DCIT, CHENNAI V. M/s. Anand Transport, CHENNAI

ITA 1954/CHNY/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51826 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 03-08-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 18-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR I VIJAYAKUMAR
• Assessee Lawyers: S SRIDHAR
• Keywords: Deemed dividend; Reason to believe
• Section: 143(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER] I.T.A.NO.1954/MDS/2010 ASSESSMENT YEAR : 2002-03 THE DY. CIT BUSINESS CIRCLE I CHENNAI VS M/S ANAND TRANSPORT 1, 9 TH STREET DR. RADHAKRSHNAN SALAI MYLAPORE, CHENNAI 600 004 [PAN - AAAFA1037D ] (APPELLANT) (RESPONDENT) APPELLANT BY : DR.I.VIJAYAKUMAR, CIT/DR RESPONDENT BY : SHRI S.SRIDHAR DATE OF HEARING : 03-08-2011 DATE OF PRONOUNCEMENT : 07-09-2011 O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE, FOR ASSESSMEN T YEAR 2002-03, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), DATED 16.8.2010. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A FIRM CONSISTING OF FOLLOWING PARTNERS: ITA 1954/10 :- 2 -: SHRI. M.G.MUTHU MS. MARY CHELLATHAI SHRI. M.G.M.MARAN SHRI. M.G.M.ANAND SHRI. DANIEL RAJAN 3. THIS ASSESSEE-FIRM HAS FILED ITS RETURN OF INCOME O N 31.10.2002 DECLARING TOTAL INCOME OF ` 14,01,42,239/-. THIS RETURN WAS PROCESSED U/S 143(1) OF THE ACT. SUBSEQUENTLY, THE CASE WAS REOPENED U/S 147 R.W.S 148 OF THE ACT ON THE BASIS OF INFORMATION TH AT THE ASSESSEE-FIRM HAD RECEIVED A SUM OF ` 3,49,77,724/- FROM A COMPANY BY THE NAME M.G.M.DIAMOND BEACH RESORTS PVT. LTD. IT WAS FOUN D THAT OUT OF THE FIVE PARTNERS, THREE PARTNERS NAMELY, SHRI M.G.MUTH U, MS. MARY CHELLATHAI AND SHRI M.G.M.MARAN ARE DIRECTORS IN TH IS M.G.M.DIAMOND BEACH RESORTS PVT. LTD. HAVING HAREHOLDING OF 33.33 %. WITH REFERENCE TO SECTION 2(22)(E) OF THE ACT WHICH SPEAKS ABOUT D EEMED DIVIDEND, ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WH ICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER A S REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MAD E AFTER THE 31 ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIARY OWNER OF SHAR ES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS T HAN TEN PERCENT OF THE ITA 1954/10 :- 3 -: VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHARE HOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST OR ANY PAYMENT BY WAY SUCH COMPANY ON BEHALF, OR FOR THE I NDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS, SHALL BE DEEMED TO BE DIVIDEND IN THE HANDS OF THE RECIPIENT. SINCE THE ASSESSEE-FIR M HAD RECEIVED ` 3,49,77,724/- FROM THE COMPANY IN WHICH THREE OF TH E PARTNERS OF THE FIRM ARE SHAREHOLDERS WITH 33% SHAREHOLDING EACH, T HE ASSESSING OFFICER WAS OF THE OPINION THAT THIS AMOUNT HAS TO BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE PARTNERSHIP FIR M. THE FIRM HAD NOT ADMITTED THIS AMOUNT AS ITS INCOME IN THE RETUR N ALREADY FURNISHED. IN THIS BACKGROUND, SENSING REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT , A NOTICE U/S 148 WA S ISSUED TO THE ASSESSEE ON 25.3.2009 CALLING UPON THE ASSESSEE TO FURNISH THE RETURN OF INCOME FOR THIS YEAR. THIS NOTICE WAS COMPLIED WITH BY THE ASSESSEE BY FILING LETTERS DATED 22.5.2009 AND 10.8.2009 STA TING THAT THE RETURN ORIGINALLY FILED ON 31.1.2002 MAY BE TREATED AS THE RETURN IN RESPONSE TO THE NOTICE U/S 148. THE RE-ASSESSMENT WAS OCMPL ETED U/S 143(3) R.W.S 147 AFTER INCLUDING A SUM OF ` 3,49,77,744/- BY TREATING IT AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE-FIRM. THIS ACTION OF THE ASSESSING OFFICER WAS CHALLENGED BEFORE THE LD. CIT (A), WHO DID NOT ITA 1954/10 :- 4 -: ACCEPT THE LEGAL GROUND CHALLENGING THE RE-ASSESSME NT PROCEEDINGS BUT ON MERITS HE HAS FOUND THAT THIS AMOUNT CANNOT BE A DDED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE U/S 2(22)(E) OF THE ACT AS THIS PAYMENT WAS MADE DURING THE ORDINARY COURSE OF BUSI NESS. NOW THE REVENUE HAS CHALLENGED THIS FINDING OF THE LD. CIT (A). 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE P ERUSED THE ENTIRE MATERIAL AVAILABLE ON RECORD. IT WAS ARGUED BY THE LD.CIT/DR, DR.I.VIJAYAKUMAR, THAT THE LD. CIT(A) IS NOT RIGHT IN DELETING THIS ADDITION OF ` 3,49,77,724/- MADE U/S 2(22)(E) OF THE ACT BECAU SE HE OUGHT TO HAVE APPLIED THE BOARDS CIRCULAR NO.495 D ATED 23.09.1987 WHEREIN IT WAS STATED THAT THE DEEMED DIVIDEND IS T O BE ASSESSED IN THE HANDS OF THE BENEFICIARIES OF THE LOANS/ADVANCE S. IT WAS FURTHER ARGUED THAT THE PAYMENT WAS MADE TO THE ASSESSEE-FI RM ONLY TO CIRCUMVENT THE PROVISIONS OF SECTION 2(22)(E) OF TH E ACT AND IS A COLOURABLE DEVICE TO AVOID TAX. FURTHER, THE ARGUM ENT OF LD.CIT/DR WAS THAT THE ASSESSING OFFICER HAD VERIFIED THE BALANCE SHEET OF THE COMPANY AND FOUND THAT THE PAYMENT TO THE FIRM COU LD NOT BE MADE OUT OF THE BALANCE STANDING TO THE CREDIT OF THE PA RTNERS OF THE FIRM IN THE BOOKS OF THE COMPANY. IN THIS BACKGROUND, THE LD.CIT/DR HAS CHALLENGED THE IMPUGNED DELETION. ON THE OTHER HAN D, THE LD.AR, SHRI.S.SRIDHAR, HAS HEAVILY RELIED ON THE REASONIGN S GIVEN BY THE LD. ITA 1954/10 :- 5 -: CIT(A) FOR DELETING THE IMPUGNED ADDITION. IT WAS FURTHER ARGUED THAT THIS TRANSACTION DOES NOT AT ALL FALL WITHIN THE AM BIT OF PROVISIONS OF SECTION 2(22)(E) OF THE ACT, THEREFORE, HE HAS JUST IFIED THE IMPUGNED DELETION. 5. WE HAVE COGITATED THE RIVAL SUBMISSIONS IN THE LIGH T OF THE OBTAINING FACTS AND EVIDENCE OF THIS CASE AVAILABLE BEFORE US AND HAVE FOUND THAT THIS ADVANCE OF THE IMPUGNED AMOUNT TO T HE COMPANY WAS OUT OF WITHDRAWALS OF FUNDS FROM THE ACCUMULATED PR OFITS OF THE ASSESSEE-FIRM. THESE WITHDRAWALS WERE MADE IN THE CAPACITY OF THE PARTNERS OF THE ASSESSEE-FIRM AND THE ADVANCE AMOU NTS TO THE COMPANY DID NOT CARRY INTEREST WHICH IS VERIFIABLE FROM THE RECORDS. SUBSEQUENTLY, THE ASSESSEE-FIRM WAS IN NEED OF FUND S, THE COMPANY, M.G.M.DIAMOND BEACH RESORTS PVT. LTD. MADE AVAILABL E THE INTEREST FREE ADVANCE LYING WITH THEM. THESE AMOUNTS WERE A DVANCED ON VARIOUS DATES BY THEM TO M.G.M.DIAMOND BEACH RESORT S PVT. LTD. AND THE BALANCE OUTSTANDING AS ON 31.3.2002 PAYABLE TO THEM WAS TO THE TUNE OF ` 1.11 CRORES. THE ABOVE LOANS WERE ADVANCED IN THE INITIAL STATE OF ESTABLISHMENT OF THE COMPANY IN WHICH THE PARTNERS OF THE ASSESSEE-FIRM WERE THE PROMOTERS/DIRECTORS AND SHAR EHOLDERS. THE MONIES WERE TAKEN FROM THE COMPANY ONLY FOR THE PUR POSE OF COMMERCIAL AND BUSINESS EXPEDIENCY. THUS, IN OUR C ONSIDERED OPINION, ITA 1954/10 :- 6 -: THE PRIMARY CONDITION OF THE TRANSACTION BEING IN T HE NATURE OF LOAN OR ADVANCE IS MISSING IN THE GIVEN FACTS OF THE CASE W HICH REPELS THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. ANY TR ANSACTION WHICH A COMMERCIAL ONE AND IS ON ACCOUNT OF BUSINESS EXPEDI ENCY HAS TO BE OUTSIDE THE PURVIEW OF THE DEEMING PROVISIONS AS HA S BEEN HELD BY NUMEROUS COURTS. IN OUR OPINION, THE FINDING OF TH E ASSESSING OFFICER GIVEN AT PAGE 4 IN PARA 3 THAT THE TRANSACTION OF F UNDING BY PARTNERS OF THE FIRM TO PROMOTE THE COMPANY UNDER CONSIDERATION AS WELL AS THE TRANSFER OF FUNDS FROM THE COMPANY TO THE ASSESSEE WERE ONLY TO CIRCUMVENT THE DEEMING PROVISIONS OF THIS SECTION, IS NOT FOUND TO BE A CORRECT FINDING. M/S M.G.M.DIAMOND BEACH RESORTS P VT. LTD. IS A COMPANY INCORPORATED AS A PRIVATE LIMITED COMPANY O N 19.8.1994 WITH THE OBJECT OF RUNNING A THEME PARK IN CHENNAI. THE MAIN PROMOTERS AS DISCUSSED ABOVE, WERE ALSO THE PARTNERS OF THIS FIRM. SINCE THE DEVELOPMENT OF A THEME PARK INVOLVED HUGE INVESTMEN TS, TO MAKE THE AIMS AND OBJECTS OF THE COMPANY FULFILLED, THE MAIN PROMOTERS NAMELY, SHRI M.G.MUTHU, THE CHAIRMAN AND MANAGING DIRECTOR AND SHRI. NESAMANI MARAN, DIRECTOR HAD LENT HUGE AMOUNT OF MO NEY TO M.G.M.DIAMOND BEACH RESORTS PVT. LTD.. THE TOTAL A MOUNT ADVANCED BY THEM AS ON 31.3.1999 WAS OF ` 2,38,00,000/- AND ` 2,10,00,000/- RESPECTIVELY. THE DIRECTORS HAD NOT CHARGED ANY I NTEREST ON THE THESE ITA 1954/10 :- 7 -: AMOUNTS AND BALANCE TO THEIR CREDIT AS ON 31.3.200 2 WAS TOTALLED TO A SUM OF ` 4,10,32,049/-. IN THE ASSESSEE-FIRM, THE ABOVE PROMOTERS/MANAGING DIRECTOR ARE PARTNERS. IN THE YEAR 2002, THE ASSESSEE-FIRM WAS IN DIRE NEED OF FUNDS TO CARRY ON ITS BUSINESS DEVELOPMENT AND A REQUEST WAS MADE TO ITS PARTNERS FOR INVESTMENT OF FUNDS. THE PARTNERS, IN TURN, HAD REQUESTED M.G.M. DIAMOND BEACH RESORTS PVT. LTD. IN WHICH THEY HAD HUGE BALANCE TO LEND MONEY TO THE FIRM OUT OF THEIR BALANCE WITH M.G.M.DIAMOND BEACH RESORTS PVT. LTD. THE TOTAL AMOUNT SO GIVEN BY M.G.M.DIAMOND BEACH RE SORTS PVT. LTD. TO THE ASSESSEE-FIRM ON THE INSTRUCTIONS OF ITS DIR ECTORS OUT OF THEIR FUNDS AVAILABLE WITH THE COMPANY AS ON 31.3.2002 ST OOD AT ` 3,49,77,724/- RELATE TO THE REPAYMENT OF LOAN WHICH WAS GIVEN TO THE COMPANY BY THE PARTNERS STATED ABOVE AND SUBSEQUENT LY, UNDER THE INSTRUCTIONS FROM THEM, THE COMPANY WAS DIRECTED TO REPAY THE LOAN TO M/S ANAND TRANSPORT, I.E THE ASSESSEE BEFORE US. BEFORE US, THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT . THE PR OVISIONS OF SECTION 2(22)(E) OF THE ACT WILL NOT ATTRACT WHEN THE SUBJE CT MATTER IS ONLY OF REPAYMENT OF LOAN AND NOT EITHER ADVANCE OR LOAN A S ENVISAGED IN THIS SECTION. THE BASIC CHARACTERISTICS OF DIVIDEND HAS ALREADY BEEN HELD BY THE HON'BLE APEX COURT IN THE CASE OF KANTILAL MANI LAL & OTHERS VS CIT, 41 ITR 275, AS A SHARE OF PROFITS OF THE COMPANY GI VEN TO ITS ITA 1954/10 :- 8 -: SHAREHOLDER. SECTION 206 OF THE COMPANIES ACT PROH IBITS PAYMENT OF DIVIDEND TO ANY PERSON OTHER THAN THE REGISTERED SH AREHOLDER. SECTION 2(22)(E) OF THE ACT HAS TO BE GIVEN STRICT INTERPRE TATION AS LAID DOWN BY THE HON'BLE APEX COURT IN THE CASE OF CIT VS C.P.SA RATHY MUDALIAR, 83 ITR 170. THE APPLICATION OF THIS DEEMING PROVISION IS NOT ENVISAGED TO BUSINESS TRANSACTIONS. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE REPORTED IN 220 CTR 639 HAS CLEARLY STATED SO. THE FOLLOWING DECISIONS ALSO HELP OUR ABOVE OPINION: (I) VEENADEVI SINGHANIA VS CIT 220 CTR 185 (II) MADURA COATS PVT. LTD 274 ITR 609(MDS) (III) CIT VS SAVITHRI SAM 236 ITR 1003(MDS) (IV) FENNER INDIA LTD 241 ITR 672(MDS) (V) CIT AND ANOTHER VS FORAMER FRANCE 264 ITR 566(S C) (VI) CIT VS KELVINATOR OF INDIA LTD 256 ITR 1(DEL) 6. WE ARE NOT IN AGREEMENT WITH THE ASSESSING OFFICER THAT THERE WERE NO ACCUMULATED PROFITS BECAUSE THE RESERVES OF THE MERGED COMPANY HAVE TO BE TREATED AS ACCUMULATED PROFITS B Y AGGREGATING THE RESERVES OF BOTH THE COMPANIES I.E AMALGAMATING AND AMALGAMATED COMPANIES. THEREFORE, IN THE LIGHT OF THE BINDING JUDICIAL PRONOUNCEMENTS CITED ABOVE, THE REVENUE HAS TO ESTA BLISH THAT THE BENEFIT HAD ACCRUED TO THE SHAREHOLDER IN THE COURS E OF TRANSACTION ENTERED INTO WITH THE COMPANY BEING LOAN OR ADVANCE COUPLED WITH ITA 1954/10 :- 9 -: SATISFYING THE OTHER CONDITIONS. THUS, THE AMOUNT GIVEN BY THE COMPANY TO THE ASSESSEE-FIRM IS ACTUALLY REPAYMENT OF LOAN AND NOT EITHER AS A DEEMED ADVANCE OR LOAN ENVISAGED IN SEC TION 2(22)(E) OF THE ACT. HENCE, THIS ADDITION CANNOT BE SUSTAINED AND THEREFORE, HAS BEEN CORRECTLY DELETED BY THE LD. CIT(A). 7. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DIS MISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 07-09-2011. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 7 TH SEPTEMBER, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR