M/S PARTHIV ENTERPRISES ,MUMBAI vs. ITO 17(2)(5), MUMBAI

O R D E R

Per Amar Jit Singh, Judicial Member:

1. The Ld. CIT(A) erred in disallowing the interest free loans of Rs.3,35,23,178/- out of Rs.12,19,54,637/- and thereby erred in treating the same as loans taken for non-business purposes.

2. The Ld.CIT(A) erred in disallowing and adding the proportionate interest paid of Rs.22,24,357/- out of the total interest paid of Rs.80,92,036/- to the total income of the assessee and thereby added the same to the total income of the assessee and thereby erred in treating the same for non business purpose.

3. The Ld. CIT(A) erred in confirming the addition of the genuine loan received from the MIS K.C. Kapadia and Sons(P) Ltd of Rs.39,34,639/- to the total income of the assessee and thereby erred in treating the same for non-business purpose.

2 M/s. Parthiv Enterprises 4. The Ld. CIT(A) erred in confirming the charging of interest under section 234A, 234B, 234C and 234D of the Income Tax Act 1961. 5. The Ld. CIT(A) erred in confirming the initiation of the penalty proceeding under section 271(1)(c) of the Income Tax Act 1961 6. The Assessee craves leave to add further grounds or to amend or alter the existing grounds of appeal on or before the date of hearing.”

3. The brief facts of the case are that the assessee filed its return of income on 25.11.2014 declaring total income to the tune of Rs.17,11,600/-. The return was processed under section 143(1) of the Act. The assessment was selected for scrutiny under CASS. Notices under section 143(2) & 143(1) were issued and served upon the assessee. The assessee is a firm engaged in trading and commission agent of yarn and derives income from business. The assessee received interest bearing loan of Rs.3,35,23,178/- which was used to advance interest free loan to two other parties. The assessee paid the interest in sum of Rs.80,92,036/- on the total loan of Rs.12,19,54,635/-. Since the loan to the tune of Rs.3,35,23,178/- was not exclusively used for business purpose, therefore proportionate interest in sum of Rs.22,24,357/- was disallowed and added to the income of the assessee. The assessee also shown the exempt dividend income in sum of Rs.37,500/- under section 10(34) of the Act. The assessee received the dividend of Rs.37,500/- on investment in share of Surat People Co-operative Ltd. and inadvertently claimed as exempt. Therefore, the sum of Rs.37,500/- was added to the income of the assessee. The assessee received the unexplained loan from M/s. K.C. Kapadia and Sons (P) Ltd. to the tune of Rs.39,34,639/-. The assessee was asked to confirm the loan with statutory audit report of company for the year under consideration. The assessee is a firm and consists of four partners namely; Mr. Parthiv K. Kapadia, Mr. Shaunak K. Kapadia, Ms. Sonalben S. Kapadia, Ms. Vandanaben Kapadia. The assessee’s partner Ms. Sonalben S. Kapadia and Mr. Parthiv K. Kapadia were holding 10% share and remaining two were holding 25% share in the company M/s. K.C. Kapadia and Sons (P) Ltd.. The said unsecured loan in sum of Rs.39,34,639/- was treated as dividend income under section 2(22)(e) of the Act. The assessee’s income was assessed to the tune of Rs.79,08,090/-.

3 M/s. Parthiv Enterprises 4. Feeling aggrieved, the assessee filed appeal before the Ld. CIT(A) and the Ld. CIT(A) partly allowed the claim of the assessee but the assessee was not satisfied on the grounds mentioned above. Therefore, the assessee filed the present appeal before us.

Ground No.1 & 2 5. We have heard the arguments advanced by the Ld. Representative of the Revenue and have gone through the case filed carefully. Number of notices were issued to the assessee at its given address. The notices were received back unserved. There is no other address available with us, therefore, we are deciding the issues on the basis of the material available on record. Ground Nos.1 & 2 are interconnected, therefore, are being taken up together or adjudication. Both the issues are in connection with the disallowance of interest of Rs.22,24,357/- out of total interest of Rs.80,92,036/- under section 36(1)(iii) of the Act treating the same for non-business purpose. Before going further, we deem it necessary to advert the finding of the Ld. CIT(A) on record.

“5.3 I have very carefully perused the impugned order, the entire attendant facts and circumstances of the matter and the submissions of the Ld. AR. I have also perused with circumspection, the pertinent details and materials on record.

5.4 Appros to the above, I find that although the Id. AR has given a lengthy and prolix submissions and also has quoted several case laws and judicial pronouncements, however, the fact of the matter is that the same do not in any manner or mode explain and demonstrate as to the exact fault that can be found out with the action of the AO in disallowing the proportionate interest of Rs.22,24,357/-. This is more so, since, I find and observe that the AO has clearly given the relevant details as to how the part of the principal amount of the loan has been diverted towards the non-business purpose. Specifically, the AO has clearly demonstrated as to how out of the total loan funds of Rs.12.19 crore (approx.), the funds of Rs.3.35 crores (approx.) have not been utilized in furtherance of the exclusive use for business purpose. Therefore, it is seen that about 27% of the total loan funds have no plausible business connection. Therefore, on similar pro-rata basis, the AO -has disallowed out of the total interest outgo of Rs.80.92 lacs (approx.), the interest to the tune of Rs.22.24 lacs (approx.).

4 M/s. Parthiv Enterprises 5.5 I find that the appellant has not been able to lead any cogent and plausible evidence in furtherance of the contention that the above disallowance is wrong and contrary to the facts and the law. Rather, I find that the AO has indeed been most judicious and discerning when he has disallowed interest in the same proportion as he found the principal amount of loan, not used or utilized for the purpose of business of the appellant. This shows that the action of the AO is quite fair and just. Moreover, as aforementioned the appellant has simply given a myriad of case laws and inundated the submission with the same. It has not been explained as to how these case laws are relevant to the facts of the appellant.

5.6 In any case, I find that it is a trite law that each judicial decision is rendered in the very peculiar and factual matrix of that case and therefore it is not either judicially expedient or prudent to superimpose the facts of the various case laws cited. In this sense, each case is undisputedly unique and stands on different pedestal.

5.7 In view of the above, I am inclined to hold that the action of the AO in disallowing the proportionate disallowance u/s.36(l)(iii) to the tune of Rs.22,24,357/- is to be confirmed and accordingly, the ground no.1 is decided against the appellant and is DISMISSED.

Ground No.3 8. Under this issue the assessee has challenged the disallowance of Rs.39,34,639/- under section 2(22)(e) of the Act. The assessee firm was having 4 partners namely Mr. Parthiv K. Kapadia, Mr. Shaunak K. Kapadia, Ms. Sonalben S. Kapadia, Ms. Vandanaben Kapadia having 25% share each. They took the unsecured loan from M/s. K.C. Kapadia and Sons (P) Ltd. in which Mr. Shaunak K. Kapadia was holding 10% and Mr. Parthiv K. Kapadia was holding 10% and remaining 2 were having 25% share. They took the unsecured loan of 39,34,639/-.

5 M/s. Parthiv Enterprises The explanation of the assessee was not found justifiable, therefore the said loan was treated as dividend income of the assessee under section 2(22)(e) of the Act. The Ld. CIT(A) has given the following findings: “7.3 On this issue, I have very carefully perused the impugned order, the entire attendant facts and circumstances of the matter and the submissions of the Ld. AR. I have also perused with circumspection, the pertinent details and materials on record.

7.4 Appros to the above, I find and pertinently -note 'that it is an undisputed position that the Tax Audit Report (TAR) clearly states that for the year under consideration, the appellant has received unsecured loan from one M/s. K.C. Kapadia and Sons Pvt. Ltd. of Rs.39,34,639/-. Moreover, it is also clear that both the appellant firm and the company noted above i.e. M/s. K.C. Kapadia and Sons Pvt. Ltd. have common partners and shareholders that is to say that Shri Shaunak K. Kapadia is holding 10% and Shri Parthiv K. Kapadia is hold 10% of share in the company M/s. K.C. Kapadia and Sons Pvt. Ltd and is having 50% share profit percentage (25% each) in the appellant firm. This also clearly emanates as a fact on record. It is also pertinent to note that in the schedule 3 of the balance sheet which is annexed to the Tax Audit Report (TAR) for the year under consideration. The name of M/s. K.C. Kapadia and Sons Pvt. Ltd. is clearly comprising under the head, "Loans and Advances". Hence, it is clear that there is loan transaction between the appellant and the said M/s. K.C. Kapadia and Sons Pvt. Ltd. 7.5 Moreover, it is also clear that the above said provision would squarely be covered in the ambit of section 2(22)(e) which reads as under:-"dividend" includes— (e) any payment by a company, not being a company in which the public are substantially interest, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clasue referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits......................

7.6 As referred to above, given the nature of the share of the partners of the appellant firm in the company M/s. K.C. Kapadia and Sons Pvt. Ltd. in as much as that both Sh. Parthiv Kapadia & Shaunak Kapadia together, in aggregation hold at least 20% of the shareholding commensurate to the 20% voting power in the said company, hence, it is a fit case for the proper and judicious invocation of the provisions of Section 2(22)(e).

7.7 One of the main contentions of the appellant is that the transaction between the appellant firm and M/s. K.C. Kapadia and Sons Pvt. Ltd. are not in the nature of 6 M/s. Parthiv Enterprises loan transactions, but rather are current account transactions and hence the Section 2(22)(e) cannot be applied. However, as I have discussed and noted in detail that the observations and classifications of the said impugned transaction of the appellant firm with M/s. K.C. Kapadia and Sons Pvt. Ltd. to the tune of Rs.39,34,639/-as per the Tax Audit Report (TAR) clearly categorizes this transaction as one of unsecured loan and therefore, given the nature of the inter-se shareholding of the two partners of the appellant firm with the fact of holding together the 20% shareholding leading to 20% voting power, in the said M/s. K.C. Kapadia and Sons Pvt. Ltd. clearly demonstrates that this is a fit case of Section 2(22)(e).

7.8 Moreover, I find that the Id. AR instead has not explained in any mode or manner by leading factual evidence as to how the classification as per the TAR is erroneous and that the transaction is actually not one of loan but relates to current account transactions. Further, the myriad of case laws cited by the Id. AR do not prove as to how the peculiar and solitary facts of the case of the appellant would absolve the matter to be taken out of the ambit of the rigours of Section 2(22)(e). Citation of case laws without cogently explaining their pinpointed relevance to the case at hand will be of little assistance in furthering the case of the appellant on this issue.

7.9 Further, I note that in the case of Sh. Sahir Sami Khatib Vs. ITO [2018] 98 taxmann.com 453 (Bombay) the Hon'ble Bombay High Court recently held that where assessee was holding more than 10 per cent of equity shares of lending company and also having substantial interest in borrowing company, amount of loan given by lender company to borrower company was rightly added to assessee's taxable income as deemed dividend. Going by the above analogy, the pattern of the inter-se holding pattern of shareholding and voting rights in the company M/s. K.C. Kapadia and Sons Pvt. Ltd. by the two partners of the firm to the tune of 20% will definitely attract provisions of Section 2(22)(e).

7.10 In light of the above factual and legal matrix, I cannot find any fault with the addition of Rs.39,34,639/- made by the AO u/s.2(22)(e). The same is therefore, confirmed and the ground no.3 is DISMISSED.” 9. The facts are not distinguishable at this stage. The assessee nowhere appeared before us to contradict the finding of the Ld. CIT(A) on record. Accordingly, we affirm the findings of the Ld. CIT(A) on this issue and decide this issue in favour of the Revenue and against the assessee.

Ground No.4 10. Ground No.4 is consequential in nature which nowhere requires any adjudication.

Ground No.6 12. Ground No.6 is formal in nature. It also nowhere requires any adjudication.