ACIT, Trivandrum V. Sri.Baby Mathew, Trivandrum

ITA 269/COCH/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4349 (ITAT-COCHIN)
• Duration Of Justice: 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-02-2019
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 04-02-2019
• Assessment Year: 2008-2009
• Appeal Filed On: 01-06-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A S BINDHU
• Assessee Lawyers: IYPE JOHN
• Keywords: Business expenditure; Deemed to accrue or arise in india; Deemed dividend
• Section: 2(22)(e)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFOR E S/ SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., J M I .T . A. NO . 269 / COCH/ 20 1 8 ASSESSMENT YEAR : 2 0 08 - 09 THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 1(1), TRIVANDRUM. VS. SHRI BABY MATHEW, SOMATHEERAM AYURVEDIC BEACH RESORTS (P) LTD., CHOWARA P.O., BALARAMAPURAM, TRIVANDRUM. [PAN:ADOPM 4999D] (ASSES SEE - APPELLANT) (REVENUE - RESPONDENT) REVENUE BY SMT. A.S. BINDHU, SR. DR ASSESSEE BY SHRI IYPE JOHN, CA D ATE OF HEARING 04 / 0 2/ 201 9 DATE OF PRONOUNCEMENT 08 / 0 2 /201 9 O R D E R PER CHANDRA POOJARI, AM: TH IS A PPE AL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A), TRIVANDRUM DATED 03/04/2018 AND PERTAIN S TO THE A SSESSMENT YEAR 2008 - 09. 2 . THE ONLY ISSUE RAISED BY THE ASSESSEE IS THAT THE CIT(A) ERRED IN RELYING ON THE DECISION OF ITAT, VISAKHAPATNAM IN THE CASE OF P. SATYA PRASAD VS. ITO (141 ITD 403) AS THE FACTS OF THE SAID CASE ARE DIFFERENT FROM THE INSTANT CASE WITH REGARD TO DEDUCTION OF DEEMED DIVIDEND. I.T.A. NO . 269 /COCH/ 201 8 2 3 . THE FACTS OF THE ISSUE A RE THAT WITH RESPECT TO DEEMED DIVIDED U/S.2(22)(E), THE ASSESSEE SUBMITTED THAT ALL THE FOUR COMPANIES, WHERE MONEY WAS GIVEN TO THE DIRECTOR MR. BABY MATHEW, THERE WAS NO QUESTION OF DEEMED DIVIDEND AS THE AMOUNTS ADVANCED WAS IN THE NORMAL COURSE OF THE BUSINESS AND TO PROMOTE THE ACTIVITIES OF THE COMPANY AND HENCE THERE WAS NO LOAN ADVANCED AND HENCE CANNOT BE TAXED. THE ASSESSING OFFICER OBSERVED FROM THE LEDGER ACCOUNT OF THE COMPANIES THAT THE FOLLOWING AMOUNTS WERE ADVANCED DURING F.Y. 2007 - 08. (1 ) MA NALTHEERAM BEACH R ESORTS LTD . ADVANCED DURING THE YEAR RS.54,59, 395 / - - 15,30,395 ( OPENING BALANCE) = RS,39,29,000/ - . AGAINST THIS SALARY CREDIT TO BE DEDUCTED RS.6,00,000/ - . THE ACTUAL ADVANC E IS RS.33,29,000/ - DURING THE YEAR . (2) SOMATHEE RAM RESORTS INSTITUTE AND A YURVEDIC HOSPITAL PT. LTD. ADVANCE DURING THE YEAR. RS. 32,2 5,547 - 5,26,750 ( OPENING BALANCE) = RS.26,98,797/ - . AGAINST THIS, BUSINESS EXPENSES AND SALARY ARE CREDITED TO THE TUNE OF RS.21,10,460/ - . BALANCE OF RS.5,88,337/ - . IS THE ACTUAL ADVANCE GIVEN DURING THE YEAR. (3) MANALTHEERAM AYURVEDIC HOSPITAL AND RESEARCH CENTRE PVT. LTD. ,, ADVANCE GIVE N DURING THE YEAR. RS. 62,38,482 - 23,72,375 ( OPENING BALANCE) + RS.38 , 66,107/ - . AGAINST THIS THE EXPENSES DEBITED IS RS.46,05,794/ - . SO AS PER THE ACCOUNTS NO LOAN IS ADVANCED DURING THE YEAR. (4) SOMATHEERAM AYURVEDIC BEACH RESORTS PVT. LTD . . ADVAN CE GIVEN DURING THE YEAR RS. 2,29, 82,817 - 102,11, 164/ - ( OPENING BALANCE) = RS.1,27,71,203/ - . THE ACTUAL EXPENSES DEBITED IS RS.3 0,62,697/ - . THE BALANCE OF RS. 97,08, 506/ - IS THE ADVANCE GIVEN DURING THE YEAR. TH US, THE ASSESSING OFFICER OBSERVED THAT THE A SSESSEE REDUCED THE DEEMED DIVIDEND OF THE EARLIER YEARS IN ORDER TO ARRIVE AT THE ACTUAL LOAN/ADVANCES GIVEN I.T.A. NO . 269 /COCH/ 201 8 3 TO THE DIRECTOR DURING THE YEAR. THE ACTUAL EXPENSES INCURRED WAS NEVER TAKEN INTO ACCOUNT. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSES HAS ALSO NOT TAKEN INTO ACCOUNT, THE EXPENSES INCURRED DURING THE YEAR IN ORDER TO ARRIVE AT THE NET FIGURE. HENCE THE FOLLOWIN G IS CONSIDERED TO BE DEEMED DIVIDEND U/S.2(22) (E) AND BROUGHT TO TAX. THE ASSESSING OFFICER OBSERVED THAT THE AMOUNTS MENTIONED WERE THE A CTUAL AMOUNT S GIVEN BY THE COMPANIES DURING THE YEAR AND HENCE , TREATED AS DEEMED DIVIDEND AS ACCUMULATED PROFITS WE RE THERE IN EARLIER YEARS. 4. ON APPEAL, THE CIT(A) OBSERVED THAT IN VIEW OF THE WORKING OF THE ACCUMULATED PROFIT AND DEEMED DIVIDEND, BASED ON THE DECISION OF THE ITA T , VISAKHAPATNAM BENCH IN THE CASE OF P. SATYA PRASAD VS. ITO (141 ITD 403) WHICH FOL LOWED THE DECISION OF THE ITAT, COCHIN BENCH IN THE CASE OF ITO VS. GORDHANDAS KHIMJI (11 ITD 158) WHICH IN TURN AGAIN CONSIDERED THE DECISION OF THE SUPREME COURT IN THE CASE OF SMT. TARULATA SHYAM VS. CIT (108 ITR 345), THE DEEMED DIVIDEND WHICH CAN BE C ONSIDERED FOR TAXATION U/S. 2(22) ( E) AS ORDERED BY THE TRIBUNAL CAN BE WORKED OUT ONLY IN THE CASE OF M ANALTHEER A M BEACH RESORTS (P) LTD. TO A SUM OF RS.26,49,634/ - BUT NOT IN THE CASE OF OTHER COMPANIES. HENCE, THE ADDITIONAL INCOME WHICH WAS BROUGHT TO TAX IN ACCORDANCE WITH SECTION 2(22)(E) WAS RESTRICTED TO RS.26,49,634/ - AS A RESULT OF WHICH THE EXCESS ADDITION MADE OF RS.1,09,76,209/ - WAS DELETED. ACCORDING TO THE CIT(A), D EEMED DIVIDEND OF EARLIER YEARS HAVE NOT BEEN TAKEN INTO ACCOUNT BECAUSE OF THE REASON THAT THE BOOKS OF ACCOUNTS OF EARLIER YEARS WERE NOT I.T.A. NO . 269 /COCH/ 201 8 4 AVAILABLE WITH HIM. TH E CIT(A) OBSERVED THAT TH IS IS TO BE ACCEPTED AND CONSIDERED FURTHER SINCE THE OPENING BALANCE OF THE FIRST YEAR WHICH CONSISTED OF RESERVE AND SURPLUS AND ACCUMULATED P ROFIT, TAKES CARE OF THE NET BROUGHT FORWARD ACCUMULATED PROFIT AND EVEN THE ASSESSING OFFICER WHO WORKED OUT THE ACCUMULATED PROFIT SUBSEQUENT TO RECEIVING DIRECTION FROM THE TRIBUNAL HAS CONSIDERED ONLY THE OPENING BALANCE AND ADVANCE MADE DURING THE YEA R UNDER CONSIDERATION. ACCORDING TO THE CIT(A) , TH E DEEMED DIVIDEND ASSESSABLE IN ANY OF THE EARLIER YEARS AS PER THE ABOVE MENTIONED DECISION HAS ALSO TO BE REDUCED FROM THE ACCUMULATED PROFITS EVEN IF IT WAS NOT ASSESSED TO TAX IN THAT YEAR. IN VIEW O F THE SPECIFIC PROVISIONS OF THE ACT AND ALSO AS PER THE TRIBUNALS DECISIONS , THE ACCUMULATED PROFIT ALONE HAS TO BE TREATED AS DEEMED DIVIDEND AND A CCUMULATED PROFITS DO NOT INCLUDE CURRENT YEARS BUSINESS PROFITS SINCE IT ACCRUES ONLY AT THE END OF THE YEAR AND THE DEEMED DIVIDEND ASSESSABLE IN ANY OF THE EARLIER YEARS HAS TO BE REDUCED FROM ACCUMULATED PROFITS EVEN IF IT WAS NOT ASSESSED TO TAX IN THAT YEAR. THUS, THE ADDITIONAL INCOME WHICH WAS BROUGHT TO TAX IN ACCORDANCE WITH SECTION 2(2209E) WAS RESTRICTED TO RS.26,49,634/ - AS A RESULT OF WHICH THE EXCESS ADDITION MADE OF RS.1,09,76,209/ - WAS DELETED. 5. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. THE LD. DR SUBMITTED THAT THE DIVIDEND AMOUNT WAS ADJUSTED AGAINST THE LOAN AMOUNT AND THE TRIBUNAL FOUND THAT 'THE DIVIDEND AMOUNT SO SET OFF SHALL HAVE TO BE DEDUCTED FROM THE DEEMED DIVIDEND COMPUTED. ACCORDING TO THE LD. DR, N O SUCH ADJUSTMENT IS I.T.A. NO . 269 /COCH/ 201 8 5 SEEN MADE AND IN THAT CASE THE MATTER WAS SET ASIDE TO THE ASSESSING OFFICER FOR DUE VERIFICATIO N. 5.1 THE LD. DR SUBMITTED THAT I N THE ASSESSEE'S CASE, AS IN THE CASE OF P. SATYA PRASAD, THIS TRIBUNAL HAD IN ITA NO.205/COCH/2013 DATED 25 - 10 - 2013, FOUND THAT 'THE ASSESSING OFFICER, WITHOUT COMPUTING THE ACCUMULATED PROFIT HAS TREATED THE AMOUNT OF ADVANCE BY THE RESPECTIVE COMPANIES AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT IN VIEW OF THE SPECIFIC PROVISIONS, ONLY TO THE EXTENT OF ACCUMULATED PROFIT HAS TO BE TREATED AS DEEMED DIVIDEND... THEREF ORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE ASSESSING OFFICER NEEDS TO RECONSIDER THE ISSUE AFTER CONSIDERING THE CONTENTION OF THE ASSESSEE AND THE AVAILABLE ACCUMULATED PROFIT'. AS SUCH , IT WAS SUBMITTED THAT IN THIS CASE ALSO THE TRIBUNAL H AD SET ASIDE THE ASSESSMENT TO THE ASSESSING OFFICER FOR ASCERTAINING THE COMPUTATION OF DEEMED DIVIDEND BASED ON THE CALCULATION OF ACCUMULATED PROFITS. 5.2 HOWEVER , IT WAS SUBMITTED THAT THE ASSESSING OFFICER, IN THE ORDER GIVING EFFECT TO THE TRIBUNA L ORDER, HA D WORKED OUT THE DEEMED DIVIDEND BY TAKING THE ENTIRE ADVANCE, NET OF EXPENSES IN THE CURRENT ACCOUNT OF THE ASSESSEE, WITHOUT CONSIDERING THE EXISTENCE OF ACCUMULATED PROFITS. I.T.A. NO . 269 /COCH/ 201 8 6 5.3 THE LD. DR SUBMITTED THAT COMPUTATION OF ACCUMULATED PROFIT H AS BEEN ELABORATELY CONSIDERED IN THE DECISION OF P. SATYA PRASAD VS. ITO AND WHICH HAS BEEN FOLLOWED BY MANY TRIBUNALS. THE LD. DR ALSO REFER RED TO THE DECISION OF THE CHENNAI BENCH OF THE ITAT IN THE CASE OF BHARAT BIR MOHINDRA VS. AC I T, CHENNAI AS REPOR TED IN 2018 ITL 17. ACCORDING TO THE LD. DR, I N ALL THESE DECISIONS IT STANDS CONFIRMED THAT THE ACCUMULATED PROFIT HAS TO BE FIRST ARRIVED AT, WHICH WILL NOT INCLUDE CURRENT YEAR'S PROFITS AND 'THE DIVIDEND AMOUNT' OF PRIOR YEARS HAS TO BE DEDUCTED FROM THE DEEMED DIVIDEND COMPUTED, IRRESPECTIVE OF WHETHER SUCH AMOUNTS WERE ASSESSED AS DEEMED DIVIDEND OR NOT IN THOSE YEARS. 5.4 . THE LD. DR SUBMITTED THAT THE FINDING OF THE CIT(A) THAT THE ACCUMULATED PROFIT DOES NOT INCLUDE CURRENT YEAR PROFIT IS AGA INST THE EXPLANATION TO SECTION 2(22)(E) OF THE INCOME TAX ACT 1961 , IS ALSO NOT SUSTAINABLE SINCE IT WAS FOUND IN THE DECISIONS REFERRED TO ABOVE , T HAT ACCUMULATED PROFITS CANNOT INCLUDE CURRENT YEAR PROFITS SINCE IT ACCRUES ONLY AT THE END OF THE YEAR A ND HENCE ACCUMULATED PROFITS IS TO BE WORKED OUT EXCLUDING CURRENT YEAR'S PROFITS. 5.5 THE LD. DR SUBMITTED THAT THE DEPARTMENT DIS PUTED THE DEDUCTION OF THE DEEMED DIVIDEND OF EARLIER YEARS FROM THE ACCUMULATED PROFIT. IT WAS SUBMITTED THAT THIS ISSUE WA S ALSO SQUARELY COVERED IN THE DECISIONS REFERRED TO ABOVE. IT WAS SUBMITTED THAT T HE SAID ISSUE WAS ALSO COVERED BY THIS TRIBUNAL IN THE CASE I.T.A. NO . 269 /COCH/ 201 8 7 OF ITO VS. GORDHANDAS KHIMJI WHICH IS REPORTED IN 11 1TD 158 AND FOLLOWED IN THE ABOVE CITED TRIBUNAL ORDERS. 5. 6 THE LD. DR SUBMITTED THAT THE CIT(A) CONSIDERED THE RATIO OF THE DECISIONS, IN ARRIVING AT THE ACCUMULATED PROFIT OF EACH OF THE COMPANIES IN WHICH THE ASSESSEE IS A SHAREHOLDER, FOR THE PURPOSE OF ASCERTAINING THE DEEMED DIVIDEND AND EXTRACTED THE WORKING OF THE DEEMED DIVIDEND WHICH IS BY. (A) BY WORKING OUT THE ACCUMULATED PROFIT AFTER REDUCING THE CURRENT YEAR PROFIT AND (B) BY REDUCING FROM THE ACCUMULATED PROFIT, THE DEEMED DIVIDENDS OF EARLIER YEARS. THUS, IT WAS SUBMITTED THAT THE GROUND S RAISED BY THE DEPARTMENT ARE ENTIRELY ON THE INTERPRETATION OF SECTION 2(22)(E) AND THE EXPLANATION THERE TO AND THERE IS NO DISPUTE ON THE CORRECTNESS OF THE COMPUTATION IN ARRIVING AT THE TAXABLE DEEMED DIVIDEND. 6. THE LD. AR BY WAY OF ADDITIONAL SUBMI SSIONS, SUBMITTED THAT THE ITAT, VISAKHAPATNAM IN THE CASE OF P. SATYA PRASAD VS. ITO (141 ITD 403) SUMMARIZED THE PRINCIPLES OF SECTION 2(22) (E) AS UNDER: I. THAT FOR PURPOSES OF SECTION 2(22) (E), THE ACCUMULATED PROFITS ARE TO BE WORKED OUT UP TO THE DATE OF EACH PAYMENT/ADVANCEMENT O F LOAN. II. THAT THERE IS A DISTINCTION BETWEEN THE 'ACCUMULATED PROFITS' OF BUSINESS AND THE CURRENT YEAR'S PROFITS OF BUSINESS. I.T.A. NO . 269 /COCH/ 201 8 8 III. THAT PROFIT OF BUSINESS ACCRUES AT THE END OF THE PREVIOUS YEAR . IV. THAT LOAN OR ADVANCE TREATED AS DEEMED INCOME UP TO THE DATE OF FRESH LOAN IS TO BE REDUCED FROM ACCUMULATED PROFITS. V. THAT THE REPAYMENT OF LOAN DURING THE SAME YEAR IS NOT TO BE DEDUCTED FROM THE ACCUMULATED PROFITS. 6.1 THUS, IT WAS SUBMITTED THAT A S PER THIS DECISION THE METHOD OF WORKING STANDS CONFIRMED THAT THE ACCUMULATED PROFIT FOR THE YEAR HAS TO BE FIRST ARRIVED AT, WHICH SHALL NOT INCLUDE CURRENT YEAR'S PROFIT AND THE 'DEEMED DIVIDEND' OF THE PRIOR YEAR'S. IT WAS SUBMITTED THAT D EEMED D IVIDE ND OF CURRENT YEAR WILL BE TO THE EXTENT OF SUCH ACCUMULATED PROFIT. THE RATIO OF THE DECISION IS CLEAR AND THERE IS NO AMBIGUITY. THE LD. AR RELIED ON THE DECISION IN THE CASE OF BHARAT BIR MOHINDRA VS. ACI T (SUPRA). IN OTHER WORDS, IT WAS SUBMITTED THAT ONLY THOSE NET AMOUNTS WHICH REFLECTS THE DEBIT SIDE OF THE BOOKS OF ACCOUNTS OF THE ASSESSEE FALLING UNDER THE DEFINITION OF THE LOANS AND ADVANCES IN THE RELEVANT ASSESSMENT YEARS WILL BE ENTITLED TO BE TAKEN AS A DEEMED DIVIDEND. THUS , THE DEEMED DIVID END THAT CAN BE TAKEN IS THE NET OF CLOSING AND OPENING BALANCES OF DEBIT SIDE OF LOANS AND ADVANCES ACCOUNT OF THE ASSESSEE. THE LD. AR FILED THE DEEMED DIVIDEND FOR THE FINANCIAL YEAR 2007 - 08, AS PER THE ABOVE DECISION, OF THE MANALTHEERAM BEACH RESORT S PVT. LTD. , SOMATHEERAM RESEARCH INSTITUTE AND AYURVEDIC HOSPITAL (P) LTD. AND SOMATH EERAM AYURVEDIC BEACH RESORTS (P) LTD. - I.T.A. NO . 269 /COCH/ 201 8 9 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. WE HAVE CAREFULLY GONE THROUGH THE DECISION OF THE ITAT, VISAK HAPATNAM IN THE CASE OF P.SATYA PRASAD VS. ITO (141 ITD 403) WHEREIN IT WAS HELD AS UNDER: 18. AS PER CLAUSE(III) OF SEC. 2(22)9E), THE DIVIDEND DOES NOT INCLUDE ANY DIVIDEND PAID BY A COMPANY WHICH IS SET OFF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PREVIOUSLY PAID BY IT AND TREATED AS DIVIDEND WITHIN THE MEANING OF SEC. 2(22)(E) OF THE ACT. THE LD. CIT(A) HAS OBSERVED THAT THE ASSESSEE HAD STATED THAT NO SUCH SET OFF WAS MADE IN THE BOOKS OF ACCOUNTS. HOWEVER, WE NOTICE THAT THE ASSESSEE HAS FURNISHED A COPY OF THE LOAN ACCOUNT OF THE ASSESSEE AS AVAILABLE IN THE BOOKS OF THE COMPANY IN PAGE 8 OF THE PAPER BOOK. ON THE PERUSAL OF THE SAID ACCOUNT, WE NOTICE THAT THE DIVIDEND AMOUNT OF RS.31,25,100/ - WAS ADJUSTED BY THE COMPANY AGAINST TH E SAID LOAN AMOUNT. THUS, THE OBSERVATION MADE BY LD. CIT(A) APPEARS TO BE AGAINST THE FACTS AVAILABLE ON RECORD. THERE CANNOT BE ANY DISPUTE THAT THE DIVIDEND AMOUNT SO SET OFF SHALL HAVE TO BE DEDUCTED FROM THE DEEMED DIVIDEND AMOUNT COMPUTED ABOVE. H OWEVER, THE OBSERVATIONS MADE BY LD. CIT(A) SHOW THAT THE TAX AUTHORITIES HAVE NOT EXAMINED THIS ASPECT PROPERLY. HENCE, THE FACTUAL ASPECT ON THIS MATTER, IN OUR VIEW, REQUIRES VERIFICATION PREFERABLY AT THE END OF THE ASSESSING OFFICER. 7 .1 HOWEVER , THE CIT(A) WHILE DECIDING THE ISSUE, CONSIDERED THE AMOUNT OF DEEMED DIVIDEND WHICH SHOULD HAVE BEEN ASSESSED IN ANY OF THE EARLIER YEARS AND REDUCED IT FROM A CCUMULATED PROFITS , THOUGH THERE WAS NO ASSESSMENT OF DEEMED DIVIDEND IN THE EARLIER YEAR. HE NCE, THIS IS WRONG APPLICATION OF THE JUDGMENT OF THE ITAT, VISAKHAPATNAM IN THE CASE OF P. SATYA PRASAD VS. ITO CITED SUPRA BY THE CIT(A) TO THE FACTS OF THE PRESENT CASE . HENCE, WE VACATE THE FINDINGS OF THE CIT(A) AND RESTORE THAT OF THE ASSESSING OFF ICER WHICH IS IN CONFORMITY OF THE DECISION IF THE ITAT, VISAKHAPATNAM, CITED SUPRA. I.T.A. NO . 269 /COCH/ 201 8 10 8 . IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWED, ORDER PRONOUNCED IN THE OPEN COURT ON THIS 08 TH FEBRUARY, 2019 SD/ - SD/ - (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 8 TH FEBRUARY, 2019 GJ COPY TO: 1 . SHRI BABY MATHEW, SOMATHEERAM AYURVEDIC BEACH RESORTS (P) LTD., BALARAMAPURAM, CHOWARA P.O., TRIVANDRUM - 2 THE ACIT, CIRCLE - 1(1), TRIVANDRUM 3 . THE CIT(A), TRIVANDUM. 4 . THE PR. COMMISSIONER OF INCOME - TAX, TRIVANDRUM. 5. I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN