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Income Tax Appellate Tribunal, HYDERABAD BENCH ‘A, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, AM:
This appeal is filed by the revenue against the order of CIT(A), Kurnool, dated 12/01/2016 for the AY 2011-12. The assessee filed C.O. against the said order of the CIT(A).
Briefly the facts of the case are, assessee filed his return of income for the AY 2011-12 on 30/09/2012 admitting an income of Rs. 19,80,540/-, which was processed u/s 143(1) of the Income-tax Act, 1961 (in short ‘the Act’). Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued and served on the assessee.
2.1 On perusal of the balance sheet as on 31/03/2011, the AO observed that the assessee had shown an amount of Rs. 87,33,204/- as creditor in the name of Somula Constructions Pvt. Ltd. as on 31/03/2011, wherein the assessee is a shareholder. Further, he observed that as the assessee is
2 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy shareholder holding not less than 10% of voting power, the transaction mentioned above falls under the category of deemed dividend as enumerated under the provisions of section 2(22)(e) of the Act. When the AO asked the assessee as to why the provisions of section 2(22)(e) should not be invoked for the year under consideration, the assessee vide his letter stated that the amount receivable in the hands of the company from the assessee is neither a loan nor an advance, it is a routine transaction which the company generally carries on and in the normal sense the assessee is a debtor to the company. In this connection, he relied on the following cases: 1. ACIT Vs. G. Sreevidhya [2012] 138 ITD 427 2. Pradip Kumar Malhotra Vs. CIT, [2011] 203 Taxman 110/15
2.2 After considering the submissions of the assessee, the AO observed that the facts of the cases quoted by the assessee are totally different from the facts of the assessee’s case, as in the present case, the assessee received loans from the company frequently and the transaction involved was only loan transaction and not regular business transactions between the company and the assessee, as the nature of business of the company is carrying out civil contract works. He, therefore, made an addition u/s 2(22)(e) to the extent of Rs. 32,07,256/- which is the total amount lent by the company to the assessee during the year.
2.3 During the course of verification of bank accounts of the assessee, the AO noticed that there was huge cash deposits in the bank accounts of the assessee viz., i) Axis Bank, Kurnool vide A/c No. 244010100006521 of Rs. 57,50,000/- from 07/04/2010 to 13/11/2010 and ii) Andhra Bank, Kurnool vide a/c No. 032010027000668 of Rs. 49,50,000/- from 30/12/2010 to 11/0/2011. When asked to explain sources for
3 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy the above cash deposits, the assessee stated that he was engaged in business activity in agricultural commodities such as Bengal gram, ground nut and paddy etc., since the assessee hails from agricultural family and was associated with many of the farmers in the native village and used to carry on this trading activity. In support of this, he furnished a constructed profit and loss a/c.
2.4. The AO observed that the assessee had not furnished any evidence for carrying out such business activities in agricultural commodities and not furnished details of the purchasers and sellers as well as not furnished any books of accounts for such transactions. Further, he observed that the assessee had not furnished even bills for purchases and sales, but, submitted a profit and loss account, which was not supported by any sort of evidence. From the facts of the case, the AO was of the view that that the assessee is trying to explain unfounded sources for the alleged cash deposits in the bank account. He, accordingly, held that the assessee made the above cash deposits in the above bank account out of unexplained sources and accordingly, treated the above cash deposits in the bank accounts as income of the assessee.
2.5 The AO accordingly, determined the income of the assessee at Rs. 1,58,87,896/- as against the returned income of Rs. 19,80,540/-. Aggrieved, the assessee preferred an appeal before the CIT(A).
As regards the addition u/s 2(22)(e), the CIT(A) deleted the addition by observing as under: “6.3 The assessment order, submissions made by the appellant in the appeal proceedings, the remand report of the AO forwarded through the AddI.CIT, Kurnool Range and the reply to the remand report furnished by the appellant have been duly considered. The judicial
4 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy decisions relied upon by the appellant which have been brought out supra merit consideration and have been considered. Normal business activity on the grounds of commercial expediency as held in the ratio of the case in the case of S.A.Builders (288 ITR 00l)(SC) is kept in view. The ratio of the decisions that were relied upon by the appellant which were remanded to the AO were not examined critically from the angle of commercial/ business expediency nor an opportunity was given to the appellant as can been seen from the record made available. The ratio of the decisions could have been examined keeping in view the landmark judgment of Hon'ble Supreme Court in the case of S.A. Builders referred to supra. Para-31 of the judgement in the case of S.A. Builders, states that Income Tax authorities must put themselves in the shoes of the assesse and see how a prudent businessman would act. It was also held that the authorities must not look at the matter from their own view point but that of a prudent businessman. Keeping in view the fact that commercial expediency is a vital consideration for a businessman treatment of the said amount as deemed dividend u/s.2(22)(e) is not correct. The decision of the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. (88 ITR 192) is respectfully kept in view. In the case of Vegetable Products, the Hon'ble Apex Court held, if two reasonable construction of a taxing provision are possible, that construction which favours the asessee must be adopted. It was further held by the Hon'ble Apex Court that it is a well-accepted rule of construction recognised by this court in several of its decisions. The ratio of various cases which the appellant relied upon in the submissions which were remanded to the AO and also in the rejoinder to the remand report hold water. Keeping in view the gamut of facts, issues and circumstances of the instant case and the judicial decisions referred to supra, the ground No.2 of the appellant with regard to the treatment of deemed dividend as a normal/routine business transaction of the appellant on the grounds of commercial expediency holds good. Hence, ground No.2 of the appellant is allowed.”
As regard the addition of Rs. 1,07,00,000/-, the CIT(A) observed as under: “7. Ground No.3 relates to addition of Rs. 1,07,00,000/- as unexplained sources. The various facts, issues and circumstances of the instant case were perused. The
5 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy lack of opportunity to the appellant and the lack of the principle of natural justice have been noted and brought out in para-6.1, 6.2 supra. From the submissions of the appellant, the remand report of the Assessing Officer and the rejoinder to \ remand report by the appellant apart from other relevant details, it is seen that the identity, creditworthiness and genuineness was brought out with regard to the sum of Rs.1,07,00,000/- at the stage of assessment itself as can be seen from the assessment record. In Para-2.2 of the assessment order it was brought out as follows:
2.2 During the course of assessment proceedings, the assesse has been asked to explain sources for the above cash deposits. In response, the assesse stated that he engaged.in business activity in agriculture commodities such as Bengal gram, ground nut and paddy etc., since the assesse hails from agricultural family and was associated with many of the farmers in the native village and used to carry on this trading activity. In support this, the assessee furnished a constructed profit and loss account.”
The details are available on the assessment record and were again submitted in the appeal proceedings. In the remand proceedings before the AO, these aspects were not critically analysed. The submission of the appellant in the reply to the remand report, with regard to the addition of Rs.1,07,00,000/- as unexplained cash deposits with details of cash deposits, the agricultural crops grown, bank details etc. establish that the addition made on this account is not warranted as the requisite details about the cash deposits were already available on the assessment folder at the time of assessment itself (as can be seen from the assessment folder) and again resubmitted during the course of appeal proceedings. The Assessing Officer has noted the same in the Para-2.2 supra. However, as brought out in the trading and profit & loss account which is available in the assessment record (also mentioned on page-4 of the assessment order) and furnished in the appeal proceedings, the gross receipts of the appellant for the year ended 31.03.2011 is treated as business receipts of Rs.1,04,50,000/- (which is part of the addition of Rs.1,07,00,000), on which net profit was arrived at Rs.8,62,125/-. Therefore, out of the addition of Rs.1,07,00,000/- the net profit of Rs.8,62,125/-shown in the trading and profit and loss account has to be brought to tax. Hence, Ground No.3 is partly allowed.”
6 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy
Aggrieved by the order of CIT(A), the revenue is in appeal before us raising the following grounds of appeal: “1. Whether under the facts and circumstances of the case, the CIT (A) is right in holding that deemed dividend u/s 2(22)(e) of the I.T. .Act, 1961 of Rs.32,07,253/- is not taxable in the hands of the assessee?
Whether the CIT(A) is right in holding that the un explained cash deposits which are taxed u/s 68 of the l.T. Act, 1961 are to be treated as the business receipts of agricultural commodities with out any evidence of purchase bills of the same and more so when these receipts are not even disclosed in the Return of Income filed by the assessee and taken this, after thought stand at the time of assessment to explain the credits ?
Any other grounds that may be urged at the time of hearing.
The Assessee has raised the following objections in his C.O.: 1. The learned Commissioner of Income-Tax (Appeals) (CIT(A) ought to have in the alternative considered the plea of the appellant that only a sum of Rs.28,74,400 which is the peak credit was assessable as against the net profit ofRs.8,62,125/-.
Any other ground(s) that may arise at the time of hearing.”
Ld. DR submitted that AO made the addition u/s 2(22)(e) on the ground that assessee would purchase corporate office building, but, there is no building brought on company books. He submitted that it is only an arrangement to escape from provisions of section 2(22)(e). With regard to cash deposits, CIT(A) has deleted the addition relying on the confirmation letters from the farmers, but, there is no evidence to show to whom assessee has sold the agricultural produce. He relied on the order of AO and also relied on the decision of ITAT,
7 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy Bangalore Bench in the case of Shri Hemanth Kumar Bothra in ITA No. 396/Bang/2017, order dated. 03/11/2017.
Ld. AR submitted that assessee has allowed the company to take loan from financial institutions by allowing his personal properties as collateral. He brought to our notice the sanction letter of Andhra Bank, which clearly discloses the collateral properties belonging to the assessee (Refer page 173 of paper book II). He further submitted that as per Circular No. 19/2017 of CBDT, trade advances which are in the nature of commercial transactions would not fall within the ambit of ‘advances’ u/s 2(22)(e) of the Act. The company has given advance to the assessee by passing proper resolution dtd. 10/05/2010 to purchase a building for Registered Office, which is placed on record at page 108 of paper book I. Further, he submitted that assessee has given his personal property as collateral security in order to get the loan, in quid-pro-quo, the company has given advance, which is in the nature of compensation, it cannot be treated as advance for the purpose of section 2(22)(e), for that proposition, he relied on the decision in the case of Pradeep Kumar Malhotra Vs. CIT (Calcutta) in ITA No. 219 of 2003 and Shital Kumar Vij Vs. ACIT, ITA No. 406/2009.
8.1 With regard to cash deposit, he submitted that assessee has cultivated the land for growing cotton in the lands belong to his family and relatives. The family holds 69.82 acres of land. The family members have submitted confirmation letters by way of an affidavit with their PAN, Chitta Book and return of income. It clearly established the identity, creditworthiness and genuineness of the transaction (refer pages 78 to 102 of paper book I).
8 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy 8.2 Ld. AR further relied on the following cases:
“1. ACIT Vs. Smt. G.Sreevidya (Chennai) 138 lTD 427 2. MTAR Technologies (P) 180 to 185 Ltd. Vs. ACIT(Hyderabad) 39 SOT 465 3. CIT Vs. Creative Dyeing 186 to 188 & Printing (P) Ltd. 184 Taxman 483 4. ITO Vs. Smt Gayatri 189 to 192 Chakraborty (Kolkata) 45 ITR(Trib) 197 5. CIT Vs. Raj Kumar (Delhi) 193 318 ITR 462
CIT Vs. Haryana Sheet Glass Ltd 194 (Delhi) 318 ITR 173 7. CIT Vs. Creative Dyeing & Printing P 195 Ltd (Delhi) 318 ITR 476 8. CBDT Circular No. 19/2017 New Delhi dated 196 to 197 12/06/2017 9. Sarat Chand Bhavaraju Vs. ITO (Vishakhapatnam) 81 Taxman 323 10. CIT Vs. Raj Kumar Taxman 155(Delhi) 11. CIT V s. Atul Engineering U dyog (Allahabad) 228 Taxman 295 12. CIT Vs. Amrik Singh (Punj ab & Haryana) 231 Taxman 731 13. CIT Vs. F.Praveen (Madras) 220 CTR 639 14. case of CIT Vs. Nagindas M.Kapadia (Bombay) 177 ITR 393 15. Jaypeem Granites(P) Ltd. Vs. ITO (Hyderabad) 139 lTD 564 16. ACIT Vs. Harshad V. Doshi (Chennai) 130 lTD 137 17. Namita V. Samant Vs.CIT (Bombay) 161 lTD 0015
Considered the submissions of both the counsels and material on record. There is no dispute with the fact that assessee has allowed his personal properties as collateral in order to facilitate the company to get the loan from the Andhra bank. The company has given a loan in order to purchase an office building by way of resolution. At the same time, the assessee claims that even otherwise, the company has given loan as a compensation for allowing the personal properties to utilize as collateral securities. Therefore, this transaction will not fall within the ambit of section 2(22)(e). Hon’ble Calcutta High Court has adjudicated in the case of Pradeep Kumar
9 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy Malhotra (supra) as this advance is outside the ambit of section 2(22)(e) of the Act, which is reproduced below: “After hearing the learned Counsel for the parties and after going through the aforesaid provisions of the Act, we are of the opinion that the phrase “by way of advance or loan” appearing in sub-section (e) must be construed to mean http://www.itatonline.org 13 those advances or loans which a share holder enjoys for simply on account of 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 per cent of the voting power; but if such loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to the company received from such a share holder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, for gratuitous loan or advance given by a company to those classes of share holders would come within the purview of Section 2(22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such share holder. In the case before us, the assessee permitted his property to be mortgaged to the bank for enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from the mortgage. In such a situation, for retaining the benefit of loan availed from Vijaya Bank if decision is taken to give advance to the assessee such decision is not to give gratuitous advance to its share holder but to protect the business interest of the company. The view we propose to take finds support from the two decisions, one of the Bombay High Court and the other of the Delhi High Court relied upon by Mr. Khaitan as indicated earlier. http://www.itatonline.org 14 We, therefore, find that the authorities below erred in law in treating the advance given by the Company to the assessee by way of compensation to the assessee for keeping his property as mortgage on behalf of the company to reap the benefit of loan as deemed dividend within the meaning of Section 2(22) (e) of the Act. We, consequently, set aside the order of the Tribunal below by directing the Assessing Officer not to treat the advance of Rs.20,75,000/- as a deemed dividend.”
By relying upon the above decision, we are inclined to allow the contention of the assessee and accordingly treat the above advances as commercial advances, which are outside the provisions of section 2(22)(e). Therefore, ground No. 1 of the revenue is dismissed.
10 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy 9.1 With regard to addition u/s 68, we have considered the affidavit submitted by the relatives, who are brothers, father and sister-in-laws of the assessee. These affidavits are accompanied by PAN, return of income and chitta book, in support of land holding and income earned. These funds were allowed by respective members to be with the assessee and they will draw as and when they require. At this stage, there is identity of the creditors, creditworthiness and genuineness of the transaction is proved. Only contention submitted by department is that assessee could not bring on record the persons to whom the agricultural produce were sold. It is not brought on record that these produce were sold in regulated market or to middlemen. It is immaterial at this stage as the family members have already confirmed that these lands were used to cultivate the cotton seeds and they confirm that these were genuine, in the absence of any findings from the AO that these are not genuine transactions, we have no option but to consider the affidavits as genuine. Therefore, the findings of CIT(A) are in order and accordingly, the ground raised by the revenue is dismissed.
In the result, appeal of the revenue is dismissed.
As regards the Cross objections filed by the assessee in his C.O., since we have dismissed the appeal of the revenue by upholding the order of CIT(A), the CO becomes infructuous and the same is dismissed as infructuous.
11 I.T.A. No. 483Hyd/2016 & CO 32/H/16 SV Mohan Reddy 12. In the result, both the appeal of the revenue and the C.O of the assessee are dismissed.
Pronounced in the open court on 24th January, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 24th January, 2018
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