ACIT, CIRCLE-3, Nagpur V. M/S RAJU STEEL INDUSTRIES, Nagpur

ITA 351/NAG/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1714 (ITAT-NAGPUR)
• Duration Of Justice: 1 year(s) 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 09-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KANE
• Keywords: Deemed dividend
• Section: 37(1)

Judgement Text

1 ITA NO. 351/NAG/2013 IN THE INCOME TAX APPELLATE TRIBUNAL, NAGPUR BENCH, NAGPUR BEFORE SHRI MUKUL K. SHRAWAT, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER. I.T.A. NO. 351/NAG/2013 ASSESSMENT YEAR : 2008 - 09. ASSTT. COMMISSIONER OF INCOME - TAX, M/S RAJU STEEL INDUSTRIES, CIRCLE - 3, NAGPUR. V/S. OLD MOTOR STAND, ITWARI, NAGPU R. PAN AAAFR9206K APPELLANT. RESPONDENT. APPELLANT BY : SHRI NARENDRA KANE. RESPONDENT BY : SHRI K.P. DEWANI. DATE OF HEARING : 28 - 07 - 2015 DATE OF PRONOUNCEMENT : 28 TH A UGUST, 2015 O R D E R PER SHAMIM YAHYA, A.M. . THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LEARNED CIT(APPEALS) - II, NAGPUR DATED 22 - 07 - 2013 AND PERTAINS TO ASSESSMENT YEAR 2008 - 09 . THE GROUNDS OF APPEAL READ AS UNDER: 1. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN TREATING THE INTEREST EXPENSES OF ` .79232 8/ - AS ALLOWABLE U/S 37(1) OF THE I.T. ACT, 1961 WITHOUT APPRECIATING THAT THERE WAS A DIRECT NEXUS BETWEEN LOANS BORROWED AND ADVANCES MADE TO THE PARTNE R S AND SISTER CONCERNS . 2 ITA NO. 351/NAG/2013 2. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) HAS ERRED IN TREATING THAT LOAN OF ` .4600616 AND INTEREST ACCRUED THEREUPON OF ` .616725/ - GIVEN TO THE ASSESSEE FIRM BY ORANGE CITY STEEL INDUSTRIES PVT. LTD. DID NOT FALL WITHIN THE AMBIT OF SECTION 2(22)(E) WITHOUT APPRECIATING THAT ORANGE C ITY NOT FALL WITHIN THE AMBIT OF SECTION 2(22)(E) WITHOUT APPRECIATING THAT ORANGE CITY STEEL INDUSTRIES PVT. LTD. IS IN THE BUSINESS OF ALLOYS AND NOT IN MONEY LENDING BUSINESS. 3. ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) HAS ERRED BY NOT CONSIDERING TWO NEWS JUDGMENTS ON DEEMED DIVIDEND HONBLE DELHI HIGH COURTS DECISION IN CIT V/S. BHARTI OVERSEAS TRADING CO. (249 CTR 54) (2012) AND NATIONAL TRAVEL SERVICES 249 CTR 540 (2012) WHEREIN THE ISSUE HAS BEEN DECIDED IN FAVOUR OF REVENUE. 2. APROPOS GROUND NO.1 DISALLOWANCE OF INTEREST OF 792328/ - . IN THIS CASE THE ASSESSING OFFICER OBSERVED FOLLOWING FACTS : THE PARTNERS OF THE SISTER CONCERN M/S BHIS OWED MONEY TO THE PARTNERS OF ASSESSEE FIRM M/S RAJU STEEL INDUSTRIES IN THE F.Y. 2007 - 08 WHICH ARE SHOWN AS FOLLOWS: 1. SMT. KALPANA RAJENDRAKUMAR DOSHI ` . 25,00,000/ - . 2. SHRI BHOGILAL R. DOSHI. ` . 30,00,000/ - . AGAIN, THE PARTNERS OF M/S RAJU STEEL INDUSTRIES OWED MONEY TO THE PARTNERS OF SISTER CONCERN M/S BHIS IN THE F.Y. 2007 - 08 WHICH ARE SHOWN AS FOLLOWING : 1. RAJENDRAKUMAR B. DOSHI ` . 20,00,000/ - 2. SMT. VINA P. DOSHI ` . 25,00,000/ - 3. SMT. NILABEN DOSHI. ` . 