Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘B’: NEW DELHI
Before: SMT. DIVA SINGH & SH. O.P. KANT
Appellant by Sh. Sunil Chander Sharma, CIT(DR) Respondent by None. Date of hearing 04.01.2016 Date of pronouncement 19.02.2016 ORDER PER O.P. KANT, A.M.: These appeals by the Revenue are directed against two separate orders of the Commissioner of Income Tax (Appeals) dated 31.10.2013 passed for the assessment years 2006-07 and 2010-11 respectively. Both the appeals are related to the same assessee, so the same are being heard together and disposed of by a consolidated order. AY: 2006-07 2. In the instant appeal, Revenue raised the following grounds of appeal:
1. The order of learned Commissioner of Income Tax (Appeals) is not correct in law and facts.
2. On the facts and in the circumstances of the case, learned Commissioner of Income Tax(Appeals) has erred in law in deleting the addition of Rs. 55,14,626/- on account of deemed dividend under Section 2(22)(e).
2 &139/Del/2014 AYs: 2006-07 & 2010-11 3. On the facts and circumstances of the case, learned Commissioner of Income Tax(Appeals) has erred in law in deleting the addition of Rs. 72,618/- under section 36(1)(iii) of the I.T. Act. 4. The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.
3. The facts in brief are that a search and seizure action under section 132 of the Income-tax Act, 1961 (for short “the Act”) was carried out at the assessee’s of ‘Tulip Group’ including the assessee and thus notice under section 153A of the Act was issued to the assessee for filing return of income for the assessment years involved. In response to the notice under Section 153A of the Act issued on 28.04.2010, the assessee filed return declaring income of Rs. 16,93,882/- on 29th October, 2010. Subsequently, notices under Section 143(2)/142(1) of the Act were issued and certain disallowances/additions were made by the ld. Assessing Officer. Aggrieved with the additions/disallowances the assessee filed appeal before the learned Commissioner of Income Tax (Appeals), who partly allowed the appeal of the assessee. Aggrieved with the findings of the learned Commissioner of Income Tax (Appeals), the assessee is before us.
4. Ground no. 1 and 4 of the appeal are general in nature, and therefore, not required to adjudicate upon.
5. In ground no. 2, the Revenue has raised the issue of addition of Rs. 55,14,626/- on account of deemed dividend under section 2(22)(e) of the Act. The Assessing Officer observed that an advance from M/. Sharad Enterprises Pvt. Ltd. i.e. another company of Tulip Group was appearing as opening balance in the books of the assessee company. It was further observed by the Assessing Officer that during the relevant previous year, the assessee company subscribed to the share capital of M/s. Sharad Enterprises pvt Ltd and acquired 13,332 equity shares out 3 &139/Del/2014 AYs: 2006-07 & 2010-11 of 54,996/- equity shares of that company. The Assessing Officer was of the view that the share holding of the assessee company being more than 10 percent. and there was an accumulated profit in the books of M/s. Sharad Enterprises Pvt. Ltd. during the year, the assessee company was liable for deemed dividend in terms of Section 2(22)(e) of the Act. The submissions of the assessee objecting to the proposed addition were not accepted by the Assessing Officer. The ld. CIT(A) observing that the advance was not received during the year and the assessee became shareholder subsequent to the receipt of the advance held that additions under Section 2(22)(e) was not sustainable and he accordingly allowed the relief to the assessee. 5.1 Before us, the ld. CIT(DR) relying on the order of the Assessing Officer submitted for sustaining the additions. No one represented on behalf of the assessee. 5.2 We have heard the submission of ld. CIT(DR) and perused the material on record. The fact that the ‘advance’ in question was appearing as opening balance in the books of the assessee and the assessee became shareholder of the M/s. Sharad Enterprises Pvt. Ltd. during the previous year only, are not in dispute. We are of the view that the provisions of Section 2(22)(e) are very clear and all the following conditions are to be simultaneously met for holding that advance or loan received by a person falls in the category of deemed dividend:
1. 1. Any payment of any sum by way of advance or loan was made by the company to the shareholder.
2. The company was not a company in which public was not substantially interested.
4 &139/Del/2014 AYs: 2006-07 & 2010-11 3. The shareholder was a beneficial owner of shares ( other than shares entitled to fixed rate of dividend) holding not less than 10% of the voting power .
The company was having accumulated profit. 5.3 But in the fact of the case of the assessee, the payment was received in a year prior to the relevant previous year and at that relevant point of time of receiving the advance, the assessee was not the beneficial shareholder of M/s. Sharda Enterprises Pvt. Ltd. and thus the conditions of Section 2(22)(e) of the Act are not fulfilled in the case of the assessee. The finding of the ld. CIT(A) on the issue are therefore well reasoned. The relevant para of the finding of the CIT(A) is reproduced as under: “4.3.1 In this ground the appellant is agitating against addition of Rs. 55,14,626/- as deemed dividend u/s 2(22)(e) of IT Act 1961. The AO has dealt with this issue at para 5 of his order. It is not in dispute that the appellant became a share holder of Sharad Enterprises Pvt. Ltd. during the year. It is also not in dispute that the appellant did not receive any advance from Sharad Enterprises Pvt. Ltd. during the year. The AO has added the opening credit balance standing in the name of Sharad Enterprises Pvt. Ltd. in the books of the appellant as deemed dividend. 4.3.2 The AR has pointed out that U/S 2(22)(e) only the amount received during the year as advance could be brought to tax as deemed dividend and not the amount which was received during the earlier period. 4.3.3 I agree with the submissions of the AR. It is only the payment by a company during the relevant previous year which could be brought to tax (when it satisfies other conditions of section 2(22)(e) as deemed dividend. The phrase used u/s 2(22)(e) is "any payment by company”. In case the AO's action is to be upheld, then the appellant becomes liable to tax every year as long as the opening balance of advance continues in his books of accounts. This could not be the meaning of section 2(22)( e). Therefore, I find no merit in the addition made by the AO under this head.” 5.4 In view of the above discussion, we are of the opinion that no interference is required in the finding of the ld. CIT(A). Accordingly, we dismiss this ground of the appeal.
5 &139/Del/2014 AYs: 2006-07 & 2010-11 6. In ground no. 3, the Revenue has contested the deletion of addition of Rs. 72,618/- under Section 36(1)(iii) of the Act by ld. CIT(A). The ld. CIT(DR) relied on the order of the Assessing Officer. 6.1 We have heard the submission of ld. CIT(DR) and perused the material on record. The Assessing Officer noticed investment of Rs. 9,74,56,010/- on 31.03.2006 and found interest payment of Rs. 72,618/-. The Assessing Officer following the decision of the Tribunal in the case of the Cheminvest Ltd. Vs. ITO, 317 ITR (AT) 0086 (2009) Delhi, and disallowed the interest of Rs. 72,618/- under Section 36(1)(iii) of the Act. Before the ld. CIT(A), the assessee submitted that the said interest was paid towards working capital loan taken during the year, which was an allowable expenditure and the investment appearing in the balance-sheet was made out of the owned sources and no loan was taken for making those investments. The ld. CIT(A) has examined the disallowance even from the angle of Section 14A of the Act. The ld. CIT(A) accepted the submission of the assessee and allowed relief to the assessee. The relevant finding of ld. CIT(A) are as under:
4.4.1 The AO has made disallowance U/S 36(1 )(iii) of the Act on the ground that borrowed funds have been diverted for investment activity. It is seen that the appellant company's capital base is small and not enough to cover the amount covered by the investment of Rs. 9.74 crores. The share capital plus reserves and surplus stood at Rs. 3.04 crores as on 31.03.2006 which infact increased from Rs. 14.29 lakhs to Rs. 3.04 crores during the same period. However the appellant had non-interest bearing business funds. The total Sundry creditors increased from Rs. 5.10 crores to Rs. 11.08 crore and advances from customers increased from Rs. 61.30 Lakhs to Rs. 2.60 crores. 4.4.2 The appellant company had taken TOD (Temporary Over Draft) from Central Bank of India on which it has paid Rs. 72,618/- Bank of Punjab. The AO has not established in his order-that the borrowed funds have been diverted for making investment. In fact the AR has submitted that except for the TOD no loan was raised and just Rs. 72,618/- was expended on the same. An investment of Rs. 4.5 crores has been made during the previous year relevant to current assessment year and no fresh loans have been raised. There are fresh funds in the form of sundry creditors & advances from customers which more or less match with the fresh quantum of investment. The secured loan at the year end was Nil. All these facts go to show that the 6 &139/Del/2014 AYs: 2006-07 & 2010-11 AO has not been able to show-that the borrowed funds have not been utilized for the purpose of business and that they have been diverted to finance the non-business tax exempt activity. Therefore the disallowance u/s 36(1 )(iii) cannot be made. The disallowance of Rs. 72,618 lakhs is therefore deleted.
In view of the above discussion, we find that the order of ld. CIT(A) on the issue in dispute is well reasoned and, therefore, no interference is required. Accordingly this ground of the Revenue is dismissed.
The following grounds of appeal are raised in the instant appeal:
1. The order of Ld. CIT(A) is not correct in law and facts.
2. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in law in deleting the addition of Rs. 70,72,280/- under Section 14A of the I.T. Act.
3. The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.
9. Grounds no. 1 & 3 are general in nature, therefore, not required to adjudicate upon.
10. In ground no. 2, the Revenue has challenged the deletion of addition of Rs. 70,72,280/- under Section 14A of the Act. The ld. CIT(DR) relied on the order of the Assessing Officer, whereas none represented on behalf of the assessee. 10.1 We have heard the submission of ld. CIT(DR) and perused the material on record. The Assessing Officer observed that during the relevant previous year the assessee company has received dividend of Rs. 40,76,753/- and the same has been claimed as exempt from tax. On 31.03.2010, the assessee company was having total investment of Rs. 8,44,56,010/- , on account of which dividend was received. The Assessing Officer held that the expenditure incurred on account of dividend income was liable to be disallowed and invoking rule 8D of IT Rules, computed total 7 &139/Del/2014 AYs: 2006-07 & 2010-11 disallowance of Rs. 70,72,280/-. Before the ld. CIT(A), the ld. Authorized Representative submitted the assessee had taken Rs. 4.75 crores loan during the last week of March, 2009 which was utilized for making payment to the outstanding creditors, namely, Tulip Telecom Ltd., Sharad Enterprises Pvt. Ltd. and to M/s Firepro Wireless Pvt. Ltd. He further submitted that the interest payment of Rs. 66,50,248 made during the year was related to the said loan of Rs. 4.57 crores taken during the financial year 2008-09 and has nothing to do with the investment made by the company. He, therefore, stressed that the action of the Assessing Officer in taking the interest expenditure for calculating disallowance under rule 6D was wrong and submitted that no expenses were directly linked with the investment of the company. The ld. CIT(A) considered the submissions of the Authorized Representative and gave his findings, which is reproduced as under:
4.1.2 I have considered the submissions of the AR and the facts of the case. There is merit in the AR's submission that the interest bearing fund have not been used for the investments activity of the company. Hence it would not be proper to take the interest expenditure for calculating disallowance under Rule 80. The AO also has not given any finding in the assessment order that he was not satisfied with the correctness of the claim of the assessee that no expenditure was incurred for investment activity. This is the requirement of law as held in the case of Maxopp Investment Ltd. (Supra). Thus the disallowance made by the AO cannot be confirmed on these lines. However there is no merit in the appellant's claim that no expenditure has been incurred for the investment activity. It is a fact that the appellant had a sizeable income from dividend and that it is deploying sizeable funds on this activity. It cannot be said that it is carrying on its investment activity without incurring any tangible expenditure. It cannot be denied that there would be expense towards maintaining investment and there will be allocation of man-power towards taking decision on holding or disposing the said investments. 0.5% of average investment comes to about Rs. 4,22,000/-. Rule 8D is applicable to this year. Therefore, I am of the view that ends of justice would be met if the disallowance is restricted to Rs. 4,22,000/- (in place of Rs. 70,72,280/-) to cover the expenditure relating to investment activity. The ground is therefore partly allowed.
10.2 As seen from the paragraph 5 of the Assessment order, we find that the Assessing Officer has not complied with the requirement of recording 8 &139/Del/2014 AYs: 2006-07 & 2010-11 dissatisfaction as to the correctness of claim of the assessee as held in Judgement of Delhi High Court in the case of Maxopp Investement ( supra), the action of the AO in invoking rule 8D was not justified. Despite the observation, the CIT(A) has upheld disallowance of Rs. 4,22,000 towards administrative expenses. In view of the above discussion, we find that the order of ld. CIT(A) on the issue in dispute is well reasoned and, therefore, no interference is required. Accordingly this ground of the Revenue is dismissed.
In the result, both the appeals of the Revenue are dismissed. The decision is pronounced in the open court on 19th February, 2016.