MSN PHARMACHEM PRIVATE LIMITED,HYDERABAD vs. ACIT., CENTRAL CIRCLE-2(4), HYDERABAD

ITA 1053/HYD/2024Status: DisposedITAT Hyderabad04 February 2025AY 2014-1565 pages
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What did the Tribunal hold?

The Tribunal held that the notice issued under Section 153A for AY 2011-12 was indeed bad-in-law as it fell outside the scope of 'relevant assessment years' as defined in Explanation 1 to Section 153A(1). The Tribunal followed the decisions of the Madras and Delhi High Courts, quashing the assessment for AY 2011-12 on this ground. Regarding the deduction for expenditure against unaccounted receipts from spent solvents and scrap, the Tribunal noted that the CIT(A) had allowed a 10% deduction. While the assessee sought a higher deduction, the Tribunal, by following a previous decision of the ITAT Hyderabad Benches for AY 2019-20 in a similar case (MSN Pharmachem Private Limited), upheld the CIT(A)'s order on this issue, directing the AO to delete the addition. Concerning Section 2(22)(e), the Tribunal held that payments made by the assessee company to recipient companies did not fall under the scope of deemed dividend. It relied on the Supreme Court's affirmation of the Gujarat High Court's decision in Jayesh T Kotak, stating that receipt of benefit by the shareholder is a sine qua non for deeming such payments as dividend. Since the funds were used for the business purposes of the recipient companies and not for the benefit of the common shareholder, the addition made by the AO and upheld by the CIT(A) towards deemed dividend and consequent Dividend Distribution Tax was deleted.

What were the facts?

The Income Tax Appellate Tribunal (ITAT) heard five appeals concerning MSN Pharmachem Private Limited (assessee) and the Assistant Commissioner of Income Tax (Revenue) for Assessment Years (AY) 2011-12 to 2014-15 and AY 2019-20. A search and seizure operation under Section 132 of the Income Tax Act, 1961, was conducted on February 24, 2021. Following the search, notices under Section 153A were issued. The Assessing Officer (AO) made additions, including Rs. 1,10,89,415/- for unaccounted sale of spent solvents and scrap. The Commissioner of Income Tax (Appeals) partly allowed the assessee's claim for AY 2011-12, allowing a deduction of Rs. 10,84,916/- (10% of gross unaccounted receipts). The Revenue also appealed regarding the treatment of certain transactions under Section 2(22)(e).

What were the issues?

1. Whether the notice issued under Section 153A for AY 2011-12 is valid, considering Explanation 1 to Section 153A(1) which defines 'relevant assessment year or years', and whether AY 2011-12 falls outside this scope as it is more than 10 assessment years from the end of the assessment year relevant to the search year. (Assessee: Contended notice is bad-in-law as AY 2011-12 is beyond the scope of 'relevant assessment years' as per Explanation 1 to Section 153A(1), relying on Madras High Court in A.R. Safiullah and Delhi High Court in PCIT Vs. Ojjus Medicare Pvt. Limited. Revenue: Supported the AO's orders.) 2. Whether the assessee is entitled to a deduction for additional expenditure of Rs. 94,55,036/- against unaccounted cash receipts from the sale of spent solvents and scrap, and whether the CIT(A) erred in allowing only an estimated 10% deduction. (Assessee: Claimed full deduction supported by notarized affidavits. Revenue: Argued against allowing deduction for unsubstantiated payments.) 3. Whether payments made by the assessee company to other companies in which it holds substantial interest constitute deemed dividend under Section 2(22)(e) of the Act, attracting Dividend Distribution Tax. (Revenue: Contended that outstanding debit balances are loans/advances attracting Section 2(22)(e). Assessee: Argued that payments were for business purposes and not for the benefit of shareholders.)

Which sections of the Income-tax Act were involved?

Section 132,Section 153A,Section 142(1),Section 2(22)(e),Section 115-O,Section 115Q

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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A” , HYDERABAD

Before: SHRI LALIET KUMAR, HON’BLE & SHRI G. MANJUNATHA, HON’BLE

For Appellant: Shri M.V. Prasad, C.A, Shri K.S. Rajendra Kumar
For Respondent: Shri B. Bala Krishna, CIT-DR
Hearing: 23.12.2024

PER BENCH :

The appeals of the assessee arise from the separate orders of Commissioner of Income Tax (Appeals) — 12 dated 21.08.2024 for A.Y. 2011-12 and dated 22.08.2024 for A.Ys 2012-13 to 2014-15, respectively. Revenue filed cross appeal for the assessment year 2019-20. Since, the facts are identical and issues are common but for

The order continues below.

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