Dy. CIT, Circle-15(2), Hyderabad V. M/s. Ushodaya Enterprises Ltd., Hyderabad

ITA 1165/HYD/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4834 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 02-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Non-deduction of tax; Deemed dividend
• Section: 194C; 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1165/HYD/2012 ASSESSMENT YEAR : 2005-06 DY. COMMISSIONER OF INCOME TAX, APPELLANT CIRCLE - 15(2,)HYDERABAD. VS. M/S USHODAYA ENTERPRISES LTD., RESPONDENT HYDERABAD. (PAN AAACU2690P) APPELLANT BY : SHRI D. SUDHAKAR RAO RESPONDENT BY : SHRI V. SIVAKUMAR DATE OF HEARING : 01/08/2013 DATE OF PRONOUNCEMENT : 2 1/08/2013 ORDER PER SAKTIJIT DEY, J.M.: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED A GAINST THE ORDER OF CIT(A)-II, HYDERABAD, DATED 26/06/2012 , FOR THE ASSESSMENT YEAR 2005-06. 2. THE SUBSTANTIVE GROUND OF THE DEPARTMENT IS AS FOLL OWS: A) THE AO ERRED IN RAISING THE DEMAND FOR INTEREST U/S 201(1A) WITHOUT DISCUSSING THE EXPLANATIONS OFFERED BY THE APPELLANT IN ITS LETTER DATED 21/11/2008 AND SIMPLY STATING THAT THE PROVISIONS OF SECTION 2(22)(E) ARE ATTRACT ED TO LOANS AND ADVANCES ALLEGED TO HAVE BEEN GIVEN BY THE APPE LLANT IGNORING THE FACT THAT NONE OF THE AMOUNTS REFERRED TO IN THE ORDER ATTRACT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT FOR THE REASONS STATED IN STATEMENT OF FACTS. ITA NO. 1165/HYD/2012 M/S USHODAYA ENTERPRISES LTD. 2 B) THE AO IS NOT JUSTIFIED IN RAISING THE DEMAND U/ S 201(1A) WITHOUT RAISING DEMAND FOR TAX TO BE DEDUCTED AT SO URCE U/S 194. 3. BRIEFLY THE FACTS RELATING TO THE ISSUE IN DISPU TE ARE, THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PU BLISHING NEWS PAPERS, PUBLICATIONS, TELECASTING AND MANUFACT URING AND SALE OF FOOD PRODUCTS SUCH AS PICKLES, MASALAS, ETC . THE AO NOTICING THAT THE ASSESSEE HAD GIVEN LOANS AND ADVA NCES TO CERTAIN GROUP COMPANIES OF ITS SISTER CONCERNS TO T HE TUNE OF RS. 752.20 LAKHS FELT THAT PROVISIONS OF SECTION 2(22)( E) ARE ATTRACTED TO THE ASSESSEES CASE AND THE ADVANCE AMOUNTS RECE IVED BY THE ABOVE MENTIONED COMPANIES ARE REQUIRED TO BE TREATE D AS INCOME IN THE HANDS OF THE BENEFICIAL SHAREHOLDERS. HE FUR THER FELT THAT THE ASSESSEE COMPANY WAS REQUIRED TO DEDUCT TAX AT SOURCE ON SUCH DEEMED DIVIDEND AS PER THE SECTION 194 OF THE ACT AND SHOULD HAVE DEDUCTED THE TAX TO THE TUNE OF RS. 1,5 7,28,502/-. THE AO, THEREFORE, ISSUED A SHOW CAUSE NOTICE TO TH E ASSESSEE TO FURNISH CERTAIN INFORMATION AND TO EXPLAIN AS TO WH Y THE TDS HAS NOT BEEN MADE ON THE DEEMED DIVIDEND AS REQUIRED U/ S 194 OF THE ACT. IN RESPONSE TO THE NOTICE ISSUED BY THE AO, TH E ASSESSEE SUBMITTED AN EXPLANATION STATING THEREIN THAT THE P ROVISIONS OF SECTION 194 READ WITH SECTION 2(22)(E) OF THE ACT W OULD NOT APPLY TO THE ASSESSEE AS THE AMOUNTS DUE TO THE ASSESSEE FROM M/S DOLPHIN HOTELS LTD. REPRESENT AMOUNTS TOWARDS EQUIP MENT AND LOCATION HIRING CHARGES FOR SALE OF PICKLES, EDIBIL E OILS, MILK ETC. BUT NOT ON ACCOUNT OF ADVANCES/LOANS GIVEN TO THEM. IT WAS STATED THAT SO FAR AS THE TRANSACTION WITH MARGADAR SHI MARKETING PVT. LTD. IS CONCERNED, IT IS ENGAGED IN THE BUSIN ESS OF PUBLICATION OF MAGAZINES AND OTHER PUBLICATIONS AND THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH IT FOR MARKETING NE WS PAPERS, ADVERTISEMENT SPACE AND PACKING AND TRANSPORTATION OF ITA NO. 1165/HYD/2012 M/S USHODAYA ENTERPRISES LTD. 3 NEWSPAPERS. IN COURSE OF CARRYING ON ITS BUSINESS, THE ASSESSEE HAD PAID CERTAIN AMOUNTS TO M/S MARGADARSHI MARKETI NG PVT. LTD. TO ENABLE THEM TO INCUR EXPENDITURE RELATING TO SER VICES PENDING FINALISATION OF THE AMOUNT TO BE PAID AGAINST THE S ERVICES RENDERED BY THEM AND THE ASSESSEE HAS ALSO DEDUCTED TAX AT SOURCE U/S 194C AND 194H OF THE ACT ON THE PAYMENTS MADE TO M/S MARGARDSHI MARKETING PVT. LTD. REGULARLY. THE A O, HOWEVER, DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE AND PROCEEDED TO PASS AN ORDER U/S 201(1A) OF THE ACT BY OBSERVING A S UNDER: 4. SUB-SECTION (1A) OF 201 PROVIDES THAT WHERE A PE RSON FAILS TO REMIT THE TAX DEDUCTED/DEDUCTIBLE INTO GOV T ACCOUNT WITHIN THE DUE DATES, THE PERSON RESPONSIBLE FOR DE DUCTING TAX SHALL BE LIABLE TO SIMPLE INTEREST AT THE PRESC RIBED RATE ON THE AMOUNT OF SUCH TAX FROM THE DATE ON WHICH SU CH TAX WAS DEDUCTIBLE TO THE DATE ON WHICH SUCH TAX IS ACT UALLY PAID. 5. SINCE THE ASSESSEE-DEDUCTOR HAS FAILED TO DEDUCT TAX OF RS. 4,57,58,502 (20.91% OF RS. 7,52,20,000) IT IS L IABLE TO PAY INTEREST OF RS. 1,32,11,940 U/S 201(1A) FOR THE PERIOD FROM 01/04/2004 TO 31/03/2011. 4. THE ASSESSEE BEING AGGRIEVED OF THE ORDER PASSED U/S 201(1A) OF THE ACT, PREFERRED AN APPEAL BEFORE THE CIT(A). 5. BEFORE THE CIT(A), THE ASSESSEE REITERATING THE STAND TAKEN BEFORE THE AO SUBMITTED THAT NO LOANS AND ADVANCES WERE PAID TO THE GROUP/SISTER CONCERNS SO AS TO HOLD IT AS PAYME NT OF DIVIDEND TO SHAREHOLDERS OF THOSE COMPANIES ATTRACTING THE P ROVISIONS OF SECTION 2(22)(E) OF THE ACT AND THEREBY REQUIRING D EDUCTION OF TAX AT SOURCE U/S 194 OF THE ACT. IT WAS SUBMITTED THAT PAYMENTS MADE WERE IN COURSE OF TRADING TRANSACTIONS WITH TH E GROUP CONCERNS AND THEY ARE NOT LOANS AND ADVANCES. THE C IT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD TH AT THOUGH THE AO GAVE FULL DETAILS OF THE ADVANCES AND LOANS GIVE N TO THE THREE CONCERNS AND THE REASONS ON ACCOUNT OF LOANS AND AD VANCES ITA NO. 1165/HYD/2012 M/S USHODAYA ENTERPRISES LTD. 4 DEEMED DIVIDEND BUT WHEN IT CAME TO FIXING LIABILIT Y ON THE ASSESSEE TO DEDUCT TAX , THE AO HAS NOT LEVIED TAX U/S 201(1), WHICH WOULD MEAN THAT THE AO HAS NOT FOUND THE ASSE SSEE LIABLE TO DEDUCT TAX U/S 201(1) BUT LEVIED INTEREST U/S 2 01(1A) OF THE ACT. SO FAR AS THE FINDING OF THE AO THAT THE ASSE SSEE IS LIABLE TO DEDUCT TAX U/S 194 READ WITH SECTION 2(22)(E) OF TH E ACT, THE CIT(A) AFTER EXAMINING THE DETAILS OF THE SHAREHOLD ING OF THE THREE GROUP CONCERNS WITH DOLHIN HOTELS LTD., MARGA DARSHI MARKETING PVT. LTD. AND MARGADARSHI FINANCIAL SERVI CES PVT. LTD. HELD AS UNDER: 7.2 AS SEEN FROM THE CHART SHOWING SHAREHOLDING PAT TERN, IT IS APPARENT THAT THE PAYEE CONCERNS ARE NOT SHAREHO LDERS IN THE APPELLANT COMPANY, OTHERWISE ALSO IT IS NOTED T HAT THE APPELLANT COMPANY HAS GOT BUSINESS TRANSACTIONS WIT H ALL THE THREE CONCERNS UNDER REFERENCE, IN FACT IT HAS GOT RUNNING ACCOUNT WITH THESE CONCERNS FOR THE LAST SO MANY YE ARS. IN RESPECT OF DOLPHIN HOTELS LTD., THE PAYMENTS IN QUE STION WERE NOTED AS MADE TOWARDS EQUIPMENTS, LOCATION, HI RE CHARGES, SALE OF PICKLES, EDIBLE OILS ETC., AND IF ADVANCES WERE MADE IT CAN BE TAKEN AS ADVANCE TOWARDS PURCHA SES TO BE MADE WHICH AMOUNTS TO COMMERCIAL TRANSACTION AND DOES NOT COME UNDER ADVANCES UNDER THE PURVIEW OF SECTIO N 2(22)(E). 7.3 REGARDING M/S MARGARDSHI FINANCIAL SERVICES PVT . LTD. INITIAL PAYMENT OF RS. 1,50,000/- WAS MADE AS A REF UNDABLE DEPOSIT IN THE FY 1995-96 AGAINST WHICH FINANCIAL N EWS SERVICES I.E. SHARE QUOTATIONS, FOREX NEWS ETC., TO BE PROVIDED BY THE SAID CONCERN IN THE STATEMENT OF AC COUNT AS APPEARING IN THE BOOKS OF ACCOUNTS. IT IS NOTED THA T THERE ARE REGULAR TRANSACTIONS BETWEEN THE TWO CONCERNS O N ACCOUNT OF SERVICE CHARGES FOR THE SERVICES RENDERE D BY MARGARDARSHI FINANCIAL SERVICES PVT. LTD. THIS SHOW S THAT THERE IS BUSINESS/COMMERCIAL RELATIONSHIP BETWEEN T HE TWO CONCERNS. RELIANCE IS PLACED IN THE CASE OF CIT VS. NAGINDAS M. KAPADIA [1989] (177 ITR 393) (MUM) WHERE IT HAS BEEN HELD THAT PAYMENTS MADE AS ADVANCES TOWARDS PURCHAS ES TO BE MADE BY THE COMPANY FROM THE ASSESSEE DID NOT CO ME WITHIN THE PURVIEW OF SECTION 2(22)(E) OF THE ACT. IN THE CASE OF K. SRIDHAR VS. CIT [1993] (201 ITR 973) (KE RALA) THE HONBLE KERANA HIGH COURT HELD THAT IT WAS VERY IMP ORTANT TO ASCERTAIN THE NATURE OF THE PAYMENT SO AS TO DECIDE WHETHER ITA NO. 1165/HYD/2012 M/S USHODAYA ENTERPRISES LTD. 5 THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE A TTRACTED OR NOT. IN OTHER WORDS, EACH AND EVERY PAYMENT WILL NO T FALL WITHIN THE PURVIEW OF SECTION 2(22)(E) OF THE ACT, WHICH MEANS THAT THE PAYMENTS MADE BY A COMPANY TO ANY CONCERN UNDER THE SAME MANAGEMENT IN THE NORMAL COU RSE OF BUSINESS WILL NOT BE COVERED UNDER THE DEFINITIO N OF DEEMED DIVIDEND EVEN THOUGH BOTH THE COMPANIES MAY HAVE COMMON SHAREHOLDERS WITH SUBSTANTIAL INTEREST. IT H AS BEEN HELD BY VARIOUS COURTS THAT IF NORMAL BUSINESS TRAN SACTIONS ARE TO BE TAXED AS DEEMED DIVIDEND, THEN IT WOULD B ECOME IMPOSSIBLE FOR ANY TWO RELATED COMPANIES TO CONDUCT EVEN NORMAL BUSINESS WITH EACH OTHER. 7.4 REGARDING THE ADVANCES AND LOANS OF MARGADARSHI MARKETING PVT. LTD. IT MAY BE NOTED THAT THE AO HAS BASED HIS ORDER ON THE ORDER PASSED BY THE ACIT, CIRCLE 1 6(2) AND IT HAS BEEN BROUGHT TO MY NOTICE THAT THE CIT(A)-V, HYDERABAD WHILE DECIDING THE APPEAL IN THE CASE OF M/S MARGADARSHI MARKETING PVT. LTD. I.E. THE RECEIVER O F THE ALLEGED LOANS AND ADVANCES HAS NOTED THAT THE ADDI TION MADE BY THE AO IN TERMS OF DEEMED DIVIDEND COULD NO T BE MADE IN THE HANDS OF THE APPELLANT AS THE APPELLANT WAS NEVER A SHAREHOLDER OF M/S USHODAYA ENTERPRISES. SE CONDLY, THE ADVANCES MADE BY M/S USHODAYA ENTERPRISES TO TH E APPELLANT ARE IN THE FORM OF A RUNNING ACCOUNT OF C OMMERCIAL TRADE. THE APPELLANT IS PROVIDING SERVICES WITH REG ARD TO THE ADVERTISEMENTS AS WELL AS PROMOTION AND DISTRIBUTIO N OF NEWSPAPERS AND MAGAZINES FOR WHICH IT IS REGULARLY SUBMITTING BILLS AND RENDERING SERVICES. THERE IS N O EVIDENCE TO PROVE THAT THIS ARRANGEMENT IS NOT AT ARMS LENGT H OR THAT ADEQUATE SERVICES HAVE NOT BEEN PROVIDED. THEREFORE , KEEPING IN VIEW THE JUDGMENT OF THE COURTS DISCUSSE D ABOVE, IT IS CLEAR THAT TRADING TRANSACTIONS DO NOT COME W ITHIN THE PURVIEW OF DEEMED DIVIDEND AS PER SECTION 2(22)(E) OF THE ACT. SINCE THE CIT(A)-V, HYDERABAD, HAS DELETED TH E ADDITION OF DEEMED DIVIDEND WHICH WAS ONE OF THE GR OUNDS ON WHICH THE ASSESSMENT ORDER U/S 201(1A) WAS BASED FOR NON-DEDUCTION OF TAX AT SOURCE FROM THE SAID DEEMED DIVIDEND, THE PROVISIONS OF SECTION 194 CANNOT BE A PPLIED. 8. IN VIEW OF THE ABOVE, IT IS HELD THAT THE APPELL ANT IS NOT LIABLE TO DEDUCT TAX ON THE LOANS AND ADVANCES MADE TO THE THREE CONCERNS (A) DOLPHIN HOTELS LTD., (B) MARGADA RSHI MARKETING PVT. LTD., AND (C) MARGADARSHI FINANCIAL SERVICES PVT. LTD. SINCE THERE IS NO LIABILITY TO DEDUCT TAX THE QUESTION OF LEVY OF INTEREST U/S 201(1A) DOES NOT ARISE AND THEREFORE, ITA NO. 1165/HYD/2012 M/S USHODAYA ENTERPRISES LTD. 6 THE AMOUNT OF RS. 1,32,11,940/- LEVIED U/S 201(1) A ND 201(1A) IS ORDERED TO BE DELETED. 6. WITH THE AFORESAID OBSERVATIONS, THE CIT(A) DELE TED THE LEVY OF INTEREST U/S 201(1A) AMOUNTING TO RS. 1,32,11,94 0/-. 7. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL BEFORE US. 8. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD. ON PERUSAL OF THE ORDER P ASSED BY THE AO CHARGING INTEREST U/S 201(1A), IT IS CLEAR THAT THE INTEREST HAS BEEN CHARGED UNDER THE AFORESAID PROVISION ON THE G ROUND THAT THE AMOUNTS ADVANCED TO THE GROUP/SISTER CONCERNS A RE IN THE NATURE OF LOANS AND ADVANCES ATTRACTING THE PROVISI ONS OF SECTION 2(22)(E) OF THE ACT AS THEY HAVE TO BE CONSIDERED A S DEEMED DIVIDEND AT THE HANDS OF THE SHAREHOLDERS. HOWEVER, ON GOING THROUGH THE ORDER OF THE CIT(A) AND ALSO THE FACTS AND MATERIALS AVAILABLE ON RECORD, IT IS CLEAR THAT THE IMPUGNED TRANSACTIONS BETWEEN THE ASSESSEE AND THE GROUP/SISTER CONCERNS ARE NOT IN THE NATURE OF LOANS AND ADVANCED BUT IN THE REGULAR COURSE OF BUSINESS TRANSACTIONS THAT THE ASSESSEE WAS CARRYIN G WITH ITS GROUP/SISTER CONCERNS. THAT BESIDES, IT IS A FACT O N RECORD THAT THE AO HAS NOT PASSED ANY ORDER U/S 201(1) OF THE ACT B Y TREATING THE ASSESSEE AS AN ASSESSEE IN DEFAULT. AT THIS STAGE , IT WOULD BE WORTHWHILE TO LOOK INTO THE PROVISIONS AS CONTAINED IN SECTION 201(1) OF THE ACT, WHICH IS EXTRACTED HEREUNDER: 201(1) WHERE ANY PERSON INCLUDING THE PRINCIPAL O FFICER OF A COMPANY,- A) WHO IS REQUIRED TO DEDUCT ANY SUM IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT; OR B) REFERRED TO IN SUB-SECTION (1A) OF SECTION 192, BEING ANY EMPLOYER, ITA NO. 1165/HYD/2012 M/S USHODAYA ENTERPRISES LTD. 7 DOES NOT DEDUCT, OR DOES NOT PAY, OR AFTER SO DEDUC TING FAILS TO PAY, THE WHOLE OR ANY PART OF THE TAX, AS REQUIRED BY OR UNDER THIS ACT, THEN, SUCH PERSON, SHALL, WITHOUT PREJUDICE TO ANY OTHER CONSEQUENCES WHICH HE MAY INCUR, BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT OF SUCH TAX. 9. ON PLAIN READING OF THE AFORESAID PROVISION, IT IS VERY MUCH CLEAR THAT THE ASSESSEE HAS TO BE TREATED AS A N ASSESSEE IN DEFAULT IN TERMS WITH THE PROVISIONS CONTAINED U/S 201(1) OF THE ACT. IN THE PRESENT CASE, ADMITTEDLY THE AO HAS NOT PASSED ANY ORDER TREATING THE ASSESSEE AS AN ASSESSEE IN DEFAU LT U/S 201(1) OF THE ACT RAISING ANY TAX DEMAND. UNDER THESE CIRC UMSTANCES, CHARGING OF INTEREST U/S 201(1A) OF THE ACT WITHOUT TREATING THE ASSESSEE AS AN ASSESSEE IN DEFAULT IS CONTRARY TO THE STATUTORY PROVISIONS AND LEGALLY UNSUSTAINABLE. 10. BESIDES AS WOULD BE CLEAR FROM THE MATERIALS AV AILABLE ON RECORD AS WELL AS ELABORATE DISCUSSIONS MADE BY THE CIT(A), THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE GROUP/SIS TER CONCERNS ARE IN COURSE OF REGULAR BUSINESS TRANSACTIONS AND CANNOT BE TREATED AS LOANS AND ADVANCES. THAT BESIDES, IT IS ALSO RELEVANT TO NOTE THAT THERE IS CATEGORICAL FINDING OF FACT THAT WHEN THE ASSESSEE HAS MADE PAYMENTS TO NON-SHAREHOLDERS IT I S IMPOSSIBLE FOR THE PAYER COMPANY TO ASCERTAIN WHETHER IT WILL ATTRACT PROVISIONS OF SECTION 2(22)(E) OR NOT. IN THE AFORE SAID VIEW OF THE MATTER, WE FIND THE CONCLUSION ARRIVED AT BY THE C IT(A) TO BE REASONABLE AND IN ACCORDANCE WITH LAW AND ACCORDING LY, DO NOT CALL FOR ANY INTERFERENCE FROM US. THE ORDER PASSED BY THE CIT(A) IS THEREFORE UPHELD AND THE GROUNDS RAISED BY THE R EVENUE ARE DISMISSED. ITA NO. 1165/HYD/2012 M/S USHODAYA ENTERPRISES LTD. 8 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. PRONOUNCED IN THE OPEN COURT ON 21/08/2013. SD/- SD/- (CHANDRA POOJARI) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMB ER HYDERABAD, DATED: 21 ST AUGUST, 2013. KV COPY TO:- 1) DCIT, CIRCLE 15(2), HYDERABAD. 2) M/S USHODAYA ENTERPRISES LTD., 6-3-570, EENADU COMPLEX, SOMAJIGUDA, HYDERABAD. 3) CIT(A)-II, HYDERABAD. 4) CIT(TDS), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T ., HYDERABAD.