alex International under the head business income. Besides business income, the assessee has also shown income from house property and income from other sources being interest income. During the year, the assessee has also earned share of profit from the aforesaid partnership firms, however the same was claimed as exempt.
The issue arising in grounds no. 1 to 3, raised in assessee‟s appeal, is pertaining to addition of Rs. 1,02,25,291 as deemed dividend under section 2(22)(e) of the Act.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the course of assessment proceedings, upon perusal of the details filed in the case of M/s Jaya Jewellery Private Limited, it was noticed that the assessee is shown to have obtained loans amounting to Rs. 1,08,25,034 from this company under the assessee‟s proprietary concern, namely, Sri Jaya Jewellery. It was further noticed that in the aforesaid company M/s Jaya Jewellery Private Limited, the assessee is found to be having shareholding of 50%. Similarly, it was noticed that M/s Jaya Jewellery Private Limited has given loans amounting to Rs. 91,17,824 of the company, M/s Alex Jewellery Private Ltd, in which the assessee was having shareholding of 40%. Accordingly, the assessee was asked to show cause as to why the provisions of section 2(22)(e) of the Act are not applicable on the loan obtained by the assessee under its proprietary concern and why same should not be deemed as income chargeable to tax for the year under consideration.
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The Assessing Officer („AO‟) vide order dated 25/08/2016 passed under section 143(3) of the Act, after noting that no submission was filed by the assessee in response to the various queries till the date of passing of the order, held that since assessee is shareholder in M/s Jaya Jewellery Private Limited and M/s Alex Jewellery Private Limited, therefore, provisions of section 2(22)(e) are attracted in the present case and accordingly, the payments received by way of advance or loan, as stated above, are chargeable to tax as „deemed dividend‟ under the aforesaid section. Further, since the accumulative profits in the form of „Reserves and Surplus‟ in assessee‟s balance sheet was only to the tune of Rs. 1,02,25,291, the addition under section 2(22)(e) of the Act was restricted to the aforesaid amount.
In appeal, learned CIT(A) vide impugned order dated 31/10/2019 dismissed the appeal filed by the assessee on this issue, by observing as under:
“5.3 The contentions of the assessee have been duly considered. It is noted that the assessee has not made any submissions with regard to the amount treated as deemed dividend u/s. 2(22)(e) in respect of the loan given by M/s. Jaya Jewellery P. Ltd. to M/s. Alex Jewellery P. Ltd. of Rs. 91,17,824/-. Thus, it is presumed that the assessee is acceptable to the view of the AO that the provisions of Sec. 2(22)(e) are clearly attracted in respect of this amount of Rs. 91,17,824/-. As regards the loan given by M/s. Jaya Jewellery P. Ltd. to the assessee of Rs. 1,08,25,034/-, the assessee has contended that the same is of the nature of business advance for supply of material and therefore, the provisions of Sec. 2(22)(e) cannot be applied. However, it is noted that the assessee has not provided any evidence to substantiate this claim of business advance for supply of material. Moreover, it is also noted that there is hardly any change in the amount of balance of Rs. 1,08,25,034/- as on 31.03.2014 shown as received by the assessee from M/s. Jaya Jewellery P. Ltd. even in the subsequent years. Even on 31.03.2016, the balance outstanding in respect of M/s. Jaya Jewellery P. Ltd. in the books of the assessee is of Rs. 83,75,223/-. In case of a genuine business advance, the said amount of advance would have been squared up in the subsequent year or latest by the end of 2 years. However, in the instant case, it is observed that even after end of 2 years, the
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balance outstanding as on 31.03.2016 in respect of M/s. Jaya Jewellery P. Ltd., in the books of the assessee, is of Rs. 83,75,223/-. Therefore, the contention of the assessee that the amount received by the assessee is of the nature of business advance, is rejected. As regards, the contention of the assessee that the said amount was received from M/s. Jaya Jewellery P. Ltd. by the proprietory concern of the assessee and not in the individual capacity of shareholder of M/s. Jaya Jewellery P. Ltd., it is held that it is not relevant as to whether an amount is received in a proprietory concern or in the individual capacity. The fact is that this amount received has benefited the ass shareholder and therefore the provisions of Sec. 2(22)(e) are clearly attracted.”
Being aggrieved, the assessee is in appeal before us.
During the course of hearing, learned Authorised Representative („learned AR‟) submitted that the advances given by M/s Jaya Jewellery Private Limited to Sri Jaya Jewellery as well as to M/s Alex Jewellery Private Limited was for supply of material and towards reimbursement of statutory taxes paid on its behalf. The learned AR referred to the Ledger of Sri Jaya Jewellery and M/s Alex Jewellery Private Limited in the books of M/s Jaya Jewellery Private Limited in order to drive home the point that the advances given by M/s Jaya Jewellery Private Limited were adjusted against the supplies of imitation jewellery by Sri Jaya Jewellery and M/s Alex Jewellery Private Limited. The learned AR also submitted that M/s Jaya Jewellery Private Limited had also given advances to other suppliers apart from its sister concerns during the relevant assessment year as well as in subsequent assessment years.
On the other hand, learned Departmental Representative („learned DR‟) vehemently relied upon the orders passed by the lower authorities.
We have considered the rival submissions and perused the material available on record. As noted above, assessee is having wholesale and retail
Joseph Mudaliar ITA No.7199/Mum./2019 trading business of imitation jewellery. Assessee is proprietor of Sri Jaya Jewellery, which has its shops/showrooms in various cities of India. Further, M/s Jaya Jewellery Private Limited is a private limited company registered in Mumbai doing trading business of imitation and fashion jewellery. The assessee is one of the director and major shareholder, i.e. having 50% of shareholding, in the aforesaid company. The assessee is also a shareholder, having 40% of shareholding, in M/s Alex Jewellery Private Limited. During the year under consideration, M/s Jaya Jewellery Private Limited gave advances to Sri Jaya Jewellery and M/s Alex Jewellery Private Limited. The learned CIT(A) upheld the conclusion of the AO to tax the said advances as „deemed dividend’ under section 2(22)(e) of the Act. As per the assessee, M/s Jaya Jewellery Private Limited not only gave such advances to its sister concerns but also has given the same to other entities. In this regard, reference has been made to the balance sheet of M/s Jaya Jewellery Private Limited, at page 29 of paper book, wherein, apart from Sri Jaya Jewellery and M/s Alex Jewellery Private Limited, names of other non-related entities have been mentioned as „advance to supplier‟. It has further been submitted that the said advances were adjusted against the material purchases and taxes paid and these transactions are in the nature of business and not for loan. In this regard, reference was made to the Ledger of Sri Jaya Jewellery and M/s Alex Jewellery Private Limited in the books of M/s Jaya Jewellery Private Limited, at page 19 – 24 of paper book. Apart from making reference to the aforesaid Ledger account, we find that no other evidence in the form of bills, agreement, delivery challans etc. has brought on record in support of the aforesaid submission. We also find
Joseph Mudaliar ITA No.7199/Mum./2019 that though the AO in para 5.3 of its order has mentioned that no submissions were filed by the assessee in response to various queries raised during the course of assessment proceedings, however, submissions dated 17/05/2016 and 24/08/2016 were in fact filed by the assessee before the AO on 20/05/2016 and 24/08/2016, respectively. Acknowledged copy of submissions form part of the paper book at page no.15–17. Thus, in view of the above, we deem it appropriate to remand this issue to the file of AO for de novo adjudication after necessary examination/verification of details. We further direct the assessee to produce the bills, delivery challans, agreement etc. in respect of the material supplied by Sri Jaya Jewellery and M/s Alex Jewellery Private Limited to M/s Jaya Jewellery Private Ltd. against the advance given. Since this issue is remanded for adjudication afresh, the assessee shall be at liberty to adduce any other evidence to support its case. Further, the AO shall also have the liberty to call for or examine any other documents/detail as may be necessary for complete adjudication of this issue. As a result, grounds no. 1 – 3 raised in assessee‟s appeal are allowed for statistical purpose.
The issue arising in ground no. 4, raised in assessee‟s appeal, is pertaining to disallowance of Rs. 79,24,051, as cost of improvement of shop owned by the assessee.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee has shown long term capital loss of Rs. 33,84,000, on sale of Shop B1, Mayur Tower. While working out the aforesaid capital loss, the assessee has, inter-alia,
Joseph Mudaliar ITA No.7199/Mum./2019
claimed deduction on account of income declared before the Income Tax Settlement Commission amounting to Rs. 60,00,000. Accordingly, in order to verify the allowability of deduction, the assessee was asked to provide the details of additional income declared during the course of proceedings before Income Tax Settlement Commission. The AO vide order passed under section 143(3) of the Act, in absence of any documentary evidence to support the claim that the disclosure made in the preceding years is on account of the same capital asset, which are sold during the year, disallowed indexed deduction of Rs. 79,24,051, claimed by the assessee in respect of Rs. 60,00,000 on account of income declared before the Income Tax Settlement Commission. Consequently, the income under the head long term capital gains was enhanced to Rs. 80,47,354.
In appeal, learned CIT(A) vide impugned order dated 31/10/2019 dismissed the appeal filed by the assessee on this issue, by observing as under:
“6.3 The contentions of the assessee have been duly considered. It is noted that, in course of the assessment proceedings, the assessee was asked to furnish evidences to demonstrate that the said disclosure of Rs.60,00,000/- before ITSC relates to the said Shop No. B1 which has been sold during the relevant year. However, the assessee failed to furnish any evidence as required by the AO. Even in the present appellate proceedings, no such evidence has been furnished to demonstrate that the said disclosure of Rs. 60,00,000/- before ITSC relates to Shop No. B1. Moreover, the assessee has not even submitted the cash flow statement which it would have submitted in course of the proceedings before the ITSC explaining the generation and application of the unaccounted funds so that his claim of having made such unaccounted investment in shop No. B1 can be verified. The AO, while rejecting the claim of the assessee for deduction of this indexed cost of improvement related to the said disclosure made before ITSC, has rightly pointed out that the income offered before ITSC is on account of 'undisclosed stock' and not on account of any 'undisclosed investment' and therefore, assessee's contention of having made the said disclosure of Rs. 60,00,000/- on account of undisclosed
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investment, cannot be accepted. It is also noted that in the year relevant to A.Y. 2013-14, the assessee had similarly sold another Shop G1 at Mayur Tower for a consideration of Rs. 124.51 lakhs, however, while determining his LTCG, no such deduction on account of indexed cost of improvement related to any undisclosed investment offered before the ITSC was made by the assessee. Therefore, no infirmity is found in the action of the AO of computing the LTCG after not allowing deduction of indexed cost of improvement of Rs. 79,24,051/- related to the undisclosed income offered of Rs.60,00,000/- before the ITSC. Accordingly, Ground no.4 of the appeal is dismissed.”
Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both the sides and perused the material available on record. As per the assessee, an amount of Rs. 60,00,000 was offered for the year relevant to assessment year 2006 – 07 before the Income Tax Settlement Commission on account of unaccounted investment made in shop No. B1 at Mayur Tower, which was sold during the year under consideration for amount of Rs. 2,05,56,000. Therefore, while computing the capital gain, deduction on account of indexed cost of improvement of Rs. 79,24,051, was claimed, in respect of the said offered amount of Rs. 60,00,000, made to the Income Tax Settlement Commission. In absence of any details to demonstrate that the said disclosure of Rs. 60,00,000, before Income Tax Settlement Commission relates to the capital asset sold during the year, the lower authorities denied the relief to the assessee. Even during the hearing before us, reference was only made to the copy of order dated 22/12/2010, passed by the Income Tax Settlement Commission under section 245D(4) of the Act, wherein the total income of the assessee was computed for the assessment years before the Income Tax Settlement Commission after taking into account the additional income offered by the assessee. In the paper
Joseph Mudaliar ITA No.7199/Mum./2019 book at page no.52–58, report of the Income Tax Department under section 254D(3) of the Act is annexed, wherein reference is made to undisclosed income of the assessee, inter-alia, invested in Mayur Tower, Mumbai. Apart from these documents, no other document was placed on record in order to support the claim of the assessee that Rs. 60,00,000, was offered by the assessee before Income Tax Settlement Commission in respect of the capital asset being shop No. B1 in Mayur Tower sold during the relevant assessment year. Since, it is not clear whether the property in Mayur Tower, Mumbai, which is referred in Income Tax Department‟s report under section 245D(3) of the Act, is the same property, which is sold during the year under consideration, therefore, we deem it appropriate to remand this issue to the file of AO for de novo adjudication after necessary examination/verification of details. We further direct the assessee to furnish before the AO all the material/evidence in support of its aforesaid claim. The AO shall also have the liberty to call for or examine any other documents/detail as may be necessary for complete adjudication of this issue. Further, since, the claim of the assessee is based on the proceedings before the Income Tax Settlement Commission, the record pertaining to same are likely to be also available with the Income Tax Department, the AO may also make necessary endeavour to call for such records for verification of facts relevant for deciding this issue. As a result, grounds no. 4 raised in assessee‟s appeal is allowed for statistical purpose.
The issue arising in ground no. 5, raised in assessee‟s appeal, is pertaining to disallowance under section 14A of the Act. Page | 10
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The brief facts of the case pertaining to this issue, as emanating from the record, are: During the course of assessment proceedings, the assessee earned exempt income in the form of share of profit and dividend income and claimed interest expenditure. The AO vide order passed under section 143(3) of the Act held that the value of the investment which give rise to exempt income is Rs. 26,41,752 (i.e investment in shares Rs. 25,66,752, and capital in partnership firm Rs. 75,000). Accordingly, the AO held that certain expenditure must have been incurred towards making and managing the aforesaid investment and therefore, the same is not allowable under section 14A of the Act. Consequently, the AO made disallowance of Rs. 1,73,996, under section 14A of the Act read with Rule 8D of the Income Tax Rules.
In appeal before the learned CIT(A) assessee submitted that it has sufficient own interest free funds available at its disposal to make the said exempt investments. The learned CIT(A) vide impugned order held that in absence of balance sheet of the assessee in its individual capacity, contention that he has sufficient own interest free funds cannot be verified. Accordingly, learned CIT(A) dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both the sides and perused the material available on record. It was submitted by learned AR that the AO considered Rs. 25,66,752, as investment in shares, while assessee‟s investment in shares is only Rs. 5,66,752. We find from the balance sheet of the assessee in his individual capacity for the year ending 31/03/2014, Page | 11
Joseph Mudaliar ITA No.7199/Mum./2019 forming part of the paper book at page no.25, that the investment in partnership firm is shown as Rs. 75,000. To this extent, we find that the factual findings recorded by the AO in para 7 is correct. However, the AO has mentioned the investment in shares as Rs. 25,66,752, in para 7 of its order, on the basis of which disallowance under section 14A of the Act was computed in the case of the assessee. From perusal of the aforesaid balance sheet of the assessee we find that the investment in shares is only Rs. 5,66,752. Thus, from the above, it is evident that the AO has not correctly appreciated the facts of the case, while computing the disallowance under section 14A of the Act read with Rule 8D of the Rules. Therefore, we deem it appropriate to remand this issue to the file of AO for de novo adjudication as per law, after necessary verification of facts available on record. As a result, ground no. 5 raised in assessee‟s appeal is allowed for statistical purpose.
Since, the aforesaid grounds raised in assessee‟s appeal are remanded to the file of AO for de novo adjudication, therefore, ground no. 6 raised in assessee‟s appeal is also remanded to AO for de novo adjudication as per law. As a result, ground no. 6 is allowed for statistical purpose.
Ground No. 7, raised in assessee‟s appeal, insofar as it pertains to levy of interest under section 234A of the Act is concerned, we deem it appropriate to remand this aspect to the file of AO for de novo adjudication after necessary examination of the fact whether the return of income was filed by the assessee within the prescribed time under the Act. While, interest levied under section
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234B and 234C of the Act are consequential in nature. Therefore, ground no. 7 is allowed for statistical purpose.
In the result, appeal by the assessee is allowed for statistical purpose. Order pronounced in the open Court on 26/09/2022 Sd/- Sd/- OM PRAKASH KANT SANDEEP SINGH KARHAIL ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 26/09/2022 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai