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Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA
Before: Shri P.M. Jagtap & Shri S.S. Viswanethra Ravi
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 1 of 31 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA ‘A’ BENCH, KOLKATA
Before Shri P.M. Jagtap, Accountant Member & Shri S.S. Viswanethra Ravi, Judicial Member
I.T.A.No. 601/Kol/2011 : Assessment Year: 2006-2007
DCIT, Central Circle-VII –Vs- M/s. The Hooghly Mills Co.Ltd. Kolkata. [PAN:AAACT 9780F] (APPELLANT) (RESPONDENT)
C.O. No.32/Kol/2011 : Assessment Year: 2006-2007 (arising out of ITA No.601/Kol/2011)
M/s.The Hooghly Mills Co.Ltd. –vs- DCIT, C.C.-VII, Kolkata (CROSS OBJECTOR) (RESPONDENT)
I.T.A. No.746/Kol/2011 : Assessment Year: 2007-2008
DCIT, Central Circle-VII –Vs- M/s. Hooghly Mills Co. Ltd. Kolkata. [PAN:AAACT 9780F] (APPELLANT) (RESPONDENT)
I.T.A. No.548/Kol/2011 : Assessment Year: 2007-2008
M/s. Hooghly Mills Co. Ltd. –Vs- ACIT, C. C.-VII, Kolkata (APPELLANT) (RESPONDENT)
I.T.A. No.747/Kol/2011 : Assessment Year: 2007-2008
DCIT,Central Circle-VII –Vs-M/s.Hooghly Mills Projects Ltd. Kolkata. [PAN:AAACH 7668G] (APPELLANT) (RESPONDENT)
I.T.A. No.598/Kol/2011 : Assessment Year: 2007-2008
M/s. Hooghly Mills Projects Ltd. –Vs- ACIT,C.C.-VII, Kol. (APPELLANT) (RESPONDENT)
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 2 of 31 Appearances: For the Department : Shri Ashok Kumar, Addl.CIT, Sr.DR For the Assessee : Shri S.Jhajharia, FCA & Shri Sujoy Sen, Advocate
Date of concluding the hearing : January 13, 2016 Date of pronouncing the order : 08 April, 2016
O R D E R Per Shri S.S.Viswanethra Ravi :- ITA 601/Kol/2011 is the appeal by the Revenue against the order dated 28.01.2011 of CIT(A), Central-I, Kolkata relating to assessment year 2006-07. The assessee has filed C.O. 32/Kol/2011 against the same order of the CIT(A).
ITA 601/Kol/2011 (Revenue’s appeal)
First we shall take up ITA 601/Kol/2011, the ground no.1 taken by the Revenue reads as follows: “1. That on the facts and circumstances in the case the Ld. CIT(A) has erred on facts as well as law in directing to delete the disallowance on account of gratuity payable to employees amounting to Rs.4,19,97,464/-“
The assessee is a company engaged in the business of manufacture and sale of jute goods. Ground no.1 is against the action of the AO in not allowing accrued, ascertained and determined gratuity liability of Rs.4,19,97,464/- being in respect of those employees who had retired during the year. It appears from the assessment order that such liability has not been allowed by the AO on the grounds that (a) since no provision for the same was made in the accounts (b) since the assessee company followed mercantile system of accountancy except in the case of gratuity liability which was
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 3 of 31 accounted for on cash basis (c) since the assessee company had no approved gratuity fund and 9d) since no actual payment was made during the year. Before the CIT(A) the assessee submitted that the issue may kindly be decided by following the view taken in assessment years 2001-02, 2002-03 and 2003-04 on identical issue. Against order of CIT(A) in assessment year 2001-02 and 2002-03 the Revenue had preferred appeal before ITAT and the same has been settled in favour of the assessee. The assessee also drew the attention of the CIT(A) to a decision of ITAT, ‘C’ Bench, Kolkata in respect of their order in case of Hooghly Mills Project Ltd. in order dated 28.07.2006 in ITA No.2404 and 2405(Kol) of 2005 for the assessment years 2001-02 and 2002-03 wherein under similar set of facts and circumstances as in the present of the assessee, it has been held by the Tribunal that such liability for gratuity in respect of those employees who had retired during the year is allowable under section 40A(7)(b) even if no provision for the same had been made in the accounts.
The CIT(A) held as follows: “3.1 I have carefully considered the submission of the Ld.A/R. The Hon’ble ITAT Kolkata in assessee’s own case has considered the issue in earlier years in the ITA No.1285/Kol/2007 A.Y. 2001-02 and ITA No.1286/Kol/2007 A.Y. 2002-03 and have allowed the claim of the appellant. Respectfully, following the decision of ITAT on the issue the A.O. is directed to allow the gratuity liability of Rs.4,19,97,464/- claimed by the assessee. Accordingly the ground no.2 taken by the appellant is allowed.”
Aggrieved by the order of CIT(A), the Revenue has raised ground no.1 before the Tribunal.
We have considered the submission of the ld. DR who relied on the order of the AO. We have considered his submission and find that
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 4 of 31 on identical grounds claim for deduction of gratuity liability was denied by the Revenue in assessment year 2001-02 and this Tribunal dealt with the identical issue as follows: “5. Ground Nos. 3 & 4 of the revenue is regarding claim of gratuity liability and was allowed by the Ld.CIT(A). The Tribunal in assessee's own case has discussed the issue and allowed in ITA No. 582/Cal/2001 dated 29.03.2003 for the A.Y. 19"7-1998 from para 18 to 22. Para 22 is the operative portion of the said order which is extracted below for better appreciation of facts: -
"We do agree with the Ld. A.R. of the assessee that with effect from 1st April 1997 i.e. from the assessment year 1997-1998 the assessee cannot adopt any other methods of accounting save and except the mercantile system of accounting. There is no dispute to the fact that the liability for payment of gratuity in the assessment year under appeal had arisen to the extent of Rs. 1,11,73,369/-. Since the assessee tied made provision of Rs. 35,46,803/- in the books of account for earlier years, the balance amount of Rs. 76,26,566/- remained due and payable to the employees who had retired during the year. The department has not disputed the claim of the assessee to that extent. The Guwahati High court has held that if a provision is made for payment of gratuity to retiring employees in respect of previous year, the assessee is entitled to claim the deduction u/s 40A(7)(b)(i) of the Act even if actual payment was not made and the claim could not be denied u/s 43B and/or 40A(7)(a) of the Act. The Guwahati High Court has stated that there are three modes of payments of gratuity -
(i) having an approved fund, (ii) by having a fund though not approved and (iii) where there is no fund but provision is made for payment of gratuity. In the first two cases payment has to be made and in the third case it is not necessary to make payment but a provision has to be made for such payment. Besides above, we also observe from the earlier orders of the Tribunal that it has been held that the bar contained in the main Section i.e. Section 40A(7) would not apply in cases where the provision on account of payment due to employees, who have already retired during the year , is made. It has been held that the provision of
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 5 of 31 Section 40A(7)(b)(i) of the Act would be applicable which permit the claim revenue's in respect of the provision made for ascertained liability in respect of employees retired during the year. In view of the above, we allow ground Nos. 4 and 5 of the appeal by reversing the orders of the authorities below.”
Respectfully, following the same we allow ground No. 3 & 4 in favour of the assessee and dismiss the revenue’s ground.”
In view of the above, we do not find any merit in ground no.1 raised by the Revenue, accordingly the same is dismissed.
Ground no.2 raised by the Revenue reads as follows: “2. That on the facts and circumstances of the case as well as in law the Ld. CIT(A) has erred in directing to allow donation of Rs.6,80,000/- paid to “Anandalok” u/s. 80G after verification in spite of the fact that the assessee has no positive income.”
Ground no.2 is against the action of the AO in disallowing the claim of deduction of charity of donation of Rs.6,80,000/- made during the year. The AO in its order has submitted that the assessee has not furnished certificate under section 80G in respect of payment of Rs.6,80,000/- and as such no deduction under section 80G is allowed. Before CIT(A), the assessee filed receipt paid in respect of such donation to M/s. Anandalok along with copy of 80G certificate and prayed that the deduction may be allowed. The CIT(A), however, on verification of the same, found that the assessee has submitted only ledger account of Charity and Donation. Considering the fact of the case the CIT(A) directed the AO to consider deduction under section 80G, if certificate in proof of the claim under section 80G is filed.
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 6 of 31
Aggrieved by the order of the CIT(A), the Revenue has preferred ground no.2 before the Tribunal. We have heard the arguments of both the sides and find that there is nothing wrong in the direction given by the ld. CIT(A) to the AO on this issue whereby the AO is directed to verify the relevant certificate and to allow the claim of the assessee for deduction under section 80G in accordance with law. The same is accordingly upheld and ground no.2 of the Revenue’s appeal is dismissed.
C.O. 32/Kol/2011 11. The cross objection filed by the assessee in C.O. 32/Kol/2011 was not pressed at the time of hearing. Hence, the same is dismissed as not pressed.
ITA No.746/Kol/2011 (Revenue’s appeal)
ITA No.746/Kol/2011 is the appeal by the Revenue and ITA 548/Kol/2011 is the appeal filed by the assessee. Both these appeals are directed against the same order dated 22.02.2011 passed by the CIT(A), Central-I, Kolkata for assessment year 2007-08.
Ground no.1 raised by the Revenue in ITA No.746/Kol/2011 reads as follows:
“1. That the Ld.CIT(A) has erred in deleting the disallowance of gratuity liability of Rs. l,80,76,940/-, since the assessee
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 7 of 31 was consistently following cash basis for accounting gratuity liabilities and since no provision was made in the accounts during the year nor any payment was made to the employees.
That the Ld. CIT(A) has erred in deleting the addition of Rs.4,04,43,067/- as dividend u/s.2(22)(e).
That the CIT(A) has erred in deleting the disallowance on account of expenditure relating to earlier year.
That the Ld. CIT(A) has erred in his observation that rule 8D read with section l4A is not retrospective and thereby in restricting to disallowance to 1% of dividend income declared by the assessee deleting the addition.“
Ground no.1 is identical to ground no.1 raised by the Revenue in ITA 601/Kol/2011. For the same reasons given above in dismissing that ground, ground no.1 in this appeal is also dismissed.
Ground no.2 raised by the Revenue reads as follows: “2. That the Ld. CIT(A) has erred in deleting the addition of Rs.4,04,43,067/- as dividend u/s.2(22)(e).”
Ground No. 2 is against the action of the CIT(A) in not treating Rs. 4,04,43,067/- as deemed dividend income u/s. 2(22)(e) of the Act, 1961 in respect of loans received during the year by the assessee from the following companies Name of the Company. Amount of fresh loans recd. a) Victoria Glass Pvt. Ltd. (VGL) 1,60,00,000/- b) Arun Properties Pvt. Ltd.(APRL) 1,20,00,000/- c) Bajoria Finance Pvt. Ltd.(BFL) 1,60,00,000/-
For the sake of convenience Para-6 of the assessment order appearing at Page - 4 is reproduced herewith.
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 8 of 31
"Deemed Dividend. u/s.2(22)(e) During the year assessee has received money from the following concerns: a) Victoria Glass Pvt. Ltd. (VGL) 1,60,00,000/- b) Arun Properties Pvt. Ltd.(APRL) 1,20,00,000/- c) Bajoria Finance Pvt. Ltd.(BFL) 1,60,00,000/-
From list of shareholders of the company's it is seen that M/s. Arun Properties Pvt. Ltd. is having major share holdings (almost 90%) in Victoria Glass and Bajoria Finance. M/s. Arun Properties Pvt. Ltd. is also holding 17,402 no. of shares out of 70,000 shares in M/s. J. & R. Hutchisons Ltd. which is holding company of the assessee company having 89% of share holding of the assessee company. Similarly, shareholders of Mls. Arun Properties Pvt. Ltd. also having substances shareholding through Arun Properties in J & R Hutchisons Ltd. Therefore, provisions of section 2(22)(e) are applied and additions are made subject to the accumulated profit of the above companies:
Accumulated Profit before Income tax. Dividend u/s. 2(22)(e) 1) Victoria Glass Pvt. Ltd. Rs.l,54,66,255/- Rs. 1,64,66,255/- 2) Arun Properties Pvt. Ltd Rs.l,17,70,674/- Rs. l,17,70,674/- 3) Bajoria Finance Pvt. Ltd Rs.l,32,06,138/- Rs. 1.32.06.138/- Rs.4,04,43,067/-"
Before CIT(A), it was submitted that M/s. JRH is the holding Company of the assessee holding about 89% shares of the assessee and none of the lender/creditors companies were holding any shares in the assessee.
It was claimed that from the details of shareholding pattern of all the lender companies as submitted above it will be apparent that neither the assessee nor the holding Company, namely JRH were holding any share in share capital of any of the lender companies neither the assessee nor the holding company of the assessee were registered shareholder for any of the shares of the lender company.
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 9 of 31
It was also pointed out that even according to the AO neither assessee nor even JRH were Regd. Shareholder for any share in any share capital of any of the Lender Companies and also that neither the assessee nor JRH were holding any shares in any of the lending companies.
It was argued that the AO proceeded to apply Sec. 2(22)(e) of the Act in respect of the aforesaid loans only because and only on the ground that one of the Lender companies namely Arun Properties Pvt. Ltd. was Regd. Shareholder in respect of about 90% of Share Capital of Victoria Glass Works Pvt. Ltd. and Bajoria Finance Pvt. Ltd. and about 35% of Share Capital of J & R Hutchison Ltd. and since J & R Hutchison Ltd was holding about 89% of the Share Capital of the assessee i.e. the borrower Co. and the AO proceeded to apply provisions of sec: 2(22)(e) by wrongly and illegally assuming and presuming applicability of sec.2(22)(e). Such action and presumptions and assumptions of the AO in respect of applicability of sec. 2(22)(e) are wholly bad, illegal unjustified and uncalled for.
The CIT(A) on consideration of the above submissions deleted the addition made by the AO observing as follows: “8.1 I have carefully considered the submission of the Ld. A.r. Section 2(22)(e) read as under - (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 10 of 31 which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;
As submitted by the Ld A.r, neither any of the lending companies held any share capital in the assessee Co. nor the asssessee Co. being the borrower company held any share in the share capital of any of the lending companies. Even the holding Co. of the assessee Co. namely JRH was not holding any share capital in any of the lending companies and hence provisions of section 2(22)(e) were not at all applicable in respect of all the aforesaid loans. In view of the aforesaid facts and circumstances that the appellant-company being not a registered shareholder of any of the lender companies; and the lender companies also not holding any shares of the assesse company, provisions of sec. 2(22)(e) were not at all applicable. Hence the addition of Rs. 4,04,43,067/- made by the A.O is deleted. Accordingly ground no 6 is allowed.
Aggrieved by the order of the CIT(A), Revenue raised ground no.2 before the Tribunal.We have considered the submissions of the learned DR who relied on the order of the AO
The provisions of Sec.2(22)(e) of the Act, reads as follows: “(e) Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5- 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.” Explanation-3 to Section 2(22)(e) is as follows:
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 11 of 31 “Explanation-3: For the purpose of this clause- (a) “concern” means a Hindu Undivided Family, or a firm or an association of persons or a body of individuals or a company; (b) A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty percent of the income of such concern;” Section 2(32) defines the expression “person who has a substantial interest in the company”, in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power. An analysis of the above provisions shows that there are three limbs to Sec.2(22)(e) which are as follows:- “Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31-5-1987, by way of advance or loan First limb (a) to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, Second limb (b) or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) Third limb (c) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.”
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 12 of 31 24. In the present appeal we are concerned with the second limb of Sec.2(22)(e) of the Act, viz., “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest”. The following conditions are required to be satisfied for application of the above category of payment to be regarded as Dividend. They are:-
(a) There must be a payment to a concern by a company.
(b) A person must be Shareholder of the company being a registered holder and beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power. This is because of the expression “Such Shareholder” found in the relevant provision. This expression only refers to the shareholder referred to in the earlier part of Sec.2(22)(e) viz., a registered and a beneficial holder of shares holding 10% voting power.
(c)The very same person referred to in (b) above must also be a member or a partner in the concern holding substantial interest in the concern viz., when the concern is not a company, he must at any time during the previous year, be beneficially entitled to not less than twenty percent of the income of such concern; and where the concern is a company he must be the owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty percent of the voting power
(d) If the above conditions are satisfied then the payment by the company to the concern will be dividend.
The Special Bench of ITAT, Mumbai, in the case of Bhaumik Color Labs ITA 5030/M/04, 118 ITD 1 (SB) (Mum), considered the question Whether deemed
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 13 of 31 dividend u/s. 2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? The Special Bench held that 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. The Special Bench on the above issue has observed as follows:-
At the outset it has to be mentioned that provisions of Sec.2(22)(e) which brought in a new category of payment which was to be considered as dividend as introduced by the Finance Act 1987 w.e.f.1- 4-88 viz., payment by a company “to any concern in which such shareholder is a member or a partner and in which he has a substantial interest” do not say as to in whose hands the dividend has to be brought to tax, whether in the hands of the “concern” or the “shareholder”. We have already seen the divergent views on this issue which have been referred to in the earlier part of this order.
The above provisions were subject matter of consideration before the Hon’ble Rajasthan High Court in the case of CIT Vs. Hotel Hilltop. 217 CTR 527(Raj). The facts of the case before the Hon’ble Court were as follows. The Assessee was one M/S.Hotel Hilltop a partnership firm. This firm received an advance of Rs.10 lacs from a company M/S.Hilltop palace Hotels (P) Ltd. The shareholding pattern of M/S.Hillltop Palace Hotels (P) Ltd., was as follows:
Shri Roop Kumar Khurana : 23.33% 2. Smt.Saroj Khurana : 4.67% 3. Vikas Khurana : 22% 4. Deshbandhu Khurana: 25% 5. Shri.Rajiv Khurana : 25%
The constitution of the firm Hotel Hill Top was as follows: 1. Shri Roop Kumar Khurana: 45% 2. Shri.Deshbandhu Khurana: 55%
The AO assessed the sum of Rs.10 lacs as deemed dividend u/s.2(22)(e) of the Act in the hands of the firm because the two partners of M/S.Hotel Hill Top were holding shares by which they had
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 14 of 31 10% voting power in M/S.Hill Top Palace Hotels (P) Ltd. They were also entitled to 20% of the income of the firm M/S.Hotel Hill Top. Therefore the loan by M/S.Hill Top Palace Hotels (P) Ltd. To the firm M/S.Hotel Hill Top was treated as deemed dividend in the hands of M/S.Hotel Hill Top, the firm under the Second limb of Sec.2(22)(e) of the Act. The CIT(A) held that since the firm was not the shareholder of the company the assessment as deemed dividend in the hands of the firm was not correct. The order of the CIT(A) was confirmed by the Tribunal. On Revenue’s appeal before the Hon’ble High Court, the following question of law was framed for consideration:-
“Whether on the facts and in the circumstances of the case and in law the learned Tribunal was justified in upholding the order of learned CIT(A) deleting the addition of Rs.10 lacs as deemed dividend under Section 2(22)(e) of the IT Act? ”
The Hon’ble Court held as follows:-
“ The important aspect, being the requirement of section 2(22)(e) is, that ‘the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he has substantial interest, or any payment by any such company, on behalf or for the individual benefit of any such shareholder ……. “ Thus, the substance of the requirement is that the payment should be made on behalf of or for the individual benefit of any such shareholder, obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is pad by the company, whether to the shareholder, or to the concerned firm. In which event, it would fall within the expression ‘deemed dividend’. Obviously, income from dividend, is taxable as income from the other sources under section 56, and in the very nature of things the income has to be of the person earning the income. The assessee in the present case is not shown to be one of the persons, being shareholder. Of course, the two individuals being R and D. are the common persons, holding more than requisite amount of shareholding and are having requisite interest, in the firm, but then, thereby the deemed dividend would not be deemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 15 of 31 behalf, or on whose individual benefit, being such shareholder, the amount is paid by the company to the concern. Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed divided, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm.”
The aforesaid decision of the Hon’ble Rajasthan High Court which is the only decision of High Court, should be sufficient to answer question No.2 which has been referred to the Special Bench by holding that 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. The argument of the learned D.R. that the Hon’ble Rajasthan High Court did not deal with the second limb of Sec.2(22)(e) of the Act is not correct.”
The Special Bench further held as follows:- “34. We are of the view that the provisions of Sec.2(22)(e) does not spell out as to whether the income has to be taxed in the hands of the shareholder or the concern(non-shareholder). The provisions are ambiguous. It is therefore necessary to examine the intention behind enacting the provisions of Sec.2(22)(e) of the Act.
The intention behind enacting provisions of section 2(22)(e) are that closely held companies (i.e. companies in which public are not substantially interested), which are controlled by a group of members, even though the company has accumulated profits would not distribute such profit as dividend because if so distributed the dividend income would became taxable in the hands of the shareholders. Instead of distributing accumulated profits as dividend, companies distribute them as loan or advances to shareholders or to concern in which such shareholders have substantial interest or make any payment on behalf of or for the individual benefit of such shareholder. In such an event, by the deeming provisions such payment by the company is treated as dividend. The intention behind the provisions of section 2(22)(e) is to tax dividend in the hands of shareholder. The deeming provisions as it applies to the case of loans or advances by a company to a concern in which it’s shareholder has substantial interest, is based on the presumption that the loan or advances would ultimately be made available to the shareholders of the company giving the loan or
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 16 of 31 advance. The intention of the legislature is therefore to tax dividend only in the hands of the shareholder and not in the hands of the concern.
The basis of bringing in the amendment to Sec.2(22)(e) of the Act by the Finance Act, 1987 w.e.f 1-4-88 is to ensure that persons who control the affairs of a company as well as that of a firm can have the payment made to a concern from the company and the person who can control the affairs of the concern can drawn the same from the concern instead of the company directly making payment to the shareholder as dividend. The source of power to control the affairs of the company and the concern is the basis on which these provisions have been made. It is therefore proper to construe those provisions as contemplating a charge to tax in the hands of the shareholder and not in the hands of a non-shareholder viz., concern. A loan or advance received by a concern is not in the nature of income. In other words there is a deemed accrual of income even u/s.5(1)(b) in the hands of the shareholder only and not in the hands of the payee viz., non- shareholder (Concern). Sec.5(1)(a) contemplates that the receipt or deemed receipt should be in the nature of income. Therefore the deeming fiction can be applied only in the hands of the shareholder and not the non-shareholder viz., the concern.
The definition of Dividend U/s.2(22)(e) of the Act is an inclusive definition. Such inclusive definition enlarges the meaning of the term “Dividend” according to its ordinary and natural meaning to include even a loan or advance. Any loan or advance cannot be dividend according to its ordinary and natural meaning. The ordinary and natural meaning of the term dividend would be a share in profits to an investor in the share capital of a limited company. To the extent the meaning of the word “Dividend” is extended to loans and advances to a shareholder or to a concern in which a shareholder is substantially interested deeming them as Dividend in the hands of a shareholder the ordinary and natural meaning of the word “Dividend” is altered. To this extent the definition of the term “Dividend can be said to operate. If the definition of “Dividend” is extended to a loan or advance to a non shareholder the ordinary and natural meaning of the word dividend is taken away. In the light of the intention behind the provisions of Sec.2(22)(e) and in the absence of indication in Sec.2(22)(e) to extend the legal fiction to a case of loan or advance to a non-shareholder also, we are of the view that loan or advance to a
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 17 of 31 non-shareholder cannot be taxed as Deemed Dividend in the hands of a non-shareholder.”
The aforesaid view has since been approved in several decisions rendered by Hon’ble High Court of Bombay and Delhi in the case of CIT Vs. Universal Medicare Pvt. Ltd., 324 ITR 263 (Bom) and CIT Vs. Ankitech Pvt.Ltd. & others 340 ITR 14 (Del.). Since the Assessee in the present case is not a shareholder in the lender company, we are of the view that the above decision is squarely applicable to the facts of the Assessee’s case.
In view of the aforesaid decision, we find no infirmity in the order of CIT(A) holding that no addition on account of deemed dividend u/s.2(22)( e ) can be made in the facts and circumstances of the present case. Consequently Gr.No.2 raised by the revenue is dismissed.
Ground no.3 raised by the Revenue reads as follows: “3. That the CIT(A) has erred in deleting the disallowance on account of expenditure relating to earlier year.”
Ground No. 3 is against the action of the CIT(A) in allowing Rs. 511505/- as deduction. As will appear from the assessment order such disallowance has been m de only on the ground that expenses related to previous year. Before CIT(A), the assessee submitted that though the liability related to earlier year but the same having accrued / arisen/ settled / paid during the year the same was fully allowable during the year. The assessee submitted that this system has been constantly and regularly followed by the assessee submitted because as the assessee has 5 (five) industrial units and some of the expenses relating to earlier
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 18 of 31 year could not be accounted for in the earlier year and having included in the expenses for year. The assessee relied on the decision of Delhi High Court in the case of Cit vs. Jagajit Industries Ltd. (2010) 48 DTR (Del) 24 wherein following the principles laid down by several Court as duly discussed therein it was held that even if the expenses related to prior period the same was allowable during the year and in view of the facts and circumstances the matter may be considered sympathetically and judiciously and the disallowance of Rs,5,11,505/- made may kindly be deleted. The CIT(A) deleted the addition made by the AO observing as follows:
“10.1 I have carefully considered the submission of the Ld. A.R. The A.O has disallowed Rs.5,11,505/- on account of expenditure relating to earlier year without making any discussion in the body of the order. Considering the submission of the Ld. A.r that though the liability is related to earlier year but the same has accrued / arisen/ settled / paid during the year, the disallowance made by the A.O is deleted. Accordingly the ground no 8 is allowed.”
Aggrieved by the order of CIT(A), Revenue raised ground no.3 before the Tribunal.
We have heard the submissions of the ld. DR who relied on the order of the AO. Perusal of the order of the AO shows that the additions made only for the expenditure related to period earlier to the previous year relevant to A.Y. 07-08. The Revenue has not controverted the finding of the CIT(A) that the liability on account of expenditure in question crystalised during the previous year. Hence, we do not find any merit in ground no.3 raised by the Revenue. Hence, the same is dismissed.
Ground no.4 raised by the Revenue reads as follows:
“That the Ld. CIT(A) has erred in his observation that rule 8D read with section 14A is not retrospective and thereby in restricting to
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 19 of 31 disallowance to 1% of dividend income declared by the assessee deleting the addition.”
Ground no.4 taken by the Revenue is that the CIT(A) was unjustified in deleting disallowance of Rs.12,17,890/- under rule 8D read with section 14A of the Act made by the AO. Before CIT(A), against disallowance under section 14A of the Act made by the AO, it was submitted that since the assessment relates to assessment year 2007-08, Rule 8D is not applicable as it will be applicable for assessment year 2008-09. The CIT(A) held as follows:
“11.1 I have carefully considered the submission of the appellant. The disallowance in question has been made under section 14A read with rule 8D (iii) of the Income tax Rule However in the recent judgment in the case of Godrej & Boyce Vs DCIT Mumbai (ITA No 626 of 2010 and of 2010 and W.P No 758 of 2010) dated August 12 ,2010 the Hon’ble Bombay High Court has held that Rule 8D is not retrospective and applies from A.Y 2008-09. For earlier years disallowance has to be worked out on "reasonable basis u/s 14A(l). Further in the case of ITO Ward 5(3) Kolkata Vs M/s. B.P.S Securities Ltd (ITA No 123/Ko1/2010) and various other Hon’ble ITAT Kolkata has consistently held that disallowance under section 14A should be restricted to 1% of the dividend income. Considering above the A.O. is directed to restrict the disallowance to 1% of the dividend income declared by the assessee. The appellant will get necessary relief accordingly.” 36. Aggrieved by the order of CIT(A), the Revenue raised ground no.4 before the Tribunal.
We have heard the rival submissions. The learned DR relied on the order of the CIT(A). The learned counsel for the Assessee relied on the submissions made before CIT(A) and submitted that ultimately the basis of disallowance done by the CIT(A) was by applying Rule 8D of the rules, though he came to the conclusion that Rule 8D of the rules is not applicable for AY 2003-04. He further pointed out that in the following cases, the Hon'ble ITAT, Kolkata has held that 1% of the exempted income/dividend shall be considered as expenses/expenditure relating to
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 20 of 31 the earning of exempted income u/s 14A in the assessment years where the rule 8D was not applicable:-
Himtaj Consultants Pvt. Ltd. vs. I.T.O. (ITA No. 721/Ko1l2007- AY. 2004-05) Order dated 27.04.2007. 2. CHNHS Association vs. ACIT(ITA No.74/KoI/2008-AY.2004-05) Order Dated 19.02.2008. 3. I.T.O. vs. M/s S.P.S. Securities (P) Ltd. (ITA NO.123/KoI/2010- AY.2000-01 Order dated 19.08.2010
He further pointed out that the Hon’ble Calcutta High Court in the case of CIT Vs. M/S.R.R.Sen & Brothers Pvt.Ltd. in GA No.3019 of 2012 in ITA No.243 of 2012 dated 4.1.2013 held that computation of 1% of exempt income as disallowance u/s.14A of the Act was proper.
We have considered the rival submissions. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010J 328 ITR 87(Bom) has held that Rule 8D could not be considered as retrospective and the said Rule could be applied only with effect from the Assessment Year 2008-09. Further, the Bombay High Court also observed in the above-referred case that the Assessing Officer would first be required to check the concerned assessee's offer of disallowance and only after recording his dissatisfaction, if any, the Assessing Officer could commute the amount to be disallowed in accordance with sub- section (2) of section 14A. The above-referred subsection (2) of section 14A was inserted by the Finance Act, 2006, with effect from the Assessment Year 2007-08. The Assessee’s case being for the Assessment Year 2003-04, there cannot be any applicability of the above-referred sub-section (2) of section 14A or Rule 8D in the Assessee's case for the Assessment Year 2006-07. In the given circumstances, the quantum of disallowance had to be decided in the light of the decisions rendered by the ITAT Kolkata Benches in the cases referred to by the CIT(A) in the impugned order. In those decisions, the ITAT, Kolkata Benches have consistently taken a view that 1% of the exempted income/dividend shall be considered as
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 21 of 31 expenses/expenditure relating to the earning of exempted income u/s 14A in the assessment years where the rule 8D was not applicable. The same has also been upheld by the Hon’ble Calcutta High Court in the case of M/S.R.R.Sen & Brothers Pvt.Ltd. (supra). Following those rulings, we hold that 1% of the exempt income alone should be disallowed u/s.14A of the Act. Gr.No.4 raised by the revenue is accordingly dismissed.
In the result, the appeal by the Revenue is dismissed.
ITA No. 548/Kol/2011 Hooghly Mills Co ltd
ITA No. 548/Kol/2011 - Assessee’s appeal :
Ground nos. 1 to 3 raised by the assessee reads as follows:
“1. For that in View of the facts and in the circumstances the A.O. is wholly unjustified in treating Rs. 2,05,92,407/- as unexplained cash credit of your petitioner u/s 68 of the Income Tax Act and in view of the facts and circumstances the CIT (Appeals) Central -I, is wholly unjustified in confirming the said action of the A.O. and in view of the facts and in the circumstances the said amount or any part thereof could not be treated as unexplained cash credit u/s 68 of the LT. Act in the hands of your petitioner and in view of the facts and circumstances it may kindly be held accordingly and the addition of Rs. 2,05,92,507/- made by the A.O. and confirmed by the CIT (Appeal) may kindly be deleted. 2. For that in view of the facts and in the circumstances Rs. 2,05,92,507/- being the realization on account of sale proceeds of goods and all evidences in connection with the same having been made available to the A.O. as well as the CIT (Appeals) any addition made on this account is wholly bad, illegal, unjustified and uncalled for and in view of the facts and circumstances the same may kindly be deleted.
For that in view of the facts and in the circumstances the CIT (Appeals) is wholly unjustified in observing and holding that the sale proceeds
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 22 of 31 against which a sum of Rs. 2,05,92,507/- was received is a Bogus sale and is further wholly unjustified in observing / holding that the amount of Rs.2,05,92,507/- credited should be treated as Bogus sale in respect of suppressed closing stock and in view of the facts and circumstances such observations 1 findings of the CIT (Appeal) is wholly bad, illegal, arbitrary unjustified and uncalled for and in view of the facts and circumstances the same may kindly be deleted/ expunged and/or modified.”
Ground no’s 1 to 3 taken by the assessee is against the addition of Rs.2.05.92,407/- made by the A.O which was confirmed by the CIT-A as unexplained cash credit u/s 68 of the Act. The brief factS are that on the basis of certain information that the M/s S. S. International proproitor Sri. Swararmal Jhunjhunwala has issued cheque of Rs. 2,06,92,409/- to assessee immediately after depositing cash in the bank account maintained in Axis Bank., the assesee was asked to explain the nature of transactions. In reply it was submitted by the assesee that the assessee is having no transaction with the given party. It was further submitted that some of the cheque received from the said party has been credited in the account of M/s Pankaj Jute Company against sale of Jute. However since no supporting evidence to prove that the amount in question received from the account of M/s S.S International is a sale proceed the AO treated the same as unexplained cash credit under section 68 of the Act.
Before the CIT-A it was submitted by the assessee the addition of Rs. 20590407/- u/s. 68 of the IT Act has been made without in any way establishing or finding out any evidence that such bank account with Axis Bank of Sri Sawarrnal Jhunjhunwala belonged to assessee and/or was owned by assessee.
The said account of Sri Sawarmal Jhunjhunwala with Axis Bank did not belong assessee nor such bank account was owned by assessee nor Sri Sawarmal Jhunjhunwala has ever deposed either before his AO or before the AO of assessee that the said bank account belonged to assessee and or that the said Bank Account did not belong to him.
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 23 of 31 46. Said Sri Sawarmal Jhunjhunwala was never examined u/s.131 by the AO of assessee or even by AO assessing Sri Sawarmal Jhunjhunwala before coming to any such conclusion nor assessee was allowed any opportunity to cross-examine Sri Sawarmal Jhunjhunwala on this point and hence the question of taking any adverse inference did not arise.
It was pointed out that the identity of Sri Sawarmal Jhunjhunwala is proved beyond doubt as he is being regularly assessed to Tax by ITO Ward 36(3), Kolkata under PAN ACWPZ4151H and Notice u/s. 143(2) and u/s. 142(1) were duly served on Sri Sawarmal Jhunjhunwala by the ITO assessing him on 29.07.2008 and 12.06.2009 as is apparent from the assessment order of Sri Sawarmal Jhunjhunwala for the assessment year 2007-08. 48. It was pointed as will appear from the assessment order of Sri Sawarmal Jhunjhunwala enclosed at Annexure "D", Sri Sawarmal Jhunjhunwala had made due compliance with some of the Notices of his assessing officer. 49. As will appear from the assessment order of Sri Sawarmal Jhunjhunwala, the AO assessing Sri Sawarmal Jhunjhunwala has pointed out that Notices u/s. 133(6) issued to assessee on 04.11.2009 and 16.11.2009 were not complied. It was submitted the Registered office of assessee at 10, Clive Row, Kolkata - 69 was under closure from 7th October, 2009 to 20th December 2009 on account of agitation by office staff and hence the question of receipt of any such Notice assessee and/or non-compliance of assessee to any such notice did not arise. 50. However, a letter from the assessing officer of assessee dated 21.12.2009 was duly handed over by the assessing officer assessing assessee and which were duly replied with by letters dated 23.12.2009 and 29.12.2009. Copies of letter of the AO and replies were filed before CIT-A and it was argued the assessee had categorically denied to have any business or any other transactions with Sri Sawarmal Jhunjhunwala and the cheques issued through Axis bank by Sri Sawarmal Jhunjhunwala were received by assessee from Pankaj Jute Co. in the account of Pankaj Jute Co. to whom assessee were selling jute goods. 51. It was argued the assessee was regularly selling Jute goods to Mls. Pankaj Jute Company and other persons. Complete details of sales made to M/s. Pankaj Jute Co. and others along with details of payments received from them by different cheques on Axis Bank during the year ended 31.03.2007 were filed before CIT-A
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 24 of 31 showing the Bill No. and date, Quantity of goods sold, Value and details of payments received against such sale and from a perusal of which it will be seen that some of such cheques credited to the account of M/s. Pankaj Jute Co. & others against sales made to them were issued by Axis bank and which must have been issued by Sri Sawarmal Jhunjhunwala on account of and on behalf of M/s. Pankaj Jute Co. & such other persons and under instructions of M/s Pankaj Jute Company & such other persons. 52. It was pointed that even in spite of copies of Lorry-passes, copies of bills and copies of Mills challans in respect of sales made to such persons having made available to the AO, the AO never examined u/s. 131 M/s. Pankaj Jute Co. and such other persons on this issue even in spite of specific submissions made by assessee that such cheques were received assessee for and on behalf of and others and in the account Pankaj Jute Co. Details of cheques received which were issued by Sri Sawarmal Jhunjhunwala through Axis Bank were filed before CIT-A to clarify the whole issue. Such copy of Bank Statement was made available by the AO. 53. Neither Sri Sawarmal Jhunjhunwala nor M/s. Pankaj Jute Co. nor Axis Bank nor such other persons having been examined by the AO of assessee u/s. 131 nor assessee having been given any opportunity to cross-examine such persons nor the AO having established by any evidence as to the ownership of account of Axis bank existing in the name of M/s S. S. International prop. Sri Sawarmal Jhunjhunwala with Axis bank as belonging to assessee, the question of treating the Cash deposits with Axis bank by Sri Sawarmal Jhunjhunwala as cash deposited by assessee in Axis Bank is wholly bad, illegal, unjustified and uncalled for. 54. It was pointed out that the AO neither called for any statement from Axis Bank nor examined Axis Bank as to who had introduced and certified the genuineness & existence of Sri Sanwarmal Jhunjhunwala, the alleged proprietor of S.S. International while opening the bank account nor the AO made any request or summoned Axis Bank u/s 131 to produce such Introduction Form which, as per law should have contained the photographs, addresses of the introducers and such other persons after obtaining such documents the AO should have examined such introducers and other persons and should have allowed an opportunity to your petitioner to Cross Examine such persons before taking any such decision and which the AO has completely failed to do.
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 25 of 31 55. It was reiterated that the cheques of Axis Bank received by assessee from Pankaj Jute Co. and such other persons had been issued by any person by the name of Sanwarmal Jhunjhunwala and assessee had no occasion or reason to think so since all such cheques had been received by assessee from Pankaj Jute Company against sale of jute goods to them and this became known to assessee only when a notice in this regard was received by assessee from the AO of assessee. 56. It was pointed out thatfrom the Asst. Order of Sri Sanwarmal Jhunjhunwala it will be apparent that a sum of Rs.3,40,90,400/- has been treated by the AO assessing Sri Sanwarmal Jhunjhunwala as his undisclosed cash credit on substantive basis in respect of cash deposits in Bank whereas in the case of assessee only Rs.2,05,92,407/- (which perhaps is equal to the cheques issued by Axis Bank in the name of your petitioner co.) has been treated as undisclosed income u/s 68 and this proves beyond any doubt that many other payments also must have been made by Sri. Sanwarmal Jhunjhunwala through Axis Bank and hence assessee fails to understand as to how part of cash deposited by Sri Sanwarmal Jhunjhunwala with Axis Bank could be treated as undisclosed income of assessee u/s 68 on sale of cash deposited by Sri Sanwarmal Jhunjhunwala in his Bank A/c with Axis Bank. 57. It was argued that the burden of proof rests on the Revenue. So far no documents or evidence have been brought on record to establish that the part of cash deposits made by Sri S. M. Jhunjhunwala in his Axis Bank is undisclosed income of your Petitioner Co. and in this connection reliance is placed on following case laws: (i) CBI v. v.c. Shukla & Ors, AIR 1998 SC 1406. (ii) Kishinchand Chellaram v. CIT, (1980) 125 ITR 713 (SC), at 723 (iii) K. P. Verghese v. ITO, Ernakulam & Anr. 131 ITR 597(SC) (iv) Hon'ble Supreme Court in the case of Kishinchand Chellaram v. CIT, (1980) (supra) held that:
The CIT-A however confirmed the order of the AO observing as follows: I have carefully considered the submission of the Ld. A.r . The assessing officer has discussed the issue in para 7 of the order. Information was received by the A.O that cheques amounting to Rs. 2,05,92,4071 has been issued in the name of the assessee after depositing cash from the account of
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 26 of 31 Sri.Sawarnal Jhunjhunwala Prop. of M/s S.S International , maintained in Axis Bank. Accordingly the assessee was asked to explain the nature of transaction. In response it was submitted by the Asssessee that there is no party in the books of the Company in the name of Sri. Sawarnal Jhunjhunwala Prop. of M/s S.S International . Subsequently it was submitted that some of the cheques in question has been credited against the sale made to Mls. Pankaj Jute Mills. However the A.O added the amount in question under section 68 of the Act stating that the submission of the assessee is not convincing and the assessee failed to explain how and why the cheques of third party was credited in the account of the Company.
9.2. As per submission of the assessee the cheques in question has been received against sale from M/s Pankaj Jute Co , Gunny sales Corp., Krisna Prasad Yadav, and others. However neither during the course of assessment proceeding nor the appellate proceeding the assessee has furnished specific confirmation in support of the claim from M/s Pankaj lute Co , or the other concerned parties. Further in the case assessment proceeding of Sri. Sawarnal Jhunjhunwala also the assessee was specifically asked to explain the nature was transaction carried out with Sri. Sawarnal Jhunjhunwala Prop. of M/s S.S International, but the same was not complied. Hence it cannot be said that the assessee has proved the identity, creditworthiness and genuineness of the receipts received from the account of Sri. Sawarnal Jhunjhunwala Prop. of M/s S.S International . Hence in absence of any supporting evidence that the amount in question received from Sri. Sawarnal Jhunjhunwala Prop. of M/s S.S International is a sale receipt credited on account of different parties, the A.O has rightly treated it as unexplained cash credit.
9.3. However since the amount in question received from Sri. Sawarnal Jhunjhunwala Prop. of M/s S.S International has already been accounted for as sale receipts by the appellant Company, the addition of the same amount under section 68 will be double addition. Hence if the corresponding sale against the payments received from the bank account of Sri. Sawamal Jhunjhunwala Prop. of M/s S.S International is treated as "Bogus Sale" ,the same had to be reduced from the accounts of the assessee. In effect it will neutralize the addition made under 68 of the Act. However the facts remains that there was no sale of goods and the assessee has inflated the sale by booking bogus sale in the name of different parties and payments shown to have received from the account of Sri Sawarnal Jhunjhunwala Prop. of M/s S.S International . Hence the only conclusion can be drawn that the asseesee has under stated the closing stock by the
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 27 of 31 quantity booked as "Bogus Sale" . Hence the amount of the suppressed closing stock has to be added in order to arrive at correct taxable income of the Company. Further since the asseessee is a loss making Company and the gross profit is in negative figure , the amount credited as "Bogus Sale" is taken as value of the suppressed closing stock. With these remarks the addition of Rs. 2,05,92,407/- made by the assessing Officer is confirmed. Accordingly ground no 7 is dismissed .
Aggrieved by the order of CIT(A), the assessee raised ground nos. 1 to 3 before the Tribunal. Ld. Counsel for the assessee reiterated the submissions made before the CIT(A). As submitted by him, no enquiry was made either by the AO or by the CIT(A) with the concerned parties and adverse conclusions were drawn against assessee on the basis of entries reflected in one bank account. Ld. DR has submitted that cheques were found to be deposited in the bank account of assessee and since no satisfactory explanation could be offered by the assessee, the same were treated as sale proceeds received by the assessee. He however has agreed that enquiries should have been made by AO and CIT-A with concerned parties in order to ascertain the exact nature of the receipts. Keeping in view the submissions made by the both the sides, we are of the view that the matter should go back to AO for deciding the same afresh after ascertaining the exact nature of receipts in question by making enquiries with the concerned parties. AO shall give proper and sufficient opportunity of being heard to the assessee who shall extend all the cooperation to the AO to decide this issue in accordance with law. Accordingly grounds 1 to 3 are treated as allowed for statistical purposes.
In the result the appeal of the assessee is allowed for statistical purposes.
ITA No.747/Kol/2011 and ITA No. 598/Kol/2011
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 28 of 31 61. ITA 747/Kol/11 is the appeal by the Revenue and ITA 598/Kol/11 is the appeal of the assessee. Both these appeals are against the same order dated 25.02.2011 passed by the CIT(A), Central-I, Kolkata for assessment year 2007-08.
ITA 747/Kol/2011 – Revenue’s appeal
Ground no.1 raised by the Revenue reads as follows:
That the Ld. CIT(A) has erred in deleting the disallowance of gratuity liability of Rs.1,17,00,692/-, since the assessee was consistently following cash basis for accounting gratuity liabilities and since no provision was made in the accounts during the year nor any payment was made to the employees.
Ground no.1 is identical to ground no.1 raised by the assessee in ITA 601/Kol/2011 in the case of Hooghly Mills Co ltd a sister concern of the assessee. For the reasons given therein for dismissing that ground no.1, in view of the same it is dismissed in this appeal.
Ground no.2 raised by the Revenue reads as follows:
That the Ld. CIT(A) has erred in his observation that rule 8D read with section 14A is not retrospective and thereby in respecting to disallowance to 1% of dividend income declared by the assessee deleting the addition.”
Ground no.2 is identical to ground no.4 raised by the Revenue in ITA 747/Kol/11 in the case of Hooghly Mills Ltd., a sister concern of the assessee. For the reasons stated for deciding the identical ground therein, we uphold the order of CIT(A) and direct the disallowance under section 14A of the Act be restricted to 1% of the exempt income.
In the result, the appeal filed by the Revenue is dismissed.
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 29 of 31
ITA 598/Kol/11 – Assessee’s appeal M/S Hooghly Mills Projects Ltd
In this appeal in ITA 598/Kol/11, the assessee Ground nos. 1 to 3 raised by the assessee are reproduced as follows: 1. For that in View of the facts and in the circumstances the A.O. is wholly unjustified in treating Rs. 73,82,654/- as unexplained cash credit of your petitioner u/s 68 of the Income Tax Act and in view of the facts and circumstances the CIT (Appeals) Central-I, is wholly unjustified in confirming the said action of the A.O. and in view of the facts and in the circumstances the said amount or any part thereof could not be treated as unexplained cash credit u/s 68 of the LT. Act. in the hands of your petitioner and in view of the facts and circumstances it may kindly be held accordingly and the addition of Rs. 73,82,654/- made by the A.O. and confirmed by the CIT (Appeal) may kindly be deleted.
For that in view of the facts and in the circumstances Rs. 73,82,654/- being the realization on account of sale proceeds of goods and all evidences in connection with the same having been made available to the A.O. as well as the CIT (Appeals) any addition made on this account is wholly bad, illegal, unjustified and uncalled for and in view of the facts and circumstances the same may kindly be deleted.
For that in view of the facts and in the circumstances the CIT (Appeals) is wholly unjustified in observing and holding that the sale proceeds against which a sum of Rs. 73,82,654/- was received is a Bogus sale and is further wholly unjustified in observing / holding that the amount of Rs. 73,82,654/- credited should be treated as Bogus sale in respect of suppressed closing stock and in view of the facts and circumstances such observations 1 findings of the CIT (Appeal) is wholly bad illegal, arbitrary, unjustified and uncalled for and in view
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 30 of 31 of the facts and circumstances the same may kindly be deleted / expunged and / or modified.
Ground no’s-1 to 3 are identical to ground no’s.1 to 3 raised by the assessee of in ITA 548/Kol/2011 in the case of Hooghly Mills Co ltd a sister concern of the assessee. For the reasons given therein for remitting to the file of AO of that ground no’s-1 to 3, in view of the same Ground no’s-1 to 3 in this appeal are treated as allowed for statistical purposes.
In the result the appeal of the assessee is allowed for statistical purposes
Order pronounced in the open Court on April 8th, 2016.
Sd/- Sd/- (P.M. Jagtap) (S.S. Viswanethra Ravi) Accountant Member Judicial Member Kolkata, the 8th day of April, 2016 Talukdar/Sr. P.S.(OS) Copies to :(1) M/s. The Hooghly Mills Co. Ltd., 10, Clive Row, 3rd floor, Kolkata- 700 001/ M/s. Hooghly Mills Co. Ltd., 18, Rabindra Sarani, 5th floor, Poddar Court, Kolkata (2) DCIT, Central Circle-VII, Kolkata / ACIT, Central Circle-VII, Kolkata (3) Commissioner of Income-tax (Appeals), Kolkata (4) Commissioner of Income Tax, Kolkata (5) The Departmental Representative, (6) Guard File By order Assistant Registrar, ITAT, Kolkata Benches, Kolkata
I.T.A.Nos. 601,746,548,747,598 & C.O.32-KOL-2011 Assessment years: 2006-2007 & 2007-08 Page 31 of 31