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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMARShri Vipul D. Shah
Date of Hearing – 09.03.2018 Date of Order – 31.05.2018 2 Shri Vipul D. Shah O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid appeal by the Revenue and cross objection by the assessee are against order dated 23rd November 2012, passed by the learned Commissioner (Appeals)–37, Mumbai, partly deleting penalty imposed under section 271(1)(c) of the Income Tax Act, 1961 (for short “the Act”) for the assessment year 2009–10
Brief facts are, the assessee an individual filed his return of income for the impugned assessment year on 10th October 2009 declaring total income of ` 34,25,890. During the assessment proceedings, the Assessing Officer noticing that the assessee has shown negative income of ` (–) 77,99,816 as income from other sources called for necessary details. From the details furnished by the assessee he found that the negative income was on account of interest paid on loan amounting to ` 2,00,11,398 and bank interest of ` 5,56,662. Whereas, assessee has earned interest income of ` 1,11,23,383. Further, the Assessing Officer noticed that while the assessee was paying interest on loan @ 12%, 15%, 16.8% and 18%, however, it is charging interest on loans advanced @ 12% and 9%. Thus, the Assessing Officer called upon the assessee to explain why the interest paid should not be restricted to 12%. Though, the 3 Shri Vipul D. Shah assessee objected to the proposed addition, however, rejecting the objection of the assessee the Assessing Officer treated the interest on loan availed at 12% which resulted in addition of ` 2,72,391. Further, the Assessing Officer observed that the assessee was unable to establish the link between the loan received and loan given to prove the fact that the interest expenditure was towards earning of interest income so as to claim it as deduction under section 57(iii) of the Act. Accordingly, out of the total expenditure claimed towards interest cost amounting to ` 2,00,11,398, the Assessing Officer disallowed an amount of ` 1,42,55,358 and added back to the income of the assessee. Further, the Assessing Officer noticed that a company by the name M/s. Green Bird Developer Pvt. Ltd. has advanced a loan of ` 2,35,00,000 to M/s. Inez Infotech Pvt. Ltd. during the relevant previous year. From the share holding pattern of these companies, he found that assessee holds 50% share in M/s. Inez Infortech Pvt. Ltd. and 49.99% share in M/s. Green Bird Developer Pvt. Ltd. Since, the assessee was substantially interested in both the companies and the other conditions of section 2(22)(e) are satisfied, he called upon the assessee to explain why the loan advanced to M/s. Inez Infotech Pvt. Ltd. should not be treated as deemed dividend at the hands of the assessee. Though, the assessee objected to the proposed addition by making elaborate submissions, however, the Assessing Officer
4 Shri Vipul D. Shah rejecting the claim of the assessee added back an amount of ` 1,17,50,000 as deemed dividend under section 2(22)(e) of the Act. Though, the assessee preferred appeal against the additions made by the Assessing Officer before the learned Commissioner (Appeals) and thereafter before the Tribunal, however, he withdrew his appeal before the Tribunal, as, in compliance to the notice issued under section 153A of the Act he had filed a return of income accepting the additions made by the Assessing Officer in the original assessment. Be that as it may, on the basis of additions made by the Assessing Officer, penalty proceedings were initiated under section 271(1)(c) of the Act. In response to the show cause notice issued under section 274 r/w 271(1)(c) of the Act, though, the assessee filed explanation objecting to the initiation of penalty proceedings, however, the Assessing Officer ultimately passed an order on 24th March 2014, imposing penalty of ` 89,31,806 under section 271(1)(c) of the Act alleging concealment of income. Being aggrieved of the penalty order so passed, assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record deleted the penalty imposed in respect of addition made on account of deemed dividend and disallowance of interest under section 57(iii) of the Act. However, he confirmed the imposition of penalty in 5 Shri Vipul D. Shah respect of addition made on account of interest paid of ` 2,72,931. Being aggrieved with the aforesaid decision of the learned Commissioner (Appeals), both, the Revenue and the assessee are in appeal before us.
The learned Departmental Representative submitted that the assessee knowing fully well that the deduction claimed on account of interest expenditure was not allowable has claimed it. Therefore, he has concealed the particulars of income. Further, he submitted that the assessee being aware that the provisions of section 2(22)(e) of the Act are applicable to the loan transaction between the two companies wherein he is a major share holder, has not offered income towards deemed dividend which amounts to concealment of income. He submitted that the learned Commissioner (Appeals) without properly appreciating the valid reasoning of the Assessing Officer has deleted the penalty imposed in respect of such addition which is not acceptable. Thus, he relied upon the observations of the Assessing Officer in the penalty order.
The learned Authorised Representative strongly relying upon the findings of the learned Commissioner (Appeals) in support of the part relief granted by him submitted that the disallowance of interest under section 57(iii) of the Act and addition made on account of deemed
6 Shri Vipul D. Shah dividend under section 2(22)(e) of the Act cannot fall within the meaning of concealment as provided under section 271(1)(c) of the Act. He submitted, the assessee has made a bonafide claim in respect of interest expenditure which has not been accepted by the Assessing Officer on the ground that the assessee failed to establish the nexus between the interest expenditure and interest income, however, that by itself would not lead to the conclusion that the assessee concealed particulars of income. Further, he submitted that the assessee is in the business of money lending, therefore, it cannot be said that the expenditure incurred is not for earning interest income. Drawing our attention to a chart showing details of loan received and loan advanced, he submitted, assessing officer’s allegation that assessee has failed to establish the linkage is incorrect. As regards the imposition of penalty on the addition made on account of deemed dividend, learned Authorised Representative submitted that the addition having been made on the basis of deeming provision and being in the nature of a notional income cannot lead to imposition of penalty under section 271(1)(c) of the Act. He submitted, when the assessee in reality has not received any amount towards dividend and such deemed dividend was on account of loan transaction between two companies, it cannot lead to imposition of penalty under section 271(1)(c) of the Act. As regards the grounds raised in the cross–
7 Shri Vipul D. Shah objection, the learned Authorised Representative submitted that the penalty order passed under section 271(1)(c) is invalid as the Assessing Officer has not recorded his satisfaction regarding the particular limb of section 271(1)(c) of the Act, violated by the assessee. Drawing our attention to the show cause notice issued under section 274 r/w 271(1)(c) of the Act, the learned Authorised Representative submitted that the Assessing Officer has not specified which limb of the section 271(1)(c) he intends to apply for imposing penalty, as he has not struck off the inappropriate words. He submitted, in the absence of satisfaction recorded by the Assessing Officer with regard to specific limb of 271(1)(c) of the Act violated by the assessee, the penalty order passed is invalid as the assessee was deprived from effectively rebutting the charge and explaining its stand before the Assessing Officer. In support of such contention, he relied upon the decision of the Tribunal, Mumbai Bench, in Shri Jayant B. Patel v/s ACIT, ITA no.1650/Mum./2017 & Ors., dated 26th July 2017. Without prejudice to the aforesaid submissions, the learned Authorised Representative contended, learned Commissioner (Appeals) was not justified in sustaining penalty on the addition of ` 2,72,391, since such addition was made on a notional basis on account of alleged difference in rate of interest. Thus, he submitted, even levy of penalty in respect of the addition of ` 2,72,391 is not sustainable.
8 Shri Vipul D. Shah
We have considered rival submissions and perused materials on record. At the outset, we propose to deal with the issue relating to imposition of penalty on merits. As could be seen from the facts on record, penalty under section 271(1)(c) of the Act was imposed by the Assessing Officer on the basis of three additions made by the Assessing Officer as under:–
i) Addition of ` 2,72,391 on account of difference in rate of interest; ii) Disallowance of interest expenditure under section 57(iii) of the Act for ` 1,42,55,358; and iii) Addition of deemed dividend under section 2(22)(e) of the Act for ` 1,17,50,000.
While disposing off assessee’s appeal, the learned Commissioner (Appeals) has deleted the penalty imposed under section 271(1)(c) of the Act in respect of disallowance of interest under section 57(iii) of the Act and addition of deemed dividend under section 2(22)(e) of the Act. Whereas, he has sustained penalty imposed in respect of disallowance of interest under section 36(1)(iii) of the Act amounting to ` 2,72,391. As regards the penalty imposed on the disallowance of interest made under section 57(iii) of the Act, it is evident from the facts on record that during the relevant previous year assessee has 9 Shri Vipul D. Shah availed loan from different entities and advanced loan to some other companies. In the process, assessee has paid interest of ` 2,11,00,398 on the loan availed, whereas, it has earned interest of ` 1,11,23,383 on the loan advanced. The reason for disallowance of part of the interest expenditure under section 57(iii) of the Act is, the assessee failed to fully establish the nexus between the loan availed and loan advanced. Undisputedly, the Assessing Officer has imposed penalty under section 271(1)(c) of the Act on the aforesaid addition alleging concealment of income. However, as could be seen from the facts on record, the assessee has disclosed all information in relation to the loan advanced and interest earned thereon as well as the loan availed and interest paid thereon. Further, from the impugned order of the learned Commissioner (Appeals) it appears that the assessee has offered interest income of ` 85 lakh under the head Profit and Gain from Business or Profession which is out of capital invested in various partnership firms. The assessee has further demonstrated that if the interest earned from partnership firms and fixed deposit are combined together then the assessee has shown net interest income of ` 5.48 lakh. Thus, from the aforesaid fact, it is clear that the assessee has not concealed any income as alleged by the Assessing Officer. Merely because the Assessing Officer while making the disallowance has alleged that the assessee failed to establish a link between the loan
10 Shri Vipul D. Shah availed and loan advanced, ipso facto, it will not lead to the conclusion that the assessee has concealed his income. In any case of the matter, there is no denial of the fact that the assessee has incurred the interest expenditure of ` 2,11,00,398 which has been claimed as a deduction. Moreover, on a perusal of the chart showing details of loan availed and loan advanced placed at page 128–132 of the paper book, prima facie, it appears that there is linkage between loan availed and loan advanced. Though, the assessee has ultimately offered the disallowed amount as income in a return of income filed under section 153A of the Act, however, penalty under section 271(1)(c) being a separate and independent proceeding, the facts and evidences have to be considered and looked into afresh to find out whether the conditions of the penalty provision are satisfied or not. In any case of the matter, it is a case of deduction claimed by the assessee which has been disallowed by the Assessing Officer. That being the case, there is no concealment of income as held by the Hon'ble Supreme Court in CIT v/s Reliance Petro products 322 ITR 158 (SC). In view of the aforesaid, learned Commissioner (Appeals) was justified in deleting the penalty in respect of this addition. i) As regards penalty imposed in respect of the addition of deemed dividend amounting to ` 1,17,50,000, there is no dispute to the fact that the aforesaid addition was made by the Assessing Officer by 11 Shri Vipul D. Shah invoking the deeming provisions of section 2(22)(e) of the Act, since, he found that the loan transactions were between two companies, wherein, the assessee held substantial shares. However, it is a fact on record, in the real sense of the term the assessee has not received any income from either of the companies towards dividend. It is also relevant to observe that all relevant information relating to loan transaction between the two companies which resulted in the impugned addition were disclosed to the Department by the assessee himself. That being the case, it cannot be said that the assessee was guilty of concealing income. In any case of the matter, it is a fact on record that M/s Green Bird Developers Ltd., which has advanced the loan to M/s. Inez Infotech Pvt. Ltd. was also in the business of lending. This fact is clearly demonstrated from the Balance Sheet of M/s. Green Bird Developers Ltd., as at 31th March 2009, which shows loans and advances to the tune of ` 48,93,04,623, which works out to almost 43% of the total fund outlay. Thus, it has to be accepted that lending is a substantial part of the company’s business activity. Therefore, in such circumstances the lending of money by the said company to another company cannot be regarded as deemed dividend as held by the Hon'ble Jurisdictional High Court in CIT v/s Parle Plastics Pvt. Ltd., 332 ITR 63 (Bom.). Though, it may be a fact that in the return of income filed in response to the notice issued under section 153A of the 12 Shri Vipul D. Shah Act assessee has accepted the aforesaid addition, however, it can be said that the issue relating to the addition of deemed under section 2(22)(e) of the Act is a debatable issue where more than one view is possible. That being the case, it cannot be said that the assessee has concealed his income. Moreover, there are decisions of different Benches of Tribunal holding that penalty 271(1)(c) of the Act cannot be imposed in respect of addition made on account of deemed dividend. In this context, we may refer to the decision of the Tribunal, Mumbai Bench, in Gitanjali Ghate v/s DCIT, ITA no.6560/Mum./2010, dated 23.05.2012;
It is also relevant to observe, from the material placed on record, it is found that the assessee has also advanced loan to M/s. Green Bird Developer Pvt. Ltd. and has received interest from the said company. In the aforesaid circumstances, the charge of concealment of income as made by the Assessing Officer is not established. That being the case, learned Commissioner (Appeals) was justified in deleting the penalty imposed under section 271(1)(c) of the Act in respect of the addition of deemed dividend under section 2(22)(e) of the Act.
Finally, we have to deal with the imposition of penalty on the addition of interest amounting to ` 2,72,391 made by the Assessing Officer and sustained by the learned Commissioner (Appeals).
13 Shri Vipul D. Shah
As could be seen from the facts on record, the aforesaid addition was made by the Assessing Officer basically for the reason that while the assessee has availed loan from different persons at a higher rate of interest ranging between 12% and 18% it has charged interest on loan advanced @ 12% and 9%. Thus, the Assessing Officer has restricted the interest paid on loan availed at 12% resulting in the addition. Thus, from the facts on record it is very much clear that Assessing Officer has made the addition only on the basis of reasonableness. Thus, in effect, it is a notional addition and the assessee has not concealed any part of its income. That being the case, the provisions of section 271(1)(c) of the Act cannot get attracted to such addition even though the assessee might have accepted such addition. That being the case, we delete the penalty imposed under section 271(1)(c) of the Act in respect of addition made of ` 2,72,391. The order passed by the learned Commissioner (Appeals) to that extent is reversed. Grounds raised by the Revenue are dismissed and ground no.4, of the cross objection by the assessee is allowed.
In view of our aforesaid decision, the legal issue raised by the assessee in ground no.3 of the cross objection is of mere academic interest, hence, is not necessary to deal with it.
14 Shri Vipul D. Shah
Ground no.1, raised by the assessee in its cross objection being general in nature and ground no.2 having not been pressed, are dismissed.
In the result, Revenue’s appeal is dismissed and assessee’s cross objection is partly allowed.
Order pronounced in the open Court on 31.05.2018