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

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

The appeal by the Revenue in the case of M/s. Aban Ventures Pvt. Ltd., is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-1, Chennai, dated

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26.02.2018 in ITA No.85/CIT(A)-1/2016-17 for the assessment year 2013-14 passed U/s.250(6) r.w.s. 143(3) of the Act.

directed against the orders passed by the learned Commissioner of Income Tax (Appeals)-1, Chennai, both dated 26.02.2018 in ITA No.84/CIT(A)-1/2016-17 & 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

3 ITA Nos. 1699, 1132 & 1133/Chny/2018

made additions towards deemed dividend Rs.1.40 crores invoking

the provisions of Section 2(22)(e) of the Act.

Assessment year 2014-15: 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 addition towards cash credit Rs.10,91,34,125/- invoking the

provisions of Section 68 of the Act with respect to the sum found

credited in the books of accounts of the assessee against which no

satisfactory explanation was offered.

limited company engaged in the business of servicing and repairing

rigs, filed its return of income for the assessment year 2013-14 on

18.09.2013 admitting total income of Rs.31,83,01,090/-. The case

was selected for scrutiny through CASS and thereafter assessment

was completed vide order dated 29.02.2016, wherein the Ld.AO

invoking the provisions of Section 2(22)(e) of the Act, made

addition of Rs.1.40 crores in the hands of the assessee.

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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

5 ITA Nos. 1699, 1132 & 1133/Chny/2018

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

6 ITA Nos. 1699, 1132 & 1133/Chny/2018

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.

engaged in business, filed his return of income for the assessment

years 2013-14 & 2014-15 on 30.07.2013 & 30.01.2015 admitting

income of Rs.1,20,09,730/- and Rs.4,50,08,115/- respectively.

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.

U/s.2(22)(e) of the Act is vividly brought out in the Revenue’s

appeal herein above. Therefore in order to avoid duplicity, we

restrain from reiterating the facts once again.

8.1 In the case of the assessee, without prejudice to the

assessment in the case of M/s. Aban Ventures Pvt. Ltd., discussed

7 ITA Nos. 1699, 1132 & 1133/Chny/2018

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

Ventures Ltd., was used as a conduit company to transfer funds

from M/s. Tuticorin Power Company Ltd., to Mr. Reji Abraham.

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.”

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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

9 ITA Nos. 1699, 1132 & 1133/Chny/2018

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

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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.

11 ITA Nos. 1699, 1132 & 1133/Chny/2018

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

12 ITA Nos. 1699, 1132 & 1133/Chny/2018

the Companies Act and all the assets and liabilities of the partnership firm was taken over by the Pvt. Ltd. Co. The right to claim damages is one of the assets taken over by M/s.Aban Constructions (P) Ltd. At the time of the sale of shares of M/s.Aban Constrictions (P) Ltd., by the share holders to M/s.Kirloskar Brothers ltd., by a share purchaser agreement dated 2910912006 the right to claim damaged from Gujarat GWSSB was retained by the selling Share holders, item no.15 under the head A TL Ltd. in schedule 1 as per clause 9 C of the agreement and

Mr.Reji Abraham has received the Rs.11,65,43,082/- as representative of AOP which consists of selling share holders. Hence, this amount has not shown in his Memo of Income. All other items in Form 26As has been shown as income.

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

13 ITA Nos. 1699, 1132 & 1133/Chny/2018

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.

Sd/- Sd/- (एन.आर.एस. गणेशन) (ए. मोहन अलंकामणी) (N.R.S. Ganesan) (A. Mohan Alankamony) लेखा सद�य/Accountant Member �याियक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated 11th September, 2018

14 ITA Nos. 1699, 1132 & 1133/Chny/2018

RSR आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती/Assessee 2. राज�व/Revenue 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF