Shri Surendra Singh Hora, Indore V. The Assistant Commissioner Of Income Tax 4(1), Indore

ITA 499/IND/2010

• Counselvise Citation: 49922714 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 23-08-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 20-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARUN DEWAN
• Keywords: Business income; Salary income; Deemed dividend
• Section: 143(3); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARM A, A.M. PAN NO. : AAYPH8175P I.T.A.NO.499/IND/2010 A.Y. : 2007-08 SHRI SURENDRA SINGH HORA, ACIT, 191-192, TRANSPORT NAGAR, VS 4(1), INDORE. INDORE. APPELLANT RESPONDENT APPELLANT BY : SHRI ANIL KAMAL GARG, C. A. RESPONDENT BY : SHRI ARUN DEWAN, SR. DR DATE OF HEARING : 20.09.2011 DATE OF PRONOUNCEMENT : 22.09.2011 O R D E R PER R. C. SHARMA, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A)-II, INDORE, DATED 30.03.2010 FOR THE ASS ESSMENT YEAR 2007-08, IN THE MATTER OF ORDER PASSED BY THE ASSES SING OFFICER U/S 143(3) OF THE INCOME-TAX ACT, 1961, DAT ED 29.12.2009. -: 2: - 2 2. FOLLOWING TWO EFFECTIVE GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE :- 1(A) THAT THE LD. CIT(A) GROSSLY ERRED, BOTH ON FAC TS AND IN LAW, IN CONFIRMING ADDITION OF RS. 14,22,809/- ON ACCOUNT OF DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME-TAX ACT, 1961, MADE BY THE ASSESSING OFFICER BY NOT ACCEPTING THE MATERIAL FACT AND TRANSACTIONS OF LOANS BETWEEN THE APPELLANT AND LENDER COMPANY WERE OUT OF PURVIEW OF DEEMED DIVIDEND IN VIEW OF EXEMPTION UNDER SUB-CLAUSE (II) TO SECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961. (B) THAT, THE LD. CIT(A) GROSSLY ERRED IN CONFIRMING THAT THE LOAN TRANSACTION BETWEEN THE APPELLANT AND THE LENDER COMPANY WERE NOT CARRIED OUT IN THE ORDINARY COURSE OF BUSINESS OF THE LENDER COMPANY. 2. THAT, THE LD. CIT GROSSLY ERRED, BOTH ON FACTS AND IN LAW, IN MAINTAINING ADDITION OF RS. -: 3: - 3 2,05,725/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PERQUISITE U/S 17(2)(VI) OF THE ACT. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUSED. IN THE COURSE OF ASSESSMENT, THE AO TREATE D THE LOAN RECEIVED BY THE ASSESSEE FROM M/S. DHARAM DEVELOPER S & FINVEST LIMITED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE INCOME-TAX ACT, 1961, AFTER HAVING THE FOLLOWING OB SERVATIONS :- 3. ASSESSEE IS HAVING THE SHAREHOLDING OF 81.52 % I N M/S. DHARAM DEVELOPERS & FINVEST LIMITED. FURTHER, ASSESSEE HAS RECEIVED LOAN FROM M/S DHARAM DEVELOPE RS & FINVEST LIMITED IN THE CONCERNED ASSESSMENT YEAR. 3.1 VIDE Q.NO.15 OF THIS OFFICE LETTER DATED 22.09. 2009, ASSESSEE WAS ASKED TO GIVE COMPLETE DETAILS OF LOAN TAKEN. ASSESSEE SUBMITTED HIS REPLY ON 05/10/2009 I N FOLLOWING FORMAT :- -: 4: - 4 NAME OF PARTY PAN OPENING BALANCE AS ON 01.04.2006 ADDITION DURING THE YEAR CLOSING BALANCE M/S. DHARAM DEVELOPERS FINVEST LIMITED AABCD4093L (-)31,54,552/- 76,14,474/- 40,71,431/- 3.2 THEREFORE, ASSESSEE IS RECEIVING LOAN FROM M/S. DHARMA DEVELOPERS & FINVEST LTD. IN WHICH ASSESSEE IS HAVING SUBSTANTIAL INTEREST. SO, VIDE LETTER DATED 08/12/2009, ASSESSEE WAS SHOW- CAUSED AS TO WHY THE PROVISIONS OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) SHOULD NOT BE INVOKED WITH RESPECT TO THE COMPANY M/S. DHARAM DEVELOPERS & FINVEST LTD. 3.3 ASSESSEE MADE THE SUBMISSION ON 14/12/2009. ASSESSEE SUBMITS IN PARA (1)(II) :- THE MAIN OBJECTS OF THE ABOVE NAMED COMPANY IS TO CARRY ON THE BUSINESS OF BUILDERS, CONTRACTORS, LEASING, FINANCE, MONEY LENDING AND INVESTMENT. HE FURTHER SUBMITS IN PARA (1)(V) :- -: 5: - 5 THAT, ON A PERUSAL OF THE AUDITED FINANCIAL STATEMENTS ON THE ABOVE NAMED COMPANY, IT SHALL BE OBSERVED BY YOUR GOOD SELF THAT THE SUBSTANTIAL PAR T OF INCOME OF THE COMPANY IS FROM MONEY LENDING ONLY. ASSESSEE IN PARA (1)(VI) MENTIONS :- THAT, THE ASSESSEE HAD BORROWED THE AMOUNT STATED IN PARA (I) SUPRA FROM THE ABOVE NAMED COMPANY, ON INTEREST BASIS AND SUCH LOAN WAS GIVEN BY THE COMPANY DURING THE ORDINARY COURSE OF BUSINESS OF MONEYLENDING OF SUCH COMPANY. THE ASSESSEE HAD ALSO PAID A SUM OF RS. 77,950/- TO THE ABOVE NAMED COMPANY ON ACCOUNT OF INTEREST. ASSESSEE CONCLUDES IN PARA (1)(VII) BY STATING :- THAT, UNDER THE EXCLUSION CLAUSE (II) OF SECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961,, ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY WOULD NOT FALL WITHIN THE MISCHIEF OF -: 6: - 6 DEEMED DIVIDEND. IN VIEW OF SUCH POSITION OF THE LA W AND ABOVE STATED FACTS, IT SHALL BE APPRECIATED BY YOUR GOOD SELF THAT THE AMOUNT OF LOAN/ADVANCE TAKEN BY THE ASSESSEE FROM THE ABOVE NAMED COMPANY WOULD NOT FALL WITHIN THE AMBIT OF DEEMED DIVIDEND UNDER THE PROVISIONS OF SECTION 2(22)(E) O F THE ACT. 4. THE AO DID NOT IMPRESS BY ASSESSEES SUBMISSIONS AND ADDED THE AMOUNT OF LOAN U/S 2(22)(E). BY THE I MPUGNED ORDER, THE LD. CIT(A) CONFIRMED THE AOS ACTION TO THE EXTENT OF RS. 14,22,809/- (BEING AMOUNT OF ACCUMULATED PROFIT OF DDFL) AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEF ORE US. 5. CONTENTION OF THE LD. AUTHORIZED REPRESENTATIVE WAS THAT THE ASSESSEE IS COVERED BY THE EXCLUSION CLAUS E (II) OF SECTION 2(22)(E) OF THE ACT, ACCORDING TO WHICH ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER BY A COMPANY IN THE ORDI NARY COURSE OF ITS BUSINESS WHERE THE LENDING OF MONEY I S SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY WOU LD NOT FALL WITHIN THE MISCHIEF OF DEEMED DIVIDEND. OUR ATTENTI ON WAS DRAWN TO THE OBJECT CLAUSE OF THE DDFL, WHICH PROVI DED THAT -: 7: - 7 MONEYLENDING WAS ONE OF THE MAIN OBJECTS OF THE ASS ESSEE COMPANY. EVEN DURING THE YEAR UNDER CONSIDERATION, OUT OF GROSS INCOME OF RS. 30.39 LAKHS, THE INTEREST INCOM E WAS TO THE TUNE OF RS. 24.28 LAKHS WHICH WORKS OUT TO BE 7 9.91 % OF THE GROSS INCOME. SIMILARLY, IN THE IMMEDIATELY PRE CEDING YEAR, INTEREST INCOME EARNED BY THE ASSESSEE WAS 60.63 % OF THE GROSS RECEIPTS. OUR ATTENTION WAS ALSO DRAWN TO THE AUDITED BALANCE SHEET OF THE DDFL, WHICH HAS SHOWN DEBTORS FOR MONEYLENDING BUSINESS AT RS. 73.99 LAKHS, AS AGAINS T VALUE OF BUILDING SITUATED AT RS. 57.07 LAKHS FROM WHICH REN TAL INCOME OF RS. 6.03 LAKHS WAS SHOWN. WITH REGARDING TO CHAR GING LOW RATE OF INTEREST FROM THE ASSESSEE, THE CONTENTIONS OF LD. AUTHORIZED REPRESENTATIVE WAS AS UNDER :- THE COMPANY HAD TAKEN INTO CONSIDERATION THAT THE APPELLANT HAD PROVIDED LOANS TO THE COMPANY AT A CONCESSIONAL RATE OF 6 % TO 8 % FROM TIME TO TIME I N EARLIER YEARS; WHEREAS OTHER CUSTOMERS HAD NEVER GIVEN ANY SINGLE PENNY TO THE COMPANY AS LOAN. THE COMPANY HAD ALSO TAKEN INTO CONSIDERATION THAT THE APPELLANT HAD SOUGHT SIZABLE CREDIT FACILITY TO THE -: 8: - 8 EXTENT OF RS. 1.00 CRORE WHEREAS CREDIT FACILITY GRANTED BY IT TO OTHER CUSTOMERS WAS OF SUBSTANTIAL LY LOWER AMOUNT. IT SHALL BE APPRECIATED THAT BIG VOLU ME OF THE BUSINESS ALWAYS YIELD A COMPARATIVELY LOWER RATE OF RETURN. THE COMPANY HAD ALSO TAKEN INTO CONSIDERATION SECURITY ASPECT. THE LOAN FACILITIES GRANTED BY THE COMPANY TO OTHER CUSTOMERS WERE FULLY UNSECURED WHEREAS THE APPELLANT HAD NOT ONLY GIVEN THE PROMISSORY NOTES TO THE COMPANY BUT HAD ALSO OFFERED SOME SECURITY IN FORM OF DEPOSIT OF TI TLE DEEDS OF IMMOVABLE PROPERTIES OWNED. IN OTHER WORDS, FOR LOANS TO OTHER CUSTOMERS, THE COMPANY WAS EXPOSED RISK OF BAD-DEBTS WHEREAS FOR CREDIT FACILITY TO THE APPELLANT, SUCH RISK WAS ALMOST NEGLIGIBLE. AT LAST, FOR PROVIDING LOANS TO OTHER CUSTOMERS, THE COMPANY WAS REQUIRED TO INCUR ADMINISTRATIVE EXPENDITURE FOR RECOVERY OF LOANS WHEREAS IN THE CASE OF THE APPELLANT, SUCH EXPENSES WERE NOT REQUIRED TO BE INCURRED. -: 9: - 9 6. IN VIEW OF THESE CONTENTIONS, HE VEHEMENTLY ARGUED THAT BOTH THE LOWER AUTHORITIES HAVE IGNORED THE CL AUSE (II) OF SECTION 2(22)(E) ACCORDING TO WHICH ASSESSEE DOES N OT FALL WITHIN THE MISCHIEF OF SECTION 2(22)(E) OF THE ACT. 7. ON THE OTHER HAND, THE LD. SENIOR D.R. RELIED ON TH E ORDER OF LOWER AUTHORITIES. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AN D FOUND FROM RECORD THAT THE ASSESSEE WAS HOLDING 81.52 % E QUITY SHARES IN DDFL. DURING THE YEAR, THE ASSESSEE HAS R ECEIVED LOAN ON INTEREST FROM DDFL, WHICH WAS TREATED BY TH E ASSESSING OFFICER AS DEEMED DIVIDEND. WE HAD MINUTE LY GONE THROUGH THE OBJECT CLAUSE OF THE MEMORANDUM OF ASSO CIATION OF DDFL AND ITS SOURCE OF INCOME AND FOUND THAT FIN ANCING WAS ONE OF THE MAIN OBJECTS OF THE DDFL AND AMOUNT OF LOAN WAS GIVEN BY IT IN THE ORDINARY COURSE OF ITS MONEY LENDING BUSINESS. EVEN THE AUDITED PROFIT AND LOSS ACCOUNT NOT ONLY FOR THE YEAR UNDER CONSIDERATION BUT ALSO OF PRECEDING YEAR CLEARLY INDICATED MAJOR SOURCE OF INCOME OUT OF INTEREST ON LOAN. MERELY BECAUSE ASSESSEE BEING DIRECTOR OF THE COMPA NY WAS -: 10: - 10 CHARGED LOW RATE OF INTEREST AS COMPARED TO THE OTH ER PARTIES TO WHOM ADVANCE WAS GIVEN BY DDFL AND THE FREQUENCY OF LOAN TRANSACTION WERE MORE, THE AO CONCLUDED THAT THE A DVANCE WAS NOT GIVEN TO THE ASSESSEE UNDER THE NORMAL COUR SE OF ITS BUSINESS. WE DO NOT FIND ANY MERIT IN THE AOS CONC LUSION. THE ASSESSEE WAS HOLDING 81.53 % EQUITY SHARES IN DDFL WHICH HAVE ADVANCED LOANS TO ASSESSEE AT A COMPARATIVE LO W RATE OF INTEREST BECAUSE ASSESSEE HAD PROVIDED ADEQUATE SEC URITY AGAINST THE LOAN. FURTHERMORE, IT IS THE BORROWER A ND LENDER WHO HAS TO DECIDE THE TERMS AND CONDITIONS ON WHICH ADVANCE CAN BE MADE. IF BY PROVIDING SUFFICIENT SECURITY TH E ASSESSEE HAS BEEN ABLE TO PROCURE LOAN AT COMPARATIVELY LOW RATE OF INTEREST, THE SAME CANNOT BE BLAMED BY AO. FURTHER FREQUENCY OF LOAN GIVEN TO ASSESSEE WILL NOT ALTER THE NATURE OF ADVANCE GIVEN TO ASSESSEE OR THE NATURE OF BUSINESS OF LEND ER COMPANY. DDFL WAS AN INDEPENDENT ENTITY, WHICH HAVE TO TAKE DECISION REGARDING RATE OF INTEREST DEPENDING UPON SECURITY OF LOAN OFFERED, STANDING OF BORROWER AND ITS ANTECEDENT. S INCE THE LOAN TO THE ASSESSEE WAS WELL SECURED AS COMPARED T O THE LOANS GIVEN TO OTHER PARTIES, THEREFORE, RATE OF IN TEREST CHARGED -: 11: - 11 BY DDFL WAS BOUND TO BE LOWER AS COMPARED TO OTHER UNSECURED LOANS. LOW RATE OF INTEREST CANNOT BE MAD E A REASON FOR IGNORING EXCLUSION CLAUSE (II) PROVIDED UNDER S ECTION 2(22)(E) OF THE ACT. AS PER OUR CONSIDERED VIEW, AD VANCE WAS GIVEN BY DDFL IN THE ORDINARY COURSE OF ITS BUSINES S OF MONEYLENDING, THEREFORE, THE ISSUE IS SQUARELY COVE RED BY EXCLUSION CLAUSE (II) OF SECTION 2(22)(E). WE ARE, THEREFORE, IN AGREEMENT WITH THE DETAILED CONTENTIONS OF THE LD. AUTHORIZED REPRESENTATIVE TO THE EFFECT THAT THIS PART OF ORDE R PASSED BY LOWER AUTHORITIES ARE DEVOID OF ANY MERITS. ACCORDI NGLY, WE REVERSE THE FINDING AND CONCLUSION OF THE LOWER AUT HORITIES AND DIRECT THE AO TO DELETE THE ADDITION MADE U/S 2(22) (E) OF THE ACT AMOUNTING TO RS. 14,22,809/-. 9. THE AO HAS ALSO ADDED AN AMOUNT OF RS. 2,05,725/- ON ACCOUNT OF PERQUISITE U/S 17(2)(VI) OF THE INCOM E-TAX ACT, 1961, ON THE PLEA THAT INTEREST CHARGED FROM THE AS SESSEE WAS LOWER THAN THE INTEREST CHARGED FROM OTHER BORROWER S, THEREFORE, LOWER INTEREST CHARGED BY THE ASSESSEE C ONSTITUTED PERQUISITE IN ASSESSEES HANDS U/S 17(2)(VI) OF THE INCOME-TAX ACT, 1961. CONTENTION OF LD. AUTHORIZED REPRESENTAT IVE WAS -: 12: - 12 THAT ENTIRE AMOUNT OF LOAN BORROWED BY THE ASSESSEE WAS DEPLOYED BY HIM IN HIS SHARE TRADING BUSINESS ONLY, THEREFORE, IF ANY ADDITION ON ACCOUNT OF NOTIONAL BENEFIT OF I NTEREST IS ADDED TO THE ASSESSEES INCOME, THEN A CORRESPONDIN G DEDUCTION WOULD BE REQUIRED TO BE GIVEN U/S 36(1)(I V) OF THE ACT OUT OF HIS BUSINESS INCOME CHARGEABLE TO TAX U/ S 28 OF THE ACT. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND FOUND THAT THE ASSESSEE AS A DIRECTOR OF DDFL W AS IN RECEIPT OF SALARY INCOME. THE BENEFIT RECEIVED BY T HE ASSESSEE IN THE FORM OF LOWER RATE OF INTEREST, ON THE LOANS ADVANCED BY DDFL CONSTITUTES PERQUISITE IN THE HANDS OF THE ASS ESSEE WITHIN THE MEANING OF SECTION 17(2)(VI) OF THE INCO ME-TAX ACT, 1961. THEREFORE, THE AO WAS JUSTIFIED IN ADDING THE SAID AMOUNT U/S 17(2)(VI) OF THE INCOME-TAX ACT, 1961. T HE CONTENTION OF THE LD. AUTHORIZED REPRESENTATIVE TO THE EFFECT THAT ADDITION ON ACCOUNT OF NOTIONAL BENEFIT OF INT EREST SHOULD BE ALLOWED AS A DEDUCTION U/S 36(1)(IV) WHILE COMPU TING BUSINESS INCOME HAS NO MERIT, IN SO FAR AS DEDUCTIO N U/S 36(1)(VI) CAN BE GIVEN ONLY FOR THE INTEREST WHICH IS PAID OR -: 13: - 13 PAYABLE ON THE LOAN TAKEN BY THE ASSESSEE IN THE OR DINARY COURSE OF ITS BUSINESS. HERE THE ASSESSEE HAS RATHE R TAKEN A BENEFIT BY WAY OF LOWER RATE OF INTEREST, THEREFORE , THE AMOUNT OF ADDITION MADE U/S 17(2)(VII) CANNOT BE ALLOWED A S A DEDUCTION U/S 36(1)(IV) OF THE INCOME-TAX ACT, 1961 . 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D IN PART, IN TERMS INDICATED HEREINABOVE. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 22 ND SEPTEMBER, 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 22 ND SEPTEMBER, 2011. CPU* 2122