D.C.I.T.-4(1), Agra V. M/s Astha Residency (P) Ltd., Agra

ITA 405/AGR/2010

• Counselvise Citation: 40520314 RSA 2010
• Duration Of Justice: 1 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 12-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 27-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K SHARMA
• Assessee Lawyers: M M AGARWAL
• Keywords: Business expenditure; Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO. 405/AGRA/2010 ASSTT. YEAR : 2006-07 D.C.I.T., 4(1), VS. M/S. ASHTHA RESIDENCY (P) LT D., AGRA. B-154, KAMLA NAGAR, AGRA. (PAN : AAFCA 0102 R) (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI A.K. SHARMA, JR. D.R. FOR RESPONDENT : SHRI M.M. AGARWAL,, C.A. DATE OF HEARING : 12.10.2011 DATE OF PRONOUNCEMENT : 14.10.2011 ORDER PER B.C. MEENA, AM : THIS IS AN APPEAL FILED BY THE REVENUE ARISING OU T OF THE ORDER OF CIT(A)-II, AGRA DATED 06.07.2010. 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGE D IN THE BUSINESS OF PURCHASE AND SALE OF LAND. THE RETURN OF INCOME WAS FILED ON 27.02.2007 DECLARING INCOME OF RS.9,91,810/- AND THE ASSESSMENT WAS FINA LIZED AT A TOTAL INCOME OF RS.18,37,143/- BY ADDING THE AMOUNT OF RS.4,00,000/ - ON ACCOUNT OF DEEMED 2 DIVIDEND AND RS.4,45,333/- ON ACCOUNT OF DISALLOWAN CE OF INTEREST EXPENSES. THE GROUNDS OF APPEAL READ AS UNDER : 1. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT IN DELETING THE ADDITION OF RS.4,00,000/- MADE U/S. 56 ON ACCOU NT OF LOAN RECEIVED BY THE ASSESSEE FROM M/S. ASTHA REAL ESTATE PVT. LT D. BY HOLDING THAT THERE WAS NO ACCUMULATED PROFIT AVAILABLE WITH THE LOAN GIVING COMPANY IGNORING THE FACT THAT ASSESSEE COULD NOT P ROVE THE NON AVAILABILITY OF THE SAME BY FURNISHING ANY FINANCIA L STATEMENT DRAWN ON THE DATE OF ADVANCEMENT OF LOAN. 2. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE U/S. 56 OF IT ACT IGNORING THE SI TUATION CONTEMPLATED IN SECTION 2(22)(E) OF IT ACT WHICH SA YS THAT ADVANCE OR LOAN TO ANY CONCERN IN WHICH SUCH SHARE HOLDER IS A MEMBER OR A PARTNER IN WHICH HE HAS A SUBSTANTIAL INTEREST AND IF THIS SITUATION IS READ DISJOINT, WILL APPLY EVEN TO THE PAYMENT MADE TO NON-SHARE HOLDERS. 3. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT IN DELETING THE ADDITION OF RS.4,00,000/- MADE U/S. 56 OF IT ACT ON THE GROUND THAT THE SHARE HOLDER IN ASSESSEES COMPANY HAVE SUBSTANTIAL DEPOSIT WITH THE LOAN GIVING COMPANY THEREFORE, THE PROVISIONS OF DE EMED DIVIDEND DOES NOT ARISE, THOUGH NO SUCH PROVISION EXISTS IN THE STATUTE. 4. THAT THE LEARNED CIT(A) HAS ERRED IN LAW BY NOT FOLLOWING THE CBDTS CIRCULAR NO. 495, DATED 22.09.2007 WHEREAS T HE SAME IS APPLICABLE TO ALL THE INCOME TAX AUTHORITIES. 5. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT IN RESTRICTING THE DISALLOWANCE OF THE ADDITION OF RS.3,30,133/- O F INTEREST ON BORROWED CAPITAL IGNORING THAT THIS AMOUNT CANNOT B E REGARDED AS BUSINESS EXPENDITURE AS THE BUSINESS DOES NOT DERIV E ANY BENEFIT BY THE OUTGOING OF INTEREST FREE ADVANCES TO THESE PAR TIES. 3. THE FIRST ISSUE RELATES TO THE DELETION OF ADDIT ION OF RS.4,00,000/- MADE BY THE ASSESSING OFFICER U/S. 56 OF THE INCOME-TAX ACT ON ACCOUNT OF LOAN RECEIVED BY 3 THE ASSESSEE FROM M/S. ASTHA REAL ESTATE PVT. LTD. THE LEARNED DR RELIED ON THE ORDER OF THE ASSESSING OFFICER AND ALSO PLEADED THA T THE CURRENT YEARS PROFITS HAVE TO BE INCLUDED IN THE EXPRESSION ACCUMULATED PROF IT IN VIEW OF EXPLANATION 2 TO SECTION 2(22). HE PLEADED THAT ACCUMULATED PROFIT I NCLUDES CURRENT PROFIT AND ALSO THE PROFIT ACCUMULATED ON DAY-TO-DAY BASIS. HE ALSO SUBMITTED THAT HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. ROSHAN LAL AND SMT. LAJWANTI DEVI, 98 ITR 349 HELD THAT ACCUMULATED PROFIT WITHIN THE MEANING OF CLAUSE (E) OF SEC. 2(22) OF THE INCOME-TAX ACT WILL NECESSARILY BE COM PRISED OF THE AMOUNT AVAILABLE FOR BEING DISTRIBUTED AS PROFITS. HE PLEADED THAT A CCUMULATED PROFIT IS EARNED BIT BY BIT AND SO ACCUMULATED. 4. ON THE OTHER HAND, LD. AR RELIED UPON THE ORDER OF THE CIT(A) AND HE SUBMITTED THAT THE CIT(A) HAS GRANTED RELIEF TO THE ASSESSEE BY HOLDING THAT THE APPELLANT IS NEITHER A REGISTERED SHARE HOLDER NOR A BENEFICIAL SHARE HOLDER IN ASTHA REAL ESTATE PVT. LTD., WHICH COULD ENJOY ANY DIVIDE ND FROM THE COMPANY. HE ALSO SUBMITTED THAT THERE WAS NO ACCUMULATED PROFIT WITH ASTHA REAL ESTATE PVT. LTD. AT THE TIME OF GIVING RS.4,00,000/- TO THE APPELLANT, WHICH COULD HAVE BEEN DISTRIBUTED BY THE COMPANY TO ITS SHARE HOLDERS IN THE FORM OF DIVIDEND. HE ALSO SUBMITTED THAT THE CIT(A) HAS CONSIDERED THAT THERE WAS CREDIT BALANCE OF THE SHARE HOLDERS SHRI AJAY KUMAR AGARWAL OF RS.8,50,000/- AN D SHRI SUNIL KUMAR AGARWAL 4 OF RS.13,73,883/-. THEREFORE, THE CIT(A) HAS RIGHTL Y GRANTED RELIEF TO THE ASSESSEE BY NOT TREATING THE AMOUNT OF RS.4,00,000/- AS DEEM ED DIVIDEND. HE FINALLY SUBMITTED THAT THE PROVISIONS OF SECTION 2(22)(E) O F THE ACT ARE NOT AT ALL APPLICABLE IN THE ASSESSEES CASE. 5. WE HAVE HEARD BOTH THE SIDES AND HAVE ALSO PERUS ED THE ORDER OF THE CIT(A). WE HAVE ALSO CONSIDERED THE CASE LAWS RELIED UPON B Y BOTH THE SIDES. AFTER HEARING THE RIVAL SUBMISSIONS WE HOLD THAT FIRSTLY, ASTHA R EAL ESTATE PRIVATE LIMITED WAS NOT HAVING ACCUMULATED PROFITS WHICH COULD HAVE COM E INTO THE AMBIT OF DEFINITION OF DEEMED DIVIDEND. AT THE BEGINNING OF THE YEAR, T HE ACCUMULATED PROFITS WERE NIL. SECONDLY, THE ASSESSEE WAS NOT A SHARE HOLDER OF AS THA REAL ESTATE PRIVATE LIMITED. HOWEVER, THERE WERE COMMON SHARE HOLDERS HAVING SUB STANTIAL SHARE HOLDING. VARIOUS COURTS HAVE DECIDED THAT FOR THE PURPOSE OF DEEMED DIVIDEND U/S. 2(22)(E) OF THE INCOME-TAX ACT, THE WORD USED IS SUCH SHARE HOLDERS AND SUCH SHARE HOLDERS MUST BE BOTH REGISTERED SHARE HOLDERS AS WE LL AS BENEFICIAL SHARE HOLDERS. THUS, THE DEEMED DIVIDEND CAN BE ASSESSED ONLY IN T HE HANDS OF THE PERSON WHO IS SHARE HOLDER IN THE LENDER COMPANY AND NOT IN THE H ANDS OF THE PERSON OTHER THAN THE SHARE HOLDER. IN THIS CASE, THE TWIN CONDITION THAT SUCH SHARE HOLDERS SHOULD BE REGISTERED AS WELL AS BENEFICIAL SHARE HOLDERS, IS NOT FULFILLED. THIRDLY, WE ALSO HOLD THAT THE SHARE HOLDERS WERE HAVING SUBSTANTIAL DEPO SITS WITH THE LOAN GIVING 5 COMPANY. SUCH ADVANCES GIVEN BY THE SAID COMPANY CA N, AT THE MOST, BE ATTRIBUTED TOWARDS THE DEPOSITS AND NOT TOWARDS THE DISTRIBUTI ON OF THE ACCUMULATED PROFITS. CONSIDERING ALL THESE ASPECTS, WE SUSTAIN THE ORDER OF THE CIT(A) ON THIS GROUND. 6. THE SECOND GROUND IN REVENUES APPEAL IS AGAINST RESTRICTING THE DISALLOWANCE OUT OF THE INTEREST ON BORROWED CAPITA L. THE ASSESSING OFFICER DISALLOWED THE INTEREST PAID TO THE FOLLOWING PERSO NS : SL. NO. NAME OF THE PARTY AMOUNT OF LOAN AMOUNT OF INTEREST 1 B.P. AGARWAL PROPERTIES 30,00,000 2,37,600 2 SHIV CHARAN AGARWAL 7,00,000 55,400 3 HI-TECH CONTAINERS 23,42,959 1,52,293 TOTAL RS.4,45,333 7. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. THE C IT(A) HAS CONFIRMED THE ADDITION OF RS.1,15,200/-. THE ADVANCES OF RS.14,40 ,000/- WERE MADE TO HI-TECH CONTAINERS ON 06.04.2005 ON THE BASIS OF THE FACTUA L FINDING THAT THE ASSESSEE HAS BORROWED ON 04.04.2005 FROM FORTUNE BUILDWELL (P) L TD. THUS, THERE WAS NEXUS BETWEEN BORROWING AND LENDING. THE BALANCE AMOUNTS DELETED AS THE REVENUE HAS FAILED TO ESTABLISH NEXUS BETWEEN THE BORROWING FUN DS AND THE DIVERSION OF THE SAME FOR THE NON-BUSINESS PURPOSE OR SAY INTEREST F REE ADVANCES TO THE SISTER CONCERN WITHOUT ANY BUSINESS NEED. THE LEARNED ARS CONTENTION THAT THE ADVANCES MADE TO B.P. AGARWAL PROPERTIES WERE TRADE ADVANCES AND THE PARTY WAS NOT RELATED 6 TO THE ASSESSEE AND THESE WERE ALSO OLD ADVANCES CO MING FROM THE PAST YEARS. THEREFORE, WE HOLD THAT REVENUE FAILED TO ESTABLISH NEXUS BETWEEN THE BORROWED FUNDS AND THESE ADVANCES. THERE IS NOTHING ON RECOR D WHICH COULD SHOW THAT THESE ADVANCES WERE NOT TRADE ADVANCES. HENCE CIT(A) WAS JUSTIFIED IN DELETING THE SAME. FURTHER, IN RESPECT OF SHRI SHIV CHARAN AGARW AL ALSO, THE FINDING OF CIT (A) IS THAT THIS AMOUNT WAS RECEIVED ON THE LAST DAY OF THE FINANCIAL YEAR. NO INTEREST WAS PAYABLE FOR THE YEAR. NOTHING HAS BEEN SAID BY THE REVENUE AGAINST THIS FINDING. THEREFORE, CONSIDERING ALL THESE ASPECTS, WE SUSTAIN THE ORDER OF CIT(A) AND DISMISS THE GROUND RELATING TO THIS ISSUE. 8. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14.10.2011. SD/- SD/- (H.S. SIDHU) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT M EMBER DATED: 14 TH OCTOBER, 2011 *AKS/- COPY OF THE ORDER FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) BY ORDER 4. CIT, CONCERNED 5. DR, ITAT, AGRA 6. GUARD FILE ASSISTANT REGISTRAR TRUE COPY