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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI AMIT SHUKLA
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER I.T.A. No.4663/M/2015 (AY 2010-2011) फनाभ/ Bloom Packaging Private ACIT, Central Circle-38, Limited, (After restructuring new Vs. 4th Floor, Ready Money Terrace, jurisdiction DCIT, Central Dr. A.B. Road, Worli Naka, Circle -6(3)), Aayakar Mumbai – 400 018. Bhavan, M.K. Road, Mumbai- 20. स्थामी रेखा सं./ PAN : AAACB1928K (अऩीराथी /Appellant) (प्रत्मथी / Respondent) ..
I.T.A. No.4676/M/2015 (AY 2010-2011) Uniphos International Limited, फनाभ/ ACIT, Central Circle-38, (Formerly known as uniphos (After restructuring new Vs. Agro Industries Limited) jurisdiction DCIT, Central Ready Money Terrace, 167, Dr. Circle -6(3)), Aayakar A.B. Road, Worli Naka, Mumbai Bhavan, M.K. Road, Mumbai- -400 018. 20. स्थामी रेखा सं./ PAN : AAACU2706L (अऩीराथी /Appellant) .. (प्रत्मथी / Respondent) अऩीराथी की ओय से / Assessee by : Shri Precy Pardiwala प्रत्मथी की ओय से/ Respondent by : Smt. Vinita Menon, DR
सुनवाई की तायीख / Date of Hearing : 23.08.2016 घोषणा की तायीख /Date of Pronouncement : 19.10.2016 आदेश / O R D E R PER D. KARUNAKARA RAO, AM: There are two appeals under consideration. Both these appeals are filed by the different assessees for the assessment year 2010-2011. Since, the issues raised in these appeals are identical, therefore, for the sake of convenience, they are clubbed, heard combinedly and disposed of in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order.
Firstly, we shall take up the appeal ITA No.4663/M/2015 in the case of Bloom Packaging Pvt Ltd. This appeal filed by the assessee against the order of the CIT (A)-54, Mumbai dated 31.3.2015. Grounds raised by the assessee in this appeal read as under:-
Disallowance u/s 14A as per Rule 8D: Rs. 2,20,243/- 1.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the disallowance made by the AO u/s 14A of the Act as per Rule 8D of the IT Rules, 1962 at Rs. 2,07,144/-. 1.2. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in upholding the action of the AO in rejecting the working of disallowance u/s 14A of the Act made by the appellant on reasonable basis. 1.3. On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in computing disallowance u/s 14A of the Act by invoking Rule 8D without giving any reasons for non-satisfaction with the correctness of the disallowance made by the appellant. 1.4. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not appreciating that no borrowed funds have been used for the purpose of making investments in shares yielding exempt income and the entire investments have been made out of own funds. 1.5. On the facts and in the circumstances of the case and in law, CIT (A) erred in not appreciating that the appellant has not incurred any interest expenditure for the purpose of earning exempt income. 1.6. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not ignoring the fact that the only interest expenditure incurred by the appellant was in respect of delayed payment of excise duty and service tax and vehicle loan which are not at all related to earning of tax free income. 1.7. On the facts and in the circumstances of the case and in law, the CIT (A) erred in rejecting the contention of the appellant that the disallowance u/s 14A of the Act ought to be computed only on those investments which have yielded exempt income during the relevant previous year. 1.8. On the facts and in the circumstances of the case and in law, the appellant submits that even if the disallowance is to be made u/s 14A of the Act, the same ought not to be computed to those investments which are capable of earning taxable income. 1.9. On the facts and in the circumstances of the case and in law, the appellant submits that strategic investments made in group companies ought to have excluded while computing the disallowance as per Rule 8D. 1.10. On the facts and in the circumstances of the case and in law, the CIT (A) erred in ignoring the fact that investments in domestic companies ought not to be included for the purpose of computing disallowance u/s 14A of the Act since dividend from domestic companies is not exempt from tax in view of section 115-O / 115R of the Act. 1.11. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not appreciating that no adjustment can be made to the book profits computed u/s 115JB in respect of disallowance made u/s 14A as per Rule 8D. 2. Addition in respect of transactions reported in Annual Information Report (AIR):- On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in making an addition of interest income amounting to Rs. 14,797/- on the basis of the information as reported in AIR vis-a-vis the interest recorded in the books of account. 3. Disallowance in respect of advances written off:-
On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in not allowing deduction u/s 36(2) read with section 36(1)(vii) of the Act in respect of advances written off amounting to Rs. 5,00,000/- given by various companies (now merged with the appellant company) which were engaged in the business of investment. 4. Taxability u/s 115-O: 4.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that by gifting the shares of United Phosphorus Limited (UPL) and Uniphos Enterprises Ltd (UEL) to Nerka Chemicals Private Limited (NCPL) there was an indirect disguised distribution of accumulated profits by the appellant to its shareholders / members of the Shroff family which is covered u/s 2(22)(a) of the Act. 4.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that the appellant is liable to pay dividend distribution tax u/s 115-O of the Act in respect of the shares transferred to NCPL held to be deemed dividend u/s 2(22)(a) of the Act. 4.3. On the facts and in the circumstances of the case and in law, the CIT (A) erred in giving directions to the AO to levy dividend distribution tax u/s 115-O without issuing a cause notice and consequently violating the principles of natural justice by not providing an adequate and reasonable opportunity of being heard. 5. Gift of UPL and UEL shares is a colourable device: 5.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO in holding that the aforesaid transaction of gifting in UPL and UEL shares to NCPL as a colourable device to avoid tax by applying the decision of the Supreme Court in the case of McDowell & Co Ltd (154 ITR 148) 5.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in making various observations which are factually incorrect and contrary to the facts available on record which the appellant carves leave to elucidate at the time of hearing, leading to perverse finding that the aforesaid transaction as a colourable device to avoid tax.” 3. In this appeal, assessee raised the issues of (i) disallowance u/s 14A of the Act; (ii) addition of Rs. 14,797/- based on the AIR reports; (iii) write off of advance of Rs. 5 lakhs u/s 36(1)(vii) read with section 36(2) of the Act; (iv) applicability of the provisions of section 2(22)(a) and section 115-O of the Act to the gift transactions and finally (v) the allegation of colourable device on the above said gift transactions involving gifting of shares of UPL and UEL.
During the proceedings before us, at the outset, Ld Representatives of both the parties submitted that the issue relating to the applicability of section 2(22)(a) and the direction issued by the CIT (A) involving the provisions of section 115-O of the Act are already heard by the Tribunal in connection with the appeals ITA No. 4646/M/2015 (AY 2010-2011) in the case of Ultima Search as well as in appeal ITA NO. 4660/M/2015 (AY 2010-2011) and others in the cases of some members of family of Shroffs (Jaidev R. Shroff; Rajnikant D. Shroff; Vikram R. Shroff &
Sandra R. Shroff). In this regard, the arguments of both the parties to the instant case are identical to the above cited cases (supra) heard by the Tribunal except for a fact that the present assessee is a corporate body whereas the assessees in the cases are individuals / partnership firms. 5. Briefly stated relevant facts of the case are that the assessee, like in the case of Ultima Search and Shroffs (Jaidev R. Shroff; Rajnikant D. Shroff; Vikram R. Shroff; Sandra R. Shroff), gifted shares of UPL and UEL to Nerka Chemicals Private Limited (NCPL) vide transfer agreement dated 26.2.2010. Assessee claimed the same as „gift‟ of the shares to NCPL does not involve any consideration by the donee assessee-company. Considering the precedent involving in similar donor concern, which was adjudicated by the Hon‟ble Jurisdictional High Court in the case of Nerka Chemicals P Ltd (371 ITR 280) as well as Ahmedabad High Court judgment in the case of M/s. Prakriya Pharmachem vs. ITO in Special Civil Application No.20492 of 2015, dated 18.1.2016, we have adjudicated the identical issue in the said cases of Ultima Search and Shroffs (supra) and the said gift transactions are held by us as „gift‟ transactions. The decision is in favour of the assessee. The decision is in favour of the assessee. While deciding the issue the above cases, we have considered the view of the Hon‟ble High Court that the title of the agreement should not come on the way of the substance of the transaction. We have also examined the applicability of the provisions of section 2(22)(a) of the Act and upheld the interpreting of the said provisions by the „principles of strict interpretation‟. We have also held that it is not a case of distribution of accumulated profits to its shareholders. It is an undisputed fact that NCPL per se is not a shareholder in the assessee-company. In the said cases, we have also taken a view that the CIT (A) erred in issuing the directions to the AO for invoking the provisions of section 115-O of the Act on the reasoning that the CIT (A) does not have such powers to do so. Further, considering the principles of strict interpretation, the deemed provisions of section 2(22)(a) of the Act are required to be read as it is and therefore, the interpretation of passing of the indirect benefit ultimately to the members of Shroff family through the holding companies was unsustainable. Considering the above, we find, relevant paras from the above referred orders of the Tribunal (supra) in the cases of Ultima Search and Shroffs (Jaidev R. Shroff; Rajnikant D. Shroff; Vikram R. Shroff; Sandra R. Shroff) are found significant to be incorporated in the following paras: -
Relevant paras from order of the Tribunal in the case of Ultima Search read as under:-
“11. We have also perused the relevant recitals and the clauses from the „transfer agreement‟ and find relevant to extract the same as under: Recitals: “A...... B. transferors on their own volition desires to transfer the above Equity Interests to Transferee without consideration in terms of money or kind..” Clause 1.1 reads as under,- 1.1 Contribution of equity interests. Upon the terms and subject to the conditions set forth in this Agreement as of (4.pm) on the Effective Date...Transferors hereby voluntarily transfers and conveys irrevocably and forever, the Equity interests to Transferee without consideration and Transferee hereby accepts from Transferors the Equity interests”;
11.1. From the above, we find that the Equity interests are transferred by the assessee without consideration and it was a voluntary act. AO has not brought any adverse material against the above to conclude that the transactions involve the payment of consideration to the firm and the transfer of shares is not a voluntary act. In that sense, we find that the impugned Agreement dated 26.2.2010 has the required ingredients of the „gift‟ agreement. This view gets strength from the finding of Honble Ahmedabad High Court in the case of M/s. Prakriya Pharmachem vs. ITO in Special Civil Application No.20492 of 2015, dated 18.1.2016 and the related transfer of shares constitutes an exempt transfer under the provisions of sectin 47(iii) of the Act. We have also perused the order of Honble Bombay High Court in the case of the recipient company NECL reported in 371 ITR 280 during the Stay Petition related proceedings and find that the assessee‟s claim of gift agreement is prima facie approved. The relevant para 5 and 6 of the said judgment is extracted as under: “5. The AO in the assessment order held that the transfer agreement is purely in the nature of “transfer” as it does not mention the word „gift‟. He rejected the contention that the transfer of the shares was by way of „gift‟ as the agreement is titled as Transfer Agreement”. He observed that if it had been a “gift“ it would have been a gift deed”. 6. The petitioner has more than just a strong prima facie vase in this regard. The title given to a document is not determinative of its true character. The purport of the document must be ascertained on a consideration of the contents thereof. The respondents do not deny that no consideration in the terms of money or money’s worth was paid by the petitioner to the transferors.” 12. Regarding the arguments relating to if the gift transaction is done only between the biological persons and not the firms and the companies, we find the arguments and judgments relied by the Ld Counsel of the assessee are relevant and consequently, the conclusions of the CIT(A) are required to be dismissed. The decision of the Tribunal in the case of DP World (P) Ltd 140 ITD 694 and KDA Enterprises P Ltd 68 SOT 349 are relevant for the legal proposition that the gifts transferred by the Indian company to the foreign company constitutes a valid gift and the transfer is an exempt transfer u/s 47(iii) of the Act. Further, we accept the Counsel‟s proposition that share transfer by way of gift is allowable u/s 56(2)(viia) & 56(2)(viib) of the Act. 13. Similarly, we analyse the provisions of section 28(iv) of the Act. These provisions imply the arising of any benefit / perquisite to the assessee-firm. On facts of the present case, we find, there is no such any benefit or perquisite to the assessee firm by transfer of shares of UPL and UEL to NCPL. Assessee is the transferor and gained nothing in the process. It is the finding of the CIT (A) that the assessee did not receive any consideration. 14. Considering the above, we are of the opinion, there is no case for invoking the provisions of the said sections in the present case. Accordingly, the order of the CIT (A) is required to the reversed. Thus, the grounds no. 2 to 4 raised by the assessee are allowed.” 7. Relevant paras from order of the Tribunal in the case of Shroffs read as under:-
“13. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. The assessee is aggrieved with the conclusions of the CIT (A) relating to the invalid invoking of various provisions of section 2(22)(a); section 115-O; section 56(2)(vii) and colourable device related issues. To list of the various aspects discussed by the CIT(A) in his order and according to him the share transfer transaction constitutes ,-(a) a transaction of transfer of shares of UPL/UEL is chargeable to tax u/s 2(22)(a) of the Act; (b) the donor companies where the shroff family members are the share holders need to be taxed on the benefit granted to them u/s 115-0 of the Act; (c) the said benefit also attracts the provisions of section 56(2)(vii) of the act; and (d) eventually whole scheme of transfer of shares of UPL/UEL to NCPL and ultimately to the holding company constitutes a case of colourable device. In the process, CIT(A) rejected the assessee‟s claim of „transfer agreement‟ as „gift agreement‟ and eventually rejected to applicability of the provisions of section 47(iii) which considers such gift transfer as „exempt transfer‟ for the purpose of capital gains. However, CIT(A) granted relief to assessee on holding that it is case of transfer without consideration. He however, confirmed the addition for the other reasons narrated above. We shall now deal with each of them in the succeeding paragraphs of this order. 14. Applicability of the provisions of clause (a) of section 2(22)/section 115-0 of the Act: In this regard, Ld Counsel for the assessee brought our attention to the relevant provisions and submitted that the assessee is an individual and therefore, the question of distribution of dividend does not arise for invoking the provisions of clause (a) of section 2(22) of the Act. 15. After hearing both the parties, we have perused the relevant provisions of section 2(22)(a) of the Act and the same reads as under:- Sec. 2(22) " dividend" includes- (a) any distribution by a company of accumulated profits, whether capitalised or not, ............ to its shareholders of all or any part of the assets of the company;
Considering the above arguments of the Ld AR and the plain reading of the above extracted provisions, we find, the conclusion of the CIT (A) constitutes far stretched one and legally unsustainable. These deemed provisions are required to be interpreted strictly and for this proposition we rely on the SC judgment in the case of C P Sarathy Mudaliar (supra). As such, there is no dispute on the facts and the assessee- individual belonging to the shroff family are not the share holders in the NCPL during
the year under consideration. Of course, he was never so. Even if he were a shareholder in NCPL, where is benefit to the assessee, when the donor and supposed ultimate beneficiary is one and the same. For example, Sri Jaidel R Shroff, Vikram R shroff or Sri Rajnikanth D Shroff are the donors of shares to NCPL. The alleged ultimate beneficiaries of the impugned transaactions are again the same individual of the shroff family. We don‟t find any benefit accrued to them in any manner. Therefore, the analysis of the provisions of clause (a) of section 2(22) of the Act reveals that the same are inapplicable to the share transaction under consideration. In our opinion, the CIT (A) has randomly applied these provisions invalidly and without having any strength of explicit legal provisions. There are no provisions for taxing the so called indirect benefit accrued to the shareholders of the company and provisions of section 2(22)(e) and the that of the section 64 helps the assessee. Therefore, we direct the AO to delete the addition on this account. 17. In our view, further, we find Ld CIT (A) exceeded his jurisdiction in directing the AO to tax the donor companies u/s 115-O of the Act, which may be consequent one, but they are not the subject matter of appeals before him. Therefore, we order for deletion of such direction. Therefore, further, we direct the AO to delete the addition on this account.” 8. Further, we proceed to interpret the provisions of section 2(22)(a) of the Act and find the said section provides for inclusive definition of the word “dividend”. The situations mentioned in clauses (a) to (e) of section 2(22) of the Act are some of the situations, which attracts these provisions subject to exceptions provided therein. It is a settled legal proposition that the provisions of section 2(22) constitutes “deemed dividend” and must receive a „strict interpretation‟ [CIT vs Martin Burn Ltd (136 ITR 805) (Cal)]. The judgment of the Hon‟ble Apex Court in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 (SC) is relevant for the proposition that every receipt by the shareholder is not a „dividend‟. The expression “accumulated profits” appearing in the above clause-(a) to section 2(22) of the Act is required to be understood in a sense of „commercial profits‟, PK Badiani v. CIT [1976] 105 ITR 642 (SC). It is also a settled proposition in law that the expression „release of capital assets‟ is not attracted in factual matrix where certain bogus shares are issued without any consideration by the company to the shareholders [CIT vs. Dalmia Investment Company Limited [52 ITR 567 (SC)]. It implies transfer of shares of a company ipso facto does not amount to release of any capital asset of the company as it only creates certain rights for the shareholders (21 ITR 12) (Bom). Therefore, the transfer of shares of UPL and UEL owned by the assessee-company to NCPL is outside the scope of the provisions of clause-(a) of section 2(22) of the Act. As such, this is the case where the assessee transferred such shares free of consideration to the NCPL which does not have any shares in the assessee-company.
8.1. Considering the above settled position of the issue, we are of the opinion that the transfer transaction of shares of UPL & UEL by the assessee-company to the NCPL constitutes the „gift transaction‟ and also they are outside the scope of section 2(22)(a) of the Act. Further, the CIT (A) is not justified legally to issue certain directions to the AO to apply the provisions of section 115-O of the Act in respect of NCPL as the same is not before the CIT (A). Consequently, the grounds no.4 and 5 raised by the assessee are required to be allowed. We order accordingly. Thus, Grounds no.4 and 5 raised by the assessee are allowed. 9. That leaves the issues relating to (i) the disallowance of disallowance u/s 14A; (ii) the addition on account of AIR reports and (iii) disallowance on account of write off of advance of Rs. 5 lakhs. We shall adjudicate each of the issues in the succeeding paras of this order. 10. Ground no.1 relates to the disallowance u/s 14A of the Act. Briefly stated relevant facts of the case are that the assessee claimed exempt income of Rs. 26,60,036/- u/s 10(34) of the Act. Assessee disallowed a sum of Rs. 1,27,451/- u/s 14A of the Act. During the assessment proceedings, unsatisfied with the reply of the assessee in this regard, AO invoked the provisions of Rule 8D and disallowed sum of Rs. 2,07,144/- ie Rs. 24,077/- under Rule 8D(2)(i); Rs. 21,380/- under Rule 8D(2)(ii) and finally Rs. 1,61,687/- under Rule 8D(2)(iii). After reducing the amount offered by the assessee suo moto amounting to Rs. 1,27,451/-, AO added the balance amount of Rs. 79,693/- (ie Rs. 2,07,144/- – Rs.1,27,451/-). Matter travelled to the first appellate authority. 11. During the proceedings before the first appellate proceedings, assessee made various submissions and relied on various decisions. After considering the submissions of the assessee, for the reasons given in paras 5.3.1 to 5.3.3 of his order, CIT (A) confirmed the addition of Rs. 79,693/- u/s 14A of the Act. Aggrieved with the said decision of the CIT (A), assessee is in further appeal before the Tribunal. 12. During the proceedings before us, Ld Counsel for the assessee reiterated the submissions made before the lower authorities.
On the other hand, Ld DR for the Revenue relied on the orders of the Revenue Authorities. 14. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties and on perusal of the orders of the Revenue Authorities as well as the submissions made before us, we find, there is no dispute so far as the disallowance under Rule 8D(2)(i) is concerned. Whereas, regarding the attracting the provisions of clause-(ii) and (iii) of Rule 8D(2) of IT Rules, 1962, Ld Counsel for the assessee was critical of the CIT (A)‟s conclusions in para 5.3.2. On perusal of the said para 5.43.2 of the CIT (A)‟s order, we find, the CIT (A) has not honoured the legal proposition relating to the transaction relating to presumption said by the jurisdictional High Court vide its judgment in the case of CIT vs. Reliance Utilities and Power Ltd (313 ITR 340) (Bom.). Considering the same, we are of the opinion that the same requires reconsideration. In case, if interest free funds are found available, the presumption of use of interest free funds for investment in the dividend yielding shares is required to be honoured. We order AO accordingly. As such, no case is made out by the Ld Counsel for the assessee that the Assessing Officer erroneously applied the provisions of clause-(iii) of Rule 8D(2) of the IT Rules, 1962. Therefore, the order of the CIT (A) on this issue stands. Thus, Ground no.1 raised by the assessee is allowed in the above mentioned manner. 15. Ground no.2 relates to the addition in respect of transactions reported in AIR qua the interest income of Rs. 14,797/-. In this regard, it is the contention of the assessee that the said income is offered in the return of income in the AY 2011-12 and the same is rightly taxed by the AO. Considering the same, the addition made by the AO and confirmed by the CIT (A) is required to be deleted ads if in case of double taxation in both the AYs. Relevant facts and conclusions of the CIT (A) in this regard are given in paras 6.1 to 6.3 of the CIT (A)‟s order. As per the assessee, interest income accrued from the Bank of Baroda is Rs. 4,53,453/- and the same is credited to the P & L Account on the basis of the entries appearing in the bank statements. However, in Form No.26AS, an amount of Rs. 4,68,250/- was reflected. Assessee claims that as per the principle of mercantile system of accounting, which is consistently followed by the assessee, an excess amount was offered. Assessee
further submitted that when the amount shown in Form No.26AS is lesser, in such cases the addition of Rs. 14,797/- is uncalled for. The relevant written submissions at paras 2.7 and 2.8 are extracted as under:- “2.7. Further, there may be innumerable reasons beyond the control of assessee such as wrong deduction of tax, non-deduction of tax, deduction on account of reimbursement of expenses, wrong filing of AIR etc due to which the amounts of income as per the AIR may nor tally with those declared by the assessee. Accordingly, no addition ought tobe made unless any cogent evidence has been brought on record by the Assessing Officer to substantiate that the assessee has received an amount higher than what has been declared by him. 2.8. In this regard, reliance is placed on the following decisions: (a) S. Ganesh Vs. ACIT (ITA No.527/Mum/2010) (ITAT Mum) (URO) affirmed in CIT vs. S. Ganesh [2016] 88 CCH 469 (Bom.) (b) Crescent Chemicals vs. ITO (ITA No.1355/Mum/2010) (ITAT Mum) (Unreported)” 16. After going through the reasoning given by the CIT (A) in para 6.3 of his order and the written submissions extracted above, we are of the opinion, the addition lacks in merits. Accordingly, we allow this part of the ground in favour of the assessee. Thus, Ground no.2 raised by the assessee is allowed. 17. Ground no.3 relates to the disallowance in respect of advances written off. Giving brief facts in this regard, Ld Counsel for the assessee submitted that the said amount was advanced by the various companies, which were merged with the assessee-company conclusively. Consequently, their advances have become the advances of the assessee-company. Assessee wrote off such advances in its books of account of the year. The same is claimed as allowable deduction considering the fact relating to the claim of merger of the said companies viz Sovereign Holdings Private Limited; Shivpada Holdings Private Limited and Rakshak Chemicals Private Limited with the assessee-company w.e.f 1.4.2002 as per the order of the Bombay High Court sanctioning the Scheme of Amalgamation (para 7.3.2 of the CIT (A)‟s order). It is the contention of the AO and the CIT (A) that the assessee failed to file any documentary evidence to support that the said transaction fulfils the conditions specified u/s 36(1)(vii) read with section 36(2) of the Act. For the sake of completeness of this order, we extract the relevant lines from para 7.3.2 of the CIT (A)‟s order on page 12 and the same reads as under:- “7.3.2........No documentary evidence has been submitted so as to bring out the nature and purpose of aforesaid advances and to show that these advances had been made in the ordinary course of business. Since, the appellant has failed to furnish any concrete evidence to demonstrate that the aforesaid advances had been given in the normal and regular course of business of said companies and that said amount had been taken into account in computing the income of said companies / the appellant for earlier AYs. I do not find any error or infirmity in the action of the AO in disallowing the appellant‟s claim for deduction of advances written off amounting to Rs. 5,00,000/- u/s 36(1)(vii) r.w.s 36(2) of the Act and the said disallowance made by the AO is, therefore, confirmed. Ground no.4 taken up by the appellant is accordingly dismissed.”
17.1. Further, we have perused the written submissions filed by the assessee and find paras 3.6 to 3.11 are relevant. Assessee relied on the judgment of the Hon‟ble Supreme Court judgment in the case of CIT vs. T. Veerabhadra Rao (155 ITR 152) and the relevant paras from the said judgment are extracted as under:-
“7.......If a business, along with its assets and liabilities, is transferred by one owner to another, we see no reason why a debit so transferred should not be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, it seems difficult to accept that the same right should not be recognised in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business be regarded as belonging to the new owner................ 8. It seems to us that even if the debt had been taken into account in computing the income of the predecessor-firm only and had subsequently been written off as irrecoverable in the accounts of the assessee, the assessee would still have been entitled to a deduction of the amount written off as a bad debt. It is not imperative that the assessee referred to in sub-clause (a) must necessarily mean the identical assessee referred to in sub-clause (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of sub-clause (b). The successor assessee, in effect, steps into the shoes of his predecessor.”
Further, it is evident that the Revenue disallowed the claim of the assessee for want of evidence that the said advances are given in ordinary course of business of that merged companies. Para 7.3.2 of the CIT (A) order is relevant in this regard. Therefore, we are of the opinion, the matter is required to be remanded to the file of the AO for fresh adjudication. We order accordingly and direct the AO to examine the issue in the light of the above said precedents and facts of the case. Further, in our view, the assessee is under obligation to explain the fulfilment of the conditions specified in the said conditions. Thus, Ground no.3 raised by the assessee is dismissed. 19. In the result, appeal of the assessee is partly allowed for statistical purposes.
II. (In the case of Uniphos International Ltd)
This appeal field by the assessee on 14.8.2015 is against the order of the CIT (A)-54, Mumbai dated 31.3.2015 for the assessment year 2010-2011. In this appeal assessee raised the following grounds which read as under:- 1. “Disallowance u/s 14A as per Rule 8D: Rs. 2,20,243/- 1.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in disallowing an amount to the extent of Rs. 2,20,243/- u/s 14A by applying Rule 8D as expenditure incurred for earning exempt income in respect of shares held as stock-in-trade. 1.2. Without prejudice to the above ground, the CIT (A) erred in not appreciating that no adjustment can be made to the book profits computed u/s 115JB in respect of disallowance made u/s 14A as per Rule 8D. 2. Disallowance of purchases from M/s. K.C. Enterprises: Rs. 6,80,000/- 2.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in restoring back the ground in respect of disallowance of purchases made from M/s. K.C. Enterprises amounting to Rs. 6,80,000/-. 2.2. On the facts and in the circumstances of the case and in law, the appellant submits that CIT (A) ought to have deleted the aforesaid addition since he has no power to set aside any matter as per the provisions of section 251(1a) of the Act. 3. Taxability u/s 115-O: 3.1. On the facts and in the circumstances of the case and in law, CIT (A) erred in giving directions to the AO to levy dividend distribution tax u/s 115-O without issuing a cause notice and consequently the principles of natural justice by not providing an adequate opportunity of being heard. 3.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that the appellant is liable to pay dividend distribution tax u/s 115-O of the Act in respect of the shares transferred to NCPL as deemed dividend u/s 2(22)(a) of the Act. 3.3. On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that by gifting the shares of UPL and UEL by various donor companies to NCPL there was an indirect disguised distribution of accumulated profits by the donor companies to their shareholders / members of the Shroff family which is covered u/s 2(22)(a) of the Ac. 4. Gift of UPL and UEL shares is a colourable device: 4.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO in holding the aforesaid transaction as a colourable device to avoid tax by applying the decision of the Supreme Court in the case of McDowell & Co Ltd (154 ITR 148). 4.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in making various observations which are factually incorrect and contrary to the facts available on record which the appellant carves leave to elucidate at the time of hearing, leading to perverse finding that the aforesaid transaction as a colourable device to avoid tax. 5. Addition as per 26AS: Rs. 3,405/- On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in taxing an amount of Rs. 3,405/- being reconciled difference in respect of interest received from Tork Fasteners (India) Private Limited.”
In this appeal, assessee raised five main Grounds in toto. The issues involved in these grounds ie viz (i) disallowance u/s 14A; (ii) taxability u/s 2(22)(a) and u/s 115-O of the Act and (iii) gift of UPL and UEL shares is colourable device are identical to that of the ones we have already adjudicated while dealing with the appeal ITA No.4663/M/2015 in the above paras of this order. Considering the commonality of the issues raised as well as the facts and evidences, we are of the opinion, our adjudication given therein (in the case of Bloom Packaging Private Limited) squarely applies to the Grounds no.1, 3 and 4 of the instant appeal too. Accordingly, the said grounds no.1, 3 and 4 are allowed as above. That leaves Grounds no.2 and 5 for our adjudication. 22. Ground no.2 relates to the disallowance of purchases from M/s. K.C. Enterprises amounting to Rs. 6.8 lakhs. In this regard, it is the argument of the assessee that CIT (A) erred in setting aside this issue to the file of the AO when the CIT (A) does not have such powers under the provisions of section 251 of the Act. Relevant facts in this regard are that the assessee claimed to have made purchases from M/s. K.C. Enterprises amounting to Rs. 6.8 lakhs. The information about the said K.C. Enterprises is that it constitutes „hawala party‟ which does not conduct genuine business transactions. In response, assessee filed written submissions dated 28.1.2013 wherein it was stated that the transactions are genuine and the payments are made involving the banks. It was further submitted that the said payment made vide cheque no.156059 dated 26th March, 2010 and the copy of the bank statement was furnished. It was also mentioned that the said purchases from M/s. K.C. Enterprises were sold with Auto System Rotocure Moulding Machine and other accessories and the same are accounted for in the books of accounts. Assessee also furnished relevant information involving VAT and tax invoices etc. The said explanation was rejected and the AO proceeded to make addition on this account as per the given in para 5.7 of his order. Matter travelled to the first appellate authority. 23. During the proceedings before the first appellate authority, after considering the submissions of the assessee, CIT (A) set aside the matter to the file of the AO with a direction to verify / examine the assessee‟s claim that the said purchases were lying in closing stock as on 31.3.2010 as well as the evidence furnished by the assessee to prove the genuineness of purchases from M/s. K.C. Enterprises. Contents of para 6.3.2 of CIT (A)‟s order are relevant in this regard. Aggrieved, assessee is in appeal before the Tribunal. 24. During the proceedings before us, Ld Counsel for the assessee reiterated the submissions made before the lower authorities. Further, Ld AR submitted that since all the evidence was before the CIT (A) and he examined the same. It is the submission of the Ld AR, since the purchased items were lying in closing stock as on 31.3.2010, for which evidence was produced before the first appellate authority, the addition made in this regard is required to be deleted. 25. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. After hearing both the parties and on perusal of the facts and written submissions of the assessee, we find, it is an undisputed fact that the items purchased were already partly sold and partly shown in the closing stock account. Relevant documents and bank transactions are undisputed by the Assessing Officer. There is no direct evidence suggesting the hawala nature of the transactions. The GP related errors were also not identified. In these circumstances, we are of the opinion the directions of the CIT (A) who does not have power of setting aside the matter are unsustainable in principle. As such, there is no case of making additions by the AO on this account. Considering the above factual matrix of the case, we are of the opinion, ground no.2 raises by the assessee is required to be allowed. We order accordingly. 26. Ground no.5 relates to the addition of Rs. 3,405/- being unreconciled difference in respect of the interest received from a company. Briefly stated relevant facts in this regard are that during the year assessee earned interest income of Rs. 78,31,319/-, which was credited to the P & L Account, and the same was offered to tax. During the course of assessment proceedings, assessee was asked to reconcile the details of TDS with return of income. In response, assessee furnished the relevant details vis-a-vis the amount reported in Form No.26AS. Considering the difference in the interest amount offered in the return of income qua the amount reported in 26AS, AO proceeded to disallow a sum of Rs. 3,405/-. Aggrieved, assessee carried the matter in appeal before the first appellate authority. After considering the submissions of the assessee, CIT (A) opined that the said amount
constitutes excess amount what is appearing in the Form No.26AS. Accordingly, CIT (A) confirmed the addition made by the AO. Again aggrieved with the said decision of the CIT (A), assessee is in further appeal before the Tribunal. 27. After hearing both parties and perusal of the facts, we find, the issue involved in this ground is identical to that of Ground no.2 of the appeal ITA No.4663/M/2015, which is adjudicated by us in the above paragraphs of this order. Considering the commonality of the issue involved, our adjudication given in Ground no.2 of the said appeal (supra) in the case of Bloom Packaging Pvt Ltd squarely applies to the instant ground too. Considering the same, Ground no.5 raised by the assessee is allowed. 28. In the result, appeal of the assessee is allowed. 29. Conclusively, appeal ITA No.4663/M/2015 is partly allowed for statistical purposes and appeal ITA No.4676/M/2015 is allowed. Order pronounced in the open court on 19th October, 2016. (AMIT SHUKLA) ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक 19.10.2016 व.नन.स./ OKK , Sr. PS आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A)- 3. 4. आमकय आमुक्त / CIT ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, 5. ITAT, Mumbai 6. गार्ड पाईर / Guard file. सत्मावऩत प्रनत ////
आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt.