M/S. HOOGHLY MILLS PROJECTS LTD.,KOLKATA vs. DCIT, CENTRAL CIRCLE - VII, KOLKATA, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal has been filed by the assessee relating to Assessment Year 2006-07 against the order of passed by Commissioner of Income Tax (Central-I), Kolkata u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide M.No. CIT (C-I/263/Hooghly Mills Proj.Ltd./Tech/10-11/Kol/113202-04 dated 08.03.2011. Assessment was framed by DCIT, CC-VII, Kolkata u/s 143(3) of the Act. Grounds raised by assessee per its appeal are as under:- “1. For that in view of the facts an circumstances order u/s. 263 made by CIT (Central-I), Kolkata, is wholly bad, illegal and void abintio both of points of law as well as facts and for that in view of the fats and circumstances order u/s. 143(3) having been made by the AO after obtaining all necessary details and particulars and after fully satisfying himself on all the issues and the A.O

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 2 having taken one of the possible views the order of the A.O cannot be said to be erroneous in as much as prejudicial to the interest of revenue and in view of the facts and circumstances such order u/s. 263 is liable to be cancelled / set aside.

Shri S. Jhajhoria, Ld. Authorized Representative appeared on behalf of assessee and Shri Radhey Shyam, Ld. Departmental Representative appeared on behalf of Revenue.

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 3 disallowances to the total income of assessee. Ld. CIT under section 263 of the Act observed certain defects in the assessment order passed under section 143(3) of the Act as detailed under :- 1) Assessee was holding the beneficial share of M/s Mega Resources Ltd. (MMRL for short) having more than 10% of the voting rights and accordingly the provision of sec. 2(22)(e) were attracted on the amount of loan received by assessee from MMRL. The Assessing Officer at the time of assessment proceedings has not applied the provision of Sec. 2(22)(e) of the Act. The AO has allowed the deduction of ₹1.17 crores towards employees 2) contribution under the Family Pension Fund/PF fund which is in contravention of the provision of Sec. 36(1)(va) of the Act. 3) The AO has not disallowed the interest payment of Rs.6.30 lakhs paid to M/s Methoni Tea Ltd. (MMTL for short) though the payment was made without deducting the TDS u/s. 194A of the Act r.w.s. 40(a)(ia) of the Act. 4) The borrowed fund was utilized in the capital work-in-progress forming part of fixed asset but the AO has not disallowed the expenditure on the borrowed fund used in such capital work-in-progress. In view of above the ld. CIT issued show cause notice for holding the order of the AO as erroneous and prejudicial to the interest of Revenue. The assessee makes the submission as under :

a) The provision of Sec. 2(22)(e) of the Act is not applicable to the assessee as it holds share of MMRL to the tune of 10,99,300 equity shares which is less than 10% of the total shares of MMRL i.e. 1.20 crores equity shares. The assessee submitted a letter from MMRL in support of its contention. The assessee further submitted that the provision of Sec. 2(22)(e) will be attracted only when it has registered shareholding in its own name exceeding 10% of equity shares of MMRL. The assessee further submitted that in its own case for AY 2005-06 on the identical issue the Hon’ble ITAT has decided issue in its favour.

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 4 b) The assessee submitted that the payment has actually been made for Rs.1.70 crores in the year under consideration and therefore it is allowable deduction in terms of Sec.43B of the Act. The assessee further submitted that in its own case for A.Y. 2005-06 and similar issue was decided by the Hon’ble Tribunal in its favour; c) The assessee submitted that the TDS was not deducted on the payment of Rs.6.03 lakhs because the party has issued certificate for non- deduction of TDS; d) The assessee submitted that no part of borrowed fund has been utilized in capital work-in-progress. Therefore, the question of making disallowance of the interest expense does not arise. The assessee made the investment in the capital work-in-progress out of its own and borrowed fund. The issue of the interest on the borrowed fund was duly considered by AO at the time of assessment and accordingly, it was allowed by AO. The assessee further submitted that in its own case for AY 2005-06 AO did not make any disallowance after verifying on the facts of the case.

2.1 However, ld. CIT in his impugned order passed u/s. 263 disregarded the claim of assessee by observing as under:- “I have carefully perused the submission of the assessee and the relevant documents. The assessee has submitted that the issue regarding applicability of Sec. 2(22)(e) may be set aside to the AO for verification. In view of the aforesaid fact the assessment order is set aside on this issue.

As far as submissions regarding other issues are concerned, these have no merit. The case laws relied upon are not applicable because the facts are distinguishable. As per tax audit report and assessee letter dated 12.12.2008 the payment of employee’s contribution towards family pension fund and PF was made out of accumulated liability. The payment was not made on or before the due date as per Sec. 36(1)(va) of the IT Act hence was disallowable. Since the AO did not disallow it, the assessment order has become erroneous and prejudicial to the interest of revenue. The order is set side on this issue also.

The provision of Sec. 40(a)(ia) was applicable in respect of interest paid to M/s Methoni Tea Ltd. Since the AO failed to do so the assessment order has become

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 5 erroneous and prejudicial to the interest of revenue on this issue also. Hence, the assessment order is set side on this issue also.

It is apparent from, the audit accounts and notes on account that no portion of interest paid on loans has been capitalized in the capital working progress of fixed assets. Capital working progress brought forward was at Rs.82489922/- CWIP c/f is Rs.2,42,21,556/-. Apparently, loan funds were utilized for CWIP also. But no such interest has been disallowed as capital expenditure in the assessment. Hence the assessment order on this issue is also erroneous and prejudicial to the interest of the revenue.

In view of the discussion in the preceding paragraph it is held that the order passed u/s. 143(3) of the IT Act is erroneous and prejudicial to the interest of revenue. Hence, the order is set aside u/s. 263 with a direction to the Assessing Officer to complete it as per law, after affording proper opportunity of being heard to the assessee.”

Being aggrieved by this order of Ld. CIT assessee came in appeal before us.

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 6 the decision of Hon'ble jurisdictional High Court in assessee’s own case and same is allowable as per the provision of Se. 43B of the Act. In rejoinder, Ld. DR submitted that the issue has not been examined by AO and therefore it should be restored back to the file of AO for fresh adjudication.

With regard to disallowance of interest of ₹ 6.30 lakh on account of non- iii) deduction of TDS Ld. AR submitted that the payee has included the interest income in its receipts and has offered the same to tax while filing IT return. Therefore, Ld. AR stated that assessee cannot be held as defaulter in view of the First proviso to Sec. 201(1) r.w.s. Second proviso to Sec. 40(a)(ia) of the Act. On the other hand, Ld. DR submitted that issue has not been examined by AO whether the receipt has been shown by the payee in its books of account and offered to tax. In regard to this, Ld. DR prayed before the Bench to restore the issue back to the file of AO for further examination.

iv) With regard to the issue of interest on the borrowed fund to the capital work-in-progress Ld. AR submitted that no borrowed fund has been utilized in the capital work-in-progress and entire amount invested in the capital work-in-progress was out of internal accruals, share capital and reserve of the company. The AO has not disallowed the same in his assessment order because the issue and the fact of the case were duly examined by him. Even in the earlier Assessment year i.e., 2005-06 no such disallowance was made by AO. Further, Ld. AR submitted that AO has taken a possible view for not making any disallowance of interest towards the capital work-in-progress. Ld. AR also submitted that during the year no-expenditure was incurred towards the capital work-in- progress. Therefore, no such disallowance is warranted and accordingly

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 7 the order passed by AO cannot be held erroneous and prejudicial to the interest of revenue. On the contrary, Ld. DR vehemently relied on the order of Ld. CIT and he left issue to the discretion of the Bench.

’41. In the light of the above discussion, the questions referred to the Special Bench are answered as follows:

On the first question:

Deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder.

On the second question:

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 8

The expression ‘shareholder’ referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of section 2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions of section 2(22)(e) will not apply.’

From the above facts and circumstances the issue is very clear that the assessee is holding registered shares to the tune of 10,99,3000 in Mega Resources Ltd. and not 13,99100 as alleged by the revenue. No doubt the total shareholding of the assessee in Mega Resources Ltd. is to the tune of 13,99,100 but registered shareholders are to the extent of 10,99,300. We have to see only the registered shareholding and not the beneficial shareholder. For this, the assessee has filed evidence before the lower authorities and even before us now. In such circumstances, this issue being covered by the Special Bench of this Tribunal, Mumbai Bench in the case of Bhaumik Colour P. Ltd., supra. Respectfully following the same, we delete the addition and reverse the orders of the lower authorities.”

We also find that similar issue was also raised in AY 2006-07 where the Tribunal in assessee’s own case has decided the issue in favour of assessee and against the Revenue in ITA No.360/Kol/2014 dated 31.05.2016 and relevant extract is reproduced below:- “19. In the present case, the case of the assessee was that the interest paid to M/s Methoni Tea Ltd on unsecured loan and debited to the P/L account and did not deduct the tax U/Sec 194A of the Act. These facts are not disputed by the either of the lower authorities as it can be seen from the record. Therefore, the question before us whether the assessee could be treated as defaulter in view of the principle enunciated by the Hon'ble High Court of Delhi supra, we hold that the assessee cannot be a defaulter in view of the first proviso to section 201(1) r/w second proviso to section 40(a)(ia) of the Act. As opined by the Hon'ble High Court of Delhi supra that the second proviso to Section 4(a)(ia) is declaratory and curative in nature having retrospective effect form 01-04- 2005 and the case on hand being for A.Y 2005-06, in our view, the matter shall go back to AO. Therefore, we remand ground no. 3 to AO for examination and for verification of the required details of the resident i.e. M/s Methoni Tea Ltd and direct the assessee to cooperate in completing the assessment. Ground no. 3 raised by the assessee is allowed for statistical purposes.”

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 9 Respectfully following the precedents in assessee’s own case (supra) we find that the impugned revision order unsustainable in law, and we, therefore cancel the same. The issue gets the relief accordingly. AO is directed accordingly.

With regard to disallowance of ₹1.70 crores on account of employees b) contribution u/s. 36(1)(va) of the Act we find that this issue has already been decided by the Hon'ble jurisdictional High Court in assessee’s own case in its favour in ITA No.173 of 2011 with reference to GA No. 1763 of 2011 dated 30.09.2011 wherein the relevant extract is reproduced below:- “The only question that arises for determination in this appeal is whether the Tribunal below was justified in deleting the addition made by C.I.T.(Appeals) in respect of the amount of contribution to provident fund made by the assessee after due date prescribed under Employees Provident Fund Act and Rules made thereunder but before the date of filing of the return. It appears that the aforesaid question has now been settled by the Supreme Court in the case of Commissioner of Income-tax vs. Vinay Cement Ltd. reported in 2007 (213) CTR 268 (SC) wherein it has been held that if the amount has been deposited before filing of return, the same is entitled to deduction under section 43B of the Income-tax Act.

We, therefore, find that the Tribunal appeal rightly deleted the said addition made by the C.I.T.(Appeals. No substantial law being involved in this appeal, we summarily dismiss this appeal.

In view of the dismissal of the appeal itself, the connected application has become infructuous and the same is disposed of accordingly.”

We also find that Ld. CIT(A) in assessee’s own case in AY 2007-08 has also deleted the addition made by Assessing Officer having reliance in the case of CIT vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC). We also rely in assessee’s own case for AY 2005-06 in ITA No.913/Kol/2010 dated 24.09.2010 where the issue was decided in favour of assessee and relevant extract of the order is reproduced below:- “10. We observe that the AO on similar facts and considering the order of Hon'ble Calcutta High Court dated 24.03.2004, a copy placed on record, allowed the claim of the assessee of Rs.1,20,00,000 towards payment of arrears of provident fund in the assessment year 2004-05 on the ground that the same were paid before due date of filing of return. We observe that in the assessment year under consideration the assessee made payment of Rs.75,00,000 out of arrears of preceding assessment years towards provident fund in monthly

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 10 instalments before due date of filing of return of income and the AO allowed the same. During the curse of hearing the learned AR submitted that the said payment was made by account payee cheques, duly reflected in the books of account and the question of showing it in the cash flow statement does not arise. We observe that the learned DR could not dispute the above facts save and except submitting that Employees’ share of provident fund could not be allowed if it is not paid within due date as per section 36(1)(va) of the Act. Considering the facts of the case as stated hereinabove, we do not find merit in the contention of learned DR because similar claim of the assessee was allowed by the AO in the preceding assessment year 2004-05 on similar facts as in the assessment year under consideration. Hence, we agree with the learned AR that the AO has taken a consistent and one of the possible view in allowing the claim of the assessee and therefore learned CIT is not justified to invoke his jurisdiction u/s. 263 of the Act in the facts and circumstances of the case. In this regard we consider it prudent to state following observations of ITAT, Bombay Bench as made in the case of Patil Cotton Co. Ltd. reported in 64 ITD 273:- ‘ Admittedly, when there are two views possible in a case then mere fact that the assessing officer has take one view would not render his order as erroneous though it may be prejudicial to the interests of the revenue. For exercising powers u/s. 263 two conditions must be satisfied. Firstly, the order sought to be revised must be erroneous and secondly, by reason of the said order there must be prejudice caused to the revenue. In this case, it may be noted that a prejudice is caused to the revenue by adopting a view favourable to the assessee, yet, the order cannot be said to be erroneous as a possible view in accordance with the decisions of the Tribunal (supra) was adopted by the Assessing Officer. Considering the facts and circumstances of this case, we are of the view that the action of the CIT u/s. 263 was not warranted as the view taken by the AO cannot be said to be erroneous in view of the decisions of the Tribunal quoted elsewhere in this order. We accordingly cancel the orders of the CIT us. 263 and restore the orders of the AO.’

In view of the above, we are of considered view that order of ld. CIT cannot be justified to hold that assessment order is erroneous.”

Respectfully following the precedents as above, we hold that the impugned revision order is unsustainable in law and, we, therefore, cancel the same as unsustainable in law. This ground of assessee’s appeal is allowed.

With regard to disallowance of interest for ₹6.30 lakh on account of non- c) deduction of TDS we concur with the argument placed by Ld. AR that assessee cannot be held defaulter for non deduction of TDS in view of the amended

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 11 provision of Sec. 201(1) r.w.s. 40(a)(ia) of the Act as per the amended provisions of the Act if the payee includes the receipt from assessee in its books of accounts and offers the tax on the same then it cannot be held as defaulter for non deduction of TDS. Therefore the expenses cannot be disallowed on account of non deduction of TDS. In this connection, we rely on assessee’s own case in ITA No. 361/Kol/2014 dated 31.05.2016 (supra) wherein the relevant extract is reproduced below:- “19. In the present case, the case of the assessee was that the interest paid to M/s Methoni Tea Ltd on unsecured loan and debited to the P/L account and did not deduct the tax U/Sec 194A of the Act. These facts are not disputed by the either of the lower authorities as it can be seen from the record. Therefore, the question before us whether the assessee could be treated as defaulter in view of the principle enunciated by the Hon'ble High Court of Delhi supra, we hold that the assessee cannot be a defaulter in view of the first proviso to section 201(1) r/w second proviso to section 40(a)(ia) of the Act. As opined by the Hon'ble High Court of Delhi supra that the second proviso to Section 4(a)(ia) is declaratory and curative in nature having retrospective effect form 01-04- 2005 and the case on hand being for A.Y 2005-06, in our view, the matter shall go back to AO. Therefore, we remand ground no. 3 to AO for examination and for verification of the required details of the resident i.e. M/s Methoni Tea Ltd and direct the assessee to cooperate in completing the assessment. Ground no. 3 raised by the assessee is allowed for statistical purposes.”

Respectfully following the aforesaid precedent we restore the matter back to the file of AO for fresh adjudication after providing reasonable opportunity of being heard to assessee. In case the payee has included the receipts from the assessee in its books accounts for tax purposes then the deduction for the interest expenses are allowed to the assessee. This ground of assessee’s appeal is allowed for statistical purposes.

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 12 fixed asset and balance remained at the end of the year is at ₹2,42,21,556/- only. As we find that there was no disallowance in the earlier year, therefore, we are not inclined to uphold the order of ld. CIT under section 263 of the Act holding the order of the AO erroneous and prejudicial to the interest of Revenue on account of non- allocation of interest to the capital work-in-progress. Besides above, we also find that various courts have held that when there is no direct link between capital borrowed and the interest expenses vis-a-vis investment then it is presumed the investment has been made out of its own fund of assessee subject to the condition that own fund is sufficient enough to cover such investment. In the instant case, Ld. CIT in his impugned order u/s. 263 of the Act alleged that borrowed fund has been invested in the capital work-in-progress and the interest pertinent to such borrowed fund invested in capital work-in-progress has not been allocated to such capital work-in-progress. From the facts, it is clear there is sufficient fund available to assessee for making the investment in the capital work-in-progress. Therefore, we are not inclined to uphold the order of ld. CIT under section 263 of the Act holding the order of the AO as erroneous in so far as prejudicial to the interest of revenue. In this connection, we also rely in the case of CIT Vs. Britannia Industries Ltd. 280 ITR 525 where the Hon’ble Jurisdictional High Court has held as under : “Business expenditure—Interest on borrowed capital—Interest-free advances to others—Advance was made to firm MCAP constituted by relatives of directors of the assessee-company—In view of definition of 'relative’ in s. 2(41), MCAP is not a firm of relatives—Further, concurrent finding has been recorded by CIT(A) and the Tribunal that MCAP supplied substantial quantity of cashew nut kernels to the assessee-company in the regular course of business—Thus, the advance was made for the purpose of business and not for any extraneous consideration or otherwise—Further, the advance was given from the mixed account where the entire sale proceeds were deposited and there were sufficient fund for making the advance—Payment was thus made out of assessee’s own fund and borrowed capital was not siphoned out—Therefore, assessee is entitled to deduction under s. 36(1)(iii) in respect of interest on borrowed funds”

Similarly the Hon’ble High Court of Bombay has decided the issue in favour of assessee in the case of CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340. The relevant extract of the judgment is reproduced below.

ITA No.549/Kol/2011 A.Y.2006-07 M/s Hooghly Mills Projects Ltd. vs. DCIT, CC-VII, Kol. Page 13 “Business expenditure—Interest on borrowed capital—Investment of interest- bearing funds in sister concerns—Contention of the Revenue that the shareholders fund to the tune of over Rs. 172 crores was utilised for the purpose of fixed assets as per the balance sheet as on 31st March, 1999, and thus the same was not available for investment is fallacious—Firstly, it is the balance sheet as on 31st March, 2000, that would be relevant and not the balance sheet as on 31st March, 1999 as the investments were made mainly during January, 2000 to March, 2000—Secondly, Revenue has been unable to point out that the shareholders funds were utilised for the purpose of fixed assets—That apart, both CIT(A) and the Tribunal have recorded a clear finding that the assessee possessed interest-free funds of its own which were generated in the course of the relevant financial year—Besides, funds of Rs. 398.19 crores including Rs. 180 crores of share capital were available with the assessee—Thus, the finding of fact recorded by the CIT(A) and the Tribunal as to availability of interest-free funds cannot be faulted and no part of interest on borrowings can be disallowed”

Respectfully following the proposition laid down by the respective courts, we find that the impugned revision order unsustainable in law and we, therefore cancel the same. The issue gets the relief accordingly.

Sd/- Sd/- (K.Narsimha Chary) (Waseem Ahmed) Judicial Member Accountant Member *Dkp, Sr.P.S �दनांकः- 26/10/2016 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-M/s Hooghly Mills Projects Ltd. C/o.Salarpuria Jajodia & Co.7, C.R.Avenue, Kolkata-72 2. ��यथ�/Respondent-DCIT, CC-VII, 18, Rabindra Sarani, Kolkata-7001 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file.

By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता