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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER: The assessee filed these appeals against the orders of the Commissioner of Income Tax (Appeals)-4, Chennai in ITA No
:-2-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 16/2014-16/ a y 2011-12/CIT(A)-4 dt 25.02.2016, ITA No 55/2016-17/ a y 2013-14/CIT(A)-4 dt 26.10.2016& ITA No 16/2014-16/ a y 2011- 12/CIT(A)-4 dt 13.02.2017 for the assessment years 2011-12, 2012- 13 & 2013-14, respectively.
M/s. Srinivasa Machine Works, the assessee, a firm in which Sri. C V. Ravindran and Smt Vimala Rao hold shares in the ratio of 40% : 60%, respectively . It undertakes engineering job work and the entire job work has been accorded by M/s Sundaram Fasteners Ltd. While making the assessment for the assessment year 2011-12, the AO added the unsecured loan received by the assessee as deemed dividend u/s 2(22)(e), disallowed the assessee’s claim of bad debts written off, business and sales promotion expenses, discount and the claim U/s.80G. In the assessment made for the assessment year 2012-13, the AO added the unsecured loan received by the assessee as deemed dividend U/s 2(22)(e), disallowed the assessee’s claim of business and sales promotion expenses and the discount. Similarly, in the assessment made for the assessment year 2013-14, the AO added the unsecured loan received by the assessee as deemed dividend u/s 2(22)(e). Aggrieved against those orders, the assessee filed appeals before the CIT(A). The ld.CIT(A)
:-3-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 dismissed them. Aggrieved against the respective orders of the ld.CIT(A), the assessee filed the above appeals before this tribunal .
The assessee filed a condonation petition pleading to condone the 30 days delay in filing the appeal for the assessment year 2011-12. It is pleaded that the appeal was handled by a CA who received the order but did not hand over the same to the assessee. Meanwhile one of the partners was contemplating change for the representations before the AO and the appellate authority. In the process, the ld.AR came to contact and hence sought various particulars and documents. While complying, it came to light that the impugned appeal has already been disposed and the order had been received by the erstwhile representative and an advise to file the appeal was tendered. In pursuance of that the assessee filed this appeal causing the impugned delay, which is neither wanton nor wilful but was beyond assessee’s control. Therefore, it was prayed to condone the delay in filing the appeal.
3.1 We heard the rival contentions and condone the delay.
:-4-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 4. With regard to the taxation of deemed dividend u/s 2(22)(e) for the assessment years 2011-12, 2012-13 & 2013-14, the learned AR submitted that the impugned transactions would not fall under the purview of 2(22)(e) of the Act since the impugned amounts were paid by the company to the firm and not to the shareholder of the company. It was pleaded that the liability to tax as deemed dividend could be attracted in the hands of the individuals, being the shareholders and not in the hands of the firm. Since, the amount is advanced to a firm which is not the shareholder of the company, the transactions will not attract the provisions of Sec.2(22)(e). In this regard, the ld.AR relied on the decisions of the Delhi High Court in the case of CIT vs Ankitech P Ltd & Ors 340 ITR 0014 and the Hon’ble Supreme Court in the case of CIT vs Madhur Housing and Development Company 401 ITR 0152 SC etc.
4.1 Per contra, the ld.DR submitted that it is an undisputed fact that the assessee is in receipt of unsecured loan from M/S Srinivasa Fashions Pvt. Ltd. (DTA) And M/S Srinivasa Fashions private limited( SEZ).This financial transaction with these two units of the company was not in the nature of trading payments in normal business activity. The amount received by the assessee was neither in the form of
:-5-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 advances for future trading transactions nor squared up by way of services or goods rendered by the assessee. The company is not engaged in money lending business either. The amount received by the firm was in the form of loan only which was confirmed by the learned AR of the assessee as well. The lender is engaged in the business of manufacturing of Garments. Shri CV Ravindran who holds 40% share in the present assessee firm also controls an equal 40% stake in the company M/S Srinivasa Fashions Pvt. Ltd. The AO has rightly relied on Circular No. 495 dated 22/09/1987 which contains an explanatory note on the provision relating to Direct Taxes with reference to the Finance Act 1987. The circular clarified that that the provisions of section 2 (22)(e) in its amended form, could be applicable in a case where shareholder has 10% or more of the equity capital. It further clarifies that a deemed dividend would be taxed in the hands of a Concern where all the following conditions are satisfied:
a) where the company makes the payment by way of loans or advance is to a concern;
b) where a member or a partner of the concern holds 10% of the voting power in the company; and
:-6-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017
c) where the member or a partner of the concern and is also beneficially entitled to 20% of the income of such concern.
It has been verified by the AO that the loan is grouped under Unsecured Loans from Group Companies in the liability side of the balance sheet of the assessee. The table of shareholding pattern in the company and the firm confirms that the above conditions (b) & (c) are satisfied. The loan or advance taken from the company may have been ultimately repaid or adjusted but that will not alter the fact that the assessee in the eyes of law had received dividend from the company during the relevant accounting periods as held by Hon’ble Apex Court in the case of P. Sharda vs CIT( 1998) reported in 1 SCC 267 dated 09/12/1997. Moreover, the assessee has neither furnished any documentary evidence to prove that the impugned advances were in the form of trade advances only either before the ld.CIT(A) nor before this Hon’ble Tribunal. It has not referred to any case law to substantiate its contentions that the circular number 495 has been overruled by judicial authority(ies). Therefore, the provisions of section 2(22)(e) are correctly attracted in respect of the loan received by the assessee from the said company. The ld.DR invited our
:-7-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 attention to the Honourable Supreme Court decisions in the cases of M/s. Gopal & Sons (HUF) vs CIT 391 ITR 1 SC and National Travel Services v CIT, Delhi, VIII 89 taxmann.com 332 SC dt 18.01. 2018 wherein the matter was referred to Hon’ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question.
4.2 We heard the rival submissions and gone through relevant material. The undisputed fact is that the assessee is a firm in which Sri. C V. Ravindran and Smt Vimala Rao hold shares in the ratio of 40% : 60%, respectively. It was in receipt of unsecured loan from M/S Srinivasa Fashions Pvt. Ltd. ( DTA) And M/S Srinivasa Fashions private limited( SEZ). This financial transactions with these two units of the company was not in the nature of trading payments in normal business activity. The amount received by the assessee was neither in the form of advances for future trading transactions nor squared up by way of services or goods rendered by the assessee. The company is not engaged in money lending business either. The amount received by the firm was in the form of loan only which was confirmed by the learned AR of the assessee as well. The lender is
:-8-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 engaged in the business of manufacturing of Garments. Shri CV Ravindran who holds 40% share in the present assessee firm also controls an equal 40% stake in the company M/s Srinivasa Fashions Pvt. Ltd. Relying on the Board’s Circular No. 495 dated 22/09/1987, the AO assessed the impugned transactions as deemed dividend in the respective assessment year, which was also confirmed by the ld.CIT(A) as well. The assessee challenged them by submitting that the impugned transactions would not fall under the purview of 2(22)(e) of the Act since the impugned amounts were paid by the company to the firm and not to the shareholder of the company. It was pleaded that the liability to tax as deemed dividend could be attracted in the hands of the individuals, being the shareholders and not in the hands of the firm. Since, the amount is advanced to a firm which is not the shareholder of the company, the transactions will not attract the provisions of Sec.2(22)(e). In this regard, he relied on the decisions mentioned, supra. However, the AO placing reliance on the Circular No. 495 dated 22.09.1987 which contained an explanatory note on the provisions relating to Direct taxes with reference to the Finance Act, 1987 and clarified that the provisions of Section 2(22)(e), in its amended form, could be applicable in a case where share holder has 10% or more of the equity capital. It goes on to
:-9-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 further clarify that deemed dividend would be taxed in the hands of a concern where the conditions mentioned therein are satisfied and in this case the AO found that impugned transactions are loan, the shareholding pattern in the company and the firm confirmed that conditions (b) and (c) mentioned in the circular were satisfied. Therefore, he held that provisions of Section 2(22)(e) were attracted in respect of the loan amount received by the firm and accordingly brought them to tax in the respective assessment year. In this regard, the ld.DR relied on the decision of the Hon’ble Apex Court in the case of National Travel Services v CIT, Delhi, VIII 89 taxmann.com 332 SC dt 18.01.2018, the relevant portion is extracted as under :
“ 18) This being the case, we are of the view that the whole object of the amended provision would be stultified if the Division Bench judgment were to be followed. Ankitech’s case, in stating that no change was made by introducing the deeming fiction insofar as the expression “shareholder” is concerned is, according to us, wrongly decided. The whole object of the provision is clear from the Explanatory memorandum and the literal language of the newly inserted definition clause which is to get over the two judgments of this Court referred to hereinabove. This is why “shareholder” now, post amendment, has only to be a person who is the beneficial owner of shares. One cannot be a registered owner and beneficial owner in the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered
:-10-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 owner to vote in a particular way, as has been held in a catena of decisions starting from Mathalone vs. Bombay Life Assurance Co. Ltd., [1954] SCR 117. 19) This being the case, we are prima facie of the view that the Ankitech judgment (supra) itself requires to be reconsidered, and this being so, without going into other questions that may arise, including whether the facts of the present case would fit the second limb of the amended definition clause, we place these appeals before the Hon’ble Chief Justice of India in order to constitute an appropriate Bench of three learned Judges in order to have a relook at the entire question.”
From the above, it is clear that the Apex Court has clearly held that “we are of the view that the whole object of the amended provision would be stultified if the Division Bench judgment were to be followed. Ankitech’s case, in stating that no change was made by introducing the deeming fiction insofar as the expression “shareholder” is concerned is, according to us, wrongly decided”. Therefore, we are of the view that the case law relied on by the ld.AR cannot be applied to the facts of this case. The facts of the above case clearly falls within the provisions of section 2(22)(e) read with Explanation 3 and therefore, we uphold the actions of the AO in assessing the deemed dividend in the assessment years 2011-12, 2012-13 & 2013-14 respectively. Therefore, the corresponding grounds of the assessee are dismissed.
:-11-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 4. On the next issue, the ld.AR submitted that the ld.CIT(A) erred in upholding the addition of Rs.15,93,249/-, the payment made to M/S R.R. Consultants, is to procure machinery, the transaction was not genuine and it is in capital field. Per contra, the ld.DR submitted that under the head of Creditors, credit of Rs.15,93,249/- stood in the name of M/s R.R. Consultants. It was never substantiated by the assessee either before the AO or during the appellate proceedings. Further, the purpose of payment of the amount was stated to be to help the assessee firm to procure machinery. From the perusal of these facts, it is evident that firstly the transaction is not proved as genuine and secondly, the payment was for the procurement of a capital asset. Therefore, the AO has rightly relied upon the judgements of the Honourable Apex Court in the case of CIT Bombay versus Abdullabhai Abdulkada and Badridas Daga vs CIT to substantiate his findings and it was rightly upheld by the ld.CIT(A).
4.1 We have considered the rival submissions. It is clear from the above, that the assessee is not able to substantiate the nature of transactions. Further, the impugned payment was made for the procurement of capital asset, therefore, this sum cannot be written off
:-12-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 by the assessee. Therefore, the corresponding grounds of the assessee are dismissed.
In respect of the issue of Bad debts written off, the ld.AR submitted that the company is in the business of tuning and grinding engineering parts. The main customer of the assessee is Sundaram Fasteners Limited (SFL). The assessee has been doing business with SFL for many years. There are many conditions stipulated by SFL in providing orders to the assessee namely, quality inspection, quality specification, time schedule etc. If these conditions are not met, SFL will deduct appropriate amount from bill routed by the assessee. Over the years, the assessee has been invoicing SFL and there was no further follow up neither from side nor from SFL as to whether the supplied product is meeting the criteria as specified in various work orders issued by SFL. While SFL has been debiting the assesse for deviation from the criteria specified in the work order. The assessee did not get any information about the deductions made by SFL and confirmation of balance every year. During the assessment proceedings, the assessing officer had requested SFL for furnishing of information on the balances of assessee. Accordingly SFL had furnished the ledger folio of assessee as
:-13-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 appearing in their books of account for the last years. During the current year, the assessee started reconciling the balance with SFL and found lot of mismatch of balance with SFL and written off some of the identified difference of Rs.41,85,589/-. The AO disallowed it. On appeal the ld.CIT(A) erred in confirming the disallowance and failed to appreciate that the bad debts have been written off as irrecoverable in the accounts of the assessee and in support relied on the decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd., v. CIT [2010] 323 ITR 0397(SC) and the CBDT Circular No.12/2016 dated 30.05.2016.
5.1 Per contra, the ld.DR submitted that under the head of Debtors, the assessee wrote off of bad debt due from M/s Sundaram Fasteners alone was to the tune of Rs.41,85,589/-. The assessee is having a running business with this company. Therefore, it is improper and unreasonable to treat the debit balance as bad debt when the entire contract receipts of Rs.6.26 crores is received from this company only. The assessee is doing job work for this company only. Further, had it been a genuine case of write off, then the assessee should have passed on the write off to M/s Sundaram Fasteners Ltd also. In the present case, the write off process is only
:-14-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 a unilateral action on the part of the appellant assessee. Under such circumstances, the AO has rightly disallowed the claim of bad debt relating to M/S Sundaram Fasteners Ltd. It is unreasonable on the part of the appellant to state that the relevant facts were not verified by the AO from the statement furnished by SFL. At para 5.2 of the assessment order, it is categorically mentioned by the AO that the copies of Ledger folio of the assessee firm as appearing in the books of accounts of SFL was requisitioned under section 131 of the Act and examined before arriving at the above conclusion. In view of the above, he supported the orders of the lower authorities.
5.2 We heard the rival submissions. It is not clear from the orders of the lower authorities whether the impugned sum has been properly reconciled and it was written off in the books of account. Therefore, we remit this issue back to the AO for a fresh examination. The assessee shall lay all the material in support of its contention before the AO and shall comply with the requirements of the AO in accordance with AO. The AO shall examine the issue in the light of the case law relied on by the ld.AR and the Board’s circular. After affording adequate opportunity to the assessee shall pass appropriate order.
:-15-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 6. With regard to the issue of business & Sales Promotion Expenses, the ld.AR submitted that the assessee had incurred expenditure of Rs.9,16,047/- & Rs.4,80,000/- and Rs.3,82,531/- towards business promotion and sales promotion expenses in the assessment years 2011-12 & 12-13 respectively. These amounts were paid for liasioning with the customers to obtain orders for the job work and arranging bill payments. These types of payments are normal as far as our type of business is concerned and pleaded to allow the appeal.
6.1 Per contra, the ld.DR submitted that it was noticed by the AO that the vouchers of expenses were self-made and the entire payment was made in cash only. All these cash payments were to the tune of Rs.20,000/- and below. Moreover, it was contended by the assessee before the AO that these expenses were incurred towards liasioning with the customers to obtain orders for the job work. However, contrary to the contentions of the assessee, it is evident that the assessee is carrying out job work only for one party i.e. SFL and none other. The assessee has not provided clinching evidence to prove that these expenses were actually incurred by the assessee. In the absence of payments through banking channels, it
:-16-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 could not be proved that these payments were made to certain parties who carried out the required activities for the assessee. Moreover, the vouchers were self-made and did not bear any evidence to prove that the receipts were issued by those parties in favour of which payments were alleged to have been made. The assessee did not provide any address of the parties. Even during the appellate proceedings, no such evidences were produced to substantiate its contentions by the appellant. Therefore, he supported the orders of the lower authorities.
6.2 We have considered the rival submissions. The assessee is pleading that it had to incur the impugned expenditure for liasioning and to obtain orders for the job work and arranging bill payments. However, the Revenue finds that the expenditures are incurred in cash below Rs.20,000/- and is not able to provide clinching evidences to prove that the expenses were actually incurred by the assessee. Considering the line of business and the nature of business environment, we direct the AO to allow 50% of the assessee’s claim towards the business & sales promotion expenses, which we consider would be a due justice to both the parties.
