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Income Tax Appellate Tribunal, “B”
Before: SHRI S.S.GODARA & DR. DIPAK P. RIPOTE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals)-1, Nashik for the Assessment Year 2015-16, dated 19.02.2019, emanating out of order under section 143(3) of the Income Tax Act, 1961 dated 26.12.2017. The assessee has raised the following grounds of appeal: “1.In the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 1, Nashik ["the CIT (A)" for short] erred in confirming the order of the learned Income Tax Officer - 1 (2), Nashik, ["the AO" for short] which was passed in violation of principles of natural justice without affording a proper opportunity of being heard to the Appellant.
2. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the action of the AO in invoking section 14A r.w.r. 8D of the Act, whereby a disallowance of Rs.12,81,831/- was made in the hands of the Appellant.
A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] 2.1 While doing so the Ld. CIT(A) failed to appreciate that: (i) No satisfaction as contemplated u/s 14A r.w.r. 8D was recorded by the AO prior to invoking section 14A; (ii) The provisions of section 14A were not at all applicable in the present case since no exempt income was actually earned by the Appellant in the present case; and; (iii) In any case no disallowance as per Rule 8D was called for in respect of interest expenditure in the present case. 2.2 In the facts and circumstances of the case the disallowance made by the AO and sustained by the CIT(A) deserves to be deleted in toto. 3 In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the addition of Rs.1,11,12,387/- as deemed dividend u/s 2 (22)(e) of the Act. 3.1 While doing so the Ld. CIT(A) failed to appreciate that: (i) The provisions of deemed dividend are not at all attracted in the present case since section 2(22)(e) envisages loans / advances by the Company to its shareholders and not the other way round; (ii) In the present transactions the Shareholders of the Assessee company had given loans / advances to it and therefore there was no question of applicability of section 2(22)(e); (iii) The whole understanding and approach of the AO in interpreting section2(22)(e) is erroneous and therefore cannot be sustained; and; (iv) Even otherwise the present transactions are not covered within the ambit of section 2(22)(e) since the same are undertaken in the course of business; 3.2 In the facts and circumstances of the case and in law, the additions made by the AO u/s 2(22)(e) of the Act deserves to be deleted. 4.1 In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in taxing the income from Renting of property under the head "Income From Other Sources “instead of "Income from House Property" as declared by the Appellant in A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] its return of income without appreciating the fact that the primary purpose of the said letting out of property was to earn rent income from immovable property and the correct computation of income could be only under the head income from House Property. In the facts and circumstances of the case and in law, the Ld. AO erred in making an addition of Rs.6,86,813/- to the rent income of Rs.10,18,051/- offered by the Appellant and treating the same as taxable income of the Appellant without appreciating the fact that certain amount of rent was unrealized and therefore not taxable. 4.2 In the facts and circumstances of the case and in law, the action of the AO be reversed.
In the facts and circumstances of the case and in law, the Ld. AO erred in recomputing the book profit u/s 115JB of the Act without appreciating that the AO was not empowered to tinker with book profits declared in accordance with the provisions of the Companies Act read with section 115JB of the Act. 5.1 In any case and without prejudice to the above no such addition of Rs.3,00,000/- made in the hands of the Appellant by the AO, could at all be sustained while computing book profits u/s 115JB of the Act 6. The Appellant craves leave to add, amend, alter delete and modify all or any of the above grounds of appeal.”
We have heard both the parties and perused the records. Ground No.1: 2.1 The assessee had stated that Ld.CIT(A) had not given opportunity of hearing to the assessee , which was violation of principal of Natural Justice. On perusal of the order of the Ld.CIT(A) it is observed that the assessee’s submission has been reproduced by the Ld.CIT(A). The Ld.CIT(A) had considered the submission of the assessee before deciding the case. Assessee was granted opportunity A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] by the Ld.CIT(A). Thus, there was no violation of natural justice. Hence, the ground number 1 of the assessee is dismissed.
Ground No.2: 14A disallowance : 2.2 The AO has made addition u/s 14Arw Rule 8D of the Act of Rs.12,81,831/-. The Ld.CIT(A) had upheld it. At the outset the Ld.AR submitted that there was no exempt income earned by the assessee during the year hence there cannot be any disallowance u/s 14A of the Act. The Ld.AR submitted that this fact of no exempt income was also submitted before the Ld.CIT(A). The Ld.DR has not rebutted this fact.
The Hon’ble Bombay High Court in the case of Pr.CIT Vs. Kohinoor Project (P.) Ltd. [2020] 121 taxmann.com 177 (Bombay) has held as under : Quote, “ Section 14A of the Act deals with expenditure incurred in relation to income not includible in total income. As per sub-section (1) of section 14A, for the purpose of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. In Cheminvest Ltd. (supra) Delhi High Court examined the expression "does not form part of the total income" as appearing in sub-section (1) of section 14A of the Act. Delhi High Court held that the said expression envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. It was clarified that section A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] 14A will not apply if no exempt income is received or receivable during the relevant previous year.
This view has been followed in several decisions by this Court. In fact in Pr. CIT v. Man Infraprojects Ltd. [IT Appeal No. 259 of 2017, dated 9-4-2019], this Court followed the decision of the Delhi High Court in Cheminvest Ltd. (supra). It was further noted in MAN Infraprojects Ltd. that the decision of the Delhi High Court was challenged by the revenue before the Supreme Court by fling SLP but the SLP was dismissed.
In the light of the above, we hold that no substantial question of law arises from the order of the Tribunal. The appeal is devoid of merit and is accordingly, dismissed.” Unquote.
The ITAT Pune Bench in the case of Kumar Properties and Real Estate (P.) Ltd. Vs DCIT ,[2021] 128 taxmann.com 364 (Pune - Trib.) has held as under : Quote, “Having heard the rival submissions gone through the relevant material on record, it is found as an admitted position that the assessee, in fact, did not earn any exempt income from the investment made in Marigold Properties during the year under consideration. The Hon'ble Delhi High Court in Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A of the Act. Similar view has been taken by the Hon'ble Delhi High Court in CIT v. Holcim India (P.) Ltd . [2015] 57 taxmann.com 28. More recently the Hon'ble jurisdictional High Court in Pr. CIT v. Kohinoor Projects (P.) Ltd . [2021] 276 Taxman 180/[2020] 121 taxmann.com 177/425 ITR A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] 700 (Bom.) has held that in the absence of any exempt income, there cannot be any disallowance of expenses u/s 14A of the Act.
The raison d'etre given by the ld. first appellate authority for sustaining the disallowance that the computation of income of the firm may result into positive income as well as negative income, i.e. loss and therefore, the provision of section 14A do not prohibit disallowance of expenditure in relation to exempt loss incurred by the assessee, is neither here nor there. The Hon'ble jurisdictional High Court in Pr. CIT v. HSBC Invest Direct (India) Ltd. [2020] 421 ITR 125 (Bom.) has held 'that disallowance cannot exceed the exempt income so earned by the assessee during the year under consideration.' If the disallowance is to be restricted to the amount of exempt income, the sequitur is that there can never be any disallowance u/s 14A in the absence of positive exempt income for the year. Insofar as section 14A is concerned, there is no qualitative difference between two situations, first, where the exempt income is Nil and second, where there is negative income for the year joined with a possibility of earning positive income in future. As the assessee in the instant case admittedly did not earn any exempt income during the year, respectfully following the ratio of the above decisions, we hold that no disallowance was called for. ” Unquote.
2.2.1 Thus, respectfully following the Hon’ble Bombay High Court, the Hon’ble Delhi High Court and ITAT Pune Bench (supra), it is held that since there was no exempt income earned during the year, no disallowance u/s 14A is called for. Accordingly Ground No.2 of the Assessee is allowed.
A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] Ground Number 3 - Deemed dividend u/s 2(22)(e) : 3. As per the Assessment order, the assessee has received Loan of Rs.1,00,00,000/- from Trenton Investment Company Pvt Ltd and Rs.11,12,387/- from Kimplas Piping System Ltd during the year. In the assessment order the AO has made addition of Rs.1,11,12,387/- u/s 2(22)(e) of the Act. The Ld.CIT(A) has upheld it.
3.1 Ld.AR submitted that the Assessee is not shareholder in Trenton Investment Company Pvt Ltd but Trenton Investment Company Pvt. Ltd is holding 99% share in the assessee company.
3.2 Ld.DR relied on the orders of the lower authorities.
Decision : 3.3 To invoke section 2(22)(e) of the Act, precondition is that the assessee should be a share holder in the lender company. The section 2(22)(e) is reproduced here under : (22) "dividend" includes— (e) any payment by a company, not being a company in which the public are substantially interested, 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 per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] he has a substantial interest (hereafter in this clause 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; However, in the case before us, the Trenton Investment Company Pvt. Ltd is 99% shareholder in the Assessee Company. The Trenton Investment Company Pvt. Ltd has given loan of Rs.1,00,00,000/- to the assessee company. Thus, the loan has been given by share holder. Therefore, provisions of Section 2(22)(e) will not be applicable to the impugned loan by Trenton Investment Company Pvt. ltd. Hon’ble Bombay High Court in the case of CIT Vs. Jignesh Shah [2015] 54 taxmann.com 293 (Bombay) has held, “Thus on strict interpretation of Section 2(22)(e) of the Act, unless the Respondent-Assessee is the shareholder of the company lending him money, no occasion to apply it can arise.” In this case as observed, the Lender Company is shareholder of the assessee and assessee is not share holder of the Lender. Therefore, respectfully following the Hon’ble Bombay High Court, the AO is directed to delete the said addition of Rs.1,00,00,000/-.
3.3.1 Kimplas Piping System Ltd : The AO has mentioned in the Order that Kimplas Piping System has given loan of Rs.11,12,387/- during the year to the assessee. The assessee holds 20.22 % shares of A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] the Kimplas Piping System Ltd. Ld.AR submitted that the Kimplas Piping System Ltd had not given any loan but the amount was part of the commercial transaction of the assessee with the Kimplas Piping System Ltd. The Ld.AR filed copy of Ledger Account of the Kimplas Piping System Ltd. The Ld.DR relied on the order of the lower authorities.
3.4 We have perused the records. It is observed from the Ledger account that there are multiple transactions during the year. However, the assessee has classified these different transactions with Kimplas Piping System Ltd differently in the Audit report which is enclosed at page 6 to 20 of the paper book filed by the assessee. In the Note 24, of the Audit Report the assessee has mentioned transactions with Related Parties (page 19 of the paper book). The transactions with Kimplas Piping System Ltd mentioned in the Audit report Note 24 is reproduced here as under : Sale: Kimplas Piping System Ltd Rs.14,37,840/- Interest Income Kimplas Piping System Ltd Rs.22,77,738/- Deposit Kimplas Piping System Ltd Rs.15,00,000/- Borrowings Kimplas Piping System Ltd Rs.11,12,387/- A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] 3.5 Thus in the Audit Report the assessee has classified the transaction with Kimplas Piping System Ltd under the head, Sale, Deposit, Interest, Borrowings. Thus, as per the Audit report the Assessee had borrowed Rs.11,12,387/- from Kimplas Piping System Ltd . Thus it is an admitted fact by the assessee that during the year the assessee had borrowed Rs.11,12,387/- from Kimplas Piping System Ltd . It is also an admitted fact that the Assessee holds 20.22% shares of Kimplas Piping System Ltd. Therefore, the requirement of Section 2(22)(e) have been satisfied i.e. the assessee is holding more than 10% of shares of the lender company. The Lender Company has accumulated profit and it is the company in which public are not substantially interested.
3.4.1 The ITAT Mumbai Bench in the case of ACIT Vs. Jasubhai Engineering (P.) Ltd. [2020] 118 taxmann.com 430 (Mumbai - Trib.) has held as under: Quote, “ With regard to inter corporate deposit of Rs. 9 lakhs, assessee has taken inter corporate deposits, but the same was repaid before the end of the current assessment year. However, we notice that since the assessee is having substantial interest in M/s ABM Steels (P.) Ltd. and M/s ABM Steels (P.) Ltd. is having substantial accumulative profit in its balance sheet and M/s ABM Steels (P.) Ltd. is a company in which public are not substantial interested, therefore the provisions of section 2(22)(e) are very much attracted. Therefore, any credit or advantage taken by the persons having substantial interest will attract the provision of section 2(22)(e) of the Act. Even A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] though, assessee has repaid the deposit within the same year, it does not mean that the loan or benefit is not taken. We can call any name but ultimately assessee has taken a credit/benefit, the assessee should have known that it is surpassing the deeming provisions particularly when it has holding beneficial interest. It is settled law that deemed dividend provisions get attracted as soon as it takes benefit and it does not matter whether it is repaid within the same year. It is similar to the case of Miss P. Sarda v. CIT [1998] 96 Taxman 11/229 ITR 444 (SC), the Hon'ble Apex court held that even though the loan is repaid at the end of the year, will attract the provision of section 2(22)(e) of the act. Therefore, in our considered view, even though assessee claims it as inter corporate deposit, the literal meaning will remain same as the short term loan enjoyed by the assessee, hence in our considered view, the provision of section 2(22)(e) is attracted in the present case.” Unquote.
3.5 The facts of the present case explains that Provisions of Section 2(22)(e) are attracted for the loan of Rs.Rs.11,12,387/- from Kimplas Piping System Ltd to the assessee. Therefore, respectfully following the ITAT Mumbai bench decision , we hold that the AO has rightly treated loan of Rs.11,12,387/- received from Kimplas Piping System Ltd as deemed dividend. Accordingly, impugned addition is upheld. Therefore, the Ground No.3 is partly allowed as discussed in earlier paras. Ground No.4: Rental Income: 4. It is mentioned in the Assessment Order that the Assessee had given two separate premises on rent to two different companies. In A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] the assessment order it is mentioned that as per 26AS, the assessee had received rent as under : Name of tenant Rent Received TDS Buro Happold Engineers India Ltd. 14,04,864 1,40,488 Kimplas Advance Welding System P. ltd 3,00,000 30,000 4.1 The assessee had given the premises on rent along with furniture, fixtures, car parking. The AO treated the said income as Income from other sources on the ground that the rent was not just for the premises but for furniture fixtures hence it was composite rent. The ld.CIT(A) upheld it.
DECISION : 5. The Ld.AR submitted copy of the rent agreement. It was observed that the assessee had given the premises which was commercial premises on lease along with the furniture fixtures. The assessee had entered into registered Leave and Licence Agreement with Buro Happpld Engineers India P Ltd on 16/09/2010 .The Rent included rent for premises and furniture fixtures .Thus, in this case the furniture was just incidental. Similarly, the other premises was given on rent for six years. In this case for earlier AY 2013-14 and AY 2014-15, the assessee had shown the rent as Income from House Property and department had accepted it in the order u/s 143(3). Thus, for the same premises, for earlier year department accepted it A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] as Income from House Property. No valid reason given by the AO for changing the head of Income from Income from House Property to Income from other Sources. We are aware that the principle of Res Judicate does not apply to the income tax proceedings but principle of consistency needs to be followed when facts are same. Once Income tax department had accepted the income as Income from House property for two years, on the same facts for the same source of income, there is no reason to deviate from earlier stand. In these facts and circumstances of the case, we are of the opinion that the assessee has rightly offered the rent as Income from House property. Hence, the AO is directed to treat it as Income from house Property. As far as the difference in amount of rent offered for taxation and the amount of rent as per 26AS, the AO is directed to verify the documents and reconcile. The Assessee shall submit all relevant documents to the AO. Therefore, to the extent of difference, the issue is set aside to the AO for verification after giving opportunity to the Assessee. Thus, the Ground No.4 is partly allowed.
Ground No.5: 6. The AO while calculating Book Profit u/s.115JB has added Rs.3,00,000/-, which according to the AO was undisclosed rent.
6.1. The Hon’ble Bombay High Court in the case of CIT Vs. Forever Diamonds Pvt. Ltd in ITA 1609 of 2013 has held as under :
A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A] Quote “3. The grievance of the revenue is that, when according to the Assessing Officer the accounts as prepared and as audited are manifestly in conflict with the manner in which the accounts have to be prepared under the Companies Act, then it is open to the Assessing Officer to recast the accounts for the purposes of Section 115JB of the Act. The Tribunal, by the impugned order negative the revenue’s contention by relying upon the decision of the Supreme Court in Apollo Tyres Ltd. V/s C.I.T., reported in 255 ITR 273. It has very pertinently quoted the following observations from Apollo Tyres Ltd. in the impugned order as under:
The Assessing Officer, while computing the book profits of a company under section 115J of the Income Tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provision of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the A.Y. 2015-16 Shree Garuda Plant Products Ltd.[A]