ITO 9(2)(3), MUMBAI V. N.D. FRAGRNCES P. LTD, MUMBAI

ITA 2940/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54973 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 04-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 13-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PARTHA SARATHI NAIK
• Keywords: Deemed dividend
• Section: 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 2940/MUM/2010 (ASSESSMENT YEAR: 2006-07) INCOME TAX OFFICER - 9(2)(3) M/S. N.D. FRAGRANCES P VT. LTD. ROOM NO. 225, AAYAKAR BHAVAN 806, UNIQUE TOWER, S.V . ROAD M.K. ROAD, MUMBAI 400020 VS. GOREGAON (W), MUMBAI 400062 PAN - AABCN 2999 K APPELLANT RESPONDENT APPELLANT BY: SHRI PARTHASARATHI NAIK RESPONDENT BY: NONE DATE OF HEARING: 04.08.2011 DATE OF PRONOUNCEMENT: 19.08.2011 O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE CIT(A) XX, MUMBAI DATED 15.02.2010. REVENUE HAS RAISED TWO GRO UNDS IN THIS APPEAL. 2. THE CASE WAS POSTED NUMBER OF TIMES AND GOT ADJOURN ED FOR VARIOUS REASONS. WHEN THE CASE WAS CALLED UPON TODAY, THE 4 TH DAY OF AUGUST 2011, NONE WAS PRESENT ON BEHALF OF ASSESSEE. HENCE THE C ASE WAS DECIDED EXPARTE RESPONDENT AFTER HEARING THE LEARNED D.R. 3. GROUND NO. 1 IN REVENUE APPEAL IS WITH REFERENCE TO THE ADDITION OF ` 5,68,422/- AS DEEMED DIVIDEND UNDER SECTION 2(22)(E ). THE A.O. NOTICED THAT THE ASSESSEE HAD TAKEN UNSECURED LOAN OF ` 40,88,392/-, BEING CLOSING BALANCE AS ON 31.03.2006, FROM ITS SISTER CONCERN M /S. N.D. TECHNOLOGIES PVT. LTD. ON BEING ASKED THE ASSESSEE SUBMITTED THE LOAN CONFIRMATION AND THE SHARE HOLDINGS OF THE SAID CONCERN. THE A.O. NO TICED THAT THERE WAS ONE COMMON SHAREHOLDER, NAMELY, SHRI VISHAMBER BADLANI WHO WAS HOLDING 48% SHARES, I.E. MORE THAN 10% SHARES OF M/S. N.D. TECHNOLOGIES PVT LTD. AND WAS ALSO HAVING 92% SHARES, I.E. MORE THAN 20% SHARES OF THE ASSESSEE COMPANY. HE FURTHER NOTICED THAT THE RESERVE AND SU RPLUS, I.E. PROFIT ITA NO. 2940/MUM/2010 M/S. N.D. FRAGRANCES PVT. LTD. 2 ACCUMULATED AS ON 31.03.2006 OF M/S. N.D. TECHNOLOG IES PVT. LTD. STOOD AT ` 5,68,422/-. THE A.O. WAS OF THE VIEW THAT THE CONDI TIONS PRESCRIBED IN SECTION 2(22)(E) EXISTED IN THE PRESENT CASE AND AC CORDINGLY TREATED THE OUTSTANDING LOAN OF ` 40,88,392/- AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. HOWEVER, SINCE THE ACCUMULATED PROFITS OF N.D. TECHNOLOGIES PVT. LTD. STOOD ONLY AT ` 5,68,422/- HE RESTRICTED THE DEEMED DIVIDEND TO ` 5,68,422/- AND ADDED THE SAME AS INCOME OF THE ASSE SSEE. BEING AGGRIEVED THE MATTER WAS CONTESTED BEFORE THE CIT(A) AND SUBM ITTED THAT THE A.O. WAS NOT CORRECT IN INVOKING PROVISIONS OF SECTION 2(22) (E) AS ASSESSEE WAS NOT A SHAREHOLDER OF M/S. N D TECHNOLOGIES PVT. LTD., THE REFORE, THE ADDITION DOES NOT ARISE IN ASSESSEES HANDS. FOLLOWING THE DECISI ON OF THE SPECIAL BENCH IN THE CASE OF ACIT VS. BHAUMIK COLOUR (P) LTD. 313 IT R (AT) 146 (MUM) (SB) THE CIT(A) DELETED THE ADDITION. REVENUE IS CONTEST ING THE SAME. 4. WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDE R OF THE CIT(A) WHO FOLLOWED THE SPECIAL BENCH DECISION. THE HON'BLE SP ECIAL BENCH IN THE CASE OF BHAUMIK COLOUR (P) LTD. (SUPRA) HAS HELD THAT WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTION 2(22)(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER OR THE CON CERN (NON-SHAREHOLDER). THE PROVISIONS ARE AMBIGUOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. . THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHA REHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATURE I S THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. 5. THE SAME PRINCIPLE WAS UPHELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICARE P. LTD. 324 ITR 273 WHERE THE PRINCIPLE ESTABLISHED IN BHAUMIK COLOUR (P) LTD. WA S UPHELD BY THE JURISDICTIONAL HIGH COURT. RESPECTFULLY FOLLOWING T HE SAME, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). G ROUND IS REJECTED. ITA NO. 2940/MUM/2010 M/S. N.D. FRAGRANCES PVT. LTD. 3 6. GROUND NO. 2 IS WITH REFERENCE TO THE DELETION OF A N AMOUNT OF ` 32,54,974/- UNDER SECTION 41(1) OF THE I.T. ACT. IT WAS THE CONTENTION OF THE REVENUE THAT THE CIT(A) ERRED IN NOT CONSIDERING TH E FACT THAT NEITHER THE CREDITORS NOR ASSESSEE CONFIRMED THE BALANCES AND A SSESSEE HAS FAILED EVEN TO DISCHARGE THE PRIMARY ONUS OF FURNISHING BASIC D ETAILS REGARDING THE CREDITORS. 7. THE BRIEF FACTS ARE THAT THE A.O. ISSUED NOTICE UND ER SECTION 133(6) TO THE FOLLOWING PARTIES CALLING FOR CONFIRMATION OF T HE CREDITS APPEARING AGAINST THEIR NAMES IN THE BALANCE SHEET OF THE ASSESSEE FO R THE CURRENT YEAR: - M/S. ASR ENTERPRISES ` 14,97,308/- M/S. CORNET TECH ` 13,51,588/- SHREE MURUGAN TRADERS ` 4,06,078/- TOTAL ` 32,54,974/- NONE OF THE PARTIES RESPONDED TO THE ENQUIRY. THE A .O. OBSERVED THAT THE LIABILITIES WERE OLD AND NOT ON ACCOUNT OF PURCHASE S MADE DURING THE CURRENT YEAR. HE ASKED THE ASSESSEE TO FURNISH CONFIRMATION FROM THESE PARTIES AND PRODUCE THE BOOKS OF ACCOUNT FOR VERIFICATION ELSE TO EXPLAIN IN THEIR ABSENCE AS TO WHY THE LIABILITIES SHOULD NOT BE ADDED BACK TO THE TOTAL INCOME UNDER SECTION 41(1) OF THE I.T. ACT. THE ASSESSEE FAILED TO COMPLY. THE A.O., THEREFORE, PRESUMED THAT THE LIABILITIES SHOWN WERE BOGUS OR THE LIABILITIES HAD CEASED TO EXIST AND ADDED THE AGGREGATE OF THE LIABILITIES AMOUNTING TO ` 32,54,974/- AS PROFIT OF BUSINESS UNDER SECTION 41( 1). BEING AGGRIEVED THE MATTER WAS CONTESTED BEFORE THE CIT(A). BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE A.O. MADE THE ADDITION ONLY ON THE BASIS T HAT THE CREDITORS DID NOT RESPOND TO THE NOTICES. IT WAS CONTENDED FURTHER TH AT THE A.O. ACCEPTED THAT THERE WERE NO TRANSACTION WITH THESE PARTIES DURING THE YEAR AND NOT RESPONDING TO THE NOTICE ISSUED UNDER SECTION 133(6 ) DID NOT AMOUNT TO REMISSION OR CESSATION OF LIABILITY SO AS TO ATTRAC T PROVISIONS OF SECTION 41(1). ASSESSEE RELIED ON THE PRINCIPLE ESTABLISHED BY THE ITAT IN THE CASE OF SHRI VARDHMAN OVERSEAS LTD. VS. ACIT 24 SOT 393 (DEL) TH AT REVENUE HAS NOT DISCHARGED ITS ONUS IN PROVING THAT BROUGHT FORWARD CREDIT BALANCES HAS CEASED FINALLY AND THERE IS NON POSSIBILITY OF THEI R REVIVING. THE CIT(A) ITA NO. 2940/MUM/2010 M/S. N.D. FRAGRANCES PVT. LTD. 4 CONSIDERED THAT THE A.O. HAS NOT BROUGHT OUT ANY MA TERIAL TO SHOW THAT THE IMPUGNED LIABILITIES WERE TRADING LIABILITIES AND I T IS NOT THE CASE OF THE A.O. THAT ANY LOSS OR EXPENDITURE WAS ALLOWED AS A DEDUC TION IN ANY YEAR AND ASSESSEE HAS OBTAINED ANY AMOUNT OR ADVANTAGE IN LI EU OF THAT IN THE CURRENT YEAR. THEREFORE, HE DELETED THE ADDITION UN DER SECTION 41(1). 8. THE LEARNED D.R. SUBMITTED THAT THE CIT(A) IS NOT C ORRECT IN STATING THAT THE A.O. HAS NOT MADE OUT ANY CASE OF CESSATIO N OF LIABILITY. HE REFERRED TO THE ORDER PASSED UNDER THE HEAD SUNDRY CREDITOR S IN THE ASSESSMENT ORDER PAGES 3 & 4 AND SUBMITTED THAT NEITHER THE AS SESSEE HAS PRODUCED THE BOOKS OF ACCOUNT FOR VERIFICATION DURING THE ASSESS MENT PROCEEDINGS NOR ASSESSEE SUBMITTED ANY DETAILS OF DISCHARGE OF ITS LIABILITY. SINCE THERE WAS NON-COMPLIANCE BY BOTH ASSESSEE AS WELL AS THE ABOV E SUNDRY CREDITORS THE A.O. HAS CORRECTLY PRESUMED THAT THE CONFIRMATION A RE NOT FILED DELIBERATELY AS THE LIABILITIES DOES NOT EXISTS. HE THEN REFERRE D TO THE FINDINGS OF THE A.O. THAT AMPLE OPPORTUNITIES WERE TO THE ASSESSEE TO ES TABLISH THE GENUINENESS OF THE LIABILITY AGAINST THESE PARTIES. 9. WE HAVE CONSIDERED THE ISSUE AND THE ARGUMENTS OF T HE ASSESSEE PLACED BEFORE THE CIT(A). WHILE AGREEING WITH THE P RINCIPLE WITH REFERENCE TO THE EXISTENCE OF CONDITION THAT THERE SHOULD BE LIA BILITY WHICH CEASED TO EXIST DURING THE YEAR, IT IS THE RESPONSIBILITY OF THE AS SESSEE TO SUBMIT THE NECESSARY DETAILS IN THE COURSE OF ASSESSMENT PROCE EDINGS WHEN THE A.O. STARTED THE ENQUIRY. WHAT WE NOTICED IS THAT THE A. O. DID NOT EXAMINE ALL THE LIABILITIES BUT ONLY SELECTED 3 PARTIES ON A RANDOM BASIS. THERE IS NO CONFIRMATION EITHER FROM THOSE PARTIES OR BY THE AS SESSEE. EVEN BEFORE THE CIT(A) ASSESSEE DID NOT PLACE ON RECORD ANY FACTS E XCEPT ARGUING ON LEGAL PRINCIPLES. BEFORE US ALSO, SINCE ASSESSEE WAS NOT REPRESENTED BY ANYBODY NOR PLACED ANY EVIDENCE ON RECORD, WE ARE UNABLE TO EXAMINE THE ISSUE ON FACTS AND ARE OF THE OPINION THAT THE MATTER REQUIR ES EXAMINATION BY THE A.O. THE CIT(A) WAS WRONG IN DELETING THE ADDITION WITHOUT EXAMINING THE ISSUES RAISED BY THE A.O. THAT NEITHER THE CREDITOR S NOR THE ASSESSEE CONFIRMED THE BALANCES AND ASSESSEE HAS EVEN FAILED TO DISCHARGE THE PRIMARY ONUS OF PRODUCING BASIC DETAILS REGARDING T HE CREDITORS. IN THE ITA NO. 2940/MUM/2010 M/S. N.D. FRAGRANCES PVT. LTD. 5 ABSENCE OF ANY EVIDENCE PLACED ON RECORD BY ASSESSE E, IT IS DIFFICULT TO SHIFT THE BURDEN TO THE REVENUE TO PROVE THAT THE LIABILI TY STILL EXISTS. SINCE ENQUIRY HAS STARTED ON THIS ISSUE, THE PRIMARY FACT S SHOULD HAVE BEEN EXAMINED. THEN ONLY THE CORRECT LAW CAN BE APPLIED. FOR THESE REASONS, WE ARE OF THE OPINION THAT THE ORDER OF THE CIT(A) CAN NOT BE UPHELD. WE SET ASIDE THE ORDER OF THE CIT(A) AND AO ON THIS ISSUE AND RESTORE THE MATTER BACK TO THE FILE OF THE A.O. TO EXAMINE THE NATURE OF THESE 3 CREDITS AND TO GIVE A FINDING WHETHER THE LIABILITY CEASED TO EXIS T OR NOT. WE MAKE IT CLEAR THAT ADDITION UNDER SECTION 41(1) CANNOT BE MADE UN LESS THE LIABILITY CEASED TO EXIST OR A BENEFIT WAS OBTAINED BY THE ASSESSEE DURING THE YEAR. WITH THESE OBSERVATIONS, GROUND NO. 2 IS CONSIDERED ALLO WED FOR STATISTICAL PURPOSE. 10. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH AUGUST 2011. SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 19 TH AUGUST 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XX, MUMBAI 4. THE CIT IX, MUMBAI CITY 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.