:-17-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 7. With regard to the Discount issue, the ld.AR submitted that the assessee does job work to M/s. Sundaram Fasteners Limited located at Padi, Pondichery, Hosur, and KPM Madurai. Out of these 4 locations the maximum turnover is from SFL Padi. The Padi unit of SFL avails discounts from SMW. The rest of the units do not avail discounts but gives scrap debits (Scrap debits are reduction from payments if final inventory is not made according to SFL Norms, any damage in the material provided by Sundaram Fasteners). Therefore in the said circumstances, SFL do not pay entire billed amounts. There are 2 types of discounts availed by SFL 1. Volume discount : This is at 10% of the total turnover made by SMW by doing job work to SFL during a year. This amount is arrived at on a estimated turnover for the year and deducted on each payment proportionately. 2. Cash discount : This is a discount at 2% availed by early payment of billed amount.
The payment advice of SFL Padi will contain these discounts and amounts and balance is remitted to us which may fall short of the actual amount to be remitted. This is because SMW is exclusively subcontracting for SFL since 1984, the only customers of SMW are
:-18-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 SFL. They have a dominant role in determining the prices on negotiations. The negotiated price is accepted by SMW, SFL do not provide SMW with statements for reconciliation of balances and SMW is not in a position to insist the same is the interest of continuing business activities. The uncontrolled portion of the billed amount which is through a debit note or scrap debit in case of 3 units of SFL(Pondi, KPM, Madhurai, Hosur) is written off as bad debts and the same cannot be recovered. The confirmation, of discount availed of Rs.10,45,602, given by SFL is relating to only one units namely Padi and the assessee have claimed an amount of Rs.30,62,352 as discount given to SFL pertaining all units of SFL. The difference of Rs.20,16,750 is on account of scrap debits from units other than Padi. Therefore the ld.AR pleaded that the discount claimed by the assessee in assessment years 2011-12 & 2012-13 be allowed. Per contra, the ld.DR supported the orders of lower authorities.
7.1 We heard the rival submissions. We find that this issue has not been properly been examined. Therefore, we deem it fit to remit this issue back to the AO for a fresh examination for the assessment years 2011-12 & 2012-13 respectively. The assessee shall lay all the material in support of its contention before the AO and shall comply
:-19-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 with the requirements of the AO in accordance with AO. The AO shall examine the issue in the light of the case law relied on by the ld.AR and the Board’s circular. After affording adequate opportunity to the assessee shall pass appropriate order.
While making the assessment for assessment year 2011-12, the AO found that the assessee has debited Rs.2 lakhs as being a donation under administration and selling expenses. Since it is not an allowable expenditure U/s.37, the AO disallowed. Alternatively, he held that since the proof of eligibility U/s.80G(5)(vi) in respect of the donee is not made available he did not allow deduction U/s.80G also. Aggrieved, the assessee filed an appeal before the CIT(A). The ld.CIT(A) dismissed the appeal, stating that the assessee had not produced any evidence to make it eligible for deduction U/s.80G(5)(vi). Though the ld.AR pleaded to allow this appeal, in the absence of production of any evidence to make it eligible for deduction U/s.80G(5)(vi) either before the lower authorities or before us, it is not possible to consider the claim and hence the assessee’s appeal is dismissed.
:-20-: ITA Nos. 1969 & 3434/Chny/2016 844/Chny/2017 9. In the result, the assessee’s appeal for the assessment year 2011-12 & 2012-13 are treated as partly allowed and the appeal for the assessment year 2013-14 is dismissed.
Order pronounced in the court on 9th October, 2019 at Chennai.
Sd/- Sd/- (धु�ु� आर एल रेड़्डी) ( एस जयरामन ) (Duvvuru R.L Reddy) (S. Jayaraman) �ाियक सद�/Judicial Member लेखा सद� /Accountant Member चे�ई/Chennai, िदनांक/Dated 9th October, 2019
RSR आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF