ITO 8(3)(4), MUMBAI V. DEEPAK SHAH, MUMBAI

ITA 5346/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92764 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 16-06-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 01-08-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LOVE KUMAR
• Keywords: Deemed dividend
• Section: 148; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ' D ' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI SANJAY ARORA , ACCOUNTANT MEMBER ITA NO. 5346/MUM/2013 (ASSESSMENT YEAR: 2007 - 08 ) INCOME TAX OFFICER 8(3)(4) VS. SHRI DEEPAK SHAH ROOM NO. 202, 2ND FLOOR AYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 307, SKY FLAMA, SEWREE MUMBAI 400050 PAN - AOZPS2310A APPELLANT RESPONDENT APPELLANT BY: SHRI LOVE KUMAR RESPONDENT BY: NONE DATE OF HEARING: 16.06. 2015 DATE OF PRONOUNCEMENT: 16.06.2015 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) - 18, MUMBAI AND IT PERTAINS TO A.Y. 2007 - 08. 2. FOLLOWING GROUNDS WERE URGED BY REVENUE: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DELETING THE ADDITION OF DEEMED DIVIDEND OF RS.23,70,049/ - MADE U/S.2(22)(E) OF THE INCOME TAX ACT, 1961 WITHOUT APPRECIATING THE FINDINGS OF THE ASSESSING OFFICER THAT THE A SSESSEE, BEING 50% SHAREHOLDER IN M/S. UNIVERSAL FOUNDRY PVT. LTD. HAD ACCEPTED LOAN FROM THE SAID COMPANY, WHICH HAD SUFFICIENT RESERVES OF ACCUMULATED PROFITS ON THE DATE OF SUCH BORROWINGS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW , THE CIT(A) ERRED IN HOLDING THAT THE AO HAS RE - CASTED THE PROFIT & LOSS ACCOUNT ON THE BASIS OF ADDITIONS MADE IN THE ASSESSMENT ORDER OF THE FOR A.Y.2006 - 07, A.Y.2007 - 08 AND A.Y.2008 - 09 ON ACCOUNT OF CAPITAL GAINS , WHICH IS FACTUALLY INCORRECT. 3. ON TH E FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT CURRENT YEAR PROFIT HAS TO BE EXCLUDED FOR COMPUTING ACCUMULATED PROFIT FOR THE PURPOSE OF SEC.2(22)(E) OF THE I.T. ACT WITHOUT APPRECIATING THE FACT THAT EXPLANATION 2 UNDER SECTION 2(22) OF THE I.T. ACT, 1961 PRESCRIBES FOR INCLUDING ALL PROFITS OF THE ITA NO. 5346/MUM/2013 SHRI DEEPAK SHAH 2 COMPANY UP TO THE DATE OF DISTRIBUTION OR PAYMENT OF THE LOAN OR ADVANCE TO THE S HAREHOLDER. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A ) ERRED IN HOLDING THAT THERE IS NO ACCUMULATED PROFIT WITH THE COMPANY M/S. UNIVERSAL FOUNDRY PVT. LTD. DURING THE PREVIOUS YEAR ENDING 31.03.2007 WITHOUT EXAMINING, IN GENERAL, THE PROFIT & LOSS ACCOUNT OF THE SAID COMPANY FOR THE YEAR ENDING 31.03.2007, AND IN PARTICULAR, SCHEDULE VIII THEREOF, WHEREIN THE SAID COMPANY HAS SHOWN PROFIT OF RS.71,14,249/ - (RS.1,35,00,00,000 - RS.63,85,751) ON SALE OF GALAS, WHICH FACT HAS BEEN NARRATED BY THE AO IN PARA 6.3.1 OF THE ASSESSMENT OF THE ASSESSEE. 5. ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN OBSERVING THAT THE COMPANY M/S. UNIVERSAL FOUNDRY PVT. LTD. HAS SHOWN OPENING RESERVES AND SURPLUS AT ( - )RS.3,81,37/ - AND CLOSING RESERVES AND SURPLUS AT ( - )RS.10,61,908/ - WITHOUT APPRECIATING THE FACT THAT NEGATIVE 'RESERVES AND SURPLUS' WAS MAINLY ON ACCOUNT OF THE LOSS OF RS.76,50,000/ - CONTRIVED BY THE COMPANY AT THE FAG END OF THE YEAR, I.E. ON 28.03.2007, ON SALE OF SHARES OF A GROUP COMPANY AND UNTIL SUCH DATE THE ASSESSEE HA D ACCUMULATED PROFITS OF RS.65,88,092/ - ARISING FROM SALE OF GALAS.' 3. THOUGH NOTICE WAS SENT TO THE ASSESSEE WELL IN ADVANCE (AD CARD ON RECORD) NONE APPEARED ON BEHALF OF THE ASSESSEE. WE, THEREFORE, PROCEED TO DISPOSE OF THE APPEAL EXPARTE, QUA ASSESSEE. 4. FACTS NECESSARY FOR DISPOSAL OF THE APPEAL ARE STATED IN BRIEF. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION ASSESSEE DECLARED TOTAL INCOME OF ` 1,29,410/ - . THE RETURN OF INCOME APPEARS TO HAVE BEEN PROCESSED ACCORDINGLY. THEREAFTER NOTICE WAS ISSUED UNDER S ECTION 148 OF THE ACT BY RECORDING THE FOLLOWING REASONS: - IN THE COURSE OF ASSESSMENT PROCEEDINGS IN THE CASE OF UNIVERSAL FOUNDRY P. LTD. FOR A.Y. 2007 - 08, IT WAS NOTICED THAT MR. DEEPAK SHAH HAD ACCEPTED LOAN OF RS.7,56,000. SHRI DEEPAK SHAH IS SHAREH OLDER - DIRECTOR HOLDING SUBSTANTIAL SHARES IN THE COMPANY, UNIVERSAL FOUNDRY P. LTD. THE ACCEPTANCE OF LOAN BEING COVERED BY THE PROVISIONS OF SEC. 2(22)(E) IS LIABLE TO TAXED AS DEEMED DIVIDEND OF THE ASSESSEE. HENCE, I AM SATISFIED THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. NOTICE U/S. 148 IS THEREFORE BEING ISSUED IN THIS CASE. 5. IN RESPONSE TO THE SAID NOTICE ASSESSEE SUBMITTED THAT PROVISIONS OF SECTION 2(22)(E) ARE NEITHER ATTRACTED NOR APPLICABLE TO THE FACTS OF THE CASE ON THE GROUND THAT THE OPENING RESERVE S AND SURPLUS AND THE CLOSING RESERVE S AND SURPLUS BALANCE IS NEGATIVE. THE AO DID NOT ACCEPT THE ITA NO. 5346/MUM/2013 SHRI DEEPAK SHAH 3 CONTENTION OF THE ASSESSEE AND PROCEEDED TO COMPUTE THE DEEMED DIVIDEND UNDER SECTION 2(22)(E ) OF THE ACT. 6. AGGRIEVED, ASSESSEE PREFERRED AP PEAL BEFORE THE CIT(A) CONTENDING, INTER ALIA, THAT THE EXPRESSION ACCUMULATED PROFIT DEFINED IN EXPLANATION 2 OF SECTION 2(22) INCLUDES ALL THE PROFITS OF THE COMPANY UP TO THE DATE OF GIVING LOAN. IN THE CASE OF THE ASSESSEE THE ACCUMULATED PROFIT AS O N THE OPENING AND CLOSING DAY OF THE YEAR ARE NEGATIVE AND HENCE NO ADDITION CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 2(22) OF THE ACT. RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MAYA B. RAMCHAND 16 2 ITR 460 AND ALSO THE DECISION OF THE ITAT IN THE CASE OF SHRI GURINDER SINGH BAWA IN ITA NO. 2075 & 2669/MUM/2010 DATED 16.11.2012. 7. THE LEARNED CIT(A) ANALYSED THE FACTS OF THE CASE IN THE BACKDROP OF THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT AND OBSERVED THAT IN THE ASSESSMENT YEARS 2006 - 07 TO 2008 - 09 ADDITIONS WERE MADE ON ACCOUNT OF CAPITAL GAIN S IN THE CASE OF THE COMPANY WHICH WERE CONFIRMED BY THE CIT(A) AND THUS THE AO HAS RE - CASTED THE PROFIT & LOSS ACCOUNT AND HELD THAT THERE WAS ACCUM ULATED PROFIT AGAINST THE LOSS SHOWN BY THE COMPANY AS ON 31.03.2007 AS PER THE AUDITED BALANCE S HEET WHEREAS THE SAID RECASTING IS NOT PERMISSIBLE UNDER THE INCOME TAX ACT. THE LEARNED CIT(A) HAS TAKEN NOTE OF THE FACT THAT IN THE BALANCE SHEET THE ASSESS EE HAS SHOWN THE OPENING RESERVES AND SURPLUS AT ( - ) ` 3,83,137/ - AND CLOSING RESERVES AND SURPLUS AT ( - ) ` 10,61,908/ - WHICH PROVE THAT THERE IS NO ACCUMULATED PROFIT. BY PLACING RELIANCE UPON THE DECISION OF THE ITAT MUMBAI BENCHES (SUPRA) THE LEARNED CIT(A) OBSERVED THAT AS PER THE CURRENT BALANCE SHEET THE OPENING AND CLOSING BALANCE OF RESERVES AND SURPLUS ARE IN NEGATIVE, IN WHICH EVENT PROVISIONS OF SECTION 2(22)(E) ARE NOT APPLICABLE. HE THUS ALLOWED THE PLEA OF THE ASSESSEE. 8. AGGRIEVED, REVENUE IS IN APPEAL, BEFORE US. NONE APPEARED ON BEHALF OF THE ASSESSEE. THE LEARNED D.R. COULD NOT PLACE ANY CASE LAW TO HIGHLIGHT THAT THE VIEW TAKEN BY THE LEARNED CIT(A) IS CONTRARY TO THE LAW. ON THE OTHER HAND, THE LEARNED CIT(A) RELIED UPON THE DECISION OF T HE HON'BLE BOMBAY HIGH COURT AS WELL AS THE DECISION OF THE ITAT MUMBAI BENCHES IN COMING TO ITA NO. 5346/MUM/2013 SHRI DEEPAK SHAH 4 THE CONCLUSION THAT THE EXPRESSION ACCUMULATED PROFIT INCLUDES THE PROFIT OF THE COMPANY UP TO THE DATE OF GIVING LOAN AND IT SHOULD BE BASED ON THE RE - CASTED PR OFIT & LOSS ACCOUNT. 9. HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT THE ORDER OF THE LEARNED CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH JUNE, 2015. SD/ - SD/ - ( SANJAY ARORA ) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 16 TH JUNE, 2015 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 18 , MUMBAI 4. THE CIT 8 , MUMBAI CITY 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.