DCTT-8(1), MUMBAI V. ELEGANT EATERIES P. LTD, MUMBAI

ITA 5793/MUM/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4323 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 19-10-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 30-10-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP HEDAOO
• Keywords: Deemed dividend
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, I, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI A L GEHLOT, ACCOUNTANT MEMBER I T A NO: 5793/MUM/2009 AND 5794/MUM/2009 (ASSESSMENT YEAR: 2005-06 AND 2006-07) ASSISTANT COMMISSIONER OF INCOME TAX 8(1) APPELLA NT MUMBAI VS ELEGANT EATERIES PVT. LTD. MUMBAI RESPONDENT (PAN: AAACG8656R) APPELLANT BY: MR PRADEEP HEDAOO RESPONDENT BY: MR NITESH JOSHI O R D E R R V EASWAR, PRESIDENT: THESE ARE TWO APPEALS FILED BY THE REVENUE AND THE Y RELATE TO THE ASSESSMENT YEARS 2005-06 AND 2006-07. IDENT ICAL GROUNDS HAVE BEEN RAISED BY THE DEPARTMENT IN BOTH THE YEAR S. 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGE D IN LEASING BUSINESS. THE APPEALS ARISE OUT OF THE ASS ESSMENT ORDERS PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, ON 08.10.2007 AND 21.11.2008 RESPECTIVELY. 3. THE FIRST GROUND RELATES TO THE ALLOWANCE OF INT EREST EXPENDITURE WHILE COMPUTING THE INCOME FROM HOUSE P ROPERTY. THE AMOUNTS INVOLVED FOR THE TWO YEARS ARE ` 20,50,289/- AND ` 8,33,683/- RESPECTIVELY. THE FACTS IN BRIEF ARE TH AT THE ASSESSEE TOOK LOANS FROM ANOTHER COMPANY FOR THE PURPOSE OF ACQUIRING PROPERTY. THEREAFTER THE ASSESSEE BORROWED MONIES FROM HDFC ITA NO: 5793 & 5794/MUM/2009 2 BANK AND UTILIZED THEM FOR REPAYING THE EARLIER BOR ROWINGS. THE INTEREST PAID TO HDFC BANK WAS CLAIMED AS A DEDUCTI ON UNDER SECTION 24(B) OF THE ACT WHILE COMPUTING THE INCOME FROM THE PROPERTY. THE ASSESSING OFFICER DISALLOWED THE SAM E AND IN THE ASSESSMENT YEAR 2002-03 THE DISPUTE REACHED THE TRI BUNAL IN ITA NO: 2094/MUM/2009. BY ORDER DATED 9 TH MARCH 2010, THE TRIBUNAL, APPLYING THE CIRCULAR OF THE CBDT, HELD THAT THE IN TEREST PAID TO HDFC BANK WAS ALLOWABLE AS A DEDUCTION. HOWEVER, T HE MATTER WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER F OR VERIFYING THE FACTS, PARTICULARLY THE FACT OF REPAYMENT OF THE LO AN BORROWED FROM THE COMPANY BY UTILIZING THE BORROWINGS FROM THE BA NK. PARAGRAPH 6 OF THE SAID ORDER IS REPRODUCED BELOW: - 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD OF THE CASE. THE ASSESSEE HAS NOT DISPUTED THAT THE INCOME IS ASSESSABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE ONLY DISPUTE IS REGARDING FINANCIAL CHARGES PAID TO BANK FOR CONSTRUCTION OF THE PROPERTY AT 883, JUHU TARA ROAD, JUHU, MUMBAI, WHICH HAD BEEN LEASED OUT TO FAVOURITE FOOD PVT. LTD. THERE CANNOT BE ANY QUARREL IN PRINCIPLE THAT TO THE EXTENT BORROWED FUNDS HAD BEEN UTILIZED FOR THE PURPOSES OF CONSTRUCTION OF ASSETS LEASED OUT, THE FINANCIAL CHARGES HAD TO BE ALLOWED UNDER THE PROVISIONS OF SECTION 24(B) OF THE ACT. FURTHER, IN VIEW OF CBDT CIRCULAR, THERE CANNOT BE ANY QUARREL ON THE ISSUE REGARDING ALLOWANCE OF FINANCIAL CHARGES IF THE NEW LOAN HAD BEEN UTILIZED FOR REPAYMENT OF OLD LOAN, WHICH WAS EARLIER USED FOR THE CONSTRUCTION OF THE BUILDING. IN ITS REPLY DATED 25.09.2006, FILED BEFORE THE AO, THE ASSESSEE HAD MERELY STATED THAT THE FUNDS BORROWED FROM HDFC TO THE TUNE OF ` 2.55 CRORES HAD BEEN UTILIZED FOR GIVING LOAN TO M/S OCEANIC HOTELS PVT. LTD., FOR BUSINESS PURPOSES AND, THERE WAS NO REFERENCE REGARDING UTILIZATION OF THIS LOAN FOR REPAYMENT OF EARLIER LOAN TO M/S LEELA SCOTTISH LACE PVT. LTD. HOWEVER, BEFORE LD CIT(A), A ITA NO: 5793 & 5794/MUM/2009 3 SPECIFIC PLEA TO THIS EFFECT HAD BEEN MADE WHICH WAS ACCEPTED BY LD CIT(A) BUT THE GRIEVANCE OF THE DEPARTMENT IS THAT THE SAME HAS BEEN ACCEPTED WITHOUT PROPER VERIFICATION PARTICULARLY WHEN NO SUCH PLEA WAS TAKEN BEFORE THE AO. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, WE ARE OF THE OPINION THAT THE MATTER NEEDS TO BE RESTORED BACK TO THE FILE OF THE AO FOR VERIFYING THE FACTS AS CLAIMED BY THE ASSESSEE BEFORE LD CIT(A), PARTICULARLY THE FACT OF REPAYMENT OF UNSECURED LOAN TO THE TUNE OF ` 1,92,00,000/- TO M/S LEELA SCOTTISH LACE PVT. LTD., WHICH HAD ALLEGEDLY BEEN UTILIZED FOR ACQUISITION OF ASSETS LEASED OUT. IN CASE THE ASSESSEE IS ABLE TO ESTABLISH ITS CLAIM, NO DISALLOWANCE IS CALLED FOR TO THE EXTENT THE INTEREST CHARGES WERE RELATABLE TO THE BORROWED FUNDS UTILIZED FOR CONSTRUCTION OF THE IMPUGNED ASSET. WE, ACCORDINGLY, RESTORE THIS ISSUE TO THE FILE OF THE AO TO REMARSHAL THE FACTS IN THE LIGHT OF THE ABOVE OBSERVATIONS. 4. SINCE THERE IS NO DISPUTE THAT THE FACTS ARE THE SAME FOR THE YEARS UNDER APPEAL, RESPECTFULLY FOLLOWING THE AFOR ESAID ORDER, WE UPHOLD THE DECISION OF THE CIT(A) IN PRINCIPLE BUT RESTORE THE MATTER TO THE ASSESSING OFFICER WITH THE SAME DIRECTIONS A S WERE GIVEN IN THE AFORESAID ORDER OF THE TRIBUNAL. GROUND NO.1 F OR BOTH THE YEARS IS THUS DISPOSED OFF. 5. GROUND NO.2 RELATES TO THE ADDITION MADE UNDER S ECTION 2(22)(E) OF THE ACT. THE ADDITION MADE BY THE ASSE SSING OFFICER IS ` 1,74,000/- FOR THE ASSESSMENT YEAR 2005-06 AND ` 84,500/- FOR THE ASSESSMENT YEAR 2006-07. IT IS SEEN FROM THE ASSES SMENT ORDER THAT 62% OF THE SHARES IN THE ASSESSEE COMPANY ARE HELD BY M/S LEELA LACE HOLDING PVT. LTD. (FORMERLY KNOWN AS M/S LEELA SCOTTISH LACE PVT. LTD.). THE BALANCE 38% OF THE SHARES ARE HELD BY ONE SURAJ HANDA. M/S LEELA LACE HOLDING PVT. LTD. ADVA NCED ` 1,17,400/- AND ` 84,500/- TO THE ASSESSEE DURING THE PREVIOUS ITA NO: 5793 & 5794/MUM/2009 4 YEARS RELEVANT TO THE ASSESSMENT YEARS 2005-06 AND 2006-07 RESPECTIVELY. THESE LOANS WERE TREATED BY THE ASSE SSING OFFICER AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE UNDER SECTION 2(22)(E) AND THE AMOUNTS WERE ADDED UNDER THE HEAD INCOME FROM OTHER SOURCES. THE CIT(A) NOTICED THAT THE ABOVE SECTION APPLIES ONLY IF A SHAREHOLDER IS GIVEN LOANS BY A COMPANY U NDER CERTAIN CIRCUMSTANCES AND THAT IN THE PRESENT CASE THE ASSE SSEE WAS NOT A SHAREHOLDER OF M/S LEELA LACE HOLDING PVT. LTD. AND , THEREFORE, THE SECTION HAS NO APPLICATION. IN FACT IT IS THE OTHE R WAY ROUND, NAMELY, THAT THE ASSESSEE COMPANY HAS TAKEN A LOAN FROM ITS SHAREHOLDER. THE CIT(A) THEREFORE DELETED THE ADDITIONS. IN DOI NG SO, HE APPLIED THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2 003-04 IN ITA NO: 7146/MUM/2006 DATED 21.11.2008. 6. THE REVENUE IS IN APPEAL. WE ARE HOWEVER UNABLE TO FIND FAULT WITH THE DECISION OF THE CIT(A) BECAUSE THE A SSESSEE IS NOT A SHAREHOLDER OF M/S LEELA LACE HOLDING PVT. LTD., WH EREAS IT IS THAT COMPANY WHICH HOLDS SHARES TO THE EXTENT OF 62% IN THE ASSESSEE COMPANY. IT IS THUS NOT A CASE OF THE SHAREHOLDER TAKING LOANS FROM THE COMPANY. IT IS A CASE OF THE COMPANY TAKING A LOAN FROM THE SHAREHOLDER. THEREFORE, THE PROVISIONS OF SECTION 2(22)(E) ARE NOT ATTRACTED. IN THE ASSESSMENT YEAR 2003-04, A SIMIL AR FACT SITUATION WAS PRESENT AND THE TRIBUNAL HAS TAKEN THE VIEW THA T THE SECTION CANNOT BE APPLIED TO NON SHAREHOLDERS. THE SAME RE ASONING AND LOGIC APPLIES TO THE FACTS OF THE PRESENT YEARS ALS O. WE, THEREFORE, HOLD THAT THE CIT(A) WAS RIGHT IN DELETING THE ADDI TIONS. THUS GROUND NO. 2 FOR BOTH THE YEARS IS DISMISSED. ITA NO: 5793 & 5794/MUM/2009 5 7. GROUND NOS.3 AND 4 ARE GENERAL AND DO NOT REQUIR E ANY DECISION. 8. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A RE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND OCTOBER 2010. SD/- SD/- (A L GEHLOT) (R V EASWAR) ACCOUNTANT MEMBER PRESIDENT MUMBAI, DATