ACIT, CHENNAI V. M/s. Ready Test Go. P. Ltd. (Now C.S.S.Corp P. Ltd.), CHENNAI

ITA 1016/CHNY/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1090 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 08-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 21-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TAPAS KUMAR DUTTA
• Assessee Lawyers: SUNDARARAJAN SAMPATH
• Keywords: Depreciation; Deemed dividend; Unabsorbed depreciation
• Section: 2(22)(e)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER I.T.A. NO. 1016/MDS/2010 [ASSESSMENT YEAR 2006-07] THE A.C.I.T COMPANY CIRCLE (I)3 CHENNAI VS. M/S READY TEST GO. PVT. LTD [NOW C.S.S CORP. P. LTD NO. 38, NORTH BOAG ROAD T. NAGAR, CHENNAI 600 017 PAN: AABCR 4470 M (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI TAPAS KUMAR DUTTA ASSESSEE BY : SHRI SUNDARARAJAN SAMPATH O R D E R PER B. RAMAKOTAIAH, A.M.:- THIS IS AN APPEAL FILED BY THE REVENUE, DIRECTED AG AINST THE ORDER OF THE LD. CIT(A) V, CHENNAI DATED 16.3.2010 FOR ASSESSMENT YEAR 2006-07. ITA NO. 2280/MDS/2008 :- 2 -: 2. THE REVENUE HAS RAISED FOUR GROUNDS OF APPEAL, O UT OF WHICH GROUND NOS. 1 AND 4 ARE GENERAL IN NATURE AND NEED NO ADJUDICATION. 3. THE ISSUE IN GROUND NO. 2 INCLUDING SUB-GROUND N OS. 2.1 TO 2.5 IS REGARDING ADDITION MADE ON ACCOUNT OF DEEMED DIVIDEND OF RS. 8,32,31,520/-. 4. BRIEFLY STATED, THE FACTS OF THE ASSESSING OFFIC ER EXAMINED THE LEDGER ACCOUNT AND FOUND THAT THE ASSESSEE HAS RECEIVED ADVANCES FROM HIS SISTER CONCERNS CYBERNET SOFTWARE SYSTEMS INC. USA [CSS]. IT WAS THE EXPLANATION OF THE ASSE SSEE THAT THESE AMOUNTS WERE RECEIVED AS ADVANCES FOR THE WOR K DONE WHICH WERE SUBSEQUENTLY ADJUSTED IN THE BILLS MADE TO THE RESPECTIVE COMPANIES AND ACCORDINGLY THE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME-TAX, 1961 [IN SHORT, THE ACT ] WERE NOT APPLICABLE. THE ASSESSEE FURTHER CONTENDED THAT TH E ADVANCES WERE IN THE REGULAR COURSE OF BUSINESS WHICH WERE N OT COVERED BY THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT. THE AS SESSING OFFICER DID NOT AGREE AND HELD THAT THE PROVISIONS OF DEEME D DIVIDEND ARE APPLICABLE EVEN WHEN THE ADVANCES OR LOANS WERE FRO M A CONCERN ITA NO. 2280/MDS/2008 :- 3 -: IN WHICH THE DIRECTORS OF THE ASSESSEE COMPANY ARE SUBSTANTIALLY INTERESTED. ACCORDINGLY, HE BROUGHT THE ABOVE AMOU NT TO TAX. THE LD. CIT(A). AFTER EXAMINING THE PROVISIONS OF S EC. 2(22)(E) OF THE ACT AND THE FACT THAT THE ASSESSEE IS NOT A SHA RE HOLDER IN THE OTHER SISTER CONCERNS AND ALSO ON THE FACT THAT THE ADVANCES ARE RECEIVED IN THE COURSE OF BUSINESS AS TRADE ADVANCE S, DELETED THE ADDITION BY STATING AS UNDER: 2. 3.9 I HAVE CAREFULLY EXAMINED THE FACTS AND CONSIDERED THE VARIOUS SUBMISSIONS OF THE APPELLANT ON THIS ISSUE. I AM OF THE CONSIDERED VIEW THAT, DEEM ED DIVIDEND MAY BE APPLICABLE ONLY WHEN THE FOLLOWING CONDITIONS ARE FULFILLED: (I) THE COMPANY MAKING THE PAYMENT IS ONE IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED. (II) MONEY SHOULD BE PAID BY THE COMPANY TO A SHAREHOLDER HOLDING NOT LESS THAN 10% OF THE VOTING POWER OF THE SAID COMPANY. (III) THE MONEY SHOULD BE PAID EITHER BY WAY OF AN ADVANCE OR LOAN OR IT MAY BE ANY PAYMENT FOR WHICH THE COMPANY MAY MAKE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF ANY SHAREHOLDER OR ALSO TO ANY CONCERN I N WHICH SUCH A SHAREHOLDER IS A MEMBER OR A PARTNER A ND ITA NO. 2280/MDS/2008 :- 4 -: IN WHICH HE IS SUBSTANTIALLY INTERESTED. (IV) AND LASTLY, THE LIMITING FACTOR THAT, THESE PA YMENTS MUST BE TO THE EXTENT OF ACCUMULATED PROFITS, POSSE SSED BY SUCH A COMPANY. 3.12 IN THIS CASE THE APPELLANT COMPANY IS NOT THE SHAREHOLDER OF THE LENDOR COMPANY. 3.15 IN THE CASE OF CIT VS AMBASSADOR TRAVELS P LTD . THE PROVISIONS OF SEC 2(22)(E) WERE NOT APPLICABLE WHERE NORMAL BUSINESS TRANSACTIONS ARE TRANSACTED BETWEEN TWO COMPANIES. THE RELEVANT PORTION IS REPRODUCED AS UNDER: HELD THAT AS THE ASSESSEE WAS INVOLVED IN THE BOOK ING OF RESORTS FOR THE CUSTOMERS OF THOSE COMPANIES AND HAD ENTERED INTO NORMAL BUSINESS TRANSACTIONS AS A PART OF ITS DAY TO DAY BUSINESS ACTIVITIES, THE FINANCIAL TRANS ACTIONS COULD NOT IN ANY CIRCUMSTANCES BE TREATED AS LOANS OR ADVANCES RECEIVED BY THE ASSESSEE FROM THESE TWO CONCERNS. THEREFORE, THE HON'BLE ITAT WAS RIGHT IN HOLDING THAT THE PROVISIONS OF SEC 2(22)(E) WERE NO T APPLICABLE. 3.17 TO CONCLUDE, MONEY ADVANCED TO THE APPELLANT COMPANY BY M/S CSS INC USA AND M/S CSS, INDIA WERE FOR SOFTWARE TESTING AND DEVELOPMENT AND SUBSEQUENT LY, ITA NO. 2280/MDS/2008 :- 5 -: THESE ADVANCES ARE ADJUSTED AGAINST THE BILLS RAISE D BY THE APPELLANT COMPANY. HENCE, THESE CAN BE TREATED AS PURELY BUSINESS/TRADING TRANSACTIONS ONLY. IN VIEW OF THE ABOVE FACTS AND JUDICIAL DECISIONS, I AM OF THE OPI NION THAT PROVISIONS OF SEC 2(22)(E) OF THE ACT WILL NOT ATTRACT IN THE APPELLANTS CASE AND HENCE, THE APPEAL IS ALLOWED. 5. WE HAVE HEARD THE LD. D.R., WHO REITERATED HIS S UBMISSIONS AND SUPPORTED THE ORDERS OF THE ASSESSING OFFICER W HEREAS THE LD. COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDERS OF TH E LD. CIT(A). THE ISSUE IS NOW CRYSTALLIZED BY THE DECISION OF TH E MUMBAI SPECIAL BENCH E IN THE CASE OF M/S BHOUMIC COLOUR PRIVATE LIMITED REPORTED IN 313 ITR [AT] 146 WHEREIN IT WAS HELD THAT THE PROVISIONS OF SEC. 2(22)(E)OF THE ACT CANNOT BE INV OKED WHEN THE ASSESSEE IS NOT A SHAREHOLDER. THIS VIEW FINDS SUP PORT FROM THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CI T VS. UNIVERSAL MEDICARE PVT. LIMITED REPORTED IN 324 ITR 263. NOT ONLY THAT, AS RIGHTLY POINTED OUT BY THE LD. CIT(A) , THE TRANSACTIONS WHICH COULD BE TREATED AS PURELY BUSINESS/TRADING T RANSACTIONS, MADE IN THE ORDINARY COURSE OF BUSINESS, DO NOT CON STITUTE LOAN OR ADVANCES. IN VIEW OF THE ABOVE FINDING, WE AGREE W ITH THE ORDER ITA NO. 2280/MDS/2008 :- 6 -: OF THE LD. CIT(A), WHICH DOES NOT REQUIRE ANY MODIF ICATION. REVENUE GROUND IS ACCORDINGLY DISMISSED. 6. GROUND NO. 3 PERTAINS TO THE DIRECTION OF THE LD . CIT(A) TO THE ASSESSING OFFICER TO ALLOW SET OFF ON UNABSORBE D DEPRECIATION HOLDING THAT SECTION 79 IS NOT APPLICABLE THOUGH TH ERE IS CHANGE OF SHAREHOLDING OF THE COMPANY. 7. BEFORE THE LD. CIT(A), IT WAS CONTENDED THAT THE PROVISIONS OF SECTION 79 ARE APPLICABLE ONLY TO THE EXTENT OF LOSS AND NOT TO UNABSORBED DEPRECIATION AND RELIED ON THE HON'BLE S UPREME COURT DECISION IN THE CASE OF SUBBULAXMI MILLS LTD 249 ITR 795. THE LD. CIT(A) HELD THAT EVEN THOUGH THERE IS A SHA REHOLDING CHANGE, THE PROVISIONS OF SECTION 79 MAY NOT BE APP LICABLE FOR SUCH UNABSORBED DEPRECIATION AS UNDER: 6. THE NEXT GROUND OF APPEAL IS THAT, OF THE BROUGH T FORWARD UNABSORBED DEPRECIATION WHICH ACCORDING TO THE AR, AMOUNTS TO RS.46,16,118 WHICH MAY BE CARRIED FORWARD AND SET OFF AGAINST THE CURRENT INCOME. TH E AR WAS OF THE OPINION THAT, THE ACIT HAS NOT CONSIDERE D THAT, THE LOSS INCURRED PRIOR TO THE PREVIOUS YEAR WAS ITA NO. 2280/MDS/2008 :- 7 -: ONLY DUE TO UNABSORBED DEPRECIATION AND NOT DUE TO ANYTHING ELSE. THE AR ALSO RELIED UPON THE CASE OF CONCORD INDUSTRIES LIMITED AND SUBBULAKSHMI MILLS LIMITED WHEREIN, THE HON'BLE SUPREME COURT HAS EXPLICITLY STATED THAT, EVEN THOUGH THERE IS A SHAREHOLDING CHANGE, THE PROVISIONS OF SECTION 79 M AY NOT BE APPLICABLE FOR SUCH UNABSORBED DEPRECIATION. HENCE, THE SAME MAY BE ALLOWED. 8. AFTER HEARING THE RIVAL PARTIES, WE ARE OF THE O PINION THAT THERE IS NO NEED TO MODIFY THE ORDER OF THE LD. CIT (A) AS IT IS COMPLYING TO THE PRINCIPLES ESTABLISHED BY THE HON 'BLE SUPREME COURT IN THE ABOVE REFERRED CASE. SECTION 79 STIPU LATES THAT IN CASE OF A CHANGE IN SHAREHOLDING TAKEN PLACE IN A P REVIOUS YEAR, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTAN TIALLY INTERESTED, NO LOSS INCURRED IN ANY YEAR PRIOR TO T HE PREVIOUS YEAR SHALL BE CARRIED FORWARD AND SET OFF AGAINST THE IN COME OF THE PREVIOUS YEAR UNLESS THE CONDITIONS IN SECTION 79A ARE FULFILLED. THIS SECTION REFERS ONLY TO LOSSES BUT NOT TO UNABS ORBED DEPRECIATION. THIS PRINCIPLE WAS UPHELD BY THE HON 'BLE SUPREME COURT IN THE CASE OF CONCORD INDUSTRIES LIMITED REP ORTED IN 247 ITR 800 WHEREIN THE HON'BLE SUPREME COURT HAS CATEG ORICALLY STATED THAT SECTION 79 CANNOT BE APPLICABLE TO THE UNABSORBED ITA NO. 2280/MDS/2008 :- 8 -: DEPRECATION. SIMILAR VIEW WAS ALSO TAKEN IN THE CA SE OF SUBBULAXMI MILLS [SUPRA] BY THE HON'BLE SUPREME COUR T WHEREIN IT WAS CATEGORICALLY STATED THAT SECTION 79 OF THE ACT DOES NOT APPLY TO ANY UNABSORBED DEPRECIATION. ACCORDINGLY, THE O RDER OF THE LD. CIT(A) IS UPHELD AS THE AMOUNT INVOLVED IS ONLY BRO UGHT FORWARD UNABSORBED DEPRECIATION. THIS GROUND STANDS DISMIS SED. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE S TANDS DISMISSED. ORDER PRONOUNCED ON THE 10 TH OF FEBRUARY, 2011 AT CHENNAI. SD/- SD/- (GEORGE MATHAN) JUDICIAL MEMBER (B. RAMAKOTAIAH) ACCOUNTANT MEMBER CHENNAI : 10 TH FEBRUARY, 2011 VL/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR