CAI Industries P. Ltd., Coimbatore V. DCIT, Coimbatore

ITA 356/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6136 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-07-2017
• Assessment Year: 2013-2014
• Appeal Filed On: 09-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Deemed dividend
• Section: 14A; 11

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A BENCH, CHENNAI . . . , . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.356/MDS/2017 ( / ASSESSMENT YEAR: 2013-14) M/S. CAI INDUSTRIES P LTD., 1547-A, AVINASHI ROAD, PEELAMEDU, COIMBATORE 641 004. VS THE DCIT, CORPORATE CIRCLE 2, COIMBATORE PAN: AABCC2146F ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI S. SRIDHAR, ADVOCATE /RESPONDENT BY : SHRI V. SREENIVASAN, JCIT /DATE OF HEARING : 01.08.2017 /DATE OF PRONOUNCEMENT : 21.09.2017 / O R D E R PER A. MOHAN ALANKAMONY, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEA LS)-1, COIMBATORE DATED 30.11.2016 IN APPEAL NO.220/15-16 FOR THE ASSESSMENT YEAR 2013-14 PASSED U/S.250(6) R.W.S.1 43(3) OF THE ACT. 2 I TA NO.356/MDS/2017 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS APPEAL HOWEVER THE CRUXES OF THE ISSUES ARE AS FOLLOWS:- (I) THE LD.CIT(A) HAS ERRED IN SUSTAINING THE ORDER OF THE LD.AO WHO HAD DISALLOWED EXPENDITURE OF RS.4,60,482 /- BY INVOKING SECTION 14A AND RULE 8D OF THE RULES. (II) THE LD.CIT(A) HAS ERRED IN SUSTAINING THE ORDE R OF THE LD.AO WHO HAD MADE ADDITION OF RS.2,90,09,110/- BY INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A AUTHORIZED DEALER OF MAHINDRA & MAHINDRA LTD, TRACT ORS, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2013-14 EL ECTRONICALLY ON 25.09.2013, DECLARING TOTAL INCOME OF RS.2,00,67 ,550/-. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND FINAL LY ASSESSMENT ORDER U/S.143(3) OF THE ACT WAS PASSED O N 09.03.2016, WHEREIN THE LD.AO MADE THE ABOVE STATED ADDITIONS. 4. GROUND NO.2 (I) : ADDITION OF RS.4,60,482/- BY INV OKING SECTION 14A AND RULE 8D OF THE RULES:- DURING THE COURSE OF SCRUTINY ASSESSMENT, THE LD. AO OBSERVED THAT THE ASSESSEE HAD MADE INVESTMENT IN S HARES AS ON 31.03.2013 FOR RS.64,42,600/- AND HAD EARNED DIV IDEND 3 I TA NO.356/MDS/2017 INCOME OF RS.5,13,800/-. THEREFORE THE LD.AO INVOKE D THE PROVISION OF SECTION 14A OF THE ACT AND RULE 8D(2)( I),(II) & (III) OF THE RULES AND COMPUTED THE DISALLOWANCE AT RS.4,60, 482/-. ON APPEAL THE LD.CIT(A) SUSTAINED THE ORDER OF LD.AO B Y RELYING ON THE ORDER OF THE ITAT CHANDIGARH BENCH IN THE CASE ANIL KUMAR SINGHANIA REPORTED IN 51 TAXMANN.COM 98, WHEREIN IT WAS HELD AS FOLLOWS: FURTHER THERE IS NO FORCE IN THE SUBMISSIONS THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY COGENT REASON F OR MAKING DISALLOWANCE IN THE SENSE THAT HE HAS NOT PO INTED OUT WHICH EXPENDITURE IS RELATABLE. FIRST OF ALL T HE ASSESSEE HAS NOT GIVEN ANY WORKING WHEREIN DISALLOWANCE WAS MADE BY THE ASSESSEE HIMSELF WHILE FILING RETURN. SECON DLY WHEN THE COMMON EXPENDITURE AND COMMON INTEREST IS INCUR RED THEN ALLOCATION HAS TO BE MADE ON PROPORTIONATE BAS IS IN TERMS OF SEC. 14A R.W.R. 8D FOR WHICH DISCUSSION HA S BEEN MADE IN CASE OF CHADHA SUPER CARS (SUPRA) AND RELEV ANT PARAS HAS ALREADY BEEN EXTRACTED ABOVE. FURTHER THE LD.CIT(A) OBSERVED THAT THE A SSESSEE HAD NOT SUBMITTED ANY PROOF SUCH AS BANK STATEMENT TO PROVE THAT THE INVESTMENTS WERE MADE OUT OF NON-INTEREST BEARING F UND. ACCORDINGLY THE ISSUE WAS DECIDED AGAINST THE ASSES SEE BY THE LD.CIT(A). 4.1 BEFORE US THE LD.AR SUBMITTED THAT THE ASSESSE E HAD NOT INCURRED ANY EXPENDITURE TOWARDS MAKING THE INVESTM ENT OR MANAGING THE INVESTMENTS. HENCE IT WAS PLEADED THA T THE 4 I TA NO.356/MDS/2017 ADDITION MADE BY INVOKING THE PROVISION OF SECTION 14A OF THE ACT, MAY BE DELETED, WHILE AS THE LD.DR ARGUED IN S UPPORT OF THE ORDERS OF THE REVENUE AUTHORITIES. 4.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. FROM THE INCOME TAX RETU RN FILED BY THE ASSESSEE, IT IS APPARENT THAT THE ASSESSEE HAS ITS OWN FUND AS DETAILED HEREIN BELOW:- 1. FULLY PAID UP EQUITY SHARE CAPITAL RS. 2,63,1 9,300/- 2. CAPITAL RESERVE - RS. 33,500/- 3. REVALUATION RESERVE - RS. 10,30,279/- 4. GENERAL RESERVE - RS. 2,48,45,850/- 5. BALANCE IN P&L ACCOUNT - RS.10,92,79,427/- -------------------------- TOTAL RS.16,15,08,356/- =============== THE OBSERVATION OF THE LD.AO IS THAT THE ASSESSEE HAD MADE INVESTMENTS IN SHARES FOR RS.64,42,600/-, HOWE VER WE FIND THAT THE ASSESSEE HAS OWN FUND MUCH ABOVE RS.64,42, 600/- EVEN BY EXCLUDING THE CAPITAL RESERVE AND REVALUATI ON RESERVE. THEREFORE IT IS OBVIOUS THAT THE ENTIRE INVESTMENT MADE BY THE ASSESSEE OF RS.64,42,600/- IS FROM ITS OWN INTEREST FREE FUNDS. IN SUCH SITUATION, IT WILL BE INCORRECT TO APPLY RULE 8D(2)(I) & (II) OF 5 I TA NO.356/MDS/2017 THE RULES IN THE CASE OF THE ASSESSEE, BECAUSE THE ASSESSEE HAS NOT INCURRED ANY INTEREST EXPENDITURE DIRECTLY OR INDIRECTLY WITH RESPECT TO ITS INVESTMENT MADE FOR RS.64,42,60 0/-. THEREFORE IN THE CASE OF THE ASSESSEE ONLY RULE 8D( 2)(III) WILL BE APPLICABLE AND ACCORDINGLY WE HEREBY SUSTAIN THE AD DITION OF RS.32,213/- AND FURTHER DIRECT THE LD.A.O TO DELETE THE ADDITION OF RS. 4,28,272/- (RS.4,60,482 RS.32,213) MADE BY AP PLYING THE RULE8D(2)(I) & (II) OF OF THE RULES. 5. GROUND NO.2 (II) : ADDITION OF RS.2,90,09,110/- BY INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT:- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDING S, ON VERIFICATION OF THE LEDGER ACCOUNTS OF THE ASSESSEE , THE LD.AO HAD NOTICED THAT THE ASSESSEE COMPANY HAD RECEIVED MONEY FROM M/S. RAJSHREE AUTOMOTIVE PVT. LTD. ON FURTHER VERIFICATION IT WAS OBSERVED THAT THE ASSESSEE COMPANY AND M/S. RAJ SHREE AUTOMOTIVE PVT. LTD., WERE HAVING THE SAME INDIVIDU AL AS THE MANAGING DIRECTOR VIZ., M.S. JAISHREE VARADARAJ. IT WAS FURTHER REVEALED THAT THE ASSESSEE COMPANY WAS HOLDING 18.3 9% SHARES OF M/S. RAJSHREE AUTOMOTIVE PVT. LTD. THEREFORE, T HE LD.AO CAME TO THE CONCLUSION THAT THE PROVISIONS OF SECTI ON 2(22)(E) OF THE ACT WILL BE SQUARELY APPLICABLE IN THE CASE OF THE ASSESSEE. 6 I TA NO.356/MDS/2017 ON QUERY, THE LD.AR SUBMITTED THE FOLLOWING EXPLANA TION BEFORE THE LD.AO:- (I) BOTH THE COMPANIES WERE MAINTAINING CURRENT ACC OUNT AND THERE WERE INTERCONNECTED COMMERCIAL TRANSACTIONS BETWEEN THE COMPANIES. (II) THE ENTIRE TRANSACTIONS WERE BUSINESS TRANSACT IONS BETWEEN THE COMPANIES. (III) CERTAIN EXPENSES INCURRED ON BEHALF OF THE SI STER CONCERNS WERE REIMBURSED FROM TIME TO TIME AND AT T HE END OF THE YEAR THEY WERE SQUARED UP. (IV) BOTH THE COMPANIES WERE IN THE SAME LINE OF BU SINESS AND THERE WERE SOME CONNECTED TRANSACTIONS BETWEEN THE COMPANIES. 5.1 IT WAS THEREFORE PLEADED THAT IN THE CASE OF TH E ASSESSEE PROVISIONS OF SECTION 2(22)(E) WILL NOT BE ATTRACTE D. HOWEVER THE LD.AO REJECTED THE EXPLANATION OFFERED BY THE ASSES SEE AND ITS REPRESENTATIVE BECAUSE OF THE FOLLOWING REASONS:- THE ASSESSEE HAS NOT PROVED THAT THE TRANSACTIONS HAD OCCURRED DURING THE NORMAL COURSE OF BUSINESS B ETWEEN THEM AND M/S.RAJSHREE AUTOMOTIVE PRIVATE LIMITED. T HE ASSESSEE COMPANY IS DEALING WITH MAHINDRA BRAND OF VEHICLES AND MLS.RAJSHREE AUTOMOTIVE PRIVATE LIMITED DEALS W ITH FORD BRAND OF VEHICLES. THE ARGUMENT OF THE COMPANY THAT 'ON CERTAIN OCCASIONS, THE VEHICLES RELATING TO M/S.RAJ SHREE AUTOMOTIVE P. LTD. ARE SENT TO US TO CARRY ON SERVI CE AND REPAIR' HAS NOT BEEN PROVED BY THE ASSESSEE. FURTHE R, THE LEDGER SUBMITTED BY THE ASSESSEE DOES NOT SHOW ANY PROOF THAT THE PAYMENTS ARE MADE FOR THE TRADING ACTIVITIES BE TWEEN THE COMPANIES. IT COULD BE CLEARLY SEEN FROM THE LEDGER THAT THE 7 I TA NO.356/MDS/2017 AMOUNT PAID ON 11-8-2012 - RS.32,00,000; 12-09-2012 - RS.1,50,00,000; 7-12-2012 - RS.39,00,000 CONSTITUTE LOANS GIVEN BY M/S.RAJSHREE AUTOMOTIVE PRIVATE LIMITED TO MLS.CAI INDUSTRIES PRIVATE LTD. THE LEDGER EXTRACT ALSO CON FIRMS THAT CERTAIN PAYMENTS HAS BEEN MADE BY THE ASSESSEE COMP ANY ON BEHALF OF M/S.RAJSHREE AUTOMOTIVE PRIVATE LTD WHICH IS REPAID BY M/S.RAJSHREE AUTOMOTIVE PRIVATE LTD. HOWEVER, TH E AMOUNTS RECEIVED BY THE ASSESSEE COMPANY FROM OVER AND ABOVE THE REPAYMENT AMOUNT IS LOANS WHICH HAS BEEN REPORTED BY M/S.CAI INDUSTRIES P. LTD. IN ITS ANNUAL REPORT. THESE ADVANCES WERE NOT TRADE ADVANCES AS CLAIME D BY THE ASSESSEE SINCE BOTH THE COMPANIES ARE IN TO DIFFERE NT LINE OF BUSINESSES. THE RECEIPT OF MONEY FROM M/S.RAJSHREE AUTOMOTIV E PRIVATE LIMITED CLEARLY SHOW A DEFINITE PATTERN. AS COULD BE SEEN FROM THE INVESTMENTS SHOWN IN T HE BALANCE SHEET, INSTEAD OF DECLARING DIVIDEND INCOME, M/S.RA JSHREE AUTOMOTIVE PRIVATE LIMITED HAD CHOSEN TO ADVANCE MO NEYS TO THE ASSESSEE COMPANY ON VARIOUS DATES. ALSO, IN PAGE 7 OF THE ANNUAL REPORT OF THE ASSES SEE COMPANY, IT IS CERTIFIED BY THE CHARTERED ACCOUNTAN T THAT' IN RESPECT OF LOANS, SECURED OR UNSECURED, GRANTED OR TAKEN BY THE COMPANY TO OR FROM COMPANIES, FIRMS OR OTHER PARTIE S COVERED IN THE REGISTER MAINTAINED U/S 301 OF THE COMPANIES ACT, 1956, ACCORDING TO THE INFORMATION AND EXPLANATIONS GIVEN TO ME: A)FROM MANAGING DIRECTOR & MEMBERS : 95.001 ACS RAJSHREE AUTOMOTIVE PRIVATE LTD. MAXIMUM AMOUNT INVOLVED DURING THE YEAR (IN CREDIT) : 220.15 LACS MAXIMUM AMOUNT INVOLVED DURING THE YEAR (IN DEBIT): 44.281ACS CLOSING BALANCE NIL' 8 I TA NO.356/MDS/2017 . FROM THE ABOVE. IT IS AMPLY CLEAR THAT ASSESSEE C OMPANY HAD RECEIVED LOANS FROM M/S.RAJSHREE AUTOMOTIVE PRIVATE LIMITED WHICH CLEARLY COME WITHIN THE MEANING OF DEEMED DIV IDEND U/S 2(22)(E) OF THE I.T.ACT, 1961. THEREAFTER THE LD.AO PLACED RELIANCE IN THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE TARULATA SHYAM AN D OTHERS VS. CIT REPORTED IN 108 ITR 345, WHEREIN IT WAS HEL D PAYMENT BY A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC WERE SUBSTANTIALLY INTERESTED WITHIN THE MEA NING OF SECTION 23A OF 1922 ACT, OF ANY SUM BY WAY OF ADVAN CE OR LOAN TO A SHAREHOLDER, NOT EXCEEDING THE ACCUMULATE D PROFITS POSSESSED BY THE COMPANY WAS TO BE DEEMED A S HIS DIVIDEND U/S 2(6A)(E) READ WITH SECTION 12(1B) OF 1 922 ACT, EVEN IT THAT ADVANCE OR LOAN WAS SUBSEQUENTLY REPAI D IN ITS ENTIRETY DURING THE RELEVANT PREVIOUS YEAR IN WHICH IT WAS TAKEN. AND IN THE CASE MISS. P. SARADHA VS. CIT REPORTED I N 222 ITR 444 (SC) WHEREIN IT WAS HELD 'FROM THE FACTS, AS STATED HEREINABOVE, IT APPEARS THAT THE WITHDRAWALS MADE BY THE APPELLANT FROM THE COMPANY AMOUNTED TO GRANT OF LOAN OR ADVANCE BY THE COMPANY TO THE SHAREHOLDER. THE LEGAL FICTION CAME INTO PLAY AS SO ON AS THE MONIES WERE PAID BY THE COMPANY TO THE APPELLANT. T HE ASSESSEE MUST BE DEEMED TO HAVE RECEIVED DIVIDENDS ON THE DATES ON WHICH SHE WITHDREW THE AFORESAID AMOUNTS O F MONEY FROM THE COMPANY. THE LOAN OR ADVANCE TAKEN F ROM THE COMPANY MAY HAVE BEEN ULTIMATELY REPAID OR ADJU STED BUT THAT WILL NOT ALTER THE FACT THAT THE ASSESSEE, IN THE EYE OF LAW, HAD RECEIVED DIVIDEND FROM THE COMPANY DURING THE RELEVANT ACCOUNTING PERIOD. 9 I TA NO.356/MDS/2017 BY APPLYING THE RATIO LAID DOWN IN THE DE CISIONS CITED SUPRA THE LD.AO TREATED THE AMOUNT OF RS.2,90,09,110/- AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT AND ADDE D THE SAME TO THE INCOME OF THE ASSESSEE. 5.2 ON APPEAL, THE LD.CIT(A) SUSTAINED THE ORDER OF THE LD.AO BY HOLDING THAT THE ASSESSEE COMPANY HAS NOT PROVED THE COMMERCIAL NEXUS BETWEEN BOTH THE SISTER COMPANIES. 5.3 BEFORE US THE LD.AR REITERATED HIS SUBMISSIONS MADE BEFORE THE LD.REVENUE AUTHORITIES AND FURTHER RELIE D IN THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE CIT VS. C. SUBBA REDDY, REPORTED IN (2016) 97 CCH 0157. TH E LD.AR ALSO RELIED ON THE CIRCULAR F.N.279/MISC./140/2015/ITJ DATED 12 TH JUNE 2017 ISSUED BY THE CBDT WHEREIN IT WAS HELD THAT TRADE ADVANCES IN THE NATURE OF COMMERCIAL TRANSACTIONS WOULD NOT FAL L WITHIN THE AMBIT OF THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 5.4 WHILE AS ON THE OTHER HAND THE LD.DR ARGUED IN SUPPORT OF THE ORDERS OF THE LD.REVENUE AUTHORITIES AND RELIED IN THE 10 ITA NO.356/MDS/2017 DECISION OF THE HONBLE JURISDICTION HIGH COURT IN THE CASE SUNIL KAPOOR VS. CIT, REPORTED IN 375 ITR 0001. 5.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CAS E, IT IS APPARENT THAT BOTH THE ASSESSEE AND ITS SISTER COMP ANY ARE DEALERS IN AUTOMOBILES OF DIFFERENT NATURE AND ENGA GED IN BUSINESS WITH CLOSE PROXIMITY. THE COMBINED ENDURA NCE TO MARKET THE PRODUCTS IN THE SAME VICINITY RESULTS IN CLOSE COMMERCIAL TIES BETWEEN THE ASSESSEE COMPANY AND IT S SISTER COMPANY. AS A RESULT BOTH THE COMPANIES WERE MAINT AINING CURRENT ACCOUNTS IN ORDER TO ACHIEVE THEIR RESPECTI VE BUSINESS TARGETS. THEREFORE IT CANNOT BE SAID THAT, THE INT ERDEPENDENCE FOR MEETING SEVERAL BUSINESS COMMITMENTS OF THE ASS ESSEE AND ITS SISTER CONCERNS DOES NOT RESULT IN COMMERCIAL N EXUS BETWEEN THE ASSESSEE COMPANY AND ITS SISTER CONCERNS. AS P OINTED OUT BY THE LD.AR SOME EXPENSES WERE MET BY BOTH THE COM PANIES WHICH WERE REIMBURSED BY EITHER COMPANY. THESE FAC TS ARE NOT DISPUTED. MOREOVER AT THE CLOSE OF THE FINANCIAL YE AR THE CURRENT ACCOUNT MAINTAINED BY THE ASSESSEE WITH ITS SISTER CONCERN SHOWED NIL BALANCE. IN THIS SITUATION, WE ARE OF T HE VIEW THAT THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE CIT VS. C. 11 ITA NO.356/MDS/2017 SUBBA REDDY WOULD BE MOST APPROPRIATE, WHEREIN IT W AS HELD THAT WHEN NO BENEFIT HAS ACCRUED TO ASSESSEE AND CREDIT WAS A RESULT OF BUSINESS TRANSACTION AND WAS NEITHER IN NATURE O F LOAN OR DEPOSIT HENCE, PROVISIONS OF SECTIONS 2(22)(E) OF THE ACT D O NOT STAND ATTRACTED. FURTHER IN THE CASE OF THE ASSESSEE THE CIRCULAR NO.19/2017 SUPRA IS ALSO VERY RELEVANT. CONSIDERIN G THESE ASPECTS OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT PROVISIONS OF SECTION 2(22)(E) OF THE ACT WILL NOT BE APPLICABLE IN THE CASE OF THE ASSESSEE. THEREFORE WE HEREBY DIRE CT THE LD.AO TO DELETE THE ADDITION MADE BY INVOKING THE PROVISI ONS OF SECTION 2(22)(E) OF THE ACT. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED ON 21 ST SEPTEMBER,2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER SD/- ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER !' /CHENNAI, #$ /DATED 21 ST SEPTEMBER, 2017 RSR $% &'(' /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. , ( )/CIT(A) 4. , /CIT 5. '-. / /DR 6. .01 /GF