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Income Tax Appellate Tribunal, MUMBAI “A” BENCH, MUMBAI
Before: SHRI SHAILENDRA KUMAR YADAV, JUDICIAL & SHRI RAJESH KUMAR.
अपीलाथ� क� ओर से /By Appellant :Shri Hero Rai, A.R. ��यथ� क� ओर से/By Respondent : Shri Anand Mohan, CIT D.R. सुनवाई क� तार�ख/Date of Hearing :19.11.2015 घोषणा क� तार�ख/Date of Pronouncement :07.12.2015 ORDER PER RAJESH KUMAR, A.M: These appeals filed by the assessee are against the consolidated order of CIT(A)-37, Mumbai, dated 11.06.2012 for all the above assessment years. Since all these appeals relate to the same assessee and the issue involved in some appeals is of common nature and therefore these appeals are heard ITA Nos.5565, 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 2 together and are being disposed of by the consolidated order for the sake of convenience and brevity. We shall take up the for A.Y. 2005-06. Assessee has raised following grounds:
“1. The Ld. CIT (Appeals) erred in confirming the addition made by Ld.A.C.I.T. on account of Deemed dividend U/s 2(22)(e) of Rs.46,67,500/-.
The Ld. CIT (Appeals) erred in treating the Share Premium Account as part of accumulated profit and further erred in treating the advances received by the Appellant as Deemed dividend.
The Ld. CIT(Appeals) erred in confirming the addition made by Ld. A.C.I.T. on account of Deemed dividend even when the company advancing loan had accumulated loss and not accumulated profit.
Additional Ground of Appeal The learned Asst. CIT was not justified in making and the learned CIT(Appeals) was not justified in confirming, the addition of Rs.46,67,500/- as deemed dividend u/s.222(e) made in the assessment completed u/s153A since the same is not based on any incriminating material found in the course of the search.”
2. The issue raised in the first three grounds of appeal relate to confirming the addition by CIT(A) amounting to Rs.46,67,500/- on account of deemed dividend as made by A.O. by treating share premium account as part of the accumulated profit whereas as a matter of fact there was accumulated loss in the balance sheet of the assessee. The assessee also raised an additional ground raising the issue therein that the CIT(A) was not justified in confirming the addition of Rs.46,67,500/- as deemed dividend u/s.2(22)(e) made in the assessment completed u/s.153A as the same was not based on any incriminating material found during the course of search. , 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 3
3. The brief facts of the case are that the assessee filed her return of income on 26.09.2006 declaring an income of Rs.8,41,254/-. A search and seizure action u/s.132 of the Act was carried out on the assessee along with other associated persons and companies, namely, Twinkle Hospitality Pvt. Ltd. (hereinafter referred as ‘THPL’) and M/s. Encore Hotels Pvt. Ltd. (hereinafter referred as ‘EHPL’). The assessee was holding 25% shares of EHPL and 18.20% shares in THPL. The assessee was served notice u/s.153A on 13.06.2011 requiring the assessee to file return within 30 days. The assessee filed return on 06.07.2011 declaring the total income of Rs.8,41,254/-.
3.1 The ld. A.O. during the course of assessment proceeding found that EHPL borrowed a loan of Rs.1,69,41,107/- from its group companies THPL between Nov. 2004 to March 2005. The A.O. came to the conclusion that since the assessee was holding 25% share of EHPL and 18.20% share of THPL. The provision u/s.2(22)(e) of the Act in respect of deemed dividend were clearly applicable as the THPL had accumulated profits as shown under the head ‘reserve and surplus’ as on 31.03.2005 of Rs.93,35,000/-. Accordingly, the A.O. added 50% of the amount of reserve and surplus Rs.46,67,500/- as deemed dividend to the income of assessee.
The ld. CIT(A) confirmed the addition by holding as under:
“4.4.9 I had called for the details of payment made by THPL to Encore and find that the same was given in piece meal from 1.11.2004 to 31.3.2005 of a sum amounting to Rs.1,69,41,108/-. I had also called for the details of allotment of shares and find that the same was allotted as on 27.11.2004 as per form No.2 filed under the Companies , 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 4
Act, 1956 dt.29.11.2004 but registered in ROC on 13.12.2004. As held earlier, the profits of the company accrue on a day to day basis and onus was on the appellant to adduce evidence that it had no other day to day profits during the year and hence cumulative loss at the end of the year cannot justify the claim that the appellant did not have any profits when the loans were being advanced by THPL to EHPL.
4.4.10 In view of the above facts and judicial analysis, I am of the considered opinion that provisions of sec.2(22)(e) apply on all fours to the case of the appellant and hence, no fault can be found with the action of the Ld. A.O. Accordingly, this ground is dismissed.”
Ld. A.R. submitted before us that the basis on which the addition of Rs.46,67,500/- on account of deemed dividend u/s.2(22)(e) was wrong as the company THPL had no accumulated profits rather the said company had accumulated loss to the tune of Rs.14,27,174/-. The company had share premium account amounting the Rs.93,35,000/- which was shown under the head ‘reserve and surplus’. The ld. A.O. treated the same as accumulated profit for the purpose of deemed dividend and thus added Rs.46,67,500/- as deemed dividend u/s.2(22)(e) of the Act. Ld. Counsel further submitted that the case of assessee is fully covered in favour of the assessee in her son’s case in A.Y. 2005-06, order dated 11.04.2014, wherein similar addition made by the A.O. was deleted. The ld. Counsel also cited a number of other judgments in support of the assessee’s stand. The ld. Counsel also submitted that the return for the instant year was processed u/s.143(1) of the Act, whereas the search was conducted on 21.08.2009 and therefore, the assessment had attained finality and the same had not abated as nothing was pending on the date of search and thus, the addition made in the assessment u/s.153A r.w.s. 143(3) was not based on the incriminating material as found during the search operation and therefore, the ITA Nos.5565, 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 5 same were bad in law. The ld. Counsel relied on some decisions, namely, 374 ITR 645 (Bom) CIT vs. (1) Continental Warehousing Corporation (Nhava Sheva) Ltd. and (2) All Cargo Global Logistics Ltd., Bombay High Court (Nagpur) CIT vs. Murli Agro Products Ltd. (ITA No.36 of 2009), 137 ITD 287 (Mum_Trib) (SB) All Cargo Global Logistics Ltd. vs. DCIT, 259 CTR 281 (Raj) Jai Steel (India) vs. Asst. CIT , 234 Taxman 300 (Del) CIT vs. Kabul Chawla and Mumbai Bench in Shri Gurinder Singh Bawa vs. DCIT The ld. D.R., on the other hand, relied heavily on the orders of authorities below.
We have heard rival submissions and material on record, we find that the co-ordinate Bench in A.Y. 2005-06 vide order dated 11.04.2014 decided the issue on the same facts in favour of the assessee who happened to be son of the assessee. The relevant para 8 & 9 are reproduced below:
“8. We have carefully perused the orders of the lower authorities and the material placed before us. A perusal of the statement of accounts of the assessee for the year ending 31.3.2005 shows that the assessee is showing profit and loss account with a debit balance of Rs.14,27,174/- in the balance sheet. Under the head Reserves and Surplus, the assessee is showing share application money at Rs.93,35,000/-. Amount representing share premium cannot form part of accumulated profit. It is an undisputed fact that the Reserve and surplus consists of only share premium. It is a trite that share premium amount cannot be used for distribution of dividend as per the interpretation of Sec. 78 of Companies Act. When there is a statutory bar on the share premium account being distributed as dividend, the deeming provision of Sec. 2(22)(e) cannot apply. It would be pertinent to note here that not only there is a prohibition on the distribution of the share premium account as dividend under the Companies Act, the same is obliged to be treated as part of the share capital of the company in the light of the provisions of Sec. 78(1) of the Companies Act. A perusal of the provisions of Sec. 2(22)(e) would suggest that it refers to "accumulated profit whether capitalized or not". Therefore it is only the distribution of the accumulated profits which are deemed to be dividend in the hands of the shareholder. Thus, the share premium account cannot be stated to , 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 6 be commercial profits in the true sense of the term having regard to the provisions of the Companies Act. 8.1. As mentioned elsewhere, if the share premium amount is taken out of Reserves and Surplus, the assessee is having negative balance under the head profit and loss account which means that it has accumulated losses for the year ending 31.3.2005, which lead to only logical conclusion that there cannot be any question of deemed dividend. The findings of the Ld. CIT(A) are accordingly reversed. The AC) is directed to delete the addition made on account of deemed dividend u/s. 2(22)(e) of the Act.
As we have directed the AO to delete the addition on the facts of the case, we do not find it necessary to decide the additional ground raised by the assessee.”
Since, the facts of the assessee are identical to the issue involved in the above ITA and we, therefore, respectfully following the decision of Co-ordinate Bench decide the ground nos. 1 to 3 in favour of assessee.
6.1 In the additional ground raised by the assessee, the issue is whether an addition which is not on the basis of incriminating material as found during the search operation can be made where the assessment has attained finality. In this case, the assessment was completed u/s.143(1), whereas the search was conducted on 21.08.2009. In our opinion, the provisions of Section153A of the Act do not disturb the already completed assessment whether u/s.143(1) or 143(3) unless some incriminating material is found during the course of search. In the case of 374 ITR 645 (Bom) CIT vs. (1) Continental Warehousing Corporation (Nhava Sheva) Ltd. and (2) All Cargo Global Logistics Ltd., Hon’ble Bombay High Court held that if there was no incriminating material found during the search then the Tribunal was right in holding that power u/s.153A being not expected to be exercised routinely and should be exercised if 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 7 search revealed any incriminating material. Similar view has been taken by the Hon’ble Bombay High Court, Nagpur Bench in CIT vs. Murli Agro Products Ltd. (ITA No.36 of 2009), 259 CTR 281 (Raj) Jai Steel (India) vs. Asst. CIT and various Tribunals’ decisions as reported in 137 ITD 287 (Mum-Trib) (SB) All Cargo Global Logistics Ltd. vs. DCIT, 234 Taxman 300 (Del) CIT vs. Kabul Chawla and Mumbai Bench in ITA No.2075/Mum/2010 Shri Gurinder Singh Bawa vs. DCIT. In view of the ratio laid down in the above decisions, we are of the considered view that the addition made is not based on the incriminating material during the search and the assessment which is already attained finality cannot be disturbed. The additional ground also decided in favour of assessee.
In A.Y. 2008-09 assessee has raised following grounds:
“1. The Ld. CIT (Appeals) erred in confirming the addition made by Ld. A.C.I.T. on account of disallowance of Rs.13,97,843/- u/s.14A r.w.Rule 8D. 2. The Ld. CIT (Appeals) erred in holding that expenses attributed towards earning exempt income even when there were no nexus. 3. The Ld. CIT(Appeals) erred in considering the facts that the major investments were made for acquiring strategic business stake.”
7.1 The common issue raised in all the grounds of appeal is with regard to confirming the addition by CIT(A) of Rs.13,97,843/- u/s.14A r.w.Rule 8D by holding that the 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 8 expenses related to exempt income by ignoring the fact that the major investment were of strategic nature.
8. The facts of the case are that the assessee’s principal business was to make investment in share and securities by buying and selling of shares and to earn profit. During the year, assessee received Rs.3,86,424/- as dividend which was claimed exempt. The ld. A.O. during the course of assessment proceedings found that the assessee had not made any disallowance and therefore, the provisions of Section 14A were attracted. The assessee submitted before the A.O. that provision of Section 14A r.w.Rule 8D were applicable from 08-09 onwards, however, the same were not applicable in case of strategic investments as made by the assessee in the group companies. However, without prejudice, this claim of the assessee, the assessee filed a working of disallowance u/s.14A r.w.Rule 8D. The ld. A.O. observed that the assessee, without prejudice to claim, has computed the disallowance u/s.14A r.w.Rule8D at Rs.13,97,843/- which is found in accordance with the Act u/s.14A r.w.Rule8D and added the same to the income of the assessee.
9. Ld. CIT(A) also dismissed the appeal of the assessee on the ground that she has received dividend income of Rs.3,86,424/- during the year and also investment in some companies’ mutual fund and therefore, by following the decision in the case of Daga Capital Management Ltd. (SB).
The ld. A.R. submitted before us that disallowance u/s.14A was not applicable as assessee invested in the group companies 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 9 from strategic point of view and drew our attention to the decision passed in ITA No.1752 to 1754/Mum/2013 A.Y. 08-09 to 10-11 in the case of group company of the assessee wherein the same has been decided that no disallowance is required to be made in case of strategic investment made in group concern. The ld. Counsel also cited a number of other decisions in the case of Asst. CIT vs. M/s. Smart Chip Ltd. in ITA No.1923/Mum/2012, 65 SOT 86, Garware Wall Ropes Ltd. vs. ACIT & M/s. J. M. Financial Ltd. vs. ACIT in ITA No. 4521/Mum/2012. Ld. D.R. relied on the orders of authorities below.
We have heard the rival submissions and perused the material on record. We find from the balance sheet filed by the A.R. for the instant financial year at page no.4 to 10 that assessee has made huge investment in its group companies which are strategic in nature. We also find that a similar issue has been decided in to 1754/Mum/2013 A.Y. 08-09 to 10-11 in the case of M/s. Twinkle Enviro Tech Ltd. vs. DCIT, wherein it has been held that no disallowance is required to be made in the case of investment which are of strategic nature. The para 10 & 11 of the said order is reproduced below:
“10. We have considered rival contentions and found that the AO has computed disallowance as per Rule 8D by treating entire investment made by the assessee without excluding strategic investment made in the group companies, it was contended by Id. AR that the investment was made as strategic investment for the purpose of business only, therefore, the investment made in the group concerns which is Rs.11.30 crores in the A.Y.2009-10, Rs.26.44 crores for A.Y.2008-09 and Rs.11.30 crores in A.Y.2010-11, respectively, may be excluded. Ld AR also submitted that the Tribunal is taking consistent view to the effect that investment made for strategic purpose in the group concerns are not meant for earning dividend income, therefore, the same are required , 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 10 to excluded from total investment while computing disallowance u/s.14A. Reliance was also placed on the following decisions:- i) M/s Smart Chip Ltd. (ITA Nos.1923, 5196, 5367/Mum/2012, order dated 28-11-2014); ii) Garware Wall Ropes Ltd., 65 SOT 86); iii) M/s JM Financial Limited (ITA No.4521/Mum/2012, order dated 26-3-2014);
11. We have gone through the orders of the -authorities below and found that as per the audited balancesheet, the assessee has made substantial investment in group concern as a strategic investment. As per the decision of coordinate bench, strategic investment are required to be excluded from total investment while working out disallowance under Rule 8D. The precise observation of the Tribunal in case of M/s Smart Chip Ltd. (supra) was as under:-
"6. We have considered the rival contentions, carefully perused the record, gone through the orders of authorities below and the judicial pronouncement referred by the lower authorities as well as Id. Representatives of both the parties during the course of hearing before us. From the record we found that the Assessee has made investment in group company which was 100% subsidiary of the Assessee. The investment was made as strategic investment for the purpose of business wherein the sole intention was to carryout the business purpose of the Assessee- company. With regard to the disallowance of interest, the Id. CIT(A) has recorded the categorical findings to the effect that the investment was made by the assessee from its own fund and not from any borrowed funds. By refereeing Annexure 'A’ filed by the assessee, the Id. CIT(A), observed that after verifying the bank statement as placed on record, the entire fund was so invested was out of the Assessee's own fund. The reliance was placed on the decision of jurisdictional High Court in the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd:. [2009] 178 TAXMAN 135 (BOM.) to the effect that the presumption for investment will be that the Assessee company has made the investment out of its own fund rather than borrowed fund. Findings so recorded by the Id. CIT(A) was not controverted by the revenue by placing any substantial evidence. Hence, we do not find any infirmity in the order of Id. CIT(A) in deleting the disallowance of Rs.33,90,461/-made by the AO on account of interest expenditure by applying the provisions of section 14A of the Act r.w.r.SD of the Rules."
, 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 11
In view of the above, ground taken by the assessee in all the years for computing disallowance under rule 3D is restored back to the file of AO with a direction to recompute the same by excluding strategic investment made .in the group concerns which is Rs.11.30 crores in the A.Y.2009-10, Rs.26.44 crores for A.Y.2008-09 and Rs.11.30 crores in A.Y.2010-11, respectively. We direct accordingly.”
The case of the assessee is fully covered by the above decision and we therefore respectfully following the order passed by the co-ordinate Bench in the said ITA, restore back to the file of A.O. the issue of disallowance u/s.14A r.w.Rule8D of the Act with the direction to re-compute the same by excluding strategic investment made in the group concern after allowing a reasonable opportunity of hearing to the assessee. The A.O. is directed accordingly. The appeal of the assessee is partly allowed for statistical purposes. & 5568/Mum/2012 for A.Y. 2009-10 & 2010-11
The issue involved in these appeals is identical to one as decided by us in A.Y. 2008-09 and therefore, facts being same, our decision in the shall apply to these appeals, as well. Accordingly, the issue is restored back to the file of A.O. with the direction to re-compute the disallowance u/s.14A r.w.Rule8D of the Act with the direction to re-compute the same by excluding strategic investment made in the group concern after allowing a reasonable opportunity of hearing to the assessee. The A.O. is directed accordingly. These appeals of the assessee are partly allowed for statistical purposes. , 5566, 5567 & 5568/Mum/2012 (05-06,08-09, 09-10 & 10-11) Page 12
As a result, appeals filed by assessee in for A.Y. 2005-06 is allowed and rest three appeals are partly allowed for statistical purposes.
Pronounced in the open Court on this the 07th day of December, 2015.
Sd/- Sd/- (SHAILENDRA KUMAR YADAV) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai: Dated 07/12/2015 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार, आयकर अपील�य अ�धकरण, मुंबई ।