REJI ABRAHAM,CHENNAI vs. DCIT CORPORATE CIRCLE 1(1), CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

2. The two appeals of the assessee, Mr. Reji Abraham are directed against the orders passed by the learned Commissioner of Income Tax (Appeals)-1, Chennai, both dated 26.02.2018 in & 697/CIT(A)/2016-17 for the assessment years 2013-14 & 2014-15 respectively both passed U/s. 250(6) r.w.s 143(3) of the Act. Since the assessees are interconnected all the appeals are heard together and disposed off by this common order.

The lone issue raised by the Revenue is that the Ld.CIT(A) has erred in deleting the addition made by the Ld.AO towards deemed dividend amounting to Rs.1.40 crores invoking the provisions of Section 2(22)(e) of the Act.

The lone issue raised by the assessee in his appeal is that the Ld.CIT(A) has erred in sustaining the order of the Ld.AO who had made additions towards deemed dividend Rs.1.40 crores invoking the provisions of Section 2(22)(e) of the Act.

6.1 During the course of scrutiny assessment proceedings it was observed by the Ld.AO that the assessee company had received loans from related companies detailed as follows:-

(i) M/s. Ginger Estate Developers Pvt. Ltd., - Rs.40 lakhs (ii) M/s. Tuticorin Power Company Ltd., - Rs.1.40 crores.

It was further revealed that M/s. Ginger Estate Developers Pvt. Ltd., did not have any reserves as on the date of receipt of loan of Rs.40 lakhs by the assessee from M/s. Ginger Estate Developers Pvt. Ltd. However M/s. Tuticorin Power Company

Ltd., had capital reserves of Rs.1,59,00,000/- resulting from the sale of land possessed by the company as on the date of receipt of loan of Rs.1.40 crores by the assessee from M/s. Tuticorin

Power Company Ltd. Further it was also revealed that Mr. Reji Abraham had 97% shareholding in the assessee company and 32% of shares in M/s. Tuticorin Power Company Ltd. On query, as to why the provisions of Section 2(22)(e) of the Act be invoked in the case of the assessee company, the assessee came out with the submission that M/s. Tuticorin Power Company Ltd., did not have reserves for distribution of profit and that the available reserves was capital reserves arising out of sale of the land possessed by the assessee. It was therefore stated that the provisions of Section 2(22)(e) of the Act cannot be applied in the case of the assessee company. However the Ld.AO rejected the submission of the assessee and was of the view that the assessee had assigned different nomenclature as capital reserve in order to escape from the ambit of Section 2(22)(e) of the Act, which is not permissible. Further relying on the Finance Minister’s speech, the provisions of the Act and the decision of the Hon’ble Delhi High Court in the case of CIT Vs. National Travel Services reported in 347 ITR 305, the Ld.AO invoked the provisions of Section 2(22)(e) of the Act and made addition of Rs.1.40 crores in the hands of the assessee. On appeal, the Ld.CIT(A) relying in the decision of the Hon’ble Delhi High Court in the case CIT Vs.

Ankitech Pvt. Ltd., & others which was further upheld by the Hon’ble Supreme Court in the case of Madhur Housing & Development Company (Civil Appeal No.3961 of 2013 dated 05.10.2017) deleted the addition made by the Ld.AO because the assessee company did not hold shares of M/s. Tuticorin Power Company Ltd., and therefore no dividend would have been brought to tax in the hands of the assessee.

6.2 Since the Ld.CIT(A) had only followed the ratio laid down in decision of Hon’ble Delhi High Court and Hon’ble Apex Court cited supra while deciding the case of the assessee wherein the facts are identical we do not find it necessary to interfere in his order. Hence appeal of the Revenue is devoid of merits.

Thereafter for both the assessment years, the case was taken up for scrutiny through CASS and finally assessment was completed on 29.02.2016 & 28.12.2016 for the assessment years 2013-14 & 2014-15 respectively.

8.1 In the case of the assessee, without prejudice to the assessment in the case of M/s. Aban Ventures Pvt. Ltd., discussed herein above, the Ld.AO had made addition of Rs.1.40 crores invoking the provisions of Section 2(22)(e) of the Act in the case of the assessee by relying in the decision of the Hon’ble Apex Court in the case CIT Vs. Mukundray K.Shah reported in 290 ITR 433 and the decision of the Hon’ble Jurisdictional High Court in the case CIT Vs. L. Alagu Sundaram Chettiyar reported in 109 ITR

When the matter cropped up before the Ld.CIT(A), the assessee reiterated his submission before the Ld.A.O that M/s. Tuticorin Power Company Ltd., only had capital reserves which cannot be distributed as dividend and therefore provisions of Section 2(22)(e) of the Act cannot be invoked. However the Ld.CIT(A) dismissed the appeal of the assessee by observing as follows:

“The appellant’s contention is considered. The position of law is fairly clear that even capital gains earned by the company forms part of its accumulated profits. The only appreciation in the capital value of an asset which is not taken into account is a capital gain that is not liable to tax under the provisions of the Income Tax Act. In the present case, the profit on sale of land referred to by the appellant is undoubtedly liable to tax under the provisions of the Income Tax Act which is also evident from the opinion placed on record by the appellant in the course of appeal proceedings. Therefore, it is held that the accumulated profits of a company for the purpose of determining the existence of deemed dividend will include any profit on sale of land so long as the same is chargeable to tax under the provisions of Income Tax Act.”

8.2 Before us also the Ld.AR reiterated the submission made before the Ld.Revenue Authorities and further pleaded by stating that the amount advanced by M/s. Tuticorin Power Company Ltd., to M/s. Aben Ventures Pvt. Ltd., was arising out of commercial exigencies and not a loan. Therefore the provisions of Section 2(22)(e) cannot be invoked. The Ld.AR also took the plea that the accumulated profit of M/s. Tuticorin Power Company was arising out of sale of its land and therefore it is a capital reserve which cannot be distributed as dividend. It was therefore pleaded that the provisions of Section 2(22)(e) of the Act cannot be invoked. The Ld.DR on the other hand relied on the orders of the Ld.Revenue Authorities.

8.3 We have heard the rival submissions and carefully perused the materials on record. As observed by the Ld.AO, the decision of the Hon’ble Apex Court in the case CIT Vs. Mukundray K.Shah cited supra is squarely applicable to the facts of the case, wherein the Hon’ble Apex Court has held as follows:

“Held, reversing the decision of the High Court and affirming that of the Appellate Tribunal, (i) that the Department was right in invoking the provisions of Chapter XIV-B of the Income-tax Act, 1961. The assessment order originated on account of a search conducted under section 132(1), in which the diary was identified. The diary made the Assessing Officer hold an enquiry and in the enquiry the cash flow statement emerged and resulted in the detection of undisclosed income of Rs. 5.99 crores. Undisclosed income in the nature of deemed dividend did not arise from any scrutiny proceedings, tax evasion petitions, surveys, information received from external agency, etc. The undisclosed income was detected by the Assessing Officer wholly and exclusively as a result of a search and, therefore, the assessment order was rightly passed under section 158BC . (ii) That, on the facts, the payments had direct relation with Rs. 5.99 crores paid by MKSEPL to MKF and MKI and payments by the two firms to the assessee who used the money to buy RBI Relief Bonds. The payments made by the company through the two firms were for the benefit of the assessee. Therefore, the funds were not repayment of loans, they were for the purchase of Bonds by the assessee. (iii) That, on the merger of SCPL with MKSEPL in 1998, the accounts of the two companies had merged and, therefore, the reserves had to be taken on the basis of the merged account. (iv) That the question whether the payments made by the company were for the benefit of the assessee (shareholder) was a question of fact. The Tribunal had concluded that the payments routed through MKF and MKI were for the benefit of the assessee. That was a finding of fact ; it was not perverse. (v) That the concept of deemed dividend under section 2(22)(e) postulated two factors : whether the payment was a loan and whether on the date of payment there existed accumulated profits. These two factors had to be correlated and this correlation had been done by the Appellate Tribunal coupled with the fact that all withdrawals were debited in the capital account of the firm leading to the debit balance of Rs. 8.18 crores. (vi) That, therefore, the High Court ought not to have disturbed the finding of fact arrived at by the Appellate Tribunal. Companies having accumulated profits and companies in which substantial voting power lies in the hands of a person other than public (or controlled) companies are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed or not. The declaration of dividends is entirely within the discretion of this group. Therefore, the Legislature realised that though funds were available with the company in the form of profits, the controlling group refused to distribute accumulated pro-fits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders to avoid payment of tax on accumulated profits. This was the main reason for enacting section 2(22)(e) .”

Further the plea of the Ld.AR that M/s. Tuticorin Power Company Ltd., has only capital reserve and therefore provisions of Section 2(22)(e) of the Act cannot be invoked is erroneous. The Hon’ble Apex Court in the case CIT Vs. Urmila Ramesh reported in 230 ITR 422, the Hon’ble Apex Court held as follows:

“Section 2(22) has used the expression ‘accumulated profits’ whether capitalized or not. This expression tends to show that under section 2(22) it is only the distribution of the accumulated profits which are deemed to be dividends in the hands of the shareholders. By using the expression ‘whether capitalized or not’ the legislative intent clearly is that the profits which are deemed to be dividend would be those which were capable of being accumulated and which would also be capable of being capitalized. The amount should, in other words, be in the nature of profits which the company could have distributed to its shareholders. This would clearly exclude return of part of a capital to the company as the same cannot be regarded as profit capable of being capitalized, the return being of capital itself. Profits mean only commercial profit.” (Source - Taxmann’s Direct Tax Manual 43rd Edition Vol.3)

From the above, it is abundantly clear that even if the company advancing loan has capital reserve, provisions of Section 2(22)(e) of the Act, can be invoked. Moreover the Ld.AR has not brought out any convincing materials / explanation before us to establish that the advance made by M/s. Tuticorin Power Company Ltd. to M/s. Aben Ventures Pvt. Ltd. was out of commercial exigencies. In this situation we do not find it necessary to interfere in the orders of the Ld.Revenue Authorities. Hence the appeal of the assessee is devoid of merits and the order of the Ld.AO is hereby confirmed on this issue.

The assessee had received Rs.11,65,43,082/- during the relevant assessment year which was explained to be received on behalf of the erstwhile shareholders of M/s. Aben Construction Company Ltd., which was their share of compensation from the Joint Venture. The details of the transaction narrated before the Ld.AO is extracted herein below for reference:-

"M/s. Aban Constructions a partnership firm entered into a JV agreement with M/s.Koya& Co. a partnership firm and MIs. Thahir Ali and the agreement 'was registered as doc.no.2875 of 1994 for the purpose of Tendering for the work of Narmada pipe line project with Gujarat State Construction Company Ltd.. The Joint Venture was successful in getting tender of project No.4 & 5 of Gujarat State Construction Co. Ltd. The "work order for project was issued on 13/02/1995 but the construction was suspended on 2810411995 and the tender was terminated on 31/07/1995. The project did not materialize and Gujarat Water Supply and Sewerage Board was entrusted with task of completing the said project. The said ____________ on 27/04/1998, the Joint venture was informed that CWSSB was contemplating changes in the pipe line alignment. Therefore the Joint venture could not proceed with work. Again Board abandoned the project and the Joint venture partners approached the Gujarat High Court for compensation and damages. The following arbitrators were appointed the Gujarat Board, however did not accept the award of the Arbitrators. a) Mr.B.J.Diwan b) Mr.P.H.Chauhan c) Mr.A. T.Doshi

M/s.Koya & Company Construction Limited has shown Rs.2,94,92,314/- as the amount paid as contract to the assesse and they have deducted Rs. 74,08,957/- as TDS. The said company has not paid any amount as contract to the assesse hence the assesse has not incorporated the said receipt in has account however since TDS has been shown as credit in the assessee account the said amount Rs.74,08,957/- has shown as his income under the head "Income from Other Sources" and the assessee has taken credit for the TDS paid in his income Tax memo.

There is no contract between M/s. Koya& Co. and Mr.Reji Abraham and the assessee was surprised to see the entry in 26AS in his name from M/s.Koya& Co. and protested to M/s.Koya& Co., and they have not done anything till now to remove the entry. The assessee protested and informed M/s.Koyas & Co. that there is no agreement for doing any contract for M/s.Koya& Co. and the assesee has not executed any work o~elJ.c;J1.of the M/s.Koya& Co. The amount of Rs.33,90,86,164/- has been received by M/s.KoyaAban, Joint Venture. And out of this, Rs.11,65,43,082/- has been received by the assessee as the representative of selling share holders of M/s.Aban Construction (P) Ltd. The M/s.AbanKoya, J. V. has deposited the whole amount in the South Indian Bank, Hyderabad Branch as A/c. No.012803000001873. Copy of the cheque received by the aseessee is enclosed herewith. It is the duty of the Joint venture to file the return. The Gujarat Board has already deducted TDS amounting to Rs.3,76,76,240/-.”

Since the submission of the assessee was not backed with any concrete evidence, the Ld.AO added an amount of Rs.10,91,34,125/- (Rs.11,65,43,082/- less income offered Rs.74,08,957/-) as the income of the assessee by invoking the provisions of Section 68 of the Act.

9.1 On appeal, the Ld.CIT(A) also confirmed the order of the Ld.AO because even before her, the assessee had not explained the transaction with sufficient evidence.

9.2 Even before us, the assessee has not furnished any materials to substantiate his claim. Therefore we do not find any reason to interfere with the orders of the Ld.Revenue Authorities. Hence the appeal of the assessee is devoid of merits.

Order pronounced on the 11th September, 2018 at Chennai.