ATR WAREHOUSING PRIVATE LIMITED,VISAKHAPATNAM vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, , VISAKHAPATNAM

PER BENCH :

This appeal filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals), Visakhapatnam [CIT (A)-3] in Appeal No. 211/2017-18/CIT(A)-3/VSP/2019-20, dated

2 31/10/2019 arising out of the order passed U/s. 143(3) r.w.s 153A

of the Income Tax Act, 1961 [the Act] for the AY 2013-14.

the name and style of M/s. ATR Ware Housing Pvt. Ltd.,

Visakhapatnam is deriving income from business and capital gains,

filed its return of income for the AY 2013-14 on 31/10/2016

declaring a total income of Rs. 1,97,91,850/-. The main source of

business income is license fee collected from the tenants for the

ware housing godowns at various places viz., Visakhapatnam,

Kakinada and Hyderabad. Sri AT Rayudu and Sri A. Avnash are the

Directors of the assessee-company who hold 45% each of the share-

holding in the company. The case was selected for scrutiny under

CASS and a notice U/s. 143(2) was issued on 15/09/2014 but the

assessment got abated as search and seizure operations u/s. 132 of

the Act were conducted on 14/10/2015 and in the cases of AT

Rayudu, Sri A. Avnash, Smt. A. Ammaji and Smt. Harshitha. In the

course of said proceedings several documents and loose sheets were

found and seized. Accordingly, notice U/s. 153A was issued to the

appellant on 18/07/2016 and served on the assessee. In response

3 to the said notice the assessee stated that the return of income filed

U/s. 139 on 31/10/2013 may be treated as the return filed in

response to the notice U/s. 153A. Subsequently a notice U/s.

143(2) was issued on 19/06/2017. In response to the said notice,

the assessee’s representative appeared and furnished the copy of

the computation of total income. Thereafter, a notice U/s. 142(1)

and a questionnaire was issued to the assessee and its Authorized

Representative to appear before the Ld. AO and the assessee was

asked to submit some basic information i.e., audit reports, financial

statements, TDS made details, bank account statements, copy of

WT return filed etc., and the assessee’s Representative furnished

the information called for. Thereafter, another notice U/s. 142(1)

was issued called for further details like books of account, bills &

Vouchers, details of share holders, breakup of certain items in the P

& L Account, balance sheet, confirmation letters in respect of

unsecured loans, and applicability of section 14A, ledger extracts of

expenditure above Rs. 5 lakhs, sundry creditors and a detailed note

on the transactions with group concerns on the basis of material

found and seized in the coursed of search and seizure operations

conducted at the business premises of the applicant and residential

4 premise of the Directors etc and the assessee was asked to furnish

the information by 30/08/2017. After considering the submissions

of the assessee as well as the material available before the Ld. AO,

the Ld. AO rejected the claim of unsecured loans borrowed by the

assessee amounting to Rs. 16,08,00,000/- and consequently

disallowed the claim of interest of Rs. 32,56,608/- relatable to such

unexplained cash credits. Ld.AO also made addition of Rs.

75,05,08,016/- being the excess amount collected for 1,93,655

shares and taxed as income from other sources U/s. 56(2)(viib) of

the Act. Further, an amount of Rs. 8,66,489/- was added by the Ld.

AO to the total income of the assessee by invoking the provisions of

section 14A of the Act as the said amount was incurred towards

earning dividend income. The Ld. AO made another addition of Rs.

1,33,58,461/- U/s. 40(a)(ia) of the Act which was incurred towards

payment of interest on loans borrowed from APFSC and no tax at

source was deducted U/s. 194A of the Act. An addition of Rs.

44,06,653/- was added by the Ld. AO invoking the provisions of

section 2(22)(e) of the Act as deemed income and liable to tax as

income from other sources. Ld. AO also made addition of Rs.

2,13,211/- u/s. 36(1)(iii) being expenditure incurred towards

interest on loans borrowed from banks on the ground that the said

loans were not used for the purpose of business. The Ld. AO made

another addition of Rs. 1,19,23,200/- by treating the shares for a

sum less than fair market value U/s. 56(2)(viia) of the Act. On

being aggrieved by the additions made by the Ld. AO, against the

order of the Ld. AO, the assessee went on appeal before the Ld. CIT

(A). On appeal, the Ld. CIT(A), after considering the submissions of

the assessee as well as discussing the issues at length, partly

allowed the appeal of the assessee. On being aggrieved by the

decision of the Ld. CIT(A), the assessee is in appeal before the

Tribunal by raising the following Grounds of Appeal:

“The order of the Ld. CIT(A)-3, Visakhapatnam is bad and unsustainable in the eyes of law as the same is passed without proper application of mind as it is also contrary to the spirit and provisions of the Income Tax Act, 1961. 1. That having regard to the facts and circumstances of the case, the present assessment pursuant to section 153A is not justified as the search conducted on the appellant was based on illegal search warrant. 2. That having regard to the facts and circumstances of the case, the present assessment is not justified as no incriminating material was found in the course of search. 3. That having regard to the facts and circumstances of the case, the Ld. AO has erred in passing the impugned assessment order which was passed pursuant to a notice issued u/s. 153A which itself was perverse in law. 4. The Ld. CIT(A) has erred in law and on facts by treating the sum of Rs. 25,93,067/- as unexplained expenditure for the mere reason that the same was not recorded in the books of accounts. 5. The Ld. CIT(A) has erred in law and on facts by holding that the appellant had received shares for a sum less than the FMV and accordingly, adding the differential amount of Rs. 1,19,23,200/- to the

6 income returned as income from other sources u/s. 56(2)(viia) of the Act.”

submitted that Grounds No. 1, 2 & 3 raised by the assessee are

not pressed. Therefore, these grounds are dismissed as not

pressed.

CIT(A) has disallowed a sum of Rs. 25,93,067/- being the

payment of interest in cash which has not been recorded in the

books of accounts as unexplained expenditure in the hands of

the assessee. The Ld. AR submitted that this enhancement of the

assessment by the Ld. CIT (A) was made without providing any

proper opportunity to the assessee and hence it is bad in law.

available before us as well as the orders of the Ld. Revenue

Authorities. We find merit in the argument of the Ld. AR that

when there is an enhancement to the assessment made by the

Ld. AO, an opportunity of being heard to the assessee shall be

provided to the assessee. However, in this case, we find that no

7 such opportunity was provided to the assessee. Therefore,

following the principles of natural justice, we are of the

considered view that the assessee shall be provided a reasonable

opportunity with respect to enhancement of disallowance of

interest of Rs. 25,93,067/-. Accordingly, in order to provide a

reasonable opportunity, we remit the issue back to the Ld. CIT(A)

for deciding the issue afresh after affording a reasonable

opportunity of being heard to the assessee. Thus, Ground No.4

raised by the assessee is allowed for statistical purposes.

CIT(A) confirmed the addition made by the Ld. AO with respect to

allotment of shares by M/s. Usha Tubes and Pipes Ltd [UTPL] to

the assessee company by invoking the provisions of section

56(2)(viia) of the Act. The Ld. AR pleaded that the assessee being

a holder of 3,10,000 equity shares in M/s. UTPL out of 3,11,000

equity shares it constitutes 99.68% of the equity shares. The Ld.

AR therefore pleaded that the assessee being a holding company

of M/s. UTPL and hence the shares were allotted at par value.

The Ld. AR relied on the decision of the Chennai Bench of the

Tribunal in the case of Vaani Estates (P.) Ltd. v. ITO (2018) reported

in 70 ITR 643 and also on the decision of the Karnataka High

8 Court in the case of PCIT v. Dr. Ranjan Pai (2021) reported in 431

ITR 250. The Ld. AR further pleaded that the Ld. AO has not

considered the relationship between the assessee company and

M/s. UTPL which is a holding and subsidiary company

relationship.

Per contra, the Ld. DR relied on the decision of the Ld.

Revenue Authorities and supported their orders.

available on record and the orders of the Ld. Revenue

Authorities. As per section 56(2)(viia) of the Act, if any company

in which the public are not substantially interested receives in

any previous year from any person or persons any property being

shares of a company for a consideration which is less than

aggregate fair market value of the property by an amount

exceeding Rs. 50,000/- of the aggregating fair market value of

such property as exceeding such consideration shall be

chargeable to tax under the head income from other sources.

The procedure for computation of fair market value is prescribed

under Rule 11U and 11UA of the IT Rules, 1962. However, in the

instant case it is established that the assessee is holding 99.68%

9 of the equity shares in the subsidiary company viz., M/s. UTPL.

The assessee company being the holding company fully controls

the management and affairs of M/s. UTPL. It is also noted that

the entire assets and liabilities of the subsidiary company also

belong to the assessee company as being a major shareholder and

also the holding company. Considering the relationship between

the assessee company and M/s. UTPL the allotment of the

further equity shares in M/s. UTPL (subsidiary company) to the

assessee company (holding company) does not alter neither the

share holding pattern nor the ownership of the assets by the

holding company. Further, section 56(2)(viia) is being introduced

as an anti-abuse measure pursuant to abolition of Gift Tax Act.

In the instant case, the assessee has made payments towards

share application money in the earlier years to the subsidiary

company which was not disputed by the Ld. Revenue Authorities.

It was also submitted that only the allotment was made during

the impugned assessment year at face value based on the share

application money already made by the assessee company being

the holding company. It is noted that the share application

money, share capital and reserves and surplus are ownership

funds and belong to the share holders. Merely by converting the

share application money by allotting shares at a subsequent date

10 cannot attract the provisions of section 56(2)(viia) of the Act as there is no change in the shareholding pattern subsequent to the allotment of shares by the subsidiary company. Therefore, as per the above discussion, we are of the considered view that the provisions of section 56(2)(viia) cannot be invoked in the instant case considering the peculiar circumstances and hence we delete the addition made by the Ld. Revenue Authorities.

Pronounced in the open Court on the 21st December, 2022.

Sd/- Sd/- (दु�वू� आर.एल रे�डी) (एस बालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

Dated : 21.12.2022 OKK - SPS

11 आदेश क� ��त�ल�प अ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee – ATR Warehousing Private Limited, D.No. 1. 11-8-34, Daspalla Hills, Visakhapatnam, Andhra Pradesh – 530003. राज�व/The Revenue – DCIT, Central Circle-2, MVP Colony, Sector-8, 2. Pratyakshakar Bhavan, Beside Post Office, Visakhapatnam, Andhra Pradesh – 530017. 3. The Principal Commissioner of Income Tax (Central), Visakhapatnam. आयकर आयु�त (अपील)/ The Commissioner of Income Tax (Appeals)-3, 4. Visakhapatnam. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, �वशाखापटणम/ DR, ITAT, 5. Visakhapatnam गाड� फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER

Sr. Private Secretary ITAT, Visakhapatnam