ITO, Nashik V. M/s MEGACOAT, Nashik

ITA 1337/PUN/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6737 (ITAT-PUNE)
• Duration Of Justice: 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-06-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 28-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Keywords: Deemed dividend
• Section: 56; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.1337/PN/2013 (ASST. YEAR: 2005-06) ITO, WARD 1(4), NASHIK APPELLANT VS. M/S. MEGACOAT H-3, MIDC, AMBAD, NASHIK 422010 PAN: AAAFM8220E RESPONDENT APPELLANT BY : SHRI S.P. WALIMBE RESPONDENT BY : SHRI NIKHIL PATHAK DATE OF HEARING : 03-06-2014 DATE OF PRONOUNCEMENT : 23-06-2014 ORDER PER R.S. PADVEKAR, JM: IN THIS APPEAL, THE REVENUE HAS CHALLENGED THE IMP UGNED ORDER OF THE LD CIT(A)-I, NASHIK, DATED 26.04.2013 FOR THE A .Y. 2005-06. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) IS NOT JUSTIFIED IN DELETING ADDITIO NS OF RS.39,12,807/- MADE BY THE A.O., U/S.2(22)(E) OF TH E I.T. ACT, 1961. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) IS NOT JUSTIFIED IN HOLDING THAT THE PROVISIONS OF SECTION 2(22)(E) ARE APPLICABLE ONLY TO SHAREHOL DERS AND THE APPELLANT FIRM IS NOT SHAREHOLDER OF MSTPL, SIN CE THE ADDITIONS WAS RIGHT BY MADE RELYING UP ON THE EXPLA NATION 3 TO SEC.2(22)(E) OF THE ACT, INSERTED BY FINANCE ACT , 1987. 2. THE ISSUE IN CONTROVERSY IN VERY NARROW COMPASS. THE ASSESSEE IS A FIRM AND FILED ITS RETURN OF INCOME FOR THE A.Y. 2005-06 DECLARING TOTAL INCOME OF 1,92,300/- ON 19.10.2005. IT APPEARS THERE WAS NO REGULAR 2 ASSESSMENT U/S.143(3) OF THE I.T. ACT. THE ASSESSI NG OFFICER ISSUED NOTICE U/S.148 OF THE ACT AS IN HIS OPINION, THE PR OVISIONS OF SECTION 56 R.W.S. 2(22)(E) OF THE ACT ARE APPLICABLE AND THERE IS ESCAPEMENT OF THE INCOME. THE ASSESSING OFFICER HAS OBSERVED THAT TH E ASSESSEE FIRM HAS TRANSACTIONS WITH MACKS SURFACE TREATMENT PVT. LTD. (IN SHORT MSTPL). THE DIRECTORS IN THE SAID COMPANY AND THE PARTNERS IN THE ASSESSEE FIRM ARE COMMON AS NOTED BY THE ASSESSING OFFICER. AS N OTED BY THE ASSESSING OFFICER, THE ASSESSEE FIRM HAS DEBIT BALA NCE OF 29,42,640/- IN RESPECT OF MSTPL. 3. THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSE SSEE FIRM HAS TRANSACTIONS WITH MSTPL WHICH ARE IN THE NATURE OF LOAN TRANSACTIONS AS WELL AS BUSINESS TRANSACTIONS AND THOSE TRANSACTION S ARE HIT BY THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE ASS ESSEE HAS FILED THE EXPLANATION WHICH IS REPRODUCED IN THE ASSESSMENT Y EAR. THE ASSESSEE CONTENDED THAT MSTPL HAS TAKEN LOAN FROM GABRIAL (I ) LTD. FOR PURCHASING PLANT & MACHINERY. IT WAS FURTHER CONTE NDED THAT THE FINANCE WAS PROVIDED SUBJECT TO THE CONDITIONS THAT THE SAME SHALL BE UTILIZED BY THE GROUP CONCERN FOR CARRYING ON MANUF ACTURING JOB OF GABRIAL (I) LTD. IT WAS STATED THAT THE ASSESSEE F IRM HAD OBTAINED LOAN FROM GABRIAL (I) LTD. WHICH WAS TRANSFERRED TO MSTP L TO PROTECT THE BUSINESS WITH GEBRIAL (I) LTD. IT WAS, THEREFORE, CLAIMED THAT THE SAID ARRANGEMENT OF THE LOANS IS IN THE NATURE OF BUSINE SS ACTIVITY. IT IS NOT DENIED BY THE ASSESSEE THAT THE PARTNERS OF THE ASS ESSEE FIRM ARE ALSO THE DIRECTORS IN THE MSTPL. THE ASSESSING OFFICER HELD THAT THERE IS TRANSFER OF FUNDS FROM MSTPL TO THE ASSESSEE AND AG AIN TAKING OF FURTHER ADDITIONAL LOAN BY MSTPL FROM THE BANK TO REPAY THE OUTSTANDING LOAN OF GABRIAL (I) LTD. TRANSFERRED FROM THE ACCOUNTS OF T HE ASSESSEE AND HENCE, THERE WAS A CONTINUED DEBIT BALANCE WITH THE MSTPL. 4. THE ASSESSING OFFICER HAS OBSERVED THAT WITHIN T HE MEANING OF SECTION 2(22)(E) OF THE ACT, THE TRANSACTIONS BETWE EN THE ASSESSEE FIRM AND MSTPL ARE IN THE NATURE OF DEEMED DIVIDEND. TH E ASSESSING OFFICER, THEREFORE, BROUGHT TO TAX 39,12,807/- BY TREATING THE SAID AMOUNT AS THE DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2 (22)(E) OF THE ACT BY DEBITING THE PEAK OF THE ADVANCES. 3 5. THE ASSESSEE HAS CHALLENGED THE ADDITION BEFORE LD. CIT(A). THE LD. CIT(A) DELETED THE ADDITION. THE OPERATIVE PAR T OF THE FINDINGS OF THE LD. CIT(A) IS AS UNDER: 4.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE APPELLA NT. ON PERUSAL OF THE SAME, IT HAS BEEN NOTICED THAT UNDIS PUTEDLY THE APPELLANT FIRM HAS RECEIVED AN ADVANCE FROM MSTPL W HICH IS OUTSTANDING AT THE END OF THE YEAR. IT IS ALSO A FA CT THAT THE PARTNERS OF THE FIRM ARE HAVING SUBSTANTIAL SHAREHO LDING IN MSTPL AND ARE HAVING SUBSTANTIAL SHARE IN THE PROFIT AND LOSS OF THE APPELLANT FIRM. IT HAS ALSO BEEN NOTICED THAT THE A PPELLANT GROUP CONCERNS I.E. MSTPL, MEGACOATS, RAHUL GOPALJI NIGAM PROP, OF MICRON INDUSTRIES, MRS. NITA NIGAM, PROP, OF MERK I NDUSTRIES WERE CARRYING OUT JOB WORK OF GABRIEL INDIA LTD. AND GAB RIEL INDIA LTD. HAD GIVEN LOAN TO MSTPL FOR UTILIZING THE SAME BY A LL THE GROUP CONCERNS INCLUDING THE APPELLANT. IT HAS ALSO BEEN NOTICED THAT THE APPELLANT FIRM HAS CLOSED ITS BUSINESS ACTIVITY IN THE LATER HALF OF THE YEAR AND THE MACHINERY AND LAND AND BUILDING OF THE APPELLANT FIRM HAS BEEN UTILIZED BY MSTPL FOR CARRYING OUT JO B WORK OF GABRIEL INDIA LTD. THE FIRST CONTENTION RAISED BY THE APPELLANT IS THA T THE AMOUNT OF ADVANCE OUTSTANDING WAS TOWARDS ADVANCE FOR PURCHAS E OF MACHINERY WHICH HAS BEEN PURCHASED IN THE SUBSEQUEN T YEAR FOR RS.19.50 LACS, DEPOSIT TOWARDS LET OUT FACTORY PLOT AND BUILDING WHICH HAS BEEN RECEIVED FULLY IN SUBSEQUENT YEAR TO THE EXTENT OF RS. 25 LACS. THIS CONTENTION OF THE APPELLANT IS FO UND TO BE FACTUALLY CORRECT IN VIEW OF THE ABOVE OBSERVATIONS IN THE PRECEDING PARA. THEREFORE, THE TRANSACTION OF THE A PPELLANT WITH MSTPL IS COMMERCIAL TRANSACTION AND HENCE CANNOT BE REGARDED AS DEEMED DIVIDEND. FURTHER, GABRIEL INDIA LTD. HAS GI VEN LOAN TO MSTPL FOR DISTRIBUTING THE SAME TO GROUP CONCERNS C ARRYING ON JOB WORK OF .GABRIEL INDIA LTD. THEREFORE, EFFECTIVELY THE ADVANCE GIVEN BY MSTPL IS GIVEN BY GABRIEL INDIA LTD FOR CA RRYING OUT ITS JOB WORK BY THE GROUP CONCERNS. THEREFORE, THE ABOV E TRANSACTIONS ARE COMMERCIAL TRANSACTIONS AND CANNOT BE REGARDED AS DEEMED DIVIDEND IN THE HANDS OF THE APPELLANT FIRM. SUCH C OMMERCIAL TRANSACTIONS ARE OUT THE AMBIT OF THE PROVISIONS OF SECTION 2(22)(E). THIS PROPOSITION OF LAW IS SUPPORTED BY T HE RATIO LAID DOWN IN THE DECISION IN THE CASE OF CIT VS. RAJKUMA R (2009) 318 ITR 462, RELIED ON BY THE APPELLANT. THE FIRST CONT ENTION RAISED BY THE APPELLANT IS, THEREFORE, ACCEPTED. THE SECOND CONTENTION RAISED BY THE APPELLANT IS TH AT MSTPL HAS OBTAINED SECURED LOAN FROM BANK BY PLEDGING IMMOVAB LE PROPERTY OF THE APPELLANT FIRM AND, HENCE, AN ADVANCE RECEIV ED FROM MSTPL DOES NOT ATTRACT PROVISIONS OF SECTION 2(22)(E). TH IS PROPOSITION OF LAW IS SUPPORTED BY THE RATIO LAID DOWN IN THE DECI SION IN THE CASE OF PRADIPKUMAR MALHOTRA VS. CIT (2011) 338 ITR 538 (KOLHAPUR). IN THIS CASE, IT HAS BEEN LAID DOWN THAT, LOAN ADVA NCED BY COMPANY TO SHAREHOLDER IN COMPENSATION OF SHAREHOLD ER MORTGAGING HIS IMMOVABLE PROPERTY FOR ENABLING COMP ANY TO SECURE BANK LOAN CANNOT BE TREATED AS DEEMED DIVIDE ND U/S 4 2(22)(E). FURTHER, IN THE CASE OF THE APPELLANT GAB RIEL INDIA LTD. HAS ADVANCED THE AMOUNT TO MSTPL FOR DISTRIBUTING T HE SAME TO GROUP CONCERNS CARRYING ON JOB WORK OF GABRIEL INDI A LTD. IN VIEW OF THE ABOVE FACTS THE TRANSACTION CANNOT BE REGARD ED AS DEEMED DIVIDEND IN THE HANDS OF THE APPELLANT. THE SECOND CONTENTION OF THE APPELLANT IS ALSO ACCEPTED. THE THIRD CONTENTION RAISED BY THE APPELLANT, IS TH AT THE PROVISIONS OF SECTION 2(22)(E) ARE APPLICABLE ONLY TO THE SHAR EHOLDERS AND THE APPELLANT FIRM IS NOT SHAREHOLDER OF MSTPL, WHO HAS ADVANCED THE AMOUNT TO THE APPELLANT FIRM. THIS CONTENTION OF TH E APPELLANT IS SUPPORTED BY THE FOLLOWING DECISIONS RELIED ON BY T HE APPELLANT: (L)C.I.T. VS. KHANDELWAL ASSOCIATES (2012) 82 CCH 1 29 (ALLA)IN THIS CASE IT HAS BEEN LAID DOWN THAT ADVANCE PAYMEN T TOWARDS JOB WORK IS NOT COVERED BY SECTION 2(22)(E) AS THE SAME IS NOT LOAN AS ENVISAGED IN SECTION 2(22)(E). THE AMOUNT WAS RECEI VED BY PARTNERSHIP FIRM FROM THE COMPANY IN WHICH PARTNERS OF THE FIRM WERE SHARE HOLDERS BUT THE PARTNERSHIP FIRM HAS NOT HELD ANY SHARES IN THE COMPANY AND HENCE PROVISIONS OF SECTI ON 2(22)(E) ARE NOT APPLICABLE TO THE PARTNERSHIP FIRM. (2) CIT VS. GOPAL CLOTHING CO., PVT. LTD. (2012) 71 DTK 358 (DEL H.C.)IN THIS CASE IT HAS BEEN LAID DOWN THAT TO ATT RACT SECTION 2(22)(E) OF INCOME TAX ACT PAYMENT MUST BE MADE TO THE REGISTERED SHAREHOLDER ALONE. FACT THAT THE SHARE H OLDERS OF THE ASSESSEE COMPANY WERE ALSO SHARE HOLDERS OF T HE COMPANY WHICH HAD GIVEN 'LOANS/ADVANCES' IS NOT SUFFICIEN T AND DOES NOT MEET THE REQUIREMENT OF SECTION 2(22)(E). (3) CIT VS. UNIVERSAL MEDICARE PVT. LTD. (2010) 324 ITR 263 (BOM.)IN CASE IT HAS BEEN LAID DOWN THAT THE PROVIS IONS OF SECTION 2(22)(E) ARE APPLICABLE ONLY TO THE PERSONS WHO ARE SHARE HOLDERS OF THE COMPANY. (4) ACIT VS. BHAUMIK COLOUR P. LTD. (2009) 313 ITR 146 (SP. BENCH) (MUMBAI TRIB.). IN THIS CASE IT HAS BEEN L AID DOWN THAT THE AMOUNT WAS RECEIVED BY PARTNERSHIP FIRM FROM TH E COMPANY IN WHICH PARTNERS OF THE FIRM WERE SHARE HOLDERS BUT T HE PARTNERSHIP FIRM HAS NOT HELD ANY SHARES IN THE COMPANY AND HEN CE PROVISIONS OF SECTION 2(22)(E) ARE NOT APPLICABLE TO THE PARTN ERSHIP FIRM. IN VIEW OF THE RATIO LAID DOWN BY THE ABOVE DECISIO NS, THE CONTENTION OF THE APPELLANT THAT AS THE APPELLANT F IRM IS NOT SHAREHOLDER OF MSTPL, PROVISIONS OF SECTION 2(22)(E ) ARE NOT APPLICABLE IS FOUND TO BE CORRECT. THE THIRD CONTEN TION OF THE APPELLANT IS ALSO ACCEPTED. IN VIEW OF THE ABOVE FACTS AND DISCUSSION, THE A.O. IS NOT JUSTIFIED IN HOLDING THAT THE PROVISIONS OF SECTION 2(22)(E) ARE APPLICABLE TO THE CASE OF THE APPELLANT AND, HENCE, THE ADDITION OF RS.39,12,107/- IS HEREBY DELETED. GROUND NO.1 IS A LLOWED. 6. NOW, THE REVENUE IS IN APPEAL BEFORE US. WE HAV E HEARD THE PARTIES. IN THIS CASE, IT IS NOT DISPUTED THAT THE ASSESSEE FIRM IS NOT A 5 SHAREHOLDER IN MSTPL. AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS. UNIVERSAL MEDICARE PVT. LTD. (2010) 324 ITR 263 (BOM) AND HEL D THAT THE PROVISION OF SECTION 2(22)(E) OF THE ACT IS APPLICA BLE ONLY TO THE PERSONS WHO ARE SHAREHOLDERS OF THE COMPANY. IN THE CASE O F ACIT VS. BHAUMIK COLOUR P. LTD. (2009) 313 ITR 146 (SP. BENCH) (MUMB AI TRIB), IT IS HELD THAT TO ATTRACT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, THE RECIPIENT SHOULD BE BENEFICIAL SHAREHOLDER IN THE COMPANY. 7. IN THE PRESENT CASE, NOWHERE IT IS CONTROVERTED BEFORE US BY THE REVENUE THAT THE ASSESSEE FIRM IS NOT THE SHAREHOLD ER IN THE MSTPL. HENCE, IN OUR OPINION, THE PRINCIPLES LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF UNIVERSAL MEDICARE PVT. LTD. (SUPRA) AND IN THE CASE OF BHAUMIK COLOUR P. LTD. ( SUPRA) ARE SQUARELY APPLICABLE TO THE ASSESSEE AND THE LD. CIT(A) HAS R IGHTLY DELETED THE ADDITION. WE ACCORDINGLY, DISMISS THE GROUNDS TAKE N BY THE REVENUE. 8. IN THE RESULT, THE REVENUE'S APPEAL IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS THE 23 RD DAY OF JUNE, 2014. SD/- SD/- (G.S. PANNU) (R.S. PADVEKAR) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED 23 RD JUNE, 2014 GCVSR COPY TO:- 1) ASSESSEE 2) DEPARTMENT 3) THE CIT(A) I, NASHIK 4) THE CIT-I, NASHIK 5) THE DR, B BENCH, I.T.A.T., PUNE 6) GUARD FILE BY ORDER //TRUE COPY// SENIOR PRIVATE SECRETARY ITAT PUNE BENCHES, PUNE