Shyamsunder Rao Gone , Mancherial V. Income Tax Officer, Ward-17(3), Hyderabad

ITA 1536/Hyd/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8054 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 03-04-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 13-07-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NILANJAN DEY
• Keywords: Deemed dividend
• Section: 142(1); 2(22)(e); 143(1); 148; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B , HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER I.T.A. NO. 15 3 6 /HYD/201 8 ASSESSMENT YEAR: 20 1 2 - 1 3 S HY A MSUNDER RAO GONE , MANCHIRYAL , AD ILABAD [PAN: A FSPG8207N ] VS INCOME TAX OFFICER, WARD - 17 ( 3 ), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.C. DEVDAS , AR FOR REVENUE : S HRI NILA NJAN DEY , D R DATE OF HEARING : 03 - 0 4 - 201 9 DATE OF PRONOUNCE MENT : 18 - 0 4 - 201 9 O R D E R PER S. RIFAUR RAHMAN, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX ( APPEAL S) - 5 , HYDERABAD , DATED 0 7 - 06 - 201 8 . 2. BRIEF FACTS OF THE CASE ARE THAT T HE ASSESSEE FILED HIS RE TURN OF INCO ME FOR THE AY. 201 2 - 1 3 , DECLARING INCOME OF RS. 5 , 54 , 5 70/ - AND THE RETURN WAS P ROCESSED U/S. 143(1) OF THE INCOME TAX ACT [ACT] ON 2 8 - 1 0 - 201 3 . 3. DURING THE ASSESSMENT PROCEEDINGS IN THE CASE OF M/S. UNITED INDIA CONSTRUCTION CO. (P) LTD., FO R THE AY. 20 12 - 13, IT ITA NO. 15 3 6 /H YD/201 8 : - 2 - : WAS NOTICED THAT THE COMPANY HAS ADVANCE D LOANS AND ADVANCES OF RS. 18,61,380/ - TO THE ASSESSEE , WHO IS HOLDING THE POSITION OF JOIN T MANAGING DIRECTOR IN THE ABOVE SAID COMPANY. A S PER THE RETURN FILED BY THE COMPANY, THE SHAREHOLDIN GS OF THE AS SESSEE ARE 22.5% OF THE EXISTING SHAR ES OF THE COMPANY. O N THE DATE OF BALANCE SHEET, THE COMPANY HAS A RESERVE OF RS. 14,99,138/ - AND THE BOOK PROFIT OF THE RELEVANT YEAR IS RS. 14,55,238/ - . T HEREFORE, THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE A TTRACTED IN THE CASE OF ASSESSEE . A CCORDINGLY, ASSESSMENT WAS REOPENED WITH A PRIOR APPROVAL OF THE AUTHORITIES . A CCORDINGLY, NOTICES U/S. 148 AND 142(1) OF THE ACT WERE ISSUED. 4 . IN RESPONSE, THE AR OF THE ASSESSEE APPEARED AND SUBMITTED THAT THERE WI LL NOT BE ANY RESERVES FROM THE FINANCIAL YEARS 2009 - 10, 2010 - 11 AND 2011 - 12 BECA USE OF MAT LIAB ILITIES TO THE EXTE NT OF RS. 1.10 CRORES PAID IN THE YEAR 2016 - 17 AGAINST THE DEMAND R AISED IN THE ORDERS P ASSED U/S. 154 OF THE ACT AND HE REQUESTED NOT TO CHARGE ANY DEEMED DIVIDE N D AND ALSO FURTHER STATED THAT RESERVES SHOWN IN THE BALANCE SHEET OF FY. 2011 - 12 RELEVANT FOR AY 2012 - 13 NOT DEDUCTED BY TAXES OF RS. 4,50,132/ - PAID DURING TH E YEAR. 4.1. T HE ASSESSING OFFICER REJECTED THE CONTENTIONS OF THE A R AND O PINED THAT THE PAYMENT TOWARDS MAT LIABILITIES ARISING IN SUBSEQUENT YEARS AND BY TH E TIME THE BOOKS OF ACCOUNT ARE ALREADY FINALISED FOR THE F YS. 2009 - 10, 2010 - 11 AND 2011 - 12 AS PER THE COMPANIES ACT. H OWEVER, HE CONS IDERED TAX ITA NO. 15 3 6 /H YD/201 8 : - 3 - : DEDUCTION PAI D OF RS. 4,50,132/ - FROM RE SERVED WH ICH WERE PAID DURING THE YEAR. A CCOR DINGLY , HE MADE THE ADDITION OF RS. 10,49,006/ - AS DEEMED DIVIDEND U/S. 2(22 )(E) OF THE ACT. 4.2. AGG RI E VED WITH THE ABOVE ORDER, ASSESSEE PREFER RED AN APPEAL BEFORE THE CIT(A) . 5 . BEFORE THE CIT(A) , ASSESS EE MADE T HE SIMILAR SUBMISSIONS , WHICH WERE MADE BEFORE THE ASSESSING OFFICER ALONG WITH APPEAL PAPERS. LD.CIT(A) DISMISSED THE APPEAL OF ASSESSEE DUE TO NON - COMPLIANCE AND NON - REPRESENTATION OF ASSESSEE S APPEAL BEFORE HIM AND OBSERVED AS BELOW: 6.4 THE APPELLANT OWNS 22.5% SHARES IN THE COMPANY MIS UNITED INDIA CONSTRUCTION PVT. LTD. AND IT HAS RESERVES AS ON 31.03.2012 AT RS . 1 4,99,138 / - . THE APPELLANT HAS BEEN ADVANCED LOAN OF RS. 18,61,380 / - DURING THE YEAR. THE AO NOTED THAT ALL THE CONDITIONS OF DEEMED DIVIDEND UL S. 2(22}(E) ARE SATISFIED AS THE LOAN HAS BEEN GIVEN TO A SHAREHOLDER BY A COMPANY IN WHICH PUBLIC ARC NOT SUBSTANTIALLY INTERESTED AND HAVING RESERVES MORE THAN THE QUANTUM OF LOAN ADVANCED TO THE APPELLANT. THE AR STATED THAT TH E RESERVES WILL NOT EXIST AS THERE IS A SUBSEQUENT LIABILITY OF MAT WHICH HAS NOT BEEN CHARGED TO THE RESERVES OF THE COMPANY. THE AO NOTED T H AT AT THE TIME OF FINALIZATION OF THE ACCOUNTS FOR THE YEAR ENDED 31.03.2012 NO SUCH CHARGE WAS MADE AND THE LI ABILITY HAS ARISEN IN THE SUBSEQUENT YEARS. THE CONTENTION OF THE AO IS CORRECT AND THE RESERVES AND SURPLUS ARE TO BE SEEN AS PROVIDED U! S. 2(22 ) (E) OF THE ACT IN THE TERM ACCUMULATED PROFITS WHICH ARE GIVEN AS PER EXPLANATION 1 AND EXPLANATION 2 OF THE SAID SUBSECTION AND NOWHERE SUCH CLARIFICATION IS PROVIDED OR INTENDED AS ITA NO. 15 3 6 /H YD/201 8 : - 4 - : CONTENDED BY THE AR. THEREFORE, A SUBSEQUENT CHARGE OF LIABILITY AFTER GIVING LOANS AND ADVANCES AND IN A SUBSEQUENT YEAR WILL NOT HAVE A BEARING ON THE YEAR IN WHICH SUCH DEEMED DIVIDEND HAS ARISEN THEREFORE, THE CONTENTIONS OF THE APPELLANT AS SUBMITTED IN THE FACTS OF THE CASE ARE REJECTED. IT HAS ALREADY BEEN STATED THAT NONE ATTENDED IN SPITE OF P ROVIDING OPPORTUNITY ON 03.04.2018, 11.04.2018, 09.05.2018 AN D 28.05.2018 LEAVING THE MATTER TO BE DECIDED AS PER THE SUBMISSIONS MADE IN THE FORM OF APPEAL. THERE IS NOTHING AS SUCH WHICH CAN BE SUPPLEMENTED AS PRIMA FACIE THE MATTER IS BASED ON FACTS AND FIGURES AND THE ASSESSEE'S CONTENTION IS DEVOID OF FACTS AND MERITS IN THE CA SE. IN VIEW OF THE ABOVE THE GROUND NO. 1 AND 2 ARE DISMISSED ACCORDIN GLY. 5.1. AGGRIEVED WITH THE SAID ORDER , ASSESSEE PREFERRED AN APPEAL BEFORE US, RAISING THE FOLLOWING GROUNDS OF APPEAL: 1 BOTH AO & LEARNED CIT (A) - 5 ERRED IN LAW AND FACTS OF THE CASE. 2. THE HON'BLE CIT (A) - 5 OUGHT TO HAVE APPRECIATED THE FACTS AND LAW WHILE DISMISSING THE APPEAL. 3. THE SECTION 2(22)(E) OF LT. ACT 1961, BY THE AO IS ARBITRAR Y AND LIABLE TO BE DELE TED ON ACCOUNT OF EXISTING TAX LIABILITIES BECAUSE OF WHICH THERE WERE NO FREE RESERVES AS ON THAT DATE OF31.03.2012. 4. ANY OTHER GROUND AT THE TIME OF HEARING. 6. BEFORE US, LD.AR SUBMITTED THAT THE COMP ANY M/S UNITED INDIA CONSTRUCTION CO. (P) LTD. FILED RETURN OF INCOME FOR THE AY. 2011 - 12 AND ACCORDINGLY, RETURN WAS PROCESSED ITA NO. 15 3 6 /H YD/201 8 : - 5 - : U/S. 143(1) OF THE ACT ON 17 - 01 - 2012 , DETERMINING TAX LIABILITY OF RS. 49,51,416/ - AND SIMI LARLY , FOR THE AY. 2010 - 11, COMPANY FILED ITS RETURN OF INCOME ON 26 - 09 - 2010 AND RE TURN WAS PROCESSED U/S. 143(1) OF THE ACT DT. 25 - 02 - 2011 , DETERMINING THE TAX LIAB ILITY OF RS. 49,27,550/ - . T HE CO MPANY HAS FINALISED THE BALANCE SHEET FOR THE AY. 2012 - 13 AND FILED THE RETURN OF INCOME ON 11 - 08 - 2012. H E SU BMITTED THAT EVEN THOUGH THE COMPANY WAS AWARE OF THE TAX LIABILITIES FOR THE AYS. 2010 - 11 AND 2011 - 12 , IT HA S NOT BROUGHT THE ABOVE LIABILITY ON RECORD WHILE COMPLETING THE BALANCE SHEET ON 31 - 03 - 2012. H E SUBM ITTED THAT BY BRINGING ON RECORD THE ESTABLISHED LIABILITY OF INCOME TAX, THE RESERVES D ECLARED BY THE COMPANY IN THE BALANCE SHEET , WHICH IS PL ACED ON R ECORD AT PG.14 OF THE PAPER BOOK WILL BE NIL. T HEREFORE, THE RESERVES OF THE C OMPANY IS NIL. T HE PROVI SI ONS OF SECTION 2(22)(E) O F THE ACT WILL NOT BE AT TRACTED IN THE CASE OF ASSESSEE . F U RTHER , HE SUBMITTED THAT THE COMPANY HAS ALSO PAID THE TAX LIABILITY FOR THE AYS. 2010 - 11 AND 2011 - 12 DURING THE A Y . 2016 - 17. I N SUPPORT OF THE ABOVE CLAIM, HE FILED A PAYMENT VOUCHER DT. 24 - 08 - 2016 , WHICH IS PLACED AT PG. 23 OF THE PAPER BOOK. I N SUPPOR T OF HIS ARGUMENT, HE RELIED ON THE CASE OF ACIT V S. G AUTAM SARABHAI T RUST [2375 TTJ 151] (AHD.) 7. ON THE OTHER HAND, LD. D R SUBMITTED THAT THE ASSESSEE HAS NOT ADJUSTED THE DETERMINED THE LIABILITY IN THE BALA NCE SHEET PREPARED FOR THE AY. 2012 - 13. ASS ESSING OFFICER WILL ONLY CONSIDER THE BALANCE SHEET, WHICH IS PLACE D BEFORE HIM. A S PER WHICH, ASSESSEE IS HAVING AN ACCUMULATED RESERVE AND ITA NO. 15 3 6 /H YD/201 8 : - 6 - : ASSESSING OFFICER HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 2(22)(E) OF THE A C T. HE FURTHER SUBMITTED THAT TH E LD.CIT(A) HAS CONFIRMED THE ADDITION BY BRINGING THE PRO PER MERIT IN PARA 6.4 OF HIS ORDER. 8. CONSIDERED THE RIVAL SUBMISSIONS AND MATERIAL ON RECORD. W E NOTICED THAT THE COMPANY, M/S. UNITED INDIA CONSTRUCTION CO. (P) LTD., FILED ITS RETURN OF INCO ME FOR THE AY. 2012 - 13 AND COMPLETED THE BALANCE SHEE T WIT H THE A CC UMULATED RESERVE TO THE EX TENT OF RS. 14,99,138/ - . D URING THE YEAR, ASSESSEE HAS TAKEN AN ADVANCE OVER AND ABOVE THE ACCUMULATED PROFIT DECLARED IN THE BALANCE SHEET OF THE COMPANY, M/S. U NITED INDIA CONSTRUCTION CO. (P) LTD. T HERE IS NO DOUBT T HAT THE C ONDITIONS OF SECTION 2(22)(E) OF THE ACT SAT ISFIES IN THE GIVEN CASE. H OWEVER, WE NOTICED THAT THE COMPANY, M/S. UNITED INDIA CONSTRUCTION CO. (P) LTD., NO DOUBT DECLARED FAVOURABLE ACCUMU LATED PROFIT IN THE BALANCE SHEET . H OWEVER, IT HAS ACCUMU LATED TAX LIABILITY AS DETERMINED BY THE DEPARTMENT U /S. 143(1) OF THE ACT ON THE BALANCE SHEET DATE. S INCE IT IS AN ESTABLISHED TAX LIABILITY AND AS PER THE DECISION RELIED ON BY THE ASSESSEE , THE DEP ARTMENT SHOULD CONSIDER THE ABOVE TAX LIABILITY WHILE CONS IDERING T HE STATUS OF THE ACCUMUL ATED PROFIT OF THE ASSESSEE IN ORDER TO INITIATE ANY P ROCEEDINGS U/S. 2(22)(E) OF THE ACT. T HE RELEVANT PORTION IN THE CASE OF M/S GAUTA M SARABHAI (SUPRA) , ON WHICH RELIANCE PLACED BY THE LD. AR , IS REPRODUCED BELO W: 41. WE HAVE CONSIDERED THE MATTER AND ARE INCLINED TO ACCEPT THE CONTENTION OF THE LEARNED COUNSEL FOR DEDUCTION OF THE TAX LIABILITIES OF ITA NO. 15 3 6 /H YD/201 8 : - 7 - : RS. 17,38,04,000 AS WELL AS RS. 23,47,000. THE VARIOUS DECISI ONS CITED BY THE LEARNED COUNSEL FULLY SUPPORT THE C LAIM FOR DEDUCTION IN RESPECT OF TAX LIABILITIES FOR THE PURPOSE OF ASCERTAINING THE PROFITS OF THE COMPANY . THE SUPREME COURT HAS HELD IN KEDARNATH JUTE MFG. CO. LTD. VS. CIT (SUPRA) : 'WHETHER THE ASSES SEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WIL L DEPEND ON THE PROVISION OF LAW RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS; NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN HIS BOOKS OF ACCOUNT BE DECISIVE OR CONCLU SIVE IN THE MATTER.' THE DECISION OF GUJARAT HIGH CO URT IN NAGRI MILLS CO. LTD.'S CASE SUPRA CITED BY THE LEARNED COUNSEL FURTHER SUPPORTS THE CLAIM FOR DEDUCT ION. THE GUJARAT HIGH COURT HELD THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION OF LIABILITY ON ACCO UNT OF GRATUITY EVEN THOUGH PROVISION FOR THE LIABIL ITY HAS BEEN MADE BY WAY OF A FOOT NOTE IN THE BALANCE SHEET AND THIS WAS IN ACCORDANCE WITH THE ACCOUNTANC Y PRACTICE'. WE HAVE ALREADY HELD ABOVE THAT ACCUMULATED PROFITS ARE TO BE CONSTRUED AS COMMERCIA L PROFITS FOR THE PURPOSES OF S. 2(22) OF THE IT ACT . SINCE TAX LIABILITIES HAVE BEEN CREATED BY THE IT AUTHORITIES AND ASSESSMENT ORDERS AS WELL AS DEMAND NOT ICES IN SUPPORT OF THE SAID LIABILITIES HAVE BEEN PRODUCED DURING THE ASSESSMENT PROCEEDINGS, SUC H LIABILITIES ARE TO BE TAKEN NOTE OF, EVEN IF NOT P ROVIDED IN THE BOOKS FOR ASCERTAINING THE ACCUMULATED PROFITS. IN THE ABSENCE OF SPECIFIC RESERVES FOR TAXA TION CREATED BY THE COMPANY THOSE LIABILITIES MAY HAVE TO BE MET FROM THE GENERAL RESERVES. IN SU CH CIRCUMSTANCES TO TAKE THE FIGURE OF GENERAL RESER VE FROM THE BALANCE SHEET FOR ASCERTAINING THE ACCUMULATED PROFITS WOULD NOT BE A CORRECT PROCEDURE FOR THE QUANTUM OF THE GENERAL RESERVES WOULD NOT REPRESENT THE ACCUMULATED PROFITS. 42. IT HAS BEEN OBS ERVED BY THE MADRAS HIGH COURT IN CIT VS. G. NARASIM HAN (1979) 9 CTR (MAD) 210 : (1979) 118 ITR 60 (MAD) : 'IF THE LIABILITIES THAT ACCRUED FROM YEAR TO YEAR HAS BEEN TAKEN INTO ACCOUNT YEAR BY YEAR AND THE ACCUMULATED PROFITS HAD BEEN DEPLETED YEAR BY YE AR BY WRITING DOWN THE ACCUMULATED PROFITS AND ONLY THE BALANCE CARRIED OVER, THE TOTAL OF THE ACCUMULATED PROFITS IN ANY GIVEN YEAR WILL BE LESS THAN IN CASES WHERE THERE HAS BEEN NO DEDUCTION MADE FOR ACCRUED LIABILITIES.' 43. IN CIT VS. V. DAMODARAN (19 72) 85 ITR 590 (KER) CITED BY THE LEARNED COUNSEL IT HAS BEEN HELD : 'THE EXPRESSION 'ACCUMULATED' NECESSARILY RELATES TO PROFITS WHICH COULD BE ACCUMULATED BY A COMPANY FROM TIME TO TIME. THIS MEANS THAT ALL LIABILITIES DUE FROM THE COMPANY WILL HAVE TO B E DEDUCTED FROM THE PROFITS TO ENABLE THE COMPANY TO ACCUMULATE THE SAME.' HAVING REGARD TO THE AFORESAID REASONS WE HOLD THAT DEDUCTION IS LIABLE TO BE MADE FOR ASCERTAINING ACCUMULATED PROFITS. ITA NO. 15 3 6 /H YD/201 8 : - 8 - : FROM THE ABOVE DECISION, IT IS CLE AR THAT THE ACCUMULATED PROFIT, WHICH IS FREELY AVAILABLE FOR DISTRIBUTION O F DIVIDEND, IT DOES MEANS THAT THE PROFIT AFTER DEDUCTION OF ALL LIABILITIES DUE FROM THE COMPANY IS STILL PROFIT WHICH IS AVAILABLE FOR DISTRIBUTION OF DIVI DEND . T HE PROFIT WHICH IS COMPLETELY FREE FROM LIABI L ITIES ARE THE PROFIT AVAILABLE FOR DISTRIBUTION OF DIVIDEND. IN THE GIVEN CASE , NO DOUBT, IT IS SHOWING ACC UMULATE D PROFIT, BUT, IT HAS DETERMINED TAX LIABILITIES , AFTER DEDUCTING THE TAX LIABILITIES , THE PROF IT AVAILABLE IN THE BUSINESS FOR THE PURPOSE OF DIVIDEND IS NEGATIVE ACCUMULATED PROFIT. THEREFORE, THE ACCUMULATED PROF IT FOR THE PURPOSE OF SECTION 2(22) (E) IS NIL , H ENCE, WE DELETE ADDITI ON U/S 2(22) (E) EVEN THOUGH IN THIS CASE, ALL THE INGREDIENTS AVAILABLE TO INVOKE THE P ROVISION BUT THE COMPANY D OES NOT HAVE ENOUGH A CCUMULATED PROFIT FOR DISTRIBUTION OF DIVIDEND AFTER DEDUCTION OF TAX LIABILITIES. ACCOR DINGLY, GROUND RAISED BY THE ASSESSEE IS ALLOWED. 9. IN THE RESULT , APPEAL OF THE ASSESSEE IS ALLOWED. ORD ER P RONOUNCED IN THE O P EN C OURT ON 18 TH APRIL , 201 9 SD/ - SD/ - (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOU NTANT ME MBER HYDERA BAD, DATED 18 TH APRIL , 201 9 T NMM / KV ITA NO. 15 3 6 /H YD/201 8 : - 9 - : COPY TO : 1. SHRI SHYAMSUNDER RAO GONE, ADILABAD. C/O. SHRI K. C. DEVDAS, C/O. SEKHAR & CO., 133/4, R.P. ROAD, SECUND ERABAD. 2. INCOME TAX OFFICER, WARD - 17 ( 3 ), HYDERAB AD. 3 . CIT( APPEALS ) - 5 , HYDE RABAD . 4. PR.CIT - 5 , HYDERABAD. 5 . D.R. ITAT, HYDERAB AD. 6 . GUARD FILE.