25,00,000/ - DETAILS OF THE INTEREST PAID TO THE PARTNERS O F THE SISTER CONCERN M/S BHIS WITH RATE OF INTEREST ARE SHOWN BELOW : 3 ITA NO. 351/NAG/2013 LOAN FROM PARTNER NO. OF DAYS RATE OF INTT. INTER . DISALLOWED . 1. SMT. KALPANA R. DOSHI. 356 15% ` .3,65,753/ - 2. SHRI BHOGILAL DOSHI. 346 15% ` .4,26,575/ - TOTAL ` .7,92,328/ - A.O. ASKED FOR FURNISHING EXPLANATION ON SHOW CAUSE WHY SHOULD NOT DISALLOW INTEREST ON FOLLOWING LOAN AMOUNT. 3. THE ASSESSEE RESPONDED AS UNDER : THAT THE ASSESSEE IS A PARTNERSHIP FIRM. THE PARTNERS ARE MAINTAINING FIXED AS WELL AS CURRENT CAPITAL ACCOUNTS. THE POSITION OF BALANCES IN THE CURRENT CAPITAL ACCOUNTS OF THE PARTNERS AS ON 04.04.2007 AND WITHDRAWALS THEREFROM WAS AS UNDER: SR.NO. NAME OF PARTNERS CREDIT BALANCE IN CURRENT AMOUNT CURRENT ACCOUNT AS ON WITHDRAWN ON 04 - 04 - 2007. 04.04.2007. 1. SHRI RAJENDRA DOSHI ` .23,57,171=07 ` . 20,00,000 2. SMT. VEENA DOSHI. ` .28,02,999=86 ` . 25,00,000 3. SMT. NEELA DOSHI. ` . 24,50,902.90 ` . 25,00,000 THE AMOUNT STANDING TO THE CREDIT OF PARTNERS CURRENT ACCOUNTS ARE INTEREST FREE AND ARE REPAYABLE ON DEMAND. ON DEMAND FROM THE PARTNERS, THE ASSESSEE FIRM ALLOWED WITHDRAWALS TO THE PARTNERS. IT IS N EVER DENIED THAT THE MONEY AT FIRST INSTANCE WAS WITHDRAWN FROM FIRMS BANK ACCOUNT AND PAID TO THE PARTNERS. LATER ON, FOR THE BUSINESS NEEDS, THE ASSESSEE FIRM RAISED LOANS FROM THE FAMILY MEMBERS OF THE PARTNERS. HENCE, THE ALLEGATION THAT THE NEXUS IS ESTABLISHED IN RESPECT OF DIVERSION OF INTEREST BEARING FUNDS FOR PERSONAL PURPOSES OF PARTNERS IS TOTALLY INCORRECT. AS SUCH, DISALLOWANCE OF INTEREST PAID TO FAMILY MEMBERS OF THE PARTNERS IS NOT CALLED FOR AT ALL. THE PARTNERS HAVE WITHDRAWN THEI R OWN CAPITAL WHICH WAS LYING WITH THE FIRM AS NON INTEREST BEARING. 4. THE ASSESSING OFFICER WAS NOT SATISFIED. HE ALSO REFERRED TO THE FACT THAT SIMILAR DISALLOWANCE OF INTEREST WAS MADE BY THE ASSESSING OFFICER IN ASSESSMENT 4 ITA NO. 351/NAG/2013 YEARS 2006 - 07 AND 2007 - 08. ACCORDINGLY THE ASSESSING OFFICER DISALLOWED INTEREST OF ` .7,92,328/ - . 5. LEARNED CIT(APPEALS) DELETED THE ADDITION BY OBSERVING AS UNDER : 8.1 DURING THE COURSE OF APPELLATE PROCEEDINGS IT IS ALSO SUBMITTED BY THE APPELLANT THAT THE ISSUE HAS BEEN DEC IDED BY THE HONBLE ITAT, NAGPUR BENCH IN THE CASE OF APPELLANT ITSELF FOR AYS 2006 - 07 VIDE ORDER ITA NO. 70/NAG/2011 DT. 9 TH JANUARY, 2013. 9. I HAVE PERUSED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE APPELLANT. THE RELEVANT PORTION OF THE ORDER OF HONBLE TRIBUNAL IN THE CASE OF BHARAT HARDWARE AND IRON STORES IS REPRODUCED THEREUNDER: AFTER CONSIDERING THE SUBMISSION AND PERUSING THE ORDERS OF THE AUTHORITIES BELOW, WE FOUND THAT THE ASSESSEE DESERVES TO SUCCEED ON THE ISSUE INVOLVED IN BOTH THESE APPEALS. THE PARTNERS HAVE WITHDRAWN THEIR CAPITAL, WHICH WERE CREDITED IN THE FIRM. THERE IS NO BAR TO WITHDRAW THEIR CAPITAL AS THEY HAVE WITHDRAWN THEIR CAPITAL OUT OF THE TOTAL CAPITAL INVESTED IN THE FIRM. THEY HAVE ADV ANCED THESE AMOUNTS TO ANO THER FIRM I.E. M/S RAJU STEEL INDUSTRIES ON WHICH THEY HAVE CHARGED INTEREST AND THAT INTEREST INCOME HAS BEEN SHOWN IN THE HANDS OF THESE PARTNERS. S IMILARLY, THE PARTNER OF M/S RAJU STEEL INDUSTRIES HAS WITHDRAWN SOME CAPITAL FROM THEIR PARTNERSHIP FIRM AND ADVANCED THE MONEY TO THIS PARTNERSHIP CONCERN. THIS PARTNERSHIP CONCERN HAS PAID INTEREST TO THEM AND THE INTEREST INCOM E HAS BEEN SHOWN IN THEIR RESPECTIVE HANDS. THEREFORE, IN OUR CONSIDERED VIEW, THERE IS NO LOSS OF REVENUE AT ALL. THE FIRM IS PAYING INTEREST AND CLAIMING DEDUCTION IN PROFIT AND LOSS ACCOUNT, ON THE OTHER HAND, THE LENDERS HAVE SHOWN THE INTEREST INCOME IN THEIR HANDS AND PAYING DUE TAX ON THAT INCOME. THE RATE OF TAX IS SAME, THEREFORE, IN OUR CO NSIDERED VIEW, DISALLOWANCE OF INTEREST PAID WAS NOT JUSTIFIED UNDER SECTION 37(1). THIS IS THE BUSINESS MAN WHO KNOWS HOW TO RUN HIS BUSINESS ACTIVITY. THE ASSESSEE HAS RUN HIS BUSINESS ACTIVITIES IN A WAY WHICH THEY LIKE AND WAS BENEFICIAL FOR THEM. IF BY ANY REASON THEY HAVE MADE SOME T AX PLANNING, THAT TAX PLANNING IS ALSO IN THE FOUR CORNER OF LAW, WHICH IS PERMISSIBLE. THEREFORE, FOR THIS REASON ALSO, DISALLOWANCE OF INTEREST WAS NOT JUSTIFIED. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF T HE CASE, WE DELETE THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST FOR BOTH THE YEARS. 10. FURTHER, IN PARA 15 OF THE SAID ORDER BEARING NO. ITA NO. 70/NAG/2011 DT. 9 TH JANUARY, 2013, THE HONBLE BENCH FURTHER STATED THAT 5 ITA NO. 351/NAG/2013 FOLLOWING THE ABOVE FINDING, ADDITION MADE IN THE CASE OF THE APPELLANT IS ALSO DELETED. 10.1 RESPECTFULLY FOLLOWING THE ORDER OF THE HONBLE ITAT, NAGPUR BENCH THE SAID ADDITION OF ` .7,92,328/ - IS HEREBY DELETED. 6. AGAINST THE ABOVE ORDER, REVENUE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT THE FACTS IN THE PRESENT CASE ALSO ARE IDENTICAL TO THE ONE DEALT WITH BY THE TRIBUNAL EARLIER. PARTNERS HAVE WITHDRAWN OUT OF THE CREDIT BALANCE STANDING IN T HE CURRENT ACCOUNT. HENCE THE OBSERVATIONS OF THE TRIBUNAL AS ABOVE ARE FULLY APPLICABLE IN THIS CASE ALSO. THE PARTNERS CAN WITHDRAW THEIR CAPITAL AND INVEST THE SAME AS PER THEIR CHOICE. IT IS SETTLED LAW THAT THE AO CANNOT SIT INTO THE SHOE OF BUSINESS MAN AND DECIDE HOW TO RUN HIS BUSINESS . A NY TAX PLANNING WITHIN THE FOUR CORNERS OF LAW IS ALSO PERMISSIBLE. HENCE RESPECTFULLY FOLLOWING THE PRECEDENT AS ABOVE, WE HOLD THAT THE DISALLOWANCE OF INTEREST WAS NOT JUSTIFIED AND ACCORDINGLY WE AFFIRM THE ORDE R OF LEARNED CIT(APPEALS). 8 . APROPOS GROUND NO. 2 RELATING TO ADDITION UNDER SECTION 2(22)(E). ON THIS ISSUE THE FACTS ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE FIRM HAD ACCEPTED LOANS OF ` .46,00,616/ - FROM ORANGE CITY STEEL INDUSTRIES PVT. LTD. HARDIK STEEL INDUSTRIES PVT. LTD., A PARTNER WHICH HAS 24.99% SHARE IN THE ICSIPL. THEREFORE, THE LOAN TRANSACTION BETWEEN THE ASSESSEE AND OCSIPL ATTRACTS THE PROVISIONS OF SECTION 2(22)(E) OF I.T. ACT. ACCORDING TO THE ASSESSING OFFICER THESE AMOUNTS ARE NOT RECEIVED IN THE ORDINARY COURSE OF BUSINESS OF THE COMPANY. FURTHER ACCORDING TO THE ASSESSING OFFICER THE ASSESSEES CONTENTION THAT THE CONCERN SCSIPL WAS IN THE BUSINESS OF MONEY LENDING IS NOT CORRECT. THE ASSESSING OFFICER HAS, THEREFORE, PROCEEDED TO TREAT AN AMOUNT OF ` .46,00,616/ - WHICH IS THE AVAILABLE ACCUMULATED PROFITS OF OCSIPL AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE FIRM. THE A.O. 6 ITA NO. 351/NAG/2013 HAS ALSO DISALLOWED AN AMOUNT OF INTEREST OF ` .6,16,725/ - TO OCSIPL PERTAINING TO THE AMOUNT TREATED AS DEEMED DIVIDEND. 9 . UPON ASSESSEES APPEAL, LEARNED CIT(APPEALS) DELETED THE ADDITION BY OBSERVING AS UNDER : 6 I HAVE PERUSED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE APPELLANT. THE FACTS IN THE CASE OF THE APPELLANT ARE IDENTICAL TO FACTS IN THE CASE OF BHARAT HARDWARE AND IRON STORES MENTIONED ABOVE IN WHICH THE HONBLE ITAT, NAGPUR BENCH AYS. 2006 - 07 AND 2007 - 08 VIDE ORDER ITA NO. 65 AND 66/NAG/2011 DT. 9 TH JANUARY, 2013 DECID ED THE MATTER IN FAVOUR OF THE APPELLANT. THE RELEVANT PORTION OF THE ORDER OF HONBLE TRIBUNAL IS REPRODUCED HEREUNDER : AFTER CONSIDERING THE ORDER OF AO AND CIT(A), WE FOUND NO INFIRMITY IN THE FINDING OF THE LD. CIT(A), THE ASSESSEES FIRFM IS N EITHER A REGISTERED SHAREHOLDER NOR BENEFICIARY SHARE HOLDER IN THE SAID COMPANY, WHO IS A CREDITOR OF THE ASSESSEE FIRM. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BHAUMIK COLOUR (P) LTD. *SUPRA) HAS HELD THAT ADDITION CAN BE MADE UNDER SECTIO N 2(22)(E) IN THE CASE OF BENEFICIARY SHAREHOLDER ONLY. THIS VIEW OF THE TRIBUNAL HAS BEEN CONFIRMED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V/S. UNIVERSAL MEDICARE PVT. LTD., REPORTED IN 324 ITR 263 (BOM). IN VIEW OF THESE FACTS AND CIRCUM STANCES OF THE CASE, WE HOLD THAT LEARNED CIT(A) WAS RIGHT IN DELETING THE ADDITION MADE BY THE AO IN VIEW OF THE PROVISION OF SECTION 2(22)(E) AND DISALLOWING THE INTEREST WHICH WAS CONSEQUENTIAL TO THE ADDITION MADE AS DEEMED DIVIDEND. ACCORDINGLY, W E CONFIRM THE ORDER OF THE LEARNED CIT(A) FOR BOTH OF THE YEARS. HENCE, APPEALS OF THE DEPARTMENT I.E. ITA NO. 65&66/NAG/2011 FALL AND THE SAME ARE DISMISSED. 7. IN THE ASSESSEES CASE THE AO HAS HELD THAT THE PROVISION OF SECTION 2(22)(E) OF THE ACT ARE ATTRACTED AS THE PARTNER M/S HARDIK STEEL INDUSTRIES PVT. LTD. HAVING 24.99% OF THE PROFIT PROFIT SHARE RATIO ALSO HAS SUBSTANTIAL INTEREST IN THE CONCERN OCSIPL. HOWEVER, AS DISCUSSED IN VARIOUS ITATS AND HIGH COURTS DECISIONS, IT IS CLEAR THAT THE INTENT OF THE LEGISLATURE WAS TO TAX THE DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDERS AND NOT IN THE HANDS OF NON SHAREHOLDERS. THE DEEMING FICTION IS TO BE APPLIED ONLY TO THE SHAREHOLDERS AND NOT TO THE CONCERN IN WHICH THE SHA REHOLDERS ARE PARTNERS. 7 ITA NO. 351/NAG/2013 7.1 RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE HONBLE ITAT, NAGPUR BENCH, I HOLD THAT THE DEEMED DIVIDEND CANNOT BE TAXED IN THE HANDS OF THE APPELLANT CONCERN AS IT IS NEITHER A REGISTERED SHAREHOLDER NOR A BENEFICIAL SHARE HOLDER OF THE SHARE IN THE COMPANY M/S OCSIPL. CONSEQUENTLY THE ADDITIONS OF ` .46,00,616/ - & ` .6,16,725/ - IS HEREBY DELETED.. 10 . AGAINST THE ABOVE ORDER, REVENUE IS IN APPEAL BEFORE US. 1 1 . WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT IT IS UNDISPUTED THAT THE ASSESSEE IS NOT A REGISTERED SHAREHOLDER IN THE COMPANY WHO IS A CREDITOR TO THE ASSESSEE. IN THESE CIRCUMSTANCES, PROVISIONS OF SECTION 2(22)(E) CANNOT BE INVOKED. THIS ISSUE IS COVERED BY VARIOUS DECISIONS OF HONB LE JURISDICTIONAL HIGH COURT INCLUDING CIT V/S. UNIVERSAL MEDICARE P. LTD. 324 ITR 263 AND CIT V/S. IMPACT CONTAINERS 367 CTR 346. WE FURTHER NOTE THAT IN THE ABOVE DECISIONS HONBLE JURISDICTIONAL HIGH COURT HAS ELABORATELY DISCUSSED THE LAW AND HELD THAT WHEN THE ASSESSEE IS NOT A SHARE HOLDER IN ANY OF THE ENTITIES WHICH HAVE ADVANCED AND LEND SUMS, ADDITIONS UNDER SECTION 2(22)(E) WERE REQUIRED TO BE DELETED. 1 2 . IN THIS REGARD WE WOULD ALSO LIKE TO REFER THAT THE LEARNED D.R. HAS REFERRED TO DECISIO N OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V/S. BHARTI OVERSEAS TRADING CO. FOR THE PROPOSITION THAT THE AMOUNT RECEIVED BY A FIRM FROM A COMPANY IN WHICH PARTNERS OF FIRM WERE HOLDING MORE THAN 10% SHARES, THE AMOUNT IS TO BE TREATED AS DEEMED DIVID END. WE FIND THAT WHEN THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF HONBLE JURISDICTIONAL HIGH COURT THE SAME CANNOT BE TINK ERED BY US BY PLACING RELIANCE UPON OTHER HIGH COURT DECISION. HONBLE APEX COURT IN THE CASE OF SAURASHTRA KUTCH STOCK EXCHANGE LTD. 262 ITR 146 HAS EXPOUNDED THAT NON CONSIDERATION OF JURISDICTIONAL HIGH COURT DECISION OR THE HONBLE APEX COURT DECISION CAN RENDER THE DECISION OF THE TRIBUNAL LIABLE FOR RECTIFICATION AS A MISTAKE APPARENT FROM RECORD. THUS W H EN RATIO FROM THE HNBLE 8 ITA NO. 351/NAG/2013 JURISDICTIONAL HIGH COURT IS IN FAVOUR OF THE ASSESSEE, THE SAME CANNOT BE TINKERED WITH BY PLACING RELIANCE UPON OTHER HIGH COURTS DECISION. IN THESE CIRCUMSTANCES, ON FINDING THAT THE IDENTICAL ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ASSESSEES OWN CASE IN THE PRECEDING YEAR, WHEN THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LEARNED CIT(APPEALS) . ACC ORDINGLY WE UPHOLD THE SAME. 1 3 . IN THE RESULT, THIS APPEAL BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF AUGUST, 2015. SD/ - SD/ - (MUKUL K. SHRAWAT) ( SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER. NAGPUR, DATED: 28 TH AUGUST, 2015. COPY OF ORDER FORW ARDED TO : 1. THE ASSESSEE. 2. REVENUE. 3. THE CIT(A) 4. THE CIT, NAGPUR. 5. THE D.R., ITAT, NAGPUR. 6. GUARD FILE. TRUE COPY. BY ORDER WAKODE ASSISTANT REGISTRAR, ITAT, NAGPUR .