Dr. V.V. Bhaskar Rao, Bangalore V. ITO, Bangalore

ITA 191/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57433 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-01-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 24-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Deemed dividend
• Section: 148; 10

Judgement Text

PAGE 1 OF 8 ITA NO.191 /BANG/2011 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.191/BANG/2011 (ASST. YEAR 2005-06) DR. V V BHASKAR RAO, MANAGING DIRECTOR, M/S AKASH HATCHERIES PVT. LTD., NO.1, 1 ST FLOOR, 10 TH MAIN, 10 TH CROSS, VASANTH NAGAR, BANGALORE-52. - APPELLANT PA NO.AAZPB 7648E VS THE INCOME TAX OFFICER, WARD-11(1), BANGALORE. - RESPONDENT PA NO.ABYPG 8186 C DATE OF HEARING : 02/01/2012 DATE OF PRONOUNCEMENT : 06/01/2012 APPELLANT BY : SHRI P A GHATAGE, C.A. RESPONDENT BY : SMT. SUSAN THOMAS JOSE, JCIT O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT (A)-I, BANGALORE DATED 20.12.2010. THE RELEVANT ASSESSMENT YEAR IS 2005-06. PAGE 2 OF 8 ITA NO.191 /BANG/2011 2 2. THE SOLITARY ISSUE THAT ARISES FOR OUR CONSIDERA TION IS WHETHER THE CIT(A) IS JUSTIFIED IN CONFIRMING THE ADDITION OF RS.2,50,000/- UNDER SECTION 2(22)(E) OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE AS FOLLOWS:- THE ASSESSEE IS AN INDIVIDUAL. FOR THE CONCERNED ASST. YEAR, RETURN OF INCOME WAS FILED ON 26/9/2005 DECLARING A N INCOME OF RS.1,83,600/-. SUBSEQUENTLY, NOTICE UNDER SECTION 1 48 OF THE ACT WAS ISSUED ON 5/2/2008. THE RE-ASSESSMENT WAS COMPLETED VIDE ORDER DATED 29/12/2008. IN THE RE-ASSESSMENT ORDER, THE ASSESS ING OFFICER HAD MADE AN ADDITION OF RS.2,50,000/- UNDER SECTION 2(22)(E) OF THE ACT. THE ASSESSEE HAD RECEIVED AN ADVANCE OF RS.2,50,000/- F ROM M/S AKASH HATCHERIES PVT. LTD. DURING THE FINANCIAL YEAR RELEV ANT TO THE ASST. YEAR 2005-06. THE ASSESSEE WAS A MANAGING DIRECTOR OF T HE ABOVE SAID COMPANY AND ALSO A BENEFICIAL OWNER HOLDING MORE THAN 10% O F THE VOTING RIGHT. ACCORDING TO THE ASSESSING OFFICER, THE BALANCE SHE ET AS ON 31/3/2005 OF M/S AKASH HATCHERIES PVT. LTD. SHOWED ACCUMULATED P ROFITS FOR THE YEAR AT RS.32,43,511/-. THE ASSESSING OFFICER WAS OF THE V IEW THAT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WAS CLEARLY ATTRACTED FOR THE FOLLOWING REASONS:- I) AN AMOUNT OF RS.2,50,000/- WAS RECEIVED BY THE ASSESSEE AS ADVANCE/LOAN DURING THE FINANCIAL YEAR F ROM M/S AKASH HATCHERIES PVT. LTD.. II) THE ASSESSEE WAS A MANAGING DIRECTOR IN THE SAID COMPANY HAVING MORE THAN 10% OF THE VOTING POWER. III) THERE WAS ACCUMULATED PROFITS AS ON 31/3/2005. PAGE 3 OF 8 ITA NO.191 /BANG/2011 3 4. AGGRIEVED BY THE ADDITION MADE UNDER SECTION 2(2 2)(E) OF THE ACT, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFO RE THE FIRST APPELLATE AUTHORITY. 5. IT WAS CONTENDED BEFORE THE FIRST APPELLATE AUT HORITY THAT THERE WAS NO ACCUMULATED PROFITS FOR M/S AKASH HATC HERIES PVT. LTD. AS ON THE DATE OF GIVING THE LOAN TO THE ASSESSEE. IT WA S SUBMITTED THAT M/S AKASH HATCHERIES PVT. LTD. HAD INCURRED SUBSTANTIAL LOSS IN THE ASSESSMENT YEAR 2003-04 AND IN THE BALANCE SHEET, THERE WAS ACC UMULATED LOSS OF RS.37 LAKHS RESULTING IN A DEBIT BALANCE OF RS.18,56,418/ -. HOWEVER, THE MONEY BROUGHT TOWARDS THE CAPITAL BY THE EARLIER DIRECTORS AMOUNTING TO RS.51 LAKHS WAS CREDITED TO THE RESERVE AND SURPLUS AS CA PITAL RECEIPT. THIS AMOUNT WAS FOREGONE BY THE DIRECTORS WHO HAD EXITED FROM M/S AKASH HATCHERIES PVT. LTD. IN THE HANDS OF M/S AKASH H ATCHERIES PVT. LTD., THE AMOUNT OF RS.51 LAKHS, FOREGONE BY THE DIRECTORS, WA S ADDED AS NOTIONAL INCOME UNDER SECTION 41 OF THE ACT. ON FURTHER APP EAL, THE ADDITION MADE UNDER SECTION 41 OF THE ACT IN THE HANDS OF M/S AKA SH HATCHERIES PVT. LTD. WAS DELETED. THEREFORE, IT WAS PLEADED THAT THE AMO UNT OF RS.51 LAKHS CANNOT BE RECKONED TO ARRIVE AT THE ACCUMULATED PRO FITS ON THE DAY OF GIVING OF LOAN TO THE ASSESSEE BY M/S AKASH HATCHERIES PVT. LTD. IT WAS CONTENDED THAT THE ACCUMULATED PROFITS WILL BE NEGA TIVE IF RS.51 LAKHS IS REDUCED. 6. THE CIT(A), HOWEVER, REJECTED THE CONTENTIONS R AISED AND DISMISSED THE APPEAL FILED BY THE ASSESSEE. THE REL EVANT FINDING OF THE CIT(A) READS AS FOLLOWS:- PAGE 4 OF 8 ITA NO.191 /BANG/2011 4 THE ABOVE SHOWS THAT THE APPELLANT HAS ADDED THE AMOUNT OF RS.512,03,020/- IN ASSESSMENT YEAR 2003-04 REPRESENTING LOANS FROM THE TWO ERSTWHILE DIRECTORS SRI RAMESH NARAYAN (RS.15 LAKHS) AND SRI KESHAVAN (RS.36 LAKHS) WHO WHILE LEAVING THE COMPANY HAD FOREGONE TH ESE AMOUNTS DUE FROM THE COMPANY. THE AR OF THE APPELLA NT NOW PLEADS THAT THIS INCOME BEING NOT REAL, IF REDU CED, THE REAL PROFIT WOULD BE A NEGATIVE ONE AND HENCE T HERE WOULD BE NO DIVISIBLE PROFIT FOR DISTRIBUTION OF DI VIDEND. I FIND FROM RECORDS THAT THE AMOUNT OF RS.51 LAKHS HAS BEEN ADDED IN ASSESSMENT YEAR 2003-04 BY THE ASSESSIN G OFFICER AND HAS ALSO BEEN CONFIRMED BY THE LEARNED CIT(A) UNDER SECTION 41(1) OF THE I T ACT BECAUSE T HE AMOUNTS OF LOAN HAVE CEASED TO BE A LIABILITY BECAUS E THE ERSTWHILE DIRECTORS HAVE FOREGONE THE SAME. MORESOEVER, THE APPELLANT HAS ADDED THE SAME IN THE BALANCE SHEET AS ON 31.3.2003 UNDER THE HEAD RESER VE AND SURPLUS AND THEREFORE THE APPELLANT FORFEITS I TS RIGHT TO CLAIM THAT SUCH IS NOT TO BE TREATED AS A PART OF RESERVE AND SURPLUS IN SUBSEQUENT YEAR. BESIDES S.2(22)(E) IS ON DEEMED DIVIDEND. SINCE IT IS A DEEMING SECTION IT CREATES A LEGAL FICTION. IT IS NOT NECE SSARY THAT THE ACCUMULATED PROFIT MUST BE REAL AND DIVISIBLE. EVEN IN CASE OF NOTIONAL PROFIT, IF CONDITIONS OF S.2(22 )(E) ARE FULFILLED THE SAME HAS TO BE TAXED AS DEEMED DIVID END. HERE ALL THE CONDITIONS ARE FULFILLED. THE APPELLA NT HAS MORE THAN 10% VOTING POWER IN THE COMPANY. THE COMPANY HAS GIVEN LOAN OF RS.2,50,000/- TO THE APPEL LANT M. D. BOOKS SHOW THE OPENING BALANCE OF ACCUMULATE D PROFIT OF RS.29,33,669/- AND THEREFORE I HOLD THE ADDITION JUSTIFIED. 7. THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFOR E US. 8. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE APPLI CABLE ONLY TO THE EXTENT OF ACCUMULATED PROFITS AS ARE AVAILABLE. IT WAS SUBM ITTED THAT THE PAGE 5 OF 8 ITA NO.191 /BANG/2011 5 ACCUMULATED PROFITS AS ON THE DATE OF ADVANCING MON EY BY M/S AKASH HATCHERIES PVT. LTD. TO THE ASSESSEE SHOWED POSITIV E FIGURE ONLY ON ACCOUNT OF THE ADDITION OF NOTIONAL FIGURE OF RS.51 LAKHS I N THE ASST. YEAR 2003-04 WHICH REPRESENTED THE LOANS FOREGONE BY ERSTWHILE DI RECTORS OF M/S AKASH HATCHERIES PVT. LTD. IT WAS FURTHER POINTED OUT T HAT THE CIT(A)S FINDING AT PARA 5 THAT ADDITION UNDER SECTION 41(1) OF THE ACT IN THE HANDS OF M/S AKASH HATCHERIES PVT. LTD. FOR THE ASST. YEAR 2003-0 4 HAS BEEN CONFIRMED IN APPEAL BY THE FIRST APPELLATE AUTHORITY IS FACTUALLY I NCORRECT. HE HAD PLACED A COPY OF THE FIRST APPELLATE AUTHORITYS ORDER IN TH E CASE OF M/S AKASH HATCHERIES PVT. LTD. FOR THE ASST. YEAR 2003-04. 9. THE LEARNED DR PRESENT WAS DULY HEARD. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE PROVISIONS OF SECTION 2(22)(E) OF T HE ACT READS AS UNDER:- DIVIDEND INCLUDES ANY PAYMENT BY A COMPANY, NOT BEIN G A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PA RT OF THE ASSETS OF THE COMPANY OR OTHERWISE) [MADE AFT ER THE 31 ST DAY OF MAY, 1987 BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL O WNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RAT E OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS) HOLDING NOT LESS THAN TEN PERCENT OF THE V OTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER I S A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS T HE SAID CONCERN)] OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF , OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHARE HOL DER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSE SS ACCUMULATED PROFITS. PAGE 6 OF 8 ITA NO.191 /BANG/2011 6 10.1 ONE OF THE CONDITIONS PRECEDENT FOR INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT IS THAT THERE SHOULD BE ACCUMULATED PROFITS AS ON THE DATE OF ADVANCING LOANS TO THE SHAREHOLDER, WHO IS HAVING BENEFICIAL INTEREST IN THE COMPANY NOT LESS THAN 10% OF THE VOT ING POWER. IT IS THE CASE OF THE ASSESSEE THAT THERE ARE NO ACCUMULATED PROFITS FOR M/S AKASH HATCHERIES PVT. LTD. AS ON THE DATE OF ADVANCING LO AN TO THE ASSESSEE. IT IS THE CONTENTION OF THE ASSESSEE THAT THE MONEY BROUGH T TOWARDS CAPITAL BY THE DIRECTORS AMOUNTING TO RS.51 LAKHS, WHICH WAS F OREGONE AND ADDED AS NOTIONAL INCOME UNDER SECTION 41 OF THE ACT, CANNOT BE RECKONED WHILE ARRIVING AT THE ACCUMULATED PROFITS AS ON THE DATE OF ADVANCING LOAN TO THE ASSESSEE. 10.2. WE HAVE PERUSED THE APPELLATE ORDER DATED 2 2/12/2006 (ITA NO.97/AC-11(1)/CIT(A)-I/06-07) IN THE CASE OF M/S A KASH HATCHERIES PVT. LTD.. WE FIND THAT THE FIRST APPELLATE AUTHORITY FO R THE ASST. YEAR 2003-04 HAS DELETED THE ADDITION MADE BY THE ASSESSING OFFIC ER UNDER SECTION 41 OF THE ACT. THE RELEVANT FINDING AT PAGE 7 OF THE CIT (A)S ORDER IN THE CASE OF M/S AKASH HATCHERIES PVT. LTD. READS AS FOLLOWS:- OBVIOUSLY THE LOANS RECEIVED FROM DIRECTORS CANNOT BE SAID TO REPRESENT A LOSS EXPENDITURE OR TRADING LIA BILITY INCURRED BY THE APPELLANT. THEREFORE, THE PRIMARY CONDITION TO INVOKE SECTION 41(1) IS NOT SATISFIED. EVEN IF SUCH CONDITION IS SATISFIED IT SHOULD BE SHOWN THAT SUCH LIABILITY, EXPENDITURE OR LOSS OR PART THEREOF IS RE COVERED IN CASH OR ANY OTHER MANNER. THE LOANS RECEIVED CAN NOT BE CALLED EXPENDITURE, LOSS OR TREATED AS LIABILITY BY ANY STRETCH OF IMAGINATION. THE ACTION OF THE ASSESSIN G OFFICER CANNOT BE SUPPORTED UNDER ANY PROVISION OF T HE ACT. THIS ADDITION IS THEREFORE DELETED. PAGE 7 OF 8 ITA NO.191 /BANG/2011 7 10.3. FROM THE ABOVE, IT IS CLEAR THAT THE CIT(A) IN THE PRESENT CASE HAS COMMITTED AN ERROR BY STATING THAT I FIND FROM RECORDS THAT THE AMOUNT OF RS.51 LAKHS HAS BEEN ADDED IN A.Y. 2003-0 4 BY THE A.O. AND HAS ALSO BEEN CONFIRMED BY THE LEARNED CIT(A) UNDER SECT ION 41(1) OF I T ACT 10.4. THEREFORE, IN ARRIVING AT THE ACCUMULATED PR OFITS OF M/S AKASH HATCHERIES PVT. LTD., WE DIRECT THAT THE AMOUNT OF RS.51 LAKHS SHOULD NOT BE TAKEN INTO ACCOUNT, SINCE IT HAS ALREADY BEEN DELETE D BY THE FIRST APPELLATE AUTHORITY FOR THE ASSESSMENT YEAR 2003-04. THE LEAR NED AR HAS CONFIRMED THAT THE CIT(A)S ORDER IN THE CASE OF M/S AKASH HA TCHERIES PVT. LTD. FOR THE ASST. YEAR 2003-04 HAS ATTAINED FINALITY, SINCE N O APPEAL HAS BEEN PREFERRED BY THE REVENUE AS AGAINST DELETION OF ADDI TION UNDER SECTION 41(1) OF THE ACT. 10.5. HOWEVER, THERE HAS BEEN NO EXAMINATION BY THE INCOME TAX AUTHORITIES THAT AS ON THE DATE OF ADVANCING THE LO AN BY M/S AKASH HATCHERIES PVT. LTD. TO THE ASSESSEE, WHETHER THERE WAS ACCUMULATED PROFITS AFTER REDUCING THE NOTIONAL INCOME THAT WAS ADDED U NDER SECTION 41 OF THE ACT FOR THE ASST. YEAR 2003-04. IN ORDER TO VERIFY THE SAME, THIS MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER, WHO SHALL EXAMINE WHETHER THE CONDITIONS STIPULATED UNDER SECTION 2(22)(E) OF THE ACT ARE SATISFIED. HE SHALL DISPOSE OFF THE MATTER AS EXPEDITIOUSLY AS POSSIBLE AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. PAGE 8 OF 8 ITA NO.191 /BANG/2011 8 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH DAY OF JANUARY, 2012. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO:- 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONC ERNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.