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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI RAMIT KOCHAR
आयकर अपील"य अ"धकरण, मुंबई "यायपीठ , मुंबई । IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER आयकर अपील सं /I.TA Nos. 3291,3293,3384 & 3385/Mum/11 ("नधा"रण वष" / Assessment Years: 2004-05 to 2007-08 The ACIT, M/s. Vijaydeep Hotels Pvt. बनाम/ Cent. Cir-29, Ltd., Vs. Aayakar BHavan, Hotel Bawa International, Mumbai-400 020 Nehru Road Ext, Near Domestic Airport, Vile Parle, Mumbai-400 049 आयकर अपील सं /I.TA Nos. 3241 & 3243/Mum/11 ("नधा"रण वष" / Assessment Years: 2006-07 & 2007-08 M/s. Vijaydeep Hotels Pvt. The ACIT, बनाम/ Ltd., Cent. Cir-29, Vs. Hotel Bawa International, Aayakar BHavan, Nehru Road Ext, Mumbai-400 020 Near Domestic Airport, Vile Parle, Mumbai-400 049 "थायी लेखा सं./जीआइआर सं./PAN/GIR No. AAACV 1582D आयकर अपील सं /I.TA Nos. 951 to 953/Mum/2013 ("नधा"रण वष" / Assessment Years: 2005-06 to 2007-08 Shri Karanveer Singh G. The ACIT, बनाम/ Bawa, Cent. Cir-29, Vs. 22, Sahib Guru Angad Aayakar BHavan, Niwas, Mumbai-400 020 Vitthal Nagar Co. Op. Soc. N.S. Road No. 22, JVPD Scheme, Juhu, Vile Parle (E), Mumbai-400 049 "थायी लेखा सं./जीआइआर सं./PAN/GIR No. AEJPB 8856F
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.. (अपीलाथ" /Appellant) (""यथ" / Respondent) अपीलाथ" ओर से/ Appellant by: Shri Rajiv Khandelwal ""यथ" क" ओर से/Respondent by: Shri G.M. Dass
सुनवाई क" तार"ख / Date of Hearing :22.03.2016 घोषणा क" तार"ख /Date of Pronouncement :20.06.2016 आदेश / O R D E R PER BENCH
These are appeals by the assessee and the Revenue against the orders of the Ld. CIT(A) for Assessment Years 2004-05 to 2007-08. All these appeals were heard together and are disposed of by this common order for the sake of convenience as the issues are common.
ITA No. 3291/Mum/2011- A.Y 2004-05 - Revenue’s appeal
The first common issue in Revenue’s appeal is that the Ld. CIT(A) erred in allowing expenditure with regard to unaccounted sales from Avalon Pub though no evidence of these expenses were produced by the assessee.
Brief facts are that there was a search u/s. 132 of the Act on 5.1.2007 in the business and residential premises of Shri Gunnder Singh Bawa, his family members and various family concerns including the office premises of the assessee company. Consequent to the search, notice u/s. 153A was issued to the assessee to file return of income and in response to said notice, assessee filed return of income on 29.8.2007 declaring income at Rs. 93,05,623/- for Assessment Year 2004-05. This income of Rs. 93,05,623/- includes income of Rs. 45,33,960/- which was declared at the time of search
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towards suppression of sales of Avalon Pub. The assessment was completed on 29.12.208 u/s. 143(3) r.w. Section 153A determining the total income of the assessee at Rs. 1,41,19,240/-. While completing the assessment, the Assessing Officer has taken income from unaccounted sales at Rs. 53,34,070/- without allowing the cost of liquor as claimed by the assessee. The assessee claimed Rs. 8,00,110/- being 15% of the Avalon Pub sale of Rs. 53,34,070/- as allowable expenses and reported income of Rs. 45,33,960/-. However, the Assessing Officer rejected the claim of the assessee stating that in the course of assessment proceedings, assessee was requested to produce invoices for liquor purchases which were not recorded in the books of account. But the assessee has not substantiated its claim with evidences. The contention of the assessee was that search party did not find any discrepancy in the stock of liquor and therefore there cannot be any sales of liquor without any purchase of such liquor. It was the contention of the assessee that since there was no discrepancy in the stock then there are bound to be purchases of liquor not recorded in the books of account. Further, it was contended that seized materials contained details of bottles purchased and not accounted and also certain expenses such as payment of salaries and incentives to the Manager, payments made to police, RTO, Municipal Staff and Excise staff etc. It was contended before the Assessing Officer that the expenses claimed by the assessee at 15% towards cost of liquor is very much reasonable and much below the actual expenditure, therefore, should be allowed. This was not accepted by the Assessing Officer and he has treated the entire gross sales of Rs. 53,34,070/- as income of the assessee.
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On appeal, the Ld. CIT(A) directed the Assessing Officer to allow deduction of 15% from the gross sales assessed as income.
The Ld. Departmental Representative before us contended that the expenses claimed by the assessee cannot be allowed in the absence of any evidences produced by the assessee and he further submits that the payments made to police personnel, Excise department, RTO etc are not allowable as expenses u/s. 37(1) of the Act.
The Ld. Counsel for the assessee submits that the claim of 15% of the gross sales from Avalon Pub is towards cost of liquor purchased and sold outside the books of account. The Ld. Counsel for the assessee submits that gross sales have been taxed but without purchases there cannot be sales. The Ld. Counsel for the assessee referring to page 50 to 54 of the Paper book submits that assessee has recorded payments to Vishal Wine shops for purchase of liquor and the liquor bottles purchased were also recorded and therefore the Ld. Counsel submits that the cost of liquor purchased has to be reduced. He further submits that the cost of purchase of liquor which was recorded in the regular books of account was allowed and such cost of liquor in the bar sales stood at the range of 19 to 26% and therefore he submits that deduction claimed by the assessee @ 15% of Pub sales towards cost of liquor is very much reasonable. The Ld. Counsel for the assessee further submits that the entire sale of liquor cannot be taxed and he places reliance on the decisions in the case of Abhishek Corporation Vs DCIT {63 TTJ 651(Ahd)}, Kishore Mohanlal
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Telwala Vs ACIT (64 TTJ 543) and in the case of Agarwal Motors Vs ACIT 68 ITD 407 (Jab).
We have heard the rival contentions, perused the orders of the authorities below and the materials placed before us. The Assessing Officer while completing the assessment considered the entire gross sales of Rs. 53,34,070/- from Avalon Pub as unaccounted sales from liquor. The assessee claimed before the Assessing Officer that 15% of such sales are towards cost of liquor and therefore it should be reduced and only the balance should be considered as sales and accordingly he offered Rs. 45,33,960/- after deducting 15% towards cost of liquor of Rs. 8,00,110/-. The contentions of the assessee that without there being any purchase, there cannot be sale at all and therefore 15% of such sales should be considered as cost of purchase of liquor is rejected by the Assessing Officer. The Ld. CIT(A) considering the submissions of the assessee and the seized documents directed the Assessing Officer to allow deduction of 15% from the Avalon Pub sales towards cost of liquor observing that the seized materials contains the recording of sales and payments were made for purchase of liquor outside the books of account and further on verification of the Foreign Liquor Register (FLR) each and every bottle of liquor sold is accounted for in the FLR. He further observed that if there were any unaccounted sales of liquor, it has to come out of unaccounted purchases of liquor only. The Ld. CIT(A) also held that as per the regular books of accounts, the cost of Bar sales is around 19% to 26% and therefore the deduction claimed by the assessee @ 15% is reasonable and in fact it is less than what has been allowed by the Assessing Officer in computing the income from Avalon Pub as per the regular books of account. Therefore, he
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concluded that 15% of the sales claimed by the assessee towards cost of liquor is very much reasonable. The findings of the Ld. CIT(A) are very much logical and it is commonsense that unless there are unaccounted purchases, there cannot be unaccounted sales. The Revenue is not disputed that in the regular books of account assessee has claimed the cost of Bar sales in the range of 19 to 26% and such cost of sales were allowed as deduction in computing the income. It is also evident from the seized materials that the assessee paid amounts to liquor shops i.e. Vishal wines. This shows that there are unaccounted purchases of liquor. In the circumstances, we find that the claim of the assessee 15% towards cost of liquor is very much reasonable. Thus, we sustain the order of the Ld. CIT(A) in directing the Assessing Officer to allow deduction of 15% from the gross sales made from Avalon Pub towards cost of purchases of liquor. This ground of the Revenue is rejected.
The next common ground in the appeal of the Revenue is that the Ld. CIT(A) erred in deleting the disallowance u/s. 36(i)(iii) out of bank interest paid.
The Ld. Counsel for the assessee at the very outset submits that the assessee himself has disallowed interest of Rs. 10,68,637/-. The Ld. Counsel for the assessee submits that no incriminating materials or documents were found in the course of search suggesting that there is escapement of income and therefore no addition/disallowance can be made towards interest u/s. 36(i)(iii) because addition/disallowance is not based on seized materials. Referring to page-5 at para-4 of the assessment order, the Ld. Counsel for the assessee submits that this table which was extracted
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by the Assessing Officer has been taken from the balance sheet and based on which he came to the conclusion that the bank overdraft was utilized for non business purposes and the assessee advanced interest free loans for non-business purposes and therefore interest u/s. 36(i)(iii) is disallowable. He submits that this conclusion was arrived only on the basis of the materials available in the balance sheet and not from the seized materials. The Ld. Counsel for the assessee submits that since the assessment for the Assessment Year 2004-05 has been completed u/s. 143(3) on 28.12.2008 and this assessment has become final and as on the date of initiation of search u/s. 132, there is no pending proceedings for Assessment Year 2004- 05, the assessment is not abated and in which circumstances there cannot be any addition or disallowance without there being any seized materials. He places reliance on the decision of the Bombay High Court in the case of Murli Agro Products Ltd. (49 taxmann.com 172).
On merits, the Ld. Counsel for the assessee submits that the disallowance of interest is not at all justified for the reason that interest free funds available with the assessee are far excess than the funds utilized for making investments/giving advance to group concerns. He submits that when assessee has sufficient interest free funds available, presumption is that investments/interest free advances given are out of interest free funds available with the assessee. For this proposition, he places reliance on the decision of the Jurisdictional High Court in the case of CIT Vs Reliance Utilities & Power Ltd., (313 ITR 340). The Ld. Counsel for the assessee further submits that the interest free advances made to sister concerns are for the purpose of business only and due to commercial expediency
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and therefore he submits that no disallowance is warranted u/s. 36(i)(iii) of the Act.
In so far as the contention that no addition is possible when no incriminating material is found in the course of search when the assessment already completed is not abated is concerned, the Ld. Departmental Representative submits that there is no appeal by the assessee raising such contentions before this Tribunal and therefore he submits that the contention raised by the assessee is not tenable as there is no appeal at all. Coming to the merits of the case, the Ld. Departmental Representative submits that the assessee has given some of the advance for acquiring properties and therefore the advances given for these properties cannot be said to be for the purpose of business. Thus he submits that the Ld. CIT(A) is not justified in considering these assets as business assets. In reply, the Ld. Counsel for the assessee submits that under Rule 27 of the ITAT Rules, the assessee can support the orders of the Ld. CIT(A) on any of the grounds which are decided against the assessee. He places reliance on the decision of the co-ordinate Bench of the Tribunal in the case of ITO Vs Shri Rupkumar Balchand Rohra in ITA No. 4999/Mum/2010 dated 10.10.2013. On a query from the Bench whether this issue was decided by the Ld. CIT(A), the Ld. Counsel for the assessee submits that the Ld. CIT(A) infact in para-2 of his order discussed this issue and in para-6.3 of his order stated that the contentions and arguments of the assessee will be dealt later but the Ld. CIT(A) has not decided while disposing of the appeal. He submits that the issue has been decided on merits. With regard to the contentions of the Ld. Departmental Representative that some of the advances given for acquiring properties cannot be considered for the 9 Vijaydeep Hotels
purpose of business, the Ld. Counsel for the assessee submits that the properties were purchased by the assessee and they were provided as accommodation to the Directors and therefore they are business assets of the assessee.
We have heard rival contentions, perused the orders of the authorities below and the decision relied on. The contention of the assessee is that the assessment proceedings for the Assessment Year 2004-05 have become final and in the absence of any pending proceedings, the assessment has not abated and therefore such assessment cannot be disturbed unless there are incriminating materials found suggesting undisclosed income and since in the assessee’s case, the disallowance of interest u/s. 36(i)(iii) was made based on the materials already available in the balance sheet and not based on the seized materials. The addition cannot be sustained in view of the decision of the Jurisdictional High Court in the case of Murli Agro Products (supra). Though this contention was raised before the Ld. CIT(A), we find that the Ld. CIT(A) has not decided this issue and the issue was left open. The Ld. CIT(A) has decided the issue on merits. Further, the assessee has neither filed an appeal nor petition under Rule 27 of ITAT Rules raising the above contentions before us. The assessee is making only oral submissions. In such circumstances, we are not inclined to go into such contentions raised by the assessee. Coming to the merits of disallowance made u/s. 36(i)(iii), the Ld. CIT(A) after considering the submission of the assessee and the case laws relied on by the assessee concluded that sufficient interest free funds were available with the assessee for advancing interest free loans, therefore deleted the disallowance made u/s. 36(i)(iii) observing as under:
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“6.6. I have carefully considered the issue. The appellant has claimed that current liabilities should be treated as Interest free funds available with them. I find no merits in the contentions of the appellant. The current liabilities is a part of working capital and cannot be explained as interest free fund available with the appellant for making interest free loans advanced. Thus, the interest free funds available with the appellant is reworked as under:
SOURCES OF FUNDS AMOUNT (Rs.) Shares 26,20,000 Reserves and surpluses 1,08,19,110/- Unsecured Loans 6,94,74,854/- ------------------ Total 8,29,13,964/- 6.7. It is also seen that the Assessing Officer has treated the entire investments as for non business purposes which is not correct. It is seen from the schedule of investments that the appellant has given advance for Bungalow amounting to Rs. 2,17,70,000/- paid a sum of Rs. 45,0,000/- for flat at Bandra and a sum of Rs. 8,37,162/- being Fixed Deposits with bank. All these are business assets and should be excluded for the purposes of computing funds utilized for Non Business Purposes. Thus the funds utilized for Non-Business purposes is computed as under:
FUNDS UTILISED FOR NON BUSINESS PURPOSES AMOUNT(Rs.)
Investment 3,78,96,510/- Loans and advances 4,68,91,872/- Total 8,47,88,382 6.8. In view of the above it is reasonable to conclude that sum of Rs. 18,74,418/- (i.e. 8,47,88,382/- - 8,29,13,964/-) has come out of interest bearing funds. A sum of Rs. 10,68,637/- has been disallowed from the interest claimed which is more than reasonable on the facts of the case. I see no reasons for making any further disallowance from interest paid. The disallowance of bank interest is 11 Vijaydeep Hotels
restricted to Rs. 10,68,637/- being interest already disallowed in the original assessment. Further, disallowance of Rs. 36,99,211/- is, therefore directed to be deleted. This ground of appeal, is accordingly, allowed.”
The Jurisdictional High Court in the case of Reliance Utilities (supra) held that if there are interest free funds available with the assessee sufficient to meet its investment and at the same time assessee raised loan, it can be presumed that investments made were out of interest free funds available with the assessee only. The Jurisdictional High Court held as under:
If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention, had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available
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with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and I.T.A.T.”
In this case it is the finding of the Ld. CIT(A) that the utilization of funds for non-business purposes stood at Rs. 8,47,88,382/- and the available funds with the assessee stood at Rs. 8,29,13,964/- and therefore it is reasonable to conclude that a sum of Rs. 18,74,418/- only has come out of interest bearing funds. He further concluded that since assessee himself has disallowed Rs. 10,68,637/-, there is no reason for making further disallowance and directed to delete the disallowance of interest of Rs. 36,99,211/-. We do not find any infirmity in the order of the Ld. CIT(A) and valid reason to interfere with the findings of the Ld. CIT(A) in deleting the disallowance. Therefore, in view of our above discussion, we uphold the order of the Ld. CIT(A). This ground of the Revenue is dismissed.
In the result, the appeal filed by the Revenue for Assessment Year 2004-05 is dismissed.
ITA No. 3293/M/2011 – A.Y. 2005-06
The grounds raised by the Revenue in this appeal is identical in Ground No.1&2 in ITA No.3291/M/2011 though quantum may differ. Since the first and second grounds are similar to the appeal in ITA No. 3291/M/11, the decision rendered therein applies mutatis and mutandis to these grounds. Therefore, on similar lines and for similar reasons, the grounds raised on 1st and 2nd issue of cost of liquor purchases and disallowance of interest u/s. 36(1)(iii) by the Revenue in ITA No. 3293/M/11 for assessment year 2005-06 are dismissed.
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ITA No. 3384/M/2011 – A.Y. 2006-07
The first and second ground raised by the Revenue in this appeal is identical in Ground No.1&2 in ITA No.3291/M/2011 though quantum may differ. Since first and second grounds are similar to the appeal in ITA No. 3291/M/11, the decision rendered therein applies mutatis and mutandis to these grounds. Therefore, on similar lines and for similar reasons, the grounds raised on 1st and 2nd issue of cost of liquor purchases and disallowance of interest u/s. 36(1)(iii) by the Revenue in ITA No. 3384/M/11 for assessment year 2006-07 are dismissed.
The third issue in the appeal of the revenue for Assessment Year 2006-07 is that the Ld. CIT(A) erred in deleting the addition made u/s. 2(22)(e) as deemed dividend.
17.1. Brief facts are that the Assessing Officer while completing the assessment noticed that assessee has received loan of Rs. 65,63,000/- from M/s. Gunjyot Properties Pvt. Ltd., a company in which public are not substantially interested. He also noticed that one of the Directors Shri Karanveer Singh Bawa had substantially interested in both assessee company as well as M/s. Gunjyot Properties Pvt. Ltd., holding 47.7.% and 49.3% of share holding respectively. He also noticed that M/s. Gunjyot Properties Pvt. Ltd is having accumulated profits and there are no business transactions either with the assessee company or with the beneficial share holder i.e. Shri Karan Veer Singh Bawa. Therefore, the Assessing Officer was of the view that provisions of Sec 2(22)(e) are attracted. When called for explanation from the assessee, the assessee contended that the 14 Vijaydeep Hotels
assessee was not a shareholder in M/s. Gunjyot Properties Pvt. Ltd., are therefore no addition can be made towards deemed dividend. The contentions of the assessee were not accepted and an addition of Rs. 6,86,191/- was made by the Assessing Officer u/s. 2(22)(e) of the Act for the reason that an addition of Rs. 94,70,000/- has already been treated as deemed dividend in the hands of Shri Karan Veer Singh Bawa for Assessment Year 2006-07. 18. On appeal, the Ld. CIT(A) following the decision of the Hon’ble Jurisdictional High Court in the case of CIT Vs Universal Medicare Pvt. Ltd (324 ITR 264) deleted the addition made u/s. 2(22)(e) since assessee is not a registered share holder of Gunjyot Properties (P) Ltd., from whom the loan was taken.
The Ld. Departmental Representative vehemently supports the orders of the Assessing Officer in invoking the provisions of Sec. 2(22)(e) of the Act.
The Ld. Counsel for the assessee places reliance on the decision of the Jurisdictional High Court in the case of Universal Medicare Pvt. Ltd (supra). He further submits that the decision of the Mumbai Special Bench in the case of Bhaumik Colour Pvt. Ltd wherein it was held that addition in respect of deemed dividend can be made only in the hands of the registered shareholders is affirmed by the Bombay High Court. Therefore, he submits that since assessee company is not a registered shareholder of M/s. Gunjyot Properties Pvt. Ltd., addition u/s. 2(22)(e) cannot be made in the hands of the assessee.
We have heard the rival contentions and perused the orders of the authorities below and the decisions relied on. Admittedly, the 15 Vijaydeep Hotels
assessee is not a shareholder in M/s. Gunjyot Properties Pvt. Ltd., and therefore in view of the decision of the Jurisdictional High Court holding that the provisions of Sec. 2(22)(e) are attracted only to register shareholders and since assessee is not the shareholder of lending company i.e. M/s. Gunjyot Properties Pvt. Ltd., no addition can be made u/s. 2(22)(e) of the Act in the hands of the assessee. Thus respectfully following the said decision of the Jurisdictional High Court, we uphold the orders of the Ld. CIT(A) on this issue. This ground is therefore rejected.
ITA No. 3385/M/2011 – A.Y. 2007-08
The first and second ground raised by the Revenue in this appeal is identical in Ground No.1&2 in ITA No.3291/M/2011 for Assessment Year 2004-05 though quantum may differ therefore, on similar lines and for similar reasons, the grounds raised by the Revenue in ITA No. 3385/M/11 for assessment year 2007-08 is also dismissed.
The third issue in the appeal of the revenue for Assessment Year 2007-08 is that the Ld. CIT(A) erred in deleting the addition made u/s. 2(22)(e) as deemed dividend.
Brief facts are that the Assessing Officer while completing the assessment noticed that assessee has received loan of Rs. 78,85,000/- from M/s. Backbay Properties Pvt. Ltd., a company in which public are not substantially interested. He also noticed that one of the Directors Shri Karanveer Singh Bawa had substantially interested in both assessee company as well as M/s. Backbay Properties Pvt. Ltd.,
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holding 47.7.% and 50% share holding respectively. He also noticed that M/s. Backbay Properties Pvt. Ltd is having accumulated profits and there are no business transactions either with the assessee company or with the beneficial share holder i.e. Shri Karan Veer Singh Bawa. Therefore, the Assessing Officer was of the view that provisions of Sec 2(22)(e) are attracted and when called for explanation from the assessee, the assessee contended that the assessee was not a shareholder in M/s. Backbay Properties Pvt. Ltd., therefore there is no addition can be made towards deemed dividend. The contentions of the assessee were not accepted and an addition of Rs. 78,85,000/- was made by the Assessing Officer u/s. 2(22)(e) of the Act for the reason that an addition of Rs. 94,70,000/- has already been treated as deemed dividend in the hands of Shri Karan Veer Singh Bawa for Assessment Year 2007-08. 25. On appeal, the Ld. CIT(A) following the decision of the Hon’ble Jurisdictional High Court in the case of CIT Vs Universal Medicare Pvt. Ltd (324 ITR 264) deleted the addition since the assessee is not a registered share holder of Backbay Properties (P) Ltd from whom the loan was taken.
The Ld. Departmental Representative vehemently supports the orders of the Assessing Officer in invoking the provisions of Sec. 2(22)(e) of the Act.
The Ld. Counsel for the assessee places reliance on the decision of the Jurisdictional High Court in the case of Universal Medicare Pvt. Ltd (supra). He further submits that the decision of the Mumbai Special Bench in the case of Bhaumik Colour Pvt. Ltd wherein it was 17 Vijaydeep Hotels
held that addition in respect of deemed dividend can be made only in the hands of the registered shareholders is affirmed by the Bombay High Court. Therefore, he submits that since assessee company is not a registered shareholder of M/s. Backbay Properties Pvt. Ltd ., addition u/s. 2(22)(e) cannot be made in the hands of the assessee.
We have heard the rival contentions and perused the orders of the authorities below and the decisions relied on. Admittedly, the assessee is not a shareholder in M/s. Backbay Properties Pvt. Ltd., and therefore in view of the decision of the Jurisdictional High Court holding that the provisions of Sec. 2(22)(e) are attracted only to register shareholders and since assessee is not the shareholder of lending company i.e. M/s. Backbay Properties Pvt. Ltd., addition u/s. 2(22)(e) of the Act is not warranted in the hands of the assessee. Thus respectfully following the said decision of the Jurisdictional High Court, we uphold the orders of the Ld. CIT(A) on this issue. This ground is therefore rejected.
ITA No. 3241/M/2011 – Assessee’s appeal
The assessee has raised following grounds of appeal: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to assessed rental received as Business income as against income from House Property.
Looking to the facts and in the circumstances of the case and in law the appellant submits that Ld. CIT(A) ought to have held that the rentals received should be assessed as Income from House property.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming addition of Rs.
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41,32,500/- on account of the alleged deemed dividend u/s. 2(22)(e) of the I.T. Act 1961. Looking to the facts and in the circumstances of the case and in law the appellant submits that Ld. CIT(A) ought to have held that the said addition is incorrect and invalid and ought to have deleted the said addition.
On the facts and in the circumstances of the case and in law, the additions made on account of the Rental income and Deemed Dividend are beyond the scope of provisions of section 153A and hence invalid and the same ought to be deleted.”
The Ld. Counsel for the assessee at the outset submits that ground No. 3 is not pressed therefore it is dismissed as not pressed.
Ground No. 1 is regarding challenging the order of the Ld. CIT(A) in directing the Assessing Officer to assess rental income received by the assessee as business income as against income from house property.
31.1. Brief facts are that the Assessing Officer while completing the assessment noticed that assessee received income from Reliance Infocom Ltd., against installation of a Antenna/tower and BTS equipment installed by Reliance Infocom Ltd., on the terrace of assessee’s hotel building and this income was shown under the head ‘Income from business property’. The Assessing Officer was of the view that Reliance Infocom by paying rent to the assessee for the Antenna/tower and BTS equipment erected on the terrace of hotel building of the assessee has only obtained a right to use a part of the terrace for putting up its mobile tower and has not obtained lease of the property consisting of any building or land. Therefore, he was of the view that the said income received by the assessee cannot be 19 Vijaydeep Hotels
treated as property income u/s. 22 of the Act and the Assessing Officer assessed this income under the head Income from other sources. He placed reliance on the decision of the Calcutta High Court in the case of Mukherjee Estate (P) Ltd Vs CIT (244 ITR 01).
On appeal, the Ld. CIT(A) held that this income is to be assessed as business income and not under the head income from other sources or income from house property.
The Ld. Counsel for the assessee submits that terrace of the hotel building was given to Reliance Infocom for setting up of Antenna/tower and this is the case of simple let out of terrace place and assessee has neither erected nor maintained the antenna/tower. He further submits that day today maintenance is done by Reliance Infocom Ltd., and assessee has simply let out of its terrace place for setting up of Antenna. Therefore he submits that the rental income received by the assessee is nothing but income from property only and certainly not its business income. He strongly places reliance on the decision of the Co-ordinate Bench in the case of M/s. Kamlesh Real Estates Pvt. Ltd. Vs ACIT in ITA No. 1451/M/2010 dated 20.4.2011. The Ld. Counsel for the assessee submits that the decision of the Calcutta High Court relied on by the Assessing Officer in the case of Mukherjee Estate (P) Ltd (supra) has been considered by the Co-ordinate Bench in this case and on identical circumstances it has been held that income from letting out of the terrace for putting up its mobile tower by the telecom companies is assessable under the head ‘income from house property’ and not under the head ‘Income from other sources’. The Ld. Counsel for the assessee also placed reliance on the decision of the Delhi Bench of the Tribunal in the case
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of Manpreet Singh Vs ITO (53 taxmann.com 244) and submits that the Tribunal held that income earned by the assessee from renting of terrace for installation of mobile antenna was taxable as ‘Income from house property’. The Ld. Counsel for the assessee submits that even in this case the decision of the Calcutta High Court in the case of Mukherjee Estate (P) Ltd (supra) has been considered. The Ld. Counsel for the assessee further places reliance on the decision of the Delhi High Court in the case of Niagara Hotels & Builders (P) Ltd Vs CIT (60 Taxmann.com 83) and submits that on identical facts the High Court held that the licence fee received by the assessee by entering into an agreement with a telecom company for mounting tower and antenna is assessable under the head ‘Income from house property and not under the head ‘Income from business’. Thus, he pleads for allowing the ground and to direct the Assessing Officer to consider the income from letting out of terrace to be assessed under the head ‘Income from house property’ but not under the head income from business/other sources.
The Ld. Departmental Representative places reliance on the decision of the authorities below.
We have heard both the parties, perused the orders of the authorities below and the case laws relied on. The assessee has let out on lease terrace place on rent to Reliance Infocom Ltd., for erection of antenna/tower and this income was shown by the assessee under the head ‘Income from house property.’ The Assessing Officer treated this income as not derived from the building and therefore he held that this income cannot be considered under the head ‘ Income from house property but should be assessed
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under the head ‘income from other sources’. In coming to such conclusion he placed reliance on the decision of the Calcutta High Court in the case of Mukherjee Estate (P) Ltd Vs CIT (244 ITR 01). The assessee carried the matter to the Ld. CIT(A) and the Ld. CIT(A) held that the income received by the assessee is from a commercial building therefore it has to be assessed under the head ‘Income from business’ and not under the head ‘income from house property’ or as assessed by the Assessing Officer under the head ‘Income from other sources’. We find an identical issues has come up before the Delhi High Court in the case of Niagara Hotels & Builders (P) Ltd Vs CIT (supra) wherein the Assessing Officer treated the licence fee received by the assessee from Telecom company for renting out the terrace floor of the building for installing tower antenna and this income was assessed by the Assessing Officer under the head income from business as against income from house property treating the property as commercial asset. The Hon’ble Delhi High Court rejected the conclusion of the Tribunal in holding that agreement of renting and hiring terrace is in essence for hiring space and not hiring building or land appurtenant thereto. The Hon’ble High Court held that the licence fee received by the assessee for letting out the terrace space is to be taxed as income from house property. While coming to such conclusion, the Hon’ble High Court also considered the decision of the Calcutta High Court in the case of Mukherjee Estate (P) Ltd Vs CIT (supra). Similar issue has arisen in the case of Manpreet Singh Vs ITO (supra) wherein the Delhi Tribunal held that income received from letting out of terrace for setting up for installation of mobile antenna is taxable under the head income from house property only. Similar view has been taken by the Co-ordinate bench in the case of 22 Vijaydeep Hotels
Kamlesh Real Estates Pvt. Ltd. Vs ACIT in ITA No. 1451/M/2010 dated 20.4.2011. Respectfully following the above said decisions, we hold that the income received by the assessee from letting out of terrace space for erection of antenna tower for Reliance Infocom is to be assessed under the head income from house property only and not under the head income from business or under the head income from other sources as was assessed by the Ld. CIT(A)/Assessing Officer . This ground of the assessee is therefore allowed.
The second ground of appeal is regarding challenging the order of the Ld. CIT(A) in confirming the addition of Rs. 41,32,500/- u/s. 2(22)(e) as deemed dividend.
Brief facts are that the Assessing Officer in the course of assessment proceedings found that M/s. Jagjit Singh & Co. which is a group concern of the assessee and also a company in which public are not substantially interested has given loans and advances amounting to Rs. 73,77,157/- to the assessee company. He also found that during the year assessee was one of the shareholders, having 49.5% share holding of Jagjit Singh & Co., has taken an advance of Rs. 41,32,500/- from the company. The Assessing Officer found that M/s. Jagjit Singh & Co. was not having business transactions with the assessee the beneficial share holder and therefore the advance received by the assessee from M/s. Jagjit Singh & Co. was treated as deemed dividend within the provisions of Sec. 2(22)(e) of the Act since the assessee company is holding 49.5% share holding which is more than 10% of the voting power in M/s. Jagjit Singh & Co. Accordingly, the advance of Rs. 41,32,500/- was treated as deemed dividend u/s. 2(22)(e) of the Act.
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On appeal, the Ld. CIT(A) sustained the addition. The Ld. Counsel for the assessee submits that the assessee is having mutual, open and current account with M/s. Jagjit Singh & Co. There is distinction between loan/advance and a mutual, open and current account. A mutual, open and current account is an account where there are reciprocal demands between the parties. Referring to Item 1 part 1 to the schedule to the Limitation Act, he submits that the period of limitation to file suit is 3 years from the close of the year in which the last item admitted or proved is entered in the account. In respect of advance/loan, referring to Item 19 and 21 Part II to the aforesaid Schedule submits that the period of limitation to file suit is 3 years from the day when the loan is made. Thus he submits that the provisions of Sec 2(22)(e) will not be applicable to mutual, open and current account.
He places reliance on following decisions in support of the above contentions.
DCIT Vs Lakra Bros (207) 162 Taxman 170 (Chd.(Mag.) 2. CIT Vs Ambassador Travels (P) Ltd (208) 173 Taxman 407 (Del). 3. Shri Satchidanand S. Pandit Vs ITO (208) 19 SOT 213 (Mum) 4. NH Securities Ltd Vs DCIT (207) 11 SOT 302 (Mum)
39.1. He further submits that the concept of deeming certain payments or loans or advances to substantial shareholders as income was introduced with the object of curbing tax evasion. Upto 31.5.1997 dividend was taxed in the hands of the recipient of the 24 Vijaydeep Hotels
dividend. However many closely held companies never declared any dividend and accumulated profits in the company itself. Since no dividend was declared the same could not be taxed. However, the companies did give loans or advances to substantial shareholders or to their concerns/companies who presumably enjoyed these funds but were not liable to pay any tax on the same as the amounts were loans or advances liable to be returned. These amounts of loans or advances are sought to be taxed as dividend by section 2(22)(e) of the Act by way of a deeming fiction.
39.2. He further submits that it is not the intention of the legislature to treat the bonafide transactions between two associate parties out of commercial expediency as deemed dividend. Various group concerns of the appellant have bank account with the same bank. If the bank manager finds that the bank balance in the bank account of a particular concern is not sufficient to meet the obligation the bank manager would transfer funds from the bank account of any other group concern. These transactions are not in nature of loan or advances. These transactions are in the nature of the current account transaction flowing both ways and entered into out of commercial expediency. Under the facts and circumstance of the appellant case the provisions of Sec. 2(22)(e) are not attracted to such transactions.
39.3. Without prejudice to above, the Ld. Counsel for the assessee argued that in determining the amount taxable u/s. 2(22)(e), addition has to be restricted to such percentage of ‘accumulated profits’ as corresponds to assessee’s shareholding in company in question. Reliance was placed on the decision of Pune Bench of the Tribunal in the case of Kewal Kumar Jain Vs ACIT (144 ITD 672). The 25 Vijaydeep Hotels
shareholding of his client is 49.5%. It is also the contention of the assessee that opening balance is to be kept out of the purview of Sec. 2(22)(e) of the Act and for this proposition reliance was placed on the decision of the Pune Bench of Tribunal in the very same case of Kewal Kumar Jain (supra).
The Ld. Departmental Representative heavily places reliance on the order of the lower authorities.
We have heard the rival contentions, perused the orders of the lower authorities and the case laws relied on. Admittedly, there is no business relation between the assessee company and M/s. Jagjit Singh & Co.. The advances received by the assessee company are not in the course of any business connection between these two companies. In the circumstances, we do not find any substance in the submissions of the Ld. Counsel for the assessee that the transaction is outside the purview of the provisions of Sec. 2(22)(e) of the Act. The decisions relied on by the assessee are distinguishable on facts and they are not applicable to the assessee. Thus we hold that the provisions of Sec 2(22)(e) are attracted in this case. However, the alternate contention of the assessee is that in determining the taxable income i.e. deemed dividend, addition is to be restricted to such percentage of accumulated profits as corresponds to assessee’s share holding and in this case it is 49.5%. The Pune Bench of ITAT considered this issue in the case of Kewal Kumar Jain (supra) wherein it was held that while determining amount taxable u/s. 2(22)(e) of the Act, addition has to be restricted to such percentage of accumulated profits as corresponding to assessee’s share holding in the company as was rightly done by the Assessing Officer while
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completing the assessment. The Revenue did not bring to our notice any other decision contrary to the Pune Bench. Therefore, respectfully following the said decision, we direct the Assessing Officer to restrict the addition only to such percentage of share holding of the assessee to the accumulated profits in line with the decision of the Pune Bench of ITAT. Similarly, following the decision of the Pune Bench in the case of Kewal Kumar Jain (supra), we direct the Assessing Officer to exclude loan/advances given to the assessee in earlier years which are assessable as deemed dividend in the hands of the assessee in the past years while computing the deemed dividend taxable u/s. 2(22)(e) of the Act during this assessment year. This ground is partly allowed.
ITA No. 3243/M/2011 – A.Y. 2007-08
Ground No. 1 is regarding challenging the order of the Ld. CIT(A) in directing the Assessing Officer to assess rental income received by the assessee as business income as against income from business property.
42.1. The issue is identical with the issue in Ground No.1 in ITA No. 3241/M/11 for assessment year 2006-07 from para 31 to 35. Therefore, on similar lines and for similar reasons, the ground raised by the assessee in ITA No. 3243/M/11 for assessment year 2007-08 is allowed.
The second ground of appeal is regarding challenging the order of the Ld. CIT(A) in confirming the addition of Rs. 9,47,000/- u/s. 2(22)(e) as deemed dividend.
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43.1. The issue is identical with the issue in Ground No.2 in ITA No. 3241/M/11 for assessment year 2006-07 from para 36 to 41. Therefore, on similar lines and for similar reasons, the ground raised by the assessee in ITA No. 3243/M/11 for assessment year 2007-08 is dismissed.
Now we take up the appeals of Shri Karanveer Singh Bawa, who is a Director in M/s. Vijaydeep Hotels Pvt. Ltd. The only issue in 45. This is second round of appeal before us by the assessee. In the original assessments certain additions were made towards unexplained expenses for Assessment Years 2004-05 to 2006-07 in the case of the assessee. The assessee contested the additions before the Ld. CIT(A) and also the Tribunal. The Tribunal by order dated 29.4.2011 restored the issue of alternative plea of the assessee for giving relief on the principles of telescoping with a direction to reconsider the plea of the assessee since admittedly the assessee has made substantial disclosure of income in respect of the assessee and their group concerns. The Assessing Officer passed orders u/s. 143(3) r.w. s. 254 of the Act, denying the benefit of telescoping observing that assessee group declared additional income of Rs. 9.10 crores only in the returns as against additional income of Rs. 12.50 crores admitted in the declaration made u/s. 132(4) in the course of search, therefore, telescoping cannot be allowed. The Assessing Officer further observed that the suppressed income belongs to Vijay
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Deep Hotels Pvt. Ltd., which is a closely held company and separate legal entity and therefore set off or telescoping of the unaccounted income of this company cannot be allowed with regard to the unexplained and unaccounted income of the assessee who is an individual. The Assessing Officer also observed that the unexplained amount is in round figures and therefore telescoping cannot be given against suppressed sale of Avalon Pub relating to Vijay Deep Hotels Pvt. Ltd. Thus, he denied possibility of giving telescoping of unexplained income for all the three years and brought to tax.
On appeal, the Ld. CIT(A) agreed with the view taken by the Assessing Officer. The Ld. Counsel for the assessee submits that the Assessing Officer failed to carry out the directions of the Tribunal in allowing telescoping. The Ld. Counsel for the assessee submits that it is not in dispute that all these receipts are generated out of unaccounted sales made from Avalon Pub of M/s. Vijay Deep Hotels Pvt. Ltd., which is a group concern of the assessee and the sales from Avalon Pub have been completely taxed and therefore there is no justification in not allowing telescoping. He further submits that telescoping was denied on the ground that these are all round figures. He submits that this is not a ground for rejecting the plea of the assessee for telescoping. The Ld. Counsel for the assessee submits that the assessee has made disclosure of Rs. 9.10 crores in the hands of various group concerns of the assessee therefore the telescoping should be given in the hands of the assessee and its group concern.
The Ld. Departmental Representative submits that the direction of the Tribunal was only for considering alternative plea as 29 Vijaydeep Hotels
to whether telescoping can be allowed or not. There is no specific direction by the Tribunal to grant telescoping. He further submits that telescoping is not automatic. The Ld. Departmental Representative supporting the orders of the Assessing Officer and Ld. CIT(A) submits that since assessee has disclosed total undisclosed income as accepted in the declaration, the Assessing Officer rightly denied the telescoping. He supports the orders of the lower authorities.
Heard both sides, perused the orders of the authorities below. The Tribunal in the first round of appeal directed the Assessing Officer to consider the alternative plea of the assessee to give the benefit of telescoping. In the second round, the Assessing Officer denied telescoping for the reason that these receipts are generated out of suppressed sales from Avalon Pub of Vijay Deep Hotels Pvt. Ltd., which is a separate entity. The second reason for denial of telescoping is that the figures are round figures and therefore they cannot be proved that they are from suppressed sales of Avalon Pub. One more reason for denying telescoping is that the assessee group in the declaration made u/s. 132(4) offered additional income of Rs. 12.50 crores but in the returns filed they admitted only Rs. 9.10 crores and not offered balance amount of Rs. 2.667crores and therefore telescoping is not possible. We are unable to agree with the views of the authorities below in not granting the benefit of telescoping for the reason that the assessee and their concerns made disclosure in the group as a whole and this has been accepted by the Revenue and therefore telescoping cannot be denied simply because the concerns and the assessee are separate entities. We also do not find any valid reason for denying telescoping simply because the 30 Vijaydeep Hotels
figures are round figures. It is also pertinent to note that the Assessing Officer accepts that these unaccounted income is generated from out of the suppressed sales of Avalon Pub of Vijay Deep Hotels Pvt. Ltd and this suppressed sales have already been taxed in the hands of Vijay Deep Hotels Pvt. Ltd. There is one more reason for denying telescoping that assessee has not fully disclosed the amount as agreed in the declaration. If this is the contention of the Assessing Officer for not allowing telescoping, he could have made additions based on the seized materials ignoring the declaration. We failed to understand why the Assessing Officer has not made additions based on seized materials rather than going by the additional income offered by the assessee. We also see that the income from suppressed sales of Avalon Pub have been fully taxed as suppressed income and the very same income is disallowed in the hands of the Director i.e. assessee treating the same as unexplained income which would result in double addition. Therefore, we are of the considered view that it is unjust in denying telescoping of these amounts among the group of the assessee. However, we make it clear that if Vijaydeep Hotels Pvt. Ltd utilized these amounts for any other sources other than for advancing such amounts to the Director Mr. Karanveer Singh Bawa, to that extent it cannot be used for telescoping. Therefore, the Assessing Officer shall examine these aspects. In the circumstances, we direct the Assessing Officer to allow telescoping of these amounts subject to verification after calling for necessary details and providing adequate opportunity of being heard to the assessee. This ground is therefore partly allowed.
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In the result, the appeals filed by the Revenue are dismissed and the appeals filed by the assessee are partly allowed.
Order pronounced in the open court on 20th June, 2016. (RAMIT KOCHAR) (C.N. PRASAD ) लेखा सद"य / ACCOUNTANT MEMBER "या"यक सद"य/JUDICIAL MEMBER मुंबई Mumbai; "दनांक Dated : 20th June, 2016 व."न.स./ Rj , Sr. PS
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant 2. ""यथ" / The Respondent. 3. आयकर आयु"त(अपील) / The CIT(A)- 4. आयकर आयु"त / CIT 5. "वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड" फाईल / Guard file. आदेशानुसार/ BY ORDER, स"या"पत ""त //// उप/सहायक पंजीकार (Dy./Asstt.