JAYANT H MODI, MUMBAI V. JCIT 12(2), MUMBAI

ITA 4461/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9343 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 10-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 31-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P K SHUKLA
• Assessee Lawyers: VIPUL B JOSHI
• Keywords: Business income; Deemed dividend
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER.. I.T.A. NO.4461/MUM/2010. ASSESSMENT YEAR : 2006-07. SHRI JAYANT H. MODI, JT. COMMISSIONER OF 29, SHARDA SADAN, VS. INCOME TAX- 12(2) 11, S.A. BRELVI ROAD, MUMBAI. FORT, MUMBAI 400 001. PAN AAHPM 5225A APPELLANT. RESPONDENT . APPELLANT BY : SHRI VIP UL B. JOSHI. RESPONDE NT BY : SHRI P.K. SHUKLA. DATE OF HEARING : 10-10-2012 DATE OF PRONOUNCEMENT : 23 -11-2012. O R D E R PER P.M. JAGTAP, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF LEARNED CIT(APPEALS)-23, MUMBAI DATED 22-03-2010. 2. GROUND NO. 1 OF THIS APPEAL INVOLVE THE ISSUE RE LATING TO DISALLOWANCE OF RS.25,37,548/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) U/S 14A OF THE ACT READ WITH RULE 8D OF INCOME-TAX RULE S. 3. THE ASSESSEE IN THE PRESENT CASE IS AN INDIVIDUA L WHO FILED HIS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 31-10-20 06 DECLARING TOTAL INCOME OF RS.3,25,94,140/- WHICH WAS COMPRISING OF INCOME FRO M BUSINESS, SHORT TERM CAPITAL GAIN AND INCOME FROM OTHER SOURCES. IN THE SAID RETURN, DIVIDEND INCOME OF 2 ITA NO.4461/MUM/2010 RS.6,50,986/- RECEIVED BY THE ASSESSEE DURING THE Y EAR UNDER CONSIDERATION WAS CLAIMED TO BE EXEMPT FROM TAX. NO DISALLOWANCE ON A CCOUNT OF EXPENSES INCURRED IN RELATION TO EARNING OF THE SAID INCOME, HOWEVER, WAS MADE BY THE ASSESSEE AS REQUIRED BY THE PROVISION OF SECTION 14A. THE AO, T HEREFORE, WORKED OUT SUCH EXPENSES INCURRED BY THE ASSESSEE IN RELATION TO EA RNING OF EXEMPT DIVIDEND INCOME AT RS.25,37,548/- BY APPLYING RULE 8D OF THE INCOME -TAX RULES AND MADE DISALLOWANCE TO THAT EXTENT U/S 14A. ON APPEAL, THE LEARNED CIT(APPEALS) CONFIRMED THE SAID DISALLOWANCE MADE BY THE AO RELY ING ON THE DECISION OF MUMBAI SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CA PITAL MANAGEMENT 117 ITD 169 (MUM)(SB) WHEREIN IT WAS HELD THAT RULE 8D HAD RETROSPECTIVE APPLICATION. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE DECISIO N OF SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT (SUPRA) HAS BEEN RE VERSED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUF ACTURING CO. LTD. 234 CTR 1 HOLDING THAT RULE 8D IS APPLICABLE PROSPECTIVELY FROM ASSESSMENT YEAR 2008-09. AS FURTHER HELD BY THE HONBLE BOMBAY HIGH COURT, D ISALLOWANCE U/S 14A OF THE ACT FOR THE YEARS PRIOR TO ASSESSMENT YEAR 2008-09 HAS TO BE MADE BY ADOPTING SOME REASONABLE METHOD. KEEPING IN VIEW THE DECISIO N OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. (SUPRA), WE SET ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) CONFIRMI NG THE DISALLOWANCE MADE BY THE AO U/S 14A BY APPLYING RULE 8D AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO RECOMPUTE THE DISALLOWANCE TO B E MADE U/S 14A ON SOME REASONABLE BASIS. 5. GROUND NO. 1 OF THE ASSESSEES APPEAL IS ACCORDI NGLY TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 3 ITA NO.4461/MUM/2010 6. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO.2 OF THIS APPEAL RELATES TO THE ADDITION OF RS.3,38,85,459/- MADE BY THE AO AND CO NFIRMED BY THE LEARNED CIT(APPEALS) ON ACCOUNT OF LOANS TAKEN FROM M/S JMC SECURITIES PVT. LTD. TREATING THE SAME AS DEEMED DIVIDEND U/S 2(22)(E) O F THE ACT. 7. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E HAD RECEIVED LOAN AMOUNT OF RS.551.45 LAKHS FROM M/S JMC SECURITIES PVT. LTD . WHEREIN HE WAS HOLDING 1.53,025 EQUITY SHARES OUT OF TOTAL 3 LAKHS EQUITY SHARES ISSUED. THE ASSESSEE THUS WAS BENEFICIAL OWNER OF SHARES IN THE SAID COMPANY HOLDING MORE THAN 10% SHARES AND SINCE THE SAID COMPANY, NAMELY, M/S JMC SECURIT IES PVT. LTD. HAD ACCUMULATED PROFITS OF RS.3,38,85,459/- AS ON 31-03 -2006, THE AO REQUIRED THE ASSESSEE TO EXPLAIN WHY THE LOAN AMOUNT TO THE EXTE NT OF RS.3,38,85,459/- SHOULD NOT BE BROUGHT TO TAX IN HIS HANDS AS DEEMED DIVIDE ND U/S 2(22)(E). IN REPLY, THE ASSESSEE SUBMITTED THAT ALTHOUGH M/S JMC SECURITIES PVT. LTD. WAS INCORPORATED WITH THE MAIN OBJECT OF CARRYING ON BUSINESS AS SHA RE AND STOCK BROKERS, ITS MEMORANDUM OF ASSOCIATION ALLOWED THE SAID COMPANY TO CARRY ON THE BUSINESS, INTER ALIA, OF LENDING OR ADVANCING MONEY. IT WAS A LSO POINTED OUT THAT THE SAID COMPANY HAD EARNED ONLY INTEREST INCOME OF RS.9,16, 088/- AND COMMISSION IN FINANCE BUSINESS OF RS.3,88,000/ DURING THE YEAR UN DER CONSIDERATION WHICH WAS CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IT WAS CONTENDED THAT LENDING OF MONEY THUS WAS A SUBS TANTIAL PART OF THE BUSINESS OF THE SAID COMPANY AND CONSEQUENTLY IT WAS COVERED UN DER THE EXCLUSION PROVIDED IN CLAUSE (II) OF SECTION 2(22)(E). THIS STAND OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE AO. ACCORDING TO HIM, ALTHOUGH M/S JMC SECUR ITIES PVT. LTD. HAD NOT ENGAGED IN CARRYING ON THE BUSINESS AS SHARE AND ST OCK BROKER IN PURSUANCE OF ITS MAIN OBJECT DURING THE YEAR UNDER CONSIDERATION, LE NDING OF MONEY WAS ONLY ONE OF THE MANY OBJECTS INCORPORATED IN THE MEMORANDUM OF ASSOCIATION AS INCIDENTAL OR 4 ITA NO.4461/MUM/2010 ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECT. HE ALSO NOTED THAT AS PER THE BALANCE SHEET OF THE SAID COMPANY AS ON 31 ST MARCH, 2006, LOANS AND ADVANCES GIVEN WERE ONLY RS.6.99 LAKHS I.E. 1.51% OF THE BALANCE SHEET TOTAL WHEREAS INVESTMENT IN SHARES WAS TO THE EXTENT OF RS.420.65 LAKHS I.E. 91 .05% OF THE BALANCE SHEET TOTAL. HE ALSO NOTED THAT THE GAIN EARNED BY THE SAID COMP ANY ON SALE OF INVESTMENT WAS 92.68% OF THE TOTAL RECEIPT WHEREAS INTEREST INCOME EARNED WAS ONLY 4.38% OF THE TOTAL RECEIPTS. HE HELD THAT THE ANALYSIS OF APPLIC ATION OF FUNDS AS WELL AS THE INCOME COMPOSITION WAS SUFFICIENT TO SHOW THAT MAK ING INVESTMENT IN SHARES WAS A SUBSTANTIAL PART OF THE BUSINESS OF M/S JMC SECUR ITIES PVT. LTD. AND THE CONTENTION OF THE ASSESSEE THAT LENDING OF MONEY WA S A SUBSTANTIAL PART OF THE BUSINESS OF THE SAID COMPANY WAS NOT ACCEPTABLE. HE , THEREFORE, REJECTED THE CONTENTION OF THE ASSESSEE THAT EXCLUSION CLAUSE (I I) OF SECTION 2(22)(E) WAS APPLICABLE IN ITS CASE AND ADDED A SUM OF RS.3,38,8 5,459/- TO THE TOTAL INCOME OF THE ASSESSEE AS DEEMED DIVIDEND U/S 2(22)(E). 8. THE ADDITION MADE BY THE AO ON ACCOUNT OF DEEMED DIVIDEND U/S 2(22)(E) WAS DISPUTED BY THE ASSESSEE IN AN APPEAL FILED BEF ORE THE LEARNED CIT(APPEALS). THE SUBMISSIONS MADE BEFORE THE AO ON THIS ISSUE WE RE REITERATED ON BEHALF OF THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS) IN SUPPORT OF HIS CONTENTION THAT EXCLUSION CLAUSE (II) OF SECTION 2(22)(E) WAS CLEAR LY APPLICABLE. IN SUPPORT OF THIS CONTENTION, RELIANCE WAS PLACED ON BEHALF OF THE AS SESSEE ON THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF JHAMU U. SUGAND VS. DCIT 284 ITR (AT) 82 AND THAT OF AHMEDABAD BENCH OF ITAT IN THE CASE OF ITO VS. KRISHNOMICS LTD. REPORTED IN 308 ITR (AT) 8. THIS CONTENTION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE LEARNED CIT(APPEALS). ACCORDING T O HIM, THE EXCEPTION PROVIDED IN CLAUSE (II) TO SECTION 2(22)(E) WAS APPLICABLE I N THE CASES WHERE LENDING OF MONEY WAS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY AND NOT THE 5 ITA NO.4461/MUM/2010 SUBSTANTIAL PART OF THE BUSINESS INCOME OF THE COMP ANY. HE NOTED THAT THE MAIN OBJECT OF THE JMC SECURITIES PVT. LTD. WAS TO CARRY ON THE BUSINESS OF SHARES AND STOCK BROKERS AND LENDING OF MONEY WAS ONLY ONE OF THE OBJECTS WHICH WAS INCIDENTAL OR ANCILLARY TO THE MAIN OBJECT. HE HELD THAT IT, THEREFORE, COULD NOT BE SAID THAT LENDING OF MONEY CONSTITUTED SUBSTANTIAL PART OF THE BUSINESS OF THE LENDING COMPANY I.E. JMC SECURITIES PVT. LTD. AS RE GARDS THE DECISIONS OF THE TRIBUNAL RELIED UPON BY THE ASSESSEE, THE LEARNED C IT(APPEALS) HELD THAT THE SAME WERE DISTINGUISHABLE ON FACTS INASMUCH AS MONEY LEN DING WAS THE MAIN BUSINESS ACTIVITY OF THE LENDING COMPANIES IN THE SAID CASES . ACCORDINGLY, THE ADDITION MADE BY THE AO U/S 2(22)(E) BY TREATING THE LOAN AMOUNT RECEIVED BY THE ASSESSEE FROM JMC SECURITIES PVT. LTD. TO THE EXTENT OF ACCUMULA TED PROFITS AS DEEMED DIVIDEND WAS CONFIRMED BY THE LEARNED CIT(APPEALS). 9. AT THE TIME OF HEARING BEFORE US, THE LEARNED CO UNSEL FOR THE ASSESSEE MAINLY REITERATED THE SUBMISSIONS MADE ON BEHALF OF THE AS SESSEE BEFORE THE AUTHORITIES BELOW ON THIS ISSUE. HE ALSO PREPARED AND FURNISHED DETAILS OF COMPOSITION OF TOTAL INCOME OF M/S JMC SECURITIES PVT. LTD. FOR THE YEAR UNDER CONSIDERATION AS WELL AS FOR THE IMMEDIATELY PRECEDING FIVE YEARS TO SHOW TH AT INTEREST INCOME CONSTITUTED SUBSTANTIAL PART OF THE BUSINESS INCOME OF THE SAID COMPANY. HE ALSO SUBMITTED THAT WHILE ASCERTAINING THE POSITION OF DEPLOYMENT OF FU NDS, THE AO HAS CONSIDERED THE POSITION OF ONLY THE LAST DAY OF THE PREVIOUS YEAR I.E. 31 ST MARCH, 2005 IGNORING THAT THE MAXIMUM AMOUNT OF LOAN ADVANCED BY M/S JMC SECU RITIES PVT. LTD. DURING THE YEAR UNDER CONSIDERATION WAS RS.95,25,000/- WHICH W AS TO THE EXTENT OF 32% OF THE TOTAL FUNDS AVAILABLE. HE CONTENDED THAT THE ACTIVI TY OF LENDING MONEY THUS WAS A SUBSTANTIAL PART OF M/S JMC SECURITIES PVT. LTD. AN D SINCE THE LOAN AMOUNT IN QUESTION WAS MADE BY THE SAID COMPANY TO THE ASSESS EE IN THE ORDINARY COURSE OF ITS BUSINESS, EXCLUSION CLAUSE (II) TO SECTION 2(22 )(E) WAS CLEARLY APPLICABLE. IN 6 ITA NO.4461/MUM/2010 SUPPORT OF THIS CONTENTION, HE RELIED, INTER ALIA, ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PARLE PLASTICS LT D. 332 ITR 63. 10. THE LEARNED DR, ON THE OTHER HAND, STRONGLY REL IED ON THE ORDERS OF THE AUTHORITIES BELOW IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE THAT EXCLUSION CLAUSE (II) TO SECTION 2(22)(E) WAS NOT APPLICABLE IN THE FACTS OF THE ASSESSEES CASE. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. THE ISSUE FOR OUR CONSIDERATION IN THE PRESENT CONTEXT IS WHETHER THE EXCLUSION CLAUSE (II) OF SECTION 2(22)( E) OF THE ACT IS APPLICABLE IN THE FACTS OF THE PRESENT CASE OR NOT. AS PROVIDED IN TH E SAID CLAUSE, ANY ADVANCE OR LOAN MADE BY A COMPANY TO A SHAREHOLDER OR CONCERN IN W HICH THE SHAREHOLDER HAS A SUBSTANTIAL INTEREST WOULD NOT BE REGARDED AS A DEE MED DIVIDEND U/S 2(22)(E) IF LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSIN ESS OF THE LENDING COMPANY AND THE LOAN OR ADVANCE IS MADE BY THE LENDING COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS. THE EXPRESSION USED IN CLAUSE (II) OF SEC TION 2(22)(E) IS SUBSTANTIAL PART OF THE BUSINESS AND THE SAME HAS BEEN INTERPRETED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PARLE PLASTICS LTD. (SUPRA) CI TED BY THE LEARNED COUNSEL FOR THE ASSESSEE. AS HELD BY THE HONBLE BOMBAY HIGH COURT, THE SAID EXPRESSION DOES NOT CONNOTE AN IDEA OF BEING THE MAJOR PART OR THE PA RT THAT CONSTITUTE MAJORITY OF THE WHOLE. ELABORATING FURTHER, IT WAS EXPLAINED BY THE HONBLE BOMBAY HIGH COURT THAT ANY BUSINESS OF A COMPANY WHICH THE COMPANY DO ES NOT REGARD AS SMALL, TRIVIAL OR INCONSEQUENTIAL AS COMPARED TO THE WHOLE OF THE BUSINESS IS SUBSTANTIAL BUSINESS AND VARIOUS FACTORS AND CIRCUMSTANCES WOULD BE REQU IRED TO BE LOOKED INTO WHILE CONSIDERING WHETHER A PART OF THE BUSINESS OF A COM PANY IS ITS SUBSTANTIAL BUSINESS. IT WAS HELD THAT SOMETIMES A PORTION WHICH CONTRIBU TES A SUBSTANTIAL PART OF THE TURNOVER, THOUGH IT CONTRIBUTES RELATIVELY SMALL PO RTION OF THE PROFIT, WOULD BE A SUBSTANTIAL PART OF THE BUSINESS. SIMILARLY, A PORT ION WHICH IS RELATIVELY SMALL AS 7 ITA NO.4461/MUM/2010 COMPARED TO THE TOTAL TURNOVER, BUT GENERATES A LAR GE PORTION, SAY MORE THAN 50% OF THE TOTAL PROFIT OF THE COMPANY WOULD ALSO BE A SUB STANTIAL PART OF HIS BUSINESS. 12. IN THE PRESENT CASE, INTEREST INCOME EARNED BY M/S JMC SECURITIES PVT. LTD. DURING THE YEAR UNDER CONSIDERATION WAS TO THE TUN E OF RS.9,16,088/- WHICH CONSTITUTED ABOUT 70% OF ITS TOTAL BUSINESS INCOME AMOUNTING TO RS.13,04,088/-. MOREOVER, THE MAXIMUM AMOUNT OF LOAN ADVANCED BY M/ S JMC SECURITIES PVT. LTD. DURING THE YEAR UNDER CONSIDERATION WAS TO THE TUNE OF RS.95,45,000/- WHICH CONSTITUTED 32% OF THE TOTAL FUNDS AVAILABLE WITH T HE SAID COMPANY. IF THESE FACTS AND FIGURES ARE CONSIDERED IN THE LIGHT OF THE DECI SION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF PARLE PLASTICS LTD. (SUPRA), I T BECOMES ABUNDANTLY CLEAR THAT LENDING OF MONEY WAS A SUBSTANTIAL PART OF A BUSINE SS OF M/S JMC SECURITIES PVT. LTD. AND THE LOAN IN QUESTION TO THE ASSESSEE WAS M ADE BY THE SAID COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS. IT, THEREFORE, FOL LOWS THAT THE CONDITIONS STIPULATED IN CLAUSE (II) OF SECTION 2(22)(E) WERE DULY SATISF IED AND THE AMOUNT OF LOAN ADVANCED BY M/S JMC SECURITIES PVT. LTD. TO THE ASS ESSEE COULD NOT BE REGARDED AS A DEEMED DIVIDEND. BEFORE US, THE LEARNED COUNSEL F OR THE AASSESSE HAS ALSO FILED A COPY OF THE ASSESSMENT ORDER PASSED U/S 143(3) OF T HE ACT IN THE CASE OF M/S JMC SECURITIES PVT. LTD. FOR THE YEAR UNDER CONSIDERATI ON I.E. ASSESSMENT YEAR 2006-07 WHEREIN THE NATURE OF THE BUSINESS OF THE SAID COMP ANY WAS CLEARLY INDICATED AS FINANCE AND IT WAS FURTHER MENTIONED IN THE BODY OF ORDER THAT THE SAID COMPANY DURING THE YEAR UNDER CONSIDERATION CONTINUED INTO BUSINESS OF SHORT TERM FINANCE OF IDLE FUNDS. AS SUCH, CONSIDERING ALL THE FACTS O F THE CASE AND KEEPING IN VIEW THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F PARLE PLASTICS LTD. (SUPRA), WE ARE OF THE VIEW THAT THE ADDITION MADE BY THE AO U/S 2(22)(E) ON ACCOUNT OF THE LOAN ADVANCED BY M/S JMC SECURITIES PVT. LTD. TO TH E ASSESSEE BY TREATING THE SAME AS DEEMED DIVIDEND IS NOT SUSTAINABLE AND THE LEARN ED CIT(APPEALS) IS NOT JUSTIFIED 8 ITA NO.4461/MUM/2010 IN CONFIRMING THE SAME. ACCORDINGLY, WE DELETE THE SAID ADDITION AND ALLOW GROUND NO.2 OF THE ASSESSEES APPEAL. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED COURT ON THIS 23 RD DAY OF NOV., 2012. SD/- SD/- (AMIT SHUKLA) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED : 23 RD NOV., 2012. WAKODE COPY TO : 1. APPLICANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. D.R., H-BENCH. (TRUE COPY) BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.