ROYAL SYNTHETICS, MUMBAI V. DCIT 24(1), MUMBAI

ITA 283/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92921 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 10-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LOVE KUMAR
• Assessee Lawyers: MAYUR A SHAH
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI D.MANMOHAN, VICE PRESIDENT AND SHRI SANJAY ARORA , A CCOUNTANT M EMBER I .T.A. NO . 283 /MUM/ 2014 ASSESSMENT YEAR : 2009 - 10 M/S . ROYAL SYNTHETICS, 405, PALM SPRING COMPLEX, LINK ROAD, MALAD (W), MUMBAI - 400 064 / VS. THE DCIT 24(1), AAYAKAR BHAVAN, MUMBAI - 400 020 PAN/GIR NO. : AADFR 3102K ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY: SHRI MAYU R A. SHAH RESPONDENT BY : SHRI LOVE KUMAR DATE OF HEARING : 17 . 0 6 .2015 DATE OF PRONOUNCEMENT : 17 .0 6 .2015 / O R D E R PER D.MANMOHAN , VP THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. CIT(A) - 34, MUMBAI D A T ED 28.11.2013 PERTAINING TO ASSESSMENT YEAR 2009 - 10. 2. THE FACTS CONCERNING THE ONLY ISSUE IN DISPUTE ARE THAT THE ASSESSEE FIRM IS ENGAGED IN TRADIN G IN CHEMICALS. THE FIRM CONSISTS OF TWO PARTNERS VIZ., AJAY N. SHAH WITH 60% PROFIT SHARING AND URMILA N . SHAH WITH 40% PROFIT SHARING RATIOS. ON 12.12.2008, A NEW PARTNER I.E . M/S. DINTARA MERCANTILE PVT. LTD. (DMPL) WAS INTRODUCED. CONSEQUENTLY, THE PROFIT SHARING RATIOS WERE MODIFIED AS UNDER: ITA. NO. 283/MUM/2014 2 SHRI AJAY N. SHAH - 50% URMILA N. SHAH - 13% DMPL - 37% 2.1. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE DECLARED TOTAL LOSS OF RS. 7,85,720/ - . T HOUGH THE RETURN WAS ORIGINALLY PROCESSED U/S. 143(1) OF THE ACT , I T WAS LATER ON TAKEN UP FOR SCRUTINY BY ISSUING A NOTICE U/S. 143(2) OF THE ACT. DURING T HE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT M/S. DMPL ADVANCED LOAN OF RS. 2,81,27,801/ - AS ON 1.4.2009. THE AO , THEREFORE , CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE LOANS SHOULD NOT BE TREATED AS DEEMED DIVIDEND IN ACCORDANCE WITH THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT. 2.2. IN RESPONSE, THE ASSESSEE SUBMITTED THAT DMPL IS A REGISTERED NBFC AND HENCE , THE PROVISIONS OF SEC. 2(22)(E) DO NOT APPLY. IT WAS FURTHER SUBMITTED THAT FOR THE PURPOSE OF SEC. 2(22) (E) OF THE ACT, WHAT IS RELEVANT TO BE CONSIDERED IS THE ACCUMULATED PROFIT . IN THIS CASE, THE BALANCE SHEET OF DMPL INDICATES THE RESERVE WHICH INCLUDES SHARE PREMIUM AT RS. 14.99 CRORES WHICH CANNOT BE EQUATED TO ACCUMULATED PROFIT . 2.3. THE AO OB SERVED THAT ONE OF THE PARTNERS OF THE ASSESSEE FIRM I.E. AJAY N. SHAH IS THE SHARE HOLDER IN DMPL. HE FURTHER OBSERVED THAT THE PROVISIONS OF SEC. 2(22)(E) STIPULATES FOUR CONDITIONS SO AS TO TREAT THE SAME AS DEEMED DIVIDEND. THEY ARE (I) COMPANY IN QUESTION MUST BE ONE IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTEREST ED (II) THE BORROWER MUST BE A SHARE HOLDER HAVING A SUBSTANTIAL INTEREST IN THE COMPANY ON THE DATE ITA. NO. 283/MUM/2014 3 WHEN THE LOAN WAS ADVANCED; (III) THE LOAN ADVANCED TO SUCH SHARE HOLDER BY SUCH A COMPANY CAN BE DEEMED TO BE DIVIDEND ONLY TO THE EXTENT TO WHICH IT IS SHOWN THAT THE COMPANY POSSESSES ACCUMULATED PROFITS ON THE DATE OF THE LOAN AND (IV) THE LOAN MUST NOT HAVE BEEN ADVANCED BY TH E COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS. 2.4. ACCORDING TO THE AO, ALL THE CONDITIONS ARE FULFILLED IN THIS CASE AND THEREFORE THE AMOUNT OF RS. 12,10,65,000/ - RECEIVED BY THE ASSESSEE AS LOAN FROM M/S. DMPL , WHICH IS RESTRICTED TO THE RESERVES AND SURPLUS OF RS. 59,55,231/ - IS TREATED AS DEEMED DIVIDEND WITHIN THE MEANING OF PROVISIONS OF SEC. 2(22)(E) OF THE ACT. 3. THE LD. CIT(A) CONFIRMED THE ACTION OF THE AO DESPITE THE CONTENTION OF THE ASSESSEE THAT IT IS NOT A SHARE HOLDER IN DMPL. 4. FURTHER AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH ONE OF THE PARTNERS OF THE ASSESSEE F IRM IS THE SHARE HOLDER OF DMPL, T HE REQUIREMENT OF SEC. 2(22)(E) IS THAT TH E RE CIPIENT MUST BE A SHARE HOLDER. I N THE INSTANT CASE, THE RECIPIENT IS A FIRM , WHEREAS THE PARTNER , IN INDIVIDUAL CAPACITY , IS A SHARE HOLDER. IN IDENTICAL FACTS AND CIRCUMSTANCES, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS IMPACT CONTAINE RS PVT. LTD., 367 ITR 346 (BOM) OBSERVED THAT WHEN THE ASSESSEE FIRM IS NOT A SHARE HOLDER IN THE COMPANY WHICH HAS ADVANCED THE AMOUNT, PROVISIONS OF SEC. 2(22)(E) CANNOT BE MADE APPLICABLE. 6. THE LD. DEPARTMENTAL REPRESENTATIVE DID NOT DISPUTE THE FACT THAT THE ASSESSEE FIRM IS NOT A SHARE HOLDER OF M/S. DMPL. ITA. NO. 283/MUM/2014 4 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORDS. THERE IS NO DISPUTE ON THE FACT THAT DMPL ADVANCED LOAN TO THE ASSESSEE, BUT THE FACT REMAINS THAT THE ASSESSEE FIRM IS NOT A SHARE HOLDER IN THIS COMPANY SO AS TO ATTRACT THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS UNIVERSAL MEDICARE PVT. LTD. 324 ITR 263 AS WELL AS THE LATEST DECI SION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF IMPACT CONTAINERS PVT. LTD. (SUPRA). HAVING REGARD TO THE BINDING NATURE OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT, WE HOLD THAT THE ADDITION MADE BY THE AO U/S. 2(22)(E) OF THE ACT , IN THE CIRCU MSTANCES OF THE CASE , IS NOT JUSTIFIED AND WE DIRECT THE AO ACCORDINGLY. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. OR DER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON 17 TH JUNE , 2015 . SD/ - SD/ - ( SANJAY ARORA ) ( D.MANMOHAN ) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI DATED : 17 TH JUNE , 2015 RJ , SR. PS ITA. NO. 283/MUM/2014 5 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) / ITAT, MUMBAI