M/S. THE HOOGHLY MILLS CO. LTD.,KOLKATA vs. DCIT, CC-VII, KOLKATA, KOLKATA

(a) As regards applicability for provisions of sec. 2(24)(x) read with sec. 36(1) (va) for Rs. 64,96,988/-, the matter have been explained in detail to the CIT in course of proceedings U/S 263 that such payment being in accordance with directions of Hon'ble Kolkata High Court and the same having been fully held as allowable in different appeals for A. Y s 2004-05 & 2005~06, the order of the AO on this account cannot be said to be erroneous in as much as prejudicial to the interest of revenue and in any case the AO having taken one of the possible views on the basis of the orders of the Appellate Authority in the case of your petitioner itself, provisions of sec. 263 were not at all applicable and in view of the facts and in the circumstances the order of the CIT u/s 263 on this account is liable to be set aside.

(b) For that in view of the facts and in the circumstances the CIT is wholly unjustified in holding that the order of the AO is erroneous in as much as prejudicial to the interest of revenue in connection with disallowance u/s 14A and such finding of the CIT in order u/s 263 is wholly bad, illegal, unjustified and uncalled for and in view of the facts and in the circumstances the order of the AO cannot be said to be erroneous in as much as prejudicial to the interest of revenue on this account and in view of the facts and in the circumstances the said finding of the CIT may kindly be deleted.

2. The assessee has also filed additional ground which is reproduced below:- Additional Grounds of appeal 1. For that in view of the facts and in the circumstances the order of the AO in respect of Gratuity Liability of Rs.4,19,97,464/- having merge with the order of CIT(A), C-I, Kolkata in his order dated 28.01.2011 in appeal No. 430/CIT(A), CI/CC-VII/08-09 relating to assessment year 2006-07, no valid jurisdiction on the issue of gratuity liability and particularly and particularly n respect of Gratuity liability of Rs.4,19,97,464/- lied with CIT, C-I u/s 263 and his order us. 263 dated 01.03.2011 on this issue, is, therefore wholly bad, illegal and uncalled for and in view of the facts and circumstances is liable to quashed / cancelled and in view of the facts and in the circumstances it may kindly be held accordingly.”

Shri S. Jhajharia and Shri Sujoy Sen L’d Authorized Representatives appeared on behalf of assessee and Shri Rajat Subhra Biswas, L’d Departmental Representative appeared on behalf of Revenue.

3. Sole issue raised by assessee in all the interconnected grounds are that Ld. CIT(A) erred in holding the order of Assessing Officer erroneous and prejudicial to the interest of revenue.

4. The facts in brief are that assessee in the present case is a Limited Company and engaged in the business of manufacturing of jute goods of different varieties. The assessee for the year has filed its return declaring loss of ₹ 1,64,32,570/-. Thereafter a notice u/s. 143(2) r.w.s. 142(1) of the Act was issued for making the scrutiny assessment. The assessment was completed by AO after making certain additions / disallowances to the total income of assessee. However, L’d CIT u/s. 263 opined that certain aspects in the assessment proceedings have not been examined by AO while framing M/s The Hooghly Mills Co.Ltd. v. DCIT, CC-VII, Kol. Page 4 assessment u/s. 143(3) of the Act. Accordingly the ld. CIT under section 263 of the Act issued notice upon assessee to clarify the following facts of the case :- i) Assessee being substantial shareholders of the company namely, M/s Hooghly Mills Projects Ltd. (MHMPL for short) has taken advance for a sum of ₹5,58,93,000/- which clearly attracts the provision of Sec. 2(22)(e) of the Act. Gratuity expenses for an amount of ₹ 4,19,58,203/- was debited in the ii) profit and loss a/c but the same was not disallowed in the computation of income although the assessee added back the same in its computation of income. iii) Assessee did not make the payment of employees contribution on or before the due date as per Sec. 36(i)Iva) of the Act for an amount of Rs. 64,96,988.00 which was not disallowed by AO. iv) Interest bearing funds were diverted by making investment in shares and no proportionate disallowance was made in the total income of the assessee except for a sum of ₹25,000/-. The expenses which are disallowable u/s. 14A of the Act should have been added in the computation of book profit u/s 115JB of the Act.

In compliance to notice, it was submitted that the assessee and MHMPL are in the jute manufacturing business and owned five jute mills which are situated in State of West Bengal and Andhra Pradesh. There are mainly and purely commercial business transactions in the day-to-day business activities of the assessee. Both the companies purchased / supplied jute bags, raw jute, stores etc., to each other. As such, there was no loan transactions between the aforesaid companies and therefore the transactions as discussed above are out of the purview of Sec. 2(22)(e) of the Act.

4.1 Regarding the gratuity liability, it was submitted that the expense for the gratuity of ₹ 4,19,58,203/- was never claimed in its profit and loss a/c. Such M/s The Hooghly Mills Co.Ltd. v. DCIT, CC-VII, Kol. Page 5 claim was made only in the computation of income. Accordingly, the AO has disallowed the same by holding that such liability has not been provided in its books of account, so not eligible for deduction. Therefore the question of holding that order passed by AO is erroneous and prejudicial to the interest of revenue on account of deduction of gratuity liability does not arise.

4.2 Regarding deduction on account of employee contribution, it was submitted that the AO has allowed the deduction in pursuance of direction given by the Hon'ble jurisdictional High Court and after obtaining all the details and particulars. On similar facts the relief was given to the assessee in the AY 2004-05 in its own case by the ld. CIT(A). Similarly the proceedings were dropped by the Hon’ble ITAT against the order passed under section 263 of the Act in its own case for the assessment year 2005-06. Therefore, on this account the order of AO cannot be held erroneous and prejudicial to the interest of revenue.

4.3 Regarding the provision of Sec. 115JB in relation to the disallowance made u/s. 14A of the Act the assessee submitted that the investment was made in the share long back and out of its own capital and reserve. The instant case is for the assessment year 2006-07 and rule 8D came into effect from AY 2008-09, so no disallowance is warranted. The assessee has not incurred any expenses in connection with the exempted income as dividend warrants are automatically transferred through ECS, no need to maintain physical records. Therefore, the disallowance u/s 14A cannot be made.

5. However, Ld. CIT(A) rejected the argument of assessee and held that order is erroneous and prejudicial to the interest of revenue on account of the following reasons :-

1) Regarding the provision of Sec.2(22)(e) of the Act, it was not apparent from the record whether there was the business transactions between M/s The Hooghly Mills Co.Ltd. v. DCIT, CC-VII, Kol. Page 6 assessee and MHMPL in relation to purchases and sales of jute goods. The name of the company i.e. MHMPL was not appearing in the audited accounts of the company.

2) Regarding gratuity liability, Ld. CIT(A) observed that the AO started computation of income of assessee with net profit as per its profit and loss a/c and did not disallow the claim of deduction made by assessee for Rs. 3,85,60,690.00 by debiting profit and loss account.

3) Regarding the employees contribution, there is no decision of Hon'ble High Court/ Supreme Court is available in favour of the assessee, therefore, it may not be allowable as deduction. Besides there is specific provision for not allowing the deduction as per section 2(24)(x) read with section 36(1)(va) of the Act. 4) Regarding the disallowance u/s. 14A of the Act, the investment has been made to the tune of ₹ 2423.97 lakhs whereas share capital and reserved are of ₹793.80 lakhs and ₹1139.69 lakhs. Therefore the loan bearing fund had been utilized for making such investment.

In view of above, Ld’ CIT(A) has held that assessment u/s 143(3) of the Act was erroneous and prejudicial to the interest of Revenue. Hence, set aside the order of AO u/s 263 of the Act with a direction to frame the assessment de novo in the light of aforesaid discussion.

Before us Ld. DR vehemently relied on the order of Ld. CIT passed under section 263 of the Act.

M/s The Hooghly Mills Co.Ltd. v. DCIT, CC-VII, Kol. Page 8 Regarding third issue with regard to employees contribution, Ld. AR before us submitted that the judgment of Hon'ble Supreme Court has decided this issue in favour of assessee in the case of CIT vs. Vinay Cement Ltd. (2007) 273 CTR 208 (SC) and therefore the order of 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 passed under section 263 of the Act.

Regarding the last issue of proportionate disallowance on interest amount of ₹ 25,000/-, the ld. AR submitted that the issue has been duly discussed and considered by AO while framing the assessment order. The assessee during the year has earned interest income only for an amount of ₹5,78,384/-. The AO after considering the submission of assessee has disallowed a sum of ₹25,000/- only. On the other hand, Ld. DR relied on the order of Ld. CIT(A).

“The phrase "by way of advance or loan" appearing in sub-cl. (e) of cl. (2) of s. 2 must be construed to mean those advances or loans which a share holder enjoys for simply on account of being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or M/s The Hooghly Mills Co.Ltd. v. DCIT, CC-VII, Kol. Page 9 without a right to participate in profits) holding not less than ten per cent of the voting power; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act. Thus, gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of s. 2(22) but not the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder. In the present case the assessee permitted his property to be mortgaged to the bank for enabling the company to take the benefit of loan and in spite of request of the assessee, the company is unable to release the property from the mortgage. In such a situation, for retaining the benefit of loan availed from the bank if decision is taken to give advance to the assessee such decision is not to give gratuitous advance to its shareholder but to protect the business interest of the company. Authorities below erred in law in treating the advance given by the company to the assessee by way of compensation to the assessee for keeping his property as mortgage on behalf of the company to reap the benefit of loan as deemed dividend within the meaning of s. 2(22)(e).—CIT vs. Creative Dyeing & Printing (P) Ltd. (2010) 229 CTR (Del) 250 : (2009) 30 DTR (Del) 143 : (2009) 318 ITR 476 (Del) and CIT vs. Nagindas M. Kapadia (1989) 75 CTR (Bom) 161 : (1989) 177 ITR 393 (Bom) relied on.

Loan advanced by company to shareholder in compensation of shareholder mortgaging his immovable property for enabling company to secure bank loan cannot be treated as deemed dividend under s. 2(22)(e).”

COMMISSIONER OF INCOME TAX vs. CREATIVE DYEING & PRINTING (P) LTD. whereby the Hon’ble HIGH COURT OF DELHI (2010) 229 CTR 0250 : (2009) 30 DTR 0143 : (2009) 318 ITR 0476 : (2009) 184 TAXMAN 0483 has Held :

“The finding of facts, arrived at by the Tribunal is that the transaction in question was a business transaction and which transaction would have benefited both the assessee company and PE Ltd. In fact, the counsel for the appellant has conceded that the amount is in fact not a loan but only an advance because the amount paid to the assessee company would be adjusted against the entitlement of moneys of the assessee company payable by PE Ltd. in the subsequent years. The contention that since PE Ltd. is not into the business of lending of money, the payments made by it to the assessee company would be covered by s. 2(22)(e)(ii) and consequently payments even for business transactions would be a deemed dividend is not acceptable. The provision of s. 2(22)(e)(ii) is basically in the nature of an Explanation. That cannot however, have bearing on interpretation of the main provision of s. 2(22)(e) and once it is held that the business transactions do not fall within s. 2(22)(e), one need not to go further to s. 2(22)(e)(ii). The provision of s. 2(22)(e)(ii) gives an example only of one of the situations where the loan/advance will not be treated as a deemed dividend, but that’s all. The same cannot be expanded further to take away the basic meaning, intent and purport of the main part of s. 2(22)(e). This interpretation is in accordance with the legislative intention of introducing s. 2(22)(e). Therefore, the Tribunal was correct in holding that the amounts advanced for business transaction between the parties, namely, the assessee company and PE Ltd. was not such to fall within the definition of deemed dividend under s. 2(22)(e).—CIT M/s The Hooghly Mills Co.Ltd. v. DCIT, CC-VII, Kol. Page 10 vs. Raj Kumar (2009) 23 DTR (Del) 304 : (2009) 181 Taxman 155 (Del) followed.

Amount advanced to the assessee company by another company having common directors not being a loan but an advance f or business transaction which is to be adjusted against the moneys payable by the latter to the assessee company in the subsequent years, same did not fall within the definition of deemed dividend under s. 2(22)(e).” Here in the present case, from the facts narrated above, it is clear that both the parties are beneficiary of the transaction being current account of the above transactions. So as per the legal proposition decided by Hon'ble jurisdictional High Court, it is clear that section 2(22)(e) of the Act was inserted to bring within the purview of taxation those amounts which are actually a distribution of profits but are disbursed as a loan so that tax thereon can be avoided. It is pertinent to note here that when dividends are declared by a company, it is solely the shareholders who benefit from the transaction. No benefits accrue to the company by way of dividend distribution. Thus, section 2(22)( e) of the Act covers only such situations, where the shareholder alone benefits from the loan. In the instant case the company benefits from the said transaction, it will take the character of a commercial transaction and hence will not qualify to be dividend. Now it can be said that sec. 2(22)(e) of the Act covers only those transactions which benefit the shareholder alone and results in no benefit to the company. On the other hand, if the transaction is mutual by which both sides are benefited, it is undoubtedly outside the purview of provisions of sec. 2(22)(e) of the Act. From the above, it is clear that the loan account differs from current account and the provisions of section 2(22)( e) of the Act, being a deeming section, cannot be applied to current account. In such circumstances, the order of the ld. CIT under section 263 of the Act is not sustainable in law.

Only in cases where action under s. 263 is taken after 1st June, 1988, the merger of assessment order will be treated as confined to issues actually considered and decided in appeal in terms of the Expln. (c).”

In view of the above after relying on the above judgment we find that order of AO cannot be held to erroneous and prejudicial to the interest of revenue. Hence the impugned order passed by the ld. CIT under section 263 of the Act is not sustainable in law and therefore we set aside.

The head notes reads as under “Business Income–Disallowance–Validity of Deletion–Assessee, engaged in business of dairy product, processing and marketing of milk and milk product and cattle feed etc, filed its return of income–AO noticed that, assessee had deposited payment of Rs. 14,60,412 in PF fund and Rs.973 in ESI fund with delay, and therefore, added said amount to income of assessee as per provisions of s 36(1)(va) read with s 2(24)(x)–CIT(A), vide its appellate order after noticing certain judgments concluded that, where payments on account of contribution to PF, ESI etc. are made within due date of filing return, such deductions are allowable–CIT(A) accordingly deleted disallowance made by AO–ITAT upheld order passed by CIT(A)–Held, Supreme Court in CIT v. Vinay Cement Ltd. had observed in a similar matter that assessee is entitled to claim the benefit u/s 43B where he had contributed to provident fund before filing of return and that in the instant case they were concerned with the law as it stood prior to the amendment of s 43B–In view of settled legal position, appeal preferred by Revenue is dismissed.”

M/s The Hooghly Mills Co.Ltd. v. DCIT, CC-VII, Kol. Page 13 It was held as under “Supreme Court in CIT v. Vinay Cement Ltd. [2009] 313 ITR (St.) 1 had observed that in such circumstances, assessee was entitled to claim the benefit in section 43B for that period particularly in view of fact that he had contributed to provident fund before filing of return. Following observations of Hon'ble Supreme Court in Vinay Cement (supra), the Delhi High Court in CIT v. Aimil Ltd. has also held that, in so far as the Income-tax Act is concerned, assessee can get benefit, if actual payment is made before return is filed, as per principle laid down by Supreme Court in Vinay Cement (2009) 313 ITR (St.) 1. In view of settled legal position, appeal preferred by Revenue has no substance and same is, therefore, dismissed.”

In view of above the order of AO cannot be held erroneous and prejudicial to the interest of revenue. Hence the impugned order passed by the ld. CIT under section 263 of the Act is not sustainable in law and therefore we set aside.