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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI C.N. PRASAD, JM & SHRI RAJESH KUMAR, AM Shri Devdatta Mainkar
आदेश / O R D E R PER RAJESH KUMAR, A. M: This is an appeal filed by the assessee against the order dated 29.2.2016 passed by the ld.CIT(A)-2, Thane for the assessment year 2010- 11. 2. Grounds of appeal taken by the assessee are as under : “Being aggrieved by the order dated 29.02.2016 passed by the learned Commissioner of Income Tax (Appeals)-2, Thane ["CIT(A)"] u/s 250 of the Income-tax Act,1961 ("Act) your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is
1. On the facts and in the circumstances of the case, and also in law, the Ld. CIT(A) erred in confirming the disallowance of Rs.8,72,346j- made by the Ld. A.O.u/s 36(1)(iii) of the Act out of interest paid. The Ld. CIT(A) erred in not appreciating that the interest-free advances were given by the appellant out of commercial expediency and that, in any event, the appellant had sufficient interest-free funds available with it to fund those advances. Your appellant, therefore, prays that the disallowance of interest of Rs.8,72,346/- be deleted.
2. On the facts and in the circumstances of the case, and also in law, the Ld. CIT(A) erred in directing the A.O. to re-examine the facts and take remedial action, if deemed fit, in the context of deemed dividend ujs.2(22)(e) of the Act. The direction given by the Ld. CIT(A) is bad in law as the Ld. CIT(A) travelled beyond the scope of the appeal before him, and had no jurisdiction to give such direction on issue that is not the subject matter of the appeal. Your appellant, therefore, prays that this direction be set aside.
The facts with regard to the grounds of appeal no.1 are that during the course of assessment proceedings, the AO noticed that the assessee has received unsecured loans of Rs.1,77,74,921/-, secured loans of Rs.1,38,97,255/- and paid interest of Rs.27,30,163/- against the loan. The assessee also advanced loans to the tune of Rs.1,01,43,559/- to its associate concerns viz (i) Splendor Sanitation (ii) Malwa Mirage Ceramics Pvt Ltd and (iii) Mirage Impex without charging any interest. Therefore, the AO observed that the assessee has diverted interest bearing funds to non-productive purposes to its associates which has resulted into reduction in tax by paying interest against the loan borrowed and advancing interest free loans to associate concerns. Accordingly, the AO issued show cause notice calling
upon the assessee to show cause as to why the aforesaid disallowances should not be made as per the provisions of section 36(1)(iii) of the Income Tax Act, 1961, which was replied by the assessee vide letter dated 23.11.2012 submitting that when the assessee’s is having its interest free funds to the tune of Rs.1,59,50,000/- and also company has reserve and surplus to the extent of Rs.1,02,61,062/- available in the business of the assessee firm and share capital to the extent of Rs.5 lakhs, it would be wrong to say that assessee has diverted interest bearing funds to non-productive purpose to reduce the tax liability.
The ld.AR submitted before the AO that advance of Rs.60,00,000/- was given to Malwa Mirage Ceramics Pvt Ltd with an intention to convert the same into share capital and ultimately the shares were issued in the financial year 2011-12. The assessee company has secured and unsecured loans of Rs.3,16,72,176/- and creditors of Rs.1,51,55,335/-aggregating to Rs.4,68,27,511/- against the inventory of Rs.4,86,77,079/- and sundry debtors of Rs.39,77,101/- aggregating to Rs.5,26,54,180/- meaning thereby the entire borrowed money and outstanding balance of the creditors were used in the business for the purpose of business. The AO did not agree with the contention of the assessee and made disallowance of Rs.8,72,346/- under section 36(1)(iii) of the Act. The assessee carried the matter before the ld.CIT(A), who after considering the submissions of the assessee as has been reproduced and incorporated in pages 5 to 8 of the appellate order by observing that in spite of repeated opportunities to the assessee it could not justify and explain the purposes of advance and therefore the appellant has diverted interest bearing funds into non productive use thereby reducing its taxable income by claiming interest expenditure and accordingly upheld the disallowance of Rs.8,72,346/- by dismissing the appeal of the assessee. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before this Tribunal.
Before us the ld.AR vehemently submitted that the assessee is having sufficient own funds and interest free advances from the customers in order to cover the monies advanced to associate concerns and its directors which was given purely out of business consideration and was of strategic nature. The ld.AR further submitted that the assessee has share capital of Rs.5 lakhs, reserve funds of Rs.1,02,61,062/- and interest free advance from customer to the tune of Rs.1,59,50,000/- as against the monies advances to the associate concerns of Rs.1,01,43,559/-. In support of his contention, the ld.AR relied on the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs CIT [2007] 288 ITR 1 (SC). The ld. AR, lastly, contended that it is for the assessee how to conduct the business and protect the interest of the business and not the revenue to dictate the terms how to run the business. Finally, the ld.AR prayed that since the assessee has sufficient funds, the disallowance made by the AO and confirmed by the FAA amounting to Rs.8,72,346/- should be deleted.
On the other hand, the ld.DR strongly objected to the arguments advanced by the counsel of the assessee and submitted that the assessee has borrowed secured and unsecured loans on which it has paid interest of Rs.27,30,163/- which was charged to the profit and loss account while the monies were advanced to the associate concern of the assessee amounting to Rs.1,01,43,559/- was free of interest. Therefore the assessee converted interest bearing funds into non productive use thereby causing suppression of income. The ld.DR finally relied on the orders of authorities below.
We have carefully considered the rival submissions, perused the material placed before us including the orders of authorities below and case law cited by the parties. We find that the assessee’s own funds in share capital is to the extent of Rs.5 lakhs, reserve and surplus to the extent of Rs.1,02,61,062/- interest free funds to the tune of Rs.1,59,50,000/- as against this the assessee has advanced Rs.1,01,43,559/- to the associate concerns viz. (i) Splendor Sanitation (ii) Malwa Mirage Ceramics Pvt Ltd and (iii) Mirage Impex. We also find that the assessee has advanced
Rs.60,00,000/-to Malwa Mirage Ceramics Pvt Ltd was in the form of share application money which was ultimately converted into shares in the Financial year 2011-12 and was purely out of business expediency, consideration and strategic in nature. The Hon’ble Supreme Court held in the case of S A Builders (supra), Revenue cannot dictate the assessee how to conduct the business operation and it is for the assessee to decide as to how to conduct business in its own way. We are therefore not in agreement with the conclusion drawn by the ld.CIT(A) and are of the view that no disallowance could be made u/s 36(1)(iii) of the Act. Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to delete the addition. The ground is allowed.
The issue raised in the second grounds of appeal is against the direction by the ld.CIT(A) to take remedial action if deem fit in the context of deemed dividend u/s 2(22)(e) of the Act. The assessee agitated that the directions given by the ld.CIT(A) was bad in law as the FAA travelled beyond the scope of powers and have not jurisdiction to deal with this issue.
9. The FAA in the appellate order has discussed this issue and observed at page 9 and directed the AO to examined the facts the dividend which is reproduced below: “Inspite of clear cut requirement, the appellant company could not justify the purpose of above advances, made to the directors, therefore, the provision of section deemed dividend i.e 2(22)(e) of Act, are clearly attracted,. Since the appellant company had total reserve and surplus of Rs.1,02,61,062, which is more than the money advanced therefore, the entire amount of Rs.27,07,129/-, is liable to be assessed as deemed dividend, in respective hands. The AO, is therefore, directed to re-examine the above facts and take the remedial action, if deemed fit.”
We have heard both the parties on the issue and perused the material placed before us. We find that the ld.CIT(A) has given direction to the AO to examine the issue of deemed dividend u/s 2(22)(e) of the Act qua loan advanced to the directors by the company in view of the facts that the assessee has reserve surplus to the tune of Rs.1,02,61,062/- which is more than the money advanced to director of Rs.27,07,129/-. The ld. AR argued before the bench that the FAA has no power to issue such direction in the appeal order qua the third party and therefore the same was bad in law.
The ld.AR, in support of his contention, relied on the decision of Hyderabad Bench of the Tribunal in the case of Pennar Electronics (P.) Ltd. V/s DCIT [2010] 124 ITD 272 (HYD.) and invited our attention to the findings of the Co-ordinate bench of the Tribunal. “HELD There was no dispute that the assessee-company had offered syndication charges for the assessment and the Assessing Officer also assessed the same in its hands. As such, there was no dispute about assessability of syndication charges in the hands of the assessee, as it was never the case of the revenue that it was not assessable in the hands of the assessee but in the hands of its Managing Director. That position was also evident from the grounds raised by the parties in the instant appeals, as both the parties were aggrieved by direction of the Commissioner (Appeals) to assess the syndication charges in the hands
Managing Director of the assessee. That being so, it was to be held that the Commissioner (Appeals) was not justified in holding that it was not the assessee that had earned the syndication charges but it was the individual, i.e., the managing director who had earned the syndication charges and in directing the Assessing Officer to re-open the assessment of the Managing Director and assess the same in the individual assessment of the Managing Director of the assessee. Accordingly, the order of the Commissioner (Appeals) was to be reversed to this extent and the stand of the Assessing Officer was to be upheld in assessing the syndication charges in the hands of the assessee. [Para 19]
However, in view of the fact that the Commissioner (Appeals) had not adjudicated the grounds raised by the assessee in the appeal before him, in the interests of justice, the matter was to be restored back to the file of the Commissioner (Appeals), who would decide the same afresh in accordance with law after providing reasonable opportunity of being heard to the assessee. [Para 20]”
On the other hand, the ld.DR submitted that the ld.CIT(A) has not enhanced the assessment of the third party but issued only a direction to examine the case in terms of the applicability of provisions of section 2(22)(e) of the Act thereby the said authority has not violated principle of natural justice. While rebutting the arguments, the ld.DR argued that at the most the ld.CIT(A) could have written a letter to the AO to this effect but giving directions to AO to examine the issue could not be taken to mean that CIT(A) has travelled beyond jurisdiction.
After considering the rival submissions and on perusal of the material and order of FAA, we find that the ld.CIT(A) has given only direction to