INSURAMCE ASSISTINDIA P. LTD, MUMBAI V. ACIT (OSD) 2, CITY-2, MUMBAI

ITA 4568/MUM/2010

• Counselvise Citation: 456819914 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 20-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 02-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUNIL KUMAR SINGH
• Assessee Lawyers: MANOHAR VADIA
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AN D SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 4568/MUM./2010 (ASSESSMENT YEAR : 2005-06 ) M/S. INSURANCE ASSIST INDIA PVT. LTD. GRESHAM ASSURANCE HOUSE SIR P.M. ROAD, FORT MUMBAI 400 001 PAN AAACT8809C .. APPELLANT V/S ASSTT. COMMISSIONER OF INCOME TAX (OSD)-2, CITY-2, R.NO.543 AAYAKAR BHAVAN, 101, M.K. ROAD MUMBAI 400 020 .... RESPONDENT ASSESSEE BY : MR. MANOHAR VADIA REVENUE BY : MR. SUNIL KUMAR SINGH DATE OF HEARING 20.09.2011 DATE OF ORDER 30.09.2011 O R D E R PER J. SUDHAKAR REDDY, A.M. THIS APPEAL PREFERRED BY THE ASSESSEE, IS DIRECTED AGAINST THE IMPUGNED ORDER DATED 26 TH FEBRUARY 2010, PASSED BY THE COMMISSIONER (APPEALS)-V, MUMBAI, FOR ASSESSMENT YEAR 2005-06. 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE IS A COMPANY, ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE FOR INSURAN CE INDUSTRIES. THE M/S. INSURANCE ASSIST INDIA PVT. LTD. ITA NO.4568/M/2010 2 ASSESSEE WAS INCORPORATED ON 9 TH JANUARY 2001. FOR THE FINANCIAL YEAR ENDED 31 ST MARCH 2004, RELEVANT TO ASSESSMENT YEAR 2004-05, T HE ASSESSEE HAD EARNED INCOME FROM RETAIL FEES. FOR THE IMPUGNED FI NANCIAL YEAR 2004-05, RELEVANT TO THE ASSESSMENT YEAR 2005-06, THE ASSESS EE CLAIMED TO HAVE CONCENTRATED ON THE DEVELOPMENT OF SPECIALIZED SOFT WARE FOR THE INSURANCE SECTOR AND HAS RECRUITED TECHNICAL STAFF AND INCURR ED EXPENDITURE TOWARDS SALARIES, BUSINESS PROMOTION, TRAVELLING, ADVERTISE MENT, PROFESSIONAL FEES, ETC. THE ASSESSING OFFICER REFERRED TO THE DIRECTOR S REPORT AND AFTER QUESTIONING THE COMPANY, VIDE PARA-3.3 OF HIS ORDER , CAME TO A CONCLUSION THAT THE ASSESSEE HAS NOT SET-UP BUSINESS AND THAT IT WAS ONLY IN THE PROCESSING OF SETTING-UP THE BUSINESS AND, HENCE, T HE EXPENDITURE IN QUESTION, WHICH WAS DEBITED TO THE PROFIT & LOSS AC COUNT, WAS TO BE TREATED AS PRE-OPERATIVE EXPENSES AND DISALLOWED. THE ASSES SING OFFICER ALSO NOTICED THAT THE ASSESSEE HAS OBTAINED AN UNSECURED LOAN OF ` 27,20,888 FROM GLOBAL INSURANCE SERVICES P. LTD., A SISTER CONCERN , AND INVOKED THE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME TAX AC T, 1961 (FOR SHORT THE ACT ) AND MADE AN ADDITION. 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER BEFORE T HE FIRST APPELLATE APPEAL AUTHORITY, BUT WITHOUT ANY SUCCESS. FURTHER AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING G ROUNDS:- 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENSES INCURRED AN D DEBITED BY THE APPELLANT CONSISTING OF SALARY, TRAVELING, BUSINESS PROMOTION ETC. AMOUNTING TO RS.25,81,954/- BY CONSIDERING AS PRE-O PERATIVE EXPENSES. YOUR APPELLANT SUBMIT THAT LOOKING TO THE AND IN LAW, THE APPELLANT IS IN THE BUSINESS OF DEVELOPING SOFTWARE FOR INSURANCE SECTOR AND THE EXPENSES INCURRED ARE AFTER THE COMMENCEMEN T OF THE BUSINESS AND NOT FOR SETTING UP OF A BUSINESS, ARE THEREFORE REVENUE IN NATURE AND NOT CAPITAL EXPENSES. THE LEARNED ASSESS ING OFFICER, THEREFORE, BE DIRECTED TO ALLOW THE SAME. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE ADDITION OF RS.27,21,780/- RECEIVED BY THE APPELLANT DURING THE YEAR FROM M/S. GLOBAL INSURANCE SERVICES PVT. LTD. AS BUSINESS ADVANCE BY TREATING THE SAME AS DEEMED DIV IDEND U/S.2(22)(E) OF THE INCOME-TAX ACT 1961 ON THE GROU ND THAT THE APPELLANT IS THE SHAREHOLDER OF M/S. GLOBAL INSURAN CE SERVICES PVT. LTD. M/S. INSURANCE ASSIST INDIA PVT. LTD. ITA NO.4568/M/2010 3 YOUR APPELLANT SUBMITS THAT LOOKING TO THE FACTS AN D CIRCUMSTANCES OF THE APPELLANTS CASE AND IN LAW, THE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME-TAX ACT 1961 ARE NOT APPLICABLE TO THE A PPELLANT AT ALL, THE LEARNED ASSESSING OFFICER, THEREFORE, BE DIRECTED T O DELETE THE SAID ADDITION. 3. WITHOUT PREJUDICE TO THE ABOVE, IF THE PRE-OPERA TIVE EXPENSES OF RS.25,81,954/- ARE ALLOWED AS REVENUE EXPENSES AND THE BUSINESS ADVANCE RECEIVED FROM M/S. GLOBAL INSURANCE SERVICE S PVT. LTD. OF RS.27,2 1,780/- IS TREATED AS THE DEEMED DIVIDEND U /S.2(22)(E) OF THE INCOME-TAX ACT 1961, THEN THE LEARNED ASSESSING OFF ICER BE DIRECTED TO ALLOW THE SET OFF OF THE SAID EXPENSES OF RS.25,81, 954/- AGAINST THE SAME. 4. BEFORE US, LEARNED COUNSEL, MR. MANOHAR VAIDA, ON B EHALF OF THE ASSESSEE, FILED PAPER BOOK RUNNING INTO 116 PAGES A S WELL AS THE SECOND PAPER BOOK RUNNING INTO EIGHT PAGES AND SUBMITTED T HAT THE ASSESSEE HAD ALREADY EARNED INCOME IN THE PREVIOUS YEAR FROM FEE S AND THAT DURING THE YEAR, THE ASSESSEE HAD ALREADY SET-UP ITS BUSINESS AND WAS SOLICITING CUSTOMERS BY INCURRING EXPENDITURE ON ADVERTISEMENT AS WELL AS BUSINESS PROMOTION. HE SUBMITTED THAT FOR CAPACITY BUILDING, THE ASSESSEE HAD RECRUITED TECHNICAL STAFF AND INCURRED EXPENDITURE BOTH ON TRAVELING AS WELL AS FOR BUSINESS PROMOTION. HE POINTED OUT THAT FOR THE IMMEDIATELY NEXT ASSESSMENT YEAR, THE ASSESSEES EFFORTS BORE FRUITS AND THE ASSESSEE COULD GET CERTAIN CONTRACTS FROM NEW INDIA ASSURANCE COMP ANY, GENERAL INSURANCE CORP., KANTILAL RATILAL CHOKSI, ETC., AND IT HAD EARNED INCOME. THE QUALIFICATION OF THE STAFF WAS GIVEN. HE ALSO SUBMI TTED THAT NON-RECEIVING REMUNERATION DURING THE YEAR CANNOT LEAD TO A CONCL USION THAT THE ASSESSEE HAS NOT SET-UP BUSINESS. HE EMPHASISED ON THE FACT THAT THE ASSESSEE WAS CONTINUOUSLY ADVERTISING THROUGH A P.R. CONSULTANT AND THIS SHOWS THAT IT WAS READY TO TAKE UP ANY ASSIGNMENT. HE RELIED ON THE F OLLOWING CASE LAWS:- WESTERN INDIA VEGETABLE PRODUCTS LTD., (1957) 26 IT R 151 (BOM.); RALLIWOLF LTD., (1980) 121 ITR 262 (BOM.); BOARD BAND SOLUTION P. LTD., 2011-TIOL-258-ITAT-MUM . WHIRLPOOL OF INDIA LTD., (2008) 114 TTJ 211; WHIRLPOOL OF INDIA LTD. (2009) 28 DTR (DEL.) 164; A ND STYLER INDIA LTD. (2009) 113 ITD 55 (PUNE) (TM). M/S. INSURANCE ASSIST INDIA PVT. LTD. ITA NO.4568/M/2010 4 5. ON THE SECOND ISSUE, I.E., SECTION 2(22)(E), LEARNE D COUNSEL SUBMITTED THAT THE ASSESSEE IS NOT A SHARE HOLDER AND, HENCE, THE ADDITION IS BAD-IN- LAW. HE RELIED ON MUMBAI SPECIAL BENCH DECISION OF THE TRIBUNAL IN ACIT V/S BHAUMIC COLOURS P. LTD., 120 TTJ 865 (MUM.) (SB). 6. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER H AND, RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED T HAT THE ASSESSEE HAS NO INCOME WHATSOEVER DURING THE YEAR AND IT WAS IN THE PROCESS OF SETTING-UP OF THE BUSINESS AND THAT UNDER THOSE CIRCUMSTANCES, NO EXPENDITURE CAN BE ALLOWED DURING THE YEAR. HE RELIED ON PARA-5 / PAGE S-4 AND 5 OF THE ORDER IMPUGNED PASSED BY THE COMMISSIONER (APPEALS). ON T HE ADDITION UNDER SECTION 2(22)(E) OF THE ACT, HE RELIED ON THE DECIS ION OF HON'BLE SUPREME COURT IN CIT V/S MUKUNDRAY K. SHAH, 290 ITR 433 (SC ). 7. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAP ERS ON RECORD, AS WELL AS THE CASE LAWS CITED BEFORE US, WE HOLD AS FOLLOWS:- 8. FACTS OF THE CASE SHOW THAT THE ASSESSEE HAD ALREAD Y RECEIVED CONSULTANCY FEES OF ` 2,55,122, IN THE PREVIOUS YEAR ENDED 31 ST MARCH 2004, RELEVANT TO ASSESSMENT YEAR 2004-05. THE ASSESSEE H AS RECRUITED SENIOR MANAGEMENT PERSONNEL. THE ASSESSEE COMPANY IS HEADE D BY MR. ZUBIN PARDIWALA, AS CHIEF I.T. OFFICER, QUALIFIED FROM NI IT AND IT HAS SUCH OTHER QUALIFIED PERSONNEL ON ITS ROLE IN FACT, THE GENUIN ENESS OF THE EXPENDITURE IS NOT IN DISPUTE. THE ASSESSEE ALSO DEMONSTRATED THAT IT HAD APPOINTED THE P.R. AGENCY WITH A MONTHLY PAYMENT OF ` 50,000, TO ADVERTISE AND PROCURE ORDERS. EVIDENCE IN THIS REGARD, AT PAGES-107 TO 11 5 OF THE PAPER BOOK HAS BEEN FILED. COPIES OF CORRESPONDENCE HAVE BEEN PROD UCED TO DEMONSTRATE THAT THE ASSESSEE HAD ACTUALLY SOLICITED BUSINESS D URING THIS PERIOD. ON 4 TH JANUARY 2005, THE ASSESSEE MADE PRESENTATION TO THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA AND IT IS DEMONS TRATED THAT ALL THESE EFFORTS HAD FRUCTIFIED IN THE IMMEDIATELY NEXT YEAR AND THE ASSESSEE COULD SECURE BUSINESS FROM NEW INDIA ASSURANCE CO., GENER AL INSURANCE CORP., M/S. INSURANCE ASSIST INDIA PVT. LTD. ITA NO.4568/M/2010 5 KANTILAL RATILAL CHOKSI. THUS, ON FACTS, WE ARE OF THE CONSIDERED OPINION THAT THE ARGUMENTS OF THE ASSESSEE THAT IT HAD, IN FACT, SET-UP BUSINESS, HAS TO BE ACCEPTED. 9. COMING TO THE CASE LAWS, THE HON'BLE JURISDICTIONAL HIGH COURT IN WESTERN INDIA VEGETABLE PRODUCTS LTD., HELD THAT WH EN THE ASSESSEE IS IN THE BUSINESS OF PURCHASE AND SALE, THE DATE OF FIRST PU RCHASE OF RAW MATERIAL IS TAKEN AS THE ACTUAL DATE OF COMMENCEMENT OF BUSINES S. 10. THE HON'BLE JURISDICTIONAL HIGH COURT IN RALLIWOLF LTD. (SUPRA), HELD AS FOLLOWS:- HELD, THAT THE EXPRESSION SETTING UP MEANS, AS DE FINED IN THE OXFORD ENGLISH DICTIONARY, TO PLACE ON FOOT OR T O ESTABLISH IN CONTRADISTINCTION TO COMMENCE. THE DISTINCTION IS T HAT, WHEN A BUSINESS IS ESTABLISHED AND IS READY TO BE COMMENCE D, THEN IT CAN BE SAID OF THAT BUSINESS THAT IT IS SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSINESS, IT IS NOT SET UP. ANY EXPENDITUR E DURING THE INTERNAL BETWEEN THE SETTING UP OF A BUSINESS AND I TS COMMENCEMENT WOULD BE A PERMISSIBLE DEDUCTION UNDER SECTION 10(2 ) OF THE ACT. IN THIS CASE ALSO, DATE OF FIRST PURCHASE WAS TAKEN AS DATE OF COMMENCEMENT. 11. THE TRIBUNAL, IN BOARD BAND SOLUTION P. LTD. (SURPA ), REFERRED TO THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT AND H ELD THAT SETTING-UP OF THE BUSINESS IS TO BE TAKEN INTO ACCOUNT FOR ALLOWANCE OF EXPENDITURE AND NOT COMMENCEMENT OF BUSINESS. COMMENCEMENT OF BUSINESS FOLLOW SETTING-UP OF BUSINESS. SIMILAR IS THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN WHIRLPOOL OF INDIA LTD. (SUPRA) WHICH WAS UPHELD BY THE HON'B LE DELHI HIGH COURT IN CIT V/S WHIRLPOOL OF INDIA LTD. (SUPRA). APPLYING T HE PROPOSITIONS LAID DOWN IN THESE CASE LAWS, WE HOLD THAT THE ASSESSEE HAS A LREADY SET-UP BUSINESS AND THE EXPENDITURE IN QUESTION IS IN THE REVENUE F IELD AND HAS TO BE ALLOWED AS SUCH. THIS GROUND IS, THUS, ALLOWED. 12. COMING TO GROUNDS NO.2 AND 3, THE UNDISPUTED FACT I S THAT THE ASSESSEE IS NOT A SHAREHOLDER OF GLOBAL INSURANCE S ERVICES PVT. LTD., FROM M/S. INSURANCE ASSIST INDIA PVT. LTD. ITA NO.4568/M/2010 6 WHOM IT HAS RECEIVED A LOAN. WHEN THE ASSESSEE IS N OT A REGISTERED SHAREHOLDER, NO ADDITION CAN BE MADE UNDER SECTION 2(22)(E) OF THE ACT. THE ISSUE NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN BHAUMIC COLOURS P. LTD. (SUPRA), AS WELL AS THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT I N UNIVERSAL MEDICARE PVT. LTD., (2010) 324 ITR 263 (BOM.), WHEREIN IT HAS BEE N HELD THAT IF THE AMOUNT TO BE TAXED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E), THE ASSESSEE SHOULD BE A SHARE HOLDER. THE COMMISSIONER (APPEALS) HAS WRONGLY RELIED ON THE DECISION OF THE TRIBUNAL RENDERED PRI OR TO THE DECISION OF MUMBAI SPECIAL BENCH. IN ANY EVENT, IN VIEW OF THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN UNIVERSAL MEDICARE (SU PRA), WE ALLOW THESE GROUNDS OF THE ASSESSEE. THE JUDGMENT OF THE HON'BL E SUPREME COURT IN MUKUNDRAY K. SHAH (SUPRA), IS NOT APPLICABLE AS IT WAS A CASE OF A SHAREHOLDER. 13. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPTEMBER 2011 SD/- VIJAY PAL RAO JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 30 TH SEPTEMBER 2011 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A), MUMBAI, CONCERNED; (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, I BENCH, ITAT, MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI