Sri Sanjay Kumar Shaw, Tanuku V. The DCIT, Central Circle, Rajahmundry

ITA 206/VIZ/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0179 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 4 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 18-11-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 25-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M NARAYANA RAO
• Keywords: Deemed dividend
• Section: 142(1); 139

Judgement Text

ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . . . . , . . . . , $ $ $ $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./ I.T.A.NO.206/VIZAG/2011 ( / ASSESSMENT YEAR : 2007-08 ) SRI SANJAY KUMAR SHAW TANUKU VS. DCIT CENTRAL CIRCLE RAJAHMUNDRY [ PAN : APBPS 6650J ] ( & & & & / APPELLANT) ( '(& '(& '(& '(& / RESPONDENT ) & ) / APPELLANT BY : SHRI G.V.N. HARI, AR '(& ) / RESPONDENT BY : SHRI M. NARAYANA RAO, DR ) - / DATE OF HEARING : 18.11.2015 ) - / DATE OF PRONOUNCEMENT : 11/12/2015 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF CIT(A)-1, HYDERABAD DATED 2.3.2011 FOR THE ASSESSME NT YEAR 2007-08. 2. THE BRIEF FACTS OF THE CASE, IS THAT THE ASSESSE E IS AN INDIVIDUAL AND ALSO A SHAREHOLDER IN M/S. NISHI EGG POULTRY PRODUC T (P) LTD., TANUKU. THE ASSESSEE DID NOT FILED HIS RETURN OF INCOME FOR THE RELEVANT ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 2 ASSESSMENT YEAR BEFORE THE DUE DATE SPECIFIED U/S 1 39 OF THE ACT. SINCE, THE ASSESSE DID NOT FILED THE RETURN, THE A. O. ISSUED NOTICE U/S 142(1) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER CAL LED AS THE ACT) DATED 27.11.2007. IN RESPONSE TO NOTICE U/S 142(1) OF THE ACT, THE ASSESSEE FILED A RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.10,50,510/-. DURING THE ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT AS PER THE BOOKS OF ACCOUNTS OF NEPPP LTD., HE HAS RECEIVED AN AMOUNT OF RS.33,54,519/-. SINCE, THE ASSESSEE WAS H OLDING BENEFICIAL OWNERSHIP BY HOLDING MORE THAN 50% OF THE SHARES IN COMPANY, THE A.O. ISSUED A SHOW CAUSE NOTICE AND ASKED THE ASSES SEE TO EXPLAIN, WHY THE AMOUNT RECEIVED BY HIM SHALL NOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. IN REPLY, THE ASSESSEE SUBMIT TED THAT ALL THE WITHDRAWALS FROM THE COMPANY WERE AGAINST THE AMOUN T ADVANCED BY HIM IN THE PREVIOUS FINANCIAL YEAR, THEREFORE, IT C ANNOT BE CONSIDERED AS LOAN OR DEPOSIT WITHIN THE MEANING OF SECTION 2(22) (E) OF THE ACT. HOWEVER, THE A.O. REJECTED THE ASSESSEES EXPLANATI ONS AND ANALYZING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, HELD THAT THE DEBITS APPEARING IN THE BOOKS OF THE COMPANY, IN THE NAME OF THE ASSESSEE MUST BE REGARDED AS DEEMED DIVIDEND WITHIN THE MEAN ING OF SECTION 2(22)(E) OF THE ACT. THE A.O. FURTHER OBSERVED THA T THE DEBIT BALANCE APPEARED IN THE COMPANYS BOOKS OF ACCOUNTS IS SHOW N UNDER THE ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 3 CURRENT ASSETS AS LOANS AND ADVANCES UNDER DIRECTOR S ADVANCE. THUS, IT IS CLEAR THAT THE COMPANY HAS PAID ADVANCES TO DIRE CTORS, WHICH IS NOTHING BUT DEEMED DIVIDEND AS ENVISAGED IN SECTION 2(22)(E) OF THE ACT. 3. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), TH E ASSESSEE SUBMITTED THAT THE ASSESSEE IS A DIRECTOR IN M/S. NISHI EGG P OULTRY PRODUCTS PVT. LTD. AND ALSO A PARTNER IN M/S. NISHI ENGINEERING. THE ASSESSEE FURTHER SUBMITTED THAT DURING THE FINANCIAL YEAR 2005-06, T HE COMPANY HAS TAKEN OVER THE RUNNING BUSINESS OF PARTNERSHIP FIRM WITH ALL ASSETS AND LIABILITIES. AS A RESULT, DEBIT BALANCE APPEARED IN THE CAPITAL ACCOUNT OF PARTNERSHIP FIRM WAS APPEARED IN THE CURRENT ASSETS AS LOANS AND ADVANCE IN THE COMPANY BOOKS OF ACCOUNTS. THE ASSE SSEE FURTHER SUBMITTED THAT AS ON THE DATE OF TAKING OVER THE AS SETS AND LIABILITIES OF THE FIRM, THERE WAS A DEBIT BALANCE OF RS.60,10,607 /- IN THE CAPITAL ACCOUNT OF THE ASSESSE AND THE SAME IS TRANSFERRED TO COMPANY BOOKS. THEREAFTER, THE ASSESSEE HAS REFUNDED AN AMOUNT OF RS.30,10,207/-, AS AGAINST THIS HE HAD WITHDRAWN ONLY AN AMOUNT OF RS. 5,76,104/-, THE NET EFFECT OF THIS WAS THAT THERE WAS AN EXCESS CREDIT IN THE COMPANYS BOOKS OF ACCOUNTS TO THE TUNE OF RS.24,34,103/-. TH EREFORE, THERE IS NO ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 4 QUESTION OF DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT ON THE DEBIT BALANCE APPEARING IN THE BOOKS OF ACCOUNT. HOWEVER , THE CIT(A), REJECTED THE EXPLANATIONS OFFERED BY THE ASSESSEE A ND UPHELD THE ADDITIONS MADE BY THE A.O. WHILE DOING SO, THE CIT(A ) HELD THAT THE ASSESSEE HAS DRAWN THE AMOUNT FROM THE COMPANY WHIC H ATTRACTS PROVISIONS OF SECTION 2(22)(E) OF THE ACT. AGGRIEVE D BY THE CIT(A) ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE A.R. OF THE ASSESSE SUBMITTED THAT THERE IS NO DISPUTE WITH REGARD TO THE FACTS THAT THERE IS A DEBIT BALANCE A ND ALSO ACCUMULATED PROFITS TO THE EXTENT OF DEBIT BALANCE APPEARING IN THE BOOKS OF THE COMPANY. THE A.R. FURTHER, SUBMITTED THAT THE ASSE SSEE WAS A PARTNER IN M/S. NISHI EGG CENTER, WHEREIN, THERE WAS A DEBI T BALANCE IN THE CAPITAL ACCOUNT. THE SAID PARTNERSHIP FIRM WAS TAK EN OVER BY THE COMPANY AND THE DEBIT BALANCE APPEARED IN THE PARTN ERSHIP BOOK WAS TAKEN INTO THE BOOKS OF ACCOUNTS OF THE COMPANY THE REFORE, THE DEBIT BALANCE IS CONTINUED IN THE BOOKS. THE A.R. FURTHE R SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION OR IN THE EARLI ER YEARS, THE ASSESSEE DID NOT DRAWN ANY AMOUNT FROM THE COMPANY, IN FACT THE ASSESSEE HAS REPAID THE AMOUNT TO THE COMPANY TO THE EXTENT OF R S.30,10,207/- AND BRING DOWN THE DEBIT BALANCE APPEARED IN THE COMPAN YS BOOKS OF ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 5 ACCOUNTS. THEREFORE, THIS CANNOT BE CONSTRUED AS L OAN OR DEBIT TO INVOKE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 5. ON THE OTHER HAND, THE D.R. SUBMITTED THAT THERE IS A DEBIT BALANCE IN THE COMPANYS BOOKS IN THE NAME OF THE A SSESSE, THEREFORE, THE A.O. RIGHTLY INVOKED THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE D.R. FURTHER SUBMITTED THAT THERE IS A DEBIT BA LANCE OF RS.35,76,494/- AT THE BEGINNING OF THE YEAR, EVEN A FTER SOME ADJUSTMENTS ARE MADE DURING THE YEAR TOWARDS REMUNE RATION, DEBIT BALANCE CONTINUED IN THE BOOKS OF ACCOUNTS OF THE C OMPANY. THEREFORE, THE A.O. RIGHTLY TREATED THE SAID DEBIT BALANCE AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT AND HIS ORDER SHOULD BE UPHELD. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MA TERIALS AVAILABLE ON RECORD. WE HAVE GONE THROUGH THE PROVI SIONS OF SECTION 2(22)( E) OF THE ACT. A CAREFUL STUDY OF THE ABOVE PROVISIONS, MAKE IT CLEAR THAT THE LEGISLATURE WANTED TO BRING TO TAX T HE AMOUNT PAID BY CLOSELY HELD COMPANIES TO THEIR PRINCIPLE SHAREHOLD ERS TO AVOID DIVIDEND DISTRIBUTION TAX. THE HONBLE SUPREME COURT ALSO HE LD IN THE CASE OF NAVNEET LAL C. JHAVERI VS. K K SEN (1965) 56 ITR 19 8 (S.C), THAT THE PROVISIONS OF SECTION 2(22) (E ) OF THE ACT MUST BE MADE APPLICABLE, WHERE DIVIDEND IS PAID IN THE GUISE OF LOAN OR ADVA NCE TO AVOID TAX. BUT, ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 6 TO APPLY THE PROVISIONS OF SECTION 2(22)( E) OF THE ACT, A HONEST ATTEMPT IS TO BE MADE TO UNDERSTAND, WHETHER THE IMPUGNED A MOUNT IS A LOAN OR ADVANCE WITHIN THE MEANING OF SAID SECTION. IN THE PRESENT CASE, THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THERE IS A DEBIT BALANCE IN THE NAME OF THE ASSESSEE IN THE COMPANYS BOOKS OF ACCO UNTS AND ALSO TO THAT EXTENT, THE COMPANY IS HAVING ACCUMULATED PROF IT AS DEFINED IN SECTION 2(22)(E) OF THE ACT. THE ONLY DISPUTE WITH REGARD TO THE SAID DEBIT BALANCE AMOUNTS TO LOAN OR DEPOSIT, WITHIN TH E MEANING OF SECTION 2(22)(E) OF THE ACT OR NOT IS A QUESTION BEFORE US. ON PERUSAL OF THE DETAILS, WE NOTICED THAT THE DEBIT BALANCE APPEARS, MAINLY BECAUSE OF THE FACT THAT THE COMPANY HAS TAKEN OVER A PARTNERS HIP FIRM, WHEREIN THE ASSESSEE WAS A PARTNER HAVING DEBIT BALANCE IN HIS CAPITAL ACCOUNT. SINCE, THE COMPANY IS TAKEN OVER THE ASSET AND LIAB ILITIES OF THE PARTNERSHIP FIRM, THE DEBIT BALANCE APPEARING IN TH E NAME OF THE ASSESSEE STANDS TRANSFERRED TO THE COMPANYS BOOKS OF ACCOUNTS. IT IS ALSO UNDISPUTED FACT THAT HE DID NOT DRAW ANY MONEY OUT OF THE ACCUMULATED PROFITS OF THE COMPANY. IN FACT, THE A SSESSEE HAS REPAID THE PORTION OF THE AMOUNT TO BRING DOWN THE DEBIT B ALANCE APPEARED IN THE COMPANYS BOOKS OF ACCOUNTS. UNDER THESE CIRCU MSTANCES, THE A.O. WAS NOT CORRECT IN COMING TO THE CONCLUSION THAT TH E DEBIT BALANCE APPEARING IN THE BOOKS OF ACCOUNTS OF THE COMPANY I S DRAWN OUT OF THE ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 7 ACCUMULATED PROFITS, WHICH ATTRACTS PROVISIONS OF S ECTION 2(22)(E) OF THE ACT. 7. THE A.O. CONTENTION WAS THAT THERE WAS A DEBIT B ALANCE IN THE NAME OF THE ASSESSEE IN THE COMPANYS BOOKS. SINCE, THE ASSESSEE IS HOLDING BENEFICIAL OWNERSHIP IN THE COMPANY BY HOLD ING MORE THAN 50% SHARE CAPITAL, ANY LOAN OR DEPOSIT IN THE NAME OF T HE ASSESSEE IN COMPANY BOOKS, THAN, THE SAID AMOUNT SHOULD BE TREA TED AS DEEMED DIVIDEND WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT. ON PERUSAL OF THE LEDGER ACCOUNT COPIES OF COMPANY AND PARTNER SHIP FIRM, SUBMITTED BY THE ASSESSE, WE FIND THAT THERE IS A D EBIT BALANCE APPEARING IN THE NAME OF THE ASSESSEE IN THE PARTNE RSHIP FIRM, WHICH WAS LATER TRANSFERRED TO COMPANY BOOKS. IT IS AN U NDISPUTED FACT THAT THE COMPANY HAS TAKEN OVER THE BUSINESS OF PARTNERS HIP FIRM AS ON 1.4.2005. WHEN THE ASSETS AND LIABILITIES ARE TAKEN OVER, NATURALLY THE DEBIT BALANCE APPEARING IN THE ASSESSEES NAME IN T HE PARTNERSHIP FIRM STAND TRANSFERRED TO THE COMPANYS BOOKS OF ACCOUNT S. WE ALSO, GONE THROUGH THE LEDGER ACCOUNT COPY OF THE ASSESSEES L OAN ACCOUNT IN THE COMPANYS BOOKS EXTRACTED BY THE A.O. IN HIS ORDER AT PAGE 2. ON PERUSAL OF THE SAID LEDGER ACCOUNT, WE NOTICED THAT THERE IS A DEBIT BALANCE OF RS.35,76,494/- AS ON 1.4.2006. WE FURTHE R NOTICED THAT THERE ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 8 ARE SOME DEBITS ON VARIOUS DATES AMOUNTING TO RS.4, 05,925/-, AS AGAINST THIS, THERE ARE CREDITS TO THE EXTENT OF RS.5,93,90 0/- REPRESENTING BANK RECEIPTS, REMUNERATION ETC. IF YOU TAKE THE DEBITS AND CREDITS IN STANDALONE BASIS, DURING THE YEAR UNDER CONSIDERATI ON OR IN THE EARLIER YEAR, THE ASSESSEE HAS REPAID THE AMOUNT TO THE COM PANY. FROM THIS, IT IS VERY CLEAR THAT THE COMPANY DID NOT MAKE ANY PAY MENT BY WAY OF LOAN OR ADVANCE TO THE ASSESSE. THEREFORE, WHEN THE RE IS NO WITHDRAWAL OF ANY AMOUNT FROM THE COMPANY OUT OF THE ACCUMULAT ED PROFITS, THE QUESTION OF INVOKING THE PROVISIONS OF SECTION 2(22 )(E) OF THE ACT TO TAX AS DEEMED DIVIDEND WOULD NOT ARISE. IN THE PRESENT CASE ON HAND, ON PERUSAL OF THE FACTS, IT IS CLEAR THAT THE ASSESSEE DID NOT WITHDRAW ANY AMOUNT, OUT OF THE ACCUMULATED PROFITS OF THE COMPA NY. THOUGH, THERE IS A DEBIT BALANCE IN THE COMPANYS BOOKS OF ACCOUN TS, IN THE NAME OF THE ASSESSE, WHICH APPEARS BECAUSE OF THE ACQUISITI ON OF ASSETS AND LIABILITIES OF PARTNERSHIP FIRM, WHEREIN THE ASSESS EE HAS A DEBIT BALANCE IN CAPITAL ACCOUNT. THEREFORE, THE SAID DEBIT BALA NCE CANNOT BE CONSIDERED AS LOAN GIVEN BY THE COMPANY, OUT OF ACC UMULATED PROFITS. UNDER THESE CIRCUMSTANCES, THE A.O. WAS NOT RIGHT I N INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, TO THE D EBIT BALANCE, WHICH IS APPEARED BECAUSE OF BOOK ADJUSTMENT BUT, NOT OUT OF ACCUMULATED PROFITS. THE DEBIT BALANCE APPEARED IN THE COMPANY BOOKS, IS BECAUSE ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 9 OF BOOK ADJUSTMENT, BY VIRTUE OF ACQUISITION OF PAR TNERSHIP FIRM, CANNOT PARTAKE THE CHARACTER OF A LOAN OR ADVANCE WITHIN THE MEANING OF SECTION 2(22)( E) OF THE ACT. IN OUR OPINION, THE A .O. WAS ERRED IN APPLYING THE PROVISIONS OF SECTION 2(22)( E) OF THE ACT. THE CIT(A), HAD FAILED TO APPRECIATE THE FACT THAT THE LOAN IN THE COMPANY BOOKS, IS NOT BECAUSE OF WITHDRAWAL OF ACCUMULATED PROFIT THE COM PANY. THEREFORE, IN OUR OPINION, THE DEBIT BALANCE APPEARING IN THE NAME OF ASSESSE IN THE COMPANY BOOKS, CANNOT BE TREATED DEEMED DIVIDEN D UNDER THE PROVISIONS OF SECTION 2(22)( E) OF THE ACT. THEREFO RE, WE DIRECT THE A.O. TO DELETE THE ADDITION. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT O N 11 TH DEC15. SD/- SD/- ( . ) ( . . . . ) ( (( ( V. DURGA RAO ) )) ) ( G. MANJUNATHA) / // / JUDICIAL MEMBER / // / ACCOUNTANT MEMBER /VISAKHAPATNAM: 3 / DATED : 11/12/2015 VG/SPS ITA NO.206/VIZAG/2011 SRI SANJAY KUMAR SHAW, TANUKU 10 ) ' 4 / COPY OF THE ORDER FORWARDED TO :- 1. & / THE APPELLANT I.S.B. SHANKAR, AUDITOR, D.NO.35-3-2/1, STATION ROA D, NEAR HEAD POST OFFICE, TANUKU-534 211. 2. '(& / THE RESPONDENT DCIT CENTRAL CIRCLE, RAJAHMUNDRY 3. 5 / THE CIT (CENTRAL), HYDERABAD 4. 5 () / THE CIT (A)-I, HYDERABAD 5. THE ACIT CENTRAL RANGE, VISAKHAPATNAM 6. ' , , / // / DR, ITAT, VISAKHAPATNAM 7 . . . . / GUARD FILE / BY ORDER // TRUE COPY // 9: ( SR.PRIVATE SECRETARY ) , / // / ITAT, VISAKHAPATNAM SL. NO. DESCRIPTION DATE INITIALS 1. DATE OF DICTATION BY THE AUTHOR SR.PS 2. DRAFT PLACED BEFORE THE DICTATING MEMBER SR.PS 3. DRAFT PLACED BEFORE THE SECOND MEMBER SR. PS 4. DRAFT APPROVED BY THE SECOND MEMBER SR. PS 5. DATE OF APPROVED ORDER COMES TO THE SR. PS SR. PS 6. DATE OF PRONOUNCEMENT OF ORDER SR. PS 7. DATE OF FILE SENT TO THE BENCH CLERK SR. PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK HD. C LK 9. DATE OF DISPATCH OF ORDER SR. PS