I.T.OWD3(1),KOLKATA vs. M/S SANCHIYA HOUSING PVT. LTD., KOLKATA

This appeal is preferred by the revenue against the order of Ld. CIT (Appeals) – XX, Kolkata dated 25.02.2013 on the following grounds: i. That the Ld. CIT (A) has erred in law and on facts by allowing the appeal of the assessee company that the provision of section 2(22)(e) is not applicable in this case hence deleted the addition of deemed dividend of Rs. 42,97,818/-. ii. That the Ld. CIT (A) has erred in law and on facts by allowing the appeal of the assessee company that the interest of Rs. 13,53,854/-, except payment of interest to M/s. Adventure Buildcon of Rs. 21,273/-, is expended for the purpose of the business.

The assessee in the present is a company which is engaged in trading business. The return of income for the year under consideration was filed by it on 20.11.2006 declaring a loss of Rs. 10,87,740/-. In the assessment completed u/s 143(3) vide an order dated 31.12.2008, the total income of the assessee was determined by the AO at Rs. 45,63,932/- after making addition of Rs. 42,97,818/- and Rs. 13,53,854/- on account of deemed dividend u/s 2(22)(e) of the Act and disallowance of interest respectively.

Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the Ld. CIT (A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT (A) deleted the entire addition made by the AO u/s 2(22)(e) on account of deemed dividend while restricting the addition of Rs. 13,53,854/- made by the AO on account of disallowance of interest to Rs. 21,273/-. Aggrieved by the order of Ld. CIT (A), the assessee has preferred this appeal before the Tribunal.

At the time of hearing fixed today i.e. on 11.09.2017, none has appeared on behalf of the assessee nor any application seeking adjournment has been filed. It is also noted from the record that there was no compliance on the part of the assessee at the time of hearings fixed earlier on several dates. This appeal of the revenue is therefore being disposed of ex-parte qua the respondent assessee after hearing the arguments of the learned DR and perusing the relevant material 3 Assessment Year: 2006 -07 M/s. Sanchiya Housing Pvt. Ltd. available on record. As regards the issue involved in ground no 1, it is observed that the addition of Rs. 42,97,818/- made by the AO on account of deemed dividend u/s 2(22)(e) of the Act was deleted by the Ld. CIT (A) for the following reasons given in paragraph no 5.2 of his impugned order: “I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the AO found that the appellant had taken loan from M/s. Great Easter Appliances Ltd. Out of which a sum of Rs. 42,97,818/- was received during the F.Y. 2005-06. On this basis, he invoked section 2(22)(e) of the I.T. Act. However, the AO himself mentioned in the assessment order that the shareholding of the appellant in M/s. Great Easter Appliances Ltd. Was less than 10% but he applied explanation 3(b) of section 2(22)(e) of the I.T. Act and made addition of Rs. 42,97,818/-. He further mentioned that although the shareholding of the appellant was less than 10% provision of section 2(22)(e) still attracts in the instant case because the legislative intent behind the enactment of section 2(22)(e) of the Act was to prevent colourable allocation of undistributed accumulated profit of the closely held companies. In this case, accumulated profit of M/s. Great Easter Appliances was allocated to the appellant in the form of loan. However, the appellant submitted that they had shareholding less than 10% in the said company, therefore, unless the shareholding is 10% or more the provision of section 2(22)(e) cannot be attracted. Even otherwise the loan had been received in ordinary course of business and the transaction was a commercial transaction, the lending company had earned interest and offered the same for tax. To support their submission, they relied upon the judgments in the case of CIT vs F. Praveen (2009) 26(1) ITCL 107 (Mad), CIT vs Raj Kumar (2009) 181 Taxman 155 (Delhi). In view of the facts and circumstances of the case, I find merit in the submission of the appellant, hence, appeal on this ground is allowed.”

As is clearly evident from the relevant portion of the Ld. CIT (A)’s impugned order reproduced above, the addition made by the AO on account of deemed dividend u/s 2(22)(e) has been deleted by the Ld. CIT (A) after having found that the shareholding of the assessee 4 Assessment Year: 2006 -07 M/s. Sanchiya Housing Pvt. Ltd. company in M/s. Great Easter Appliances Ltd. from whom the amount in question was received by the assessee as loan, was less than 10% and the provisions of section 2(22)(e) thus were not attracted. At the time of hearing before us, the learned DR has not been able to bring anything on record to rebut or controvert the said finding of fact recorded by the Ld. CIT (A). We, therefore, find no justifiable reason to interfere with the impugned order of the Ld. CIT (A) giving relief to the assessee on this issue and upholding the same, we dismiss ground no 1.

As regards ground no 2, it is observed that the disallowance of Rs. 13,53,854/- made by the AO on account of interest was restricted by the Ld. CIT (A) to Rs. 21,273/- for the following reasons given in paragraph no 4.2 of his impugned order: “I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the AO disallowed Rs. 13,53,854 out of claim of interest on the ground that the funds attributable to the extent of interest claimed as disallowed was not utilized for the purpose of business of the appellant. However, the AO himself mentioned in the order that during the assessment year 2005-06 the appellant had taken loan for the purpose of land and interest paid thereon was capitalized till the land was sold during the same year. Out of the sale proceeds of land, loan to M/s. Great Easter Appliances was given and earned interest thereon. The AO further mentioned that interest free advance to M/s. Adventure Buildcon was given without any business purpose. However, the appellant submitted that they had taken loan of Rs. 17 lacs as on 31.03.2005 as seen from the balance sheet out of which during the A.Y. 2006-07 the same was reduced to Rs. 116.80 lacs. It is further submitted that the borrowed money was invested in purchase/construction of flats out of which most of the flats were sold in A.Y. 2005-06 itself. It was argued that the entire funds including capital/loans were utilized in fixed assets/current assets and to mitigate the loss of the company. Loan given to M/s. Great Easter Appliances were interest bearing on which interest of RS. 3.57 lacs was 5 Assessment Year: 2006 -07 M/s. Sanchiya Housing Pvt. Ltd. received. The only loan which was in interest free was given to Adventure Buildcon of Rs. 10,00,000/- which was refunded on 06.06.2005, except this there was no non-interest bearing loan/advance were given to any person. After careful consideration of the fact of the case, I find that at the most Rs. 21,273/- can be disallowed as calculated by the appellant @ 10% only interest free loan given to Adventure Buildcon. There is no any other material on record placed by the AO to establish that whatever submission given by the appellant are contrary to the facts of the case on this issue. In view of the facts and circumstances of the case as discussed above, the A.O. is directed to disallow Rs. 21,273/- and allow the balance amount.

As is evident from the relevant portion of the Ld. CIT (A)’s impugned order reproduced above substantial relief has been given by him to the assessee on the issue of disallowance of interest after having found that the entire borrowed funds were utilised for fixed / current assets and to mitigate the loss of the company. Even the loan given by the assessee company to M/s. Great Easter Appliances was interest bearing and only one loan of Rs. 10,00,000/- was given by the assessee to M/s. Adventure Buildcon free of interest and that too for a short period. Keeping in view this factual position evident from the relevant record, the Ld. CIT (A) restricted the disallowance of Rs. 13,53,854/- to Rs. 21,273/-. At the time of hearing before us, the learned DR has not been able to bring anything on record to rebut or controvert the finding of fact recorded by the Ld. CIT (A) while giving relief to the assessee on this issue. We therefore find no justifiable reasons to interfere with the impugned order of the Ld. CIT (A) giving relief to the assessee on this issue and upholding the same, we dismiss ground no 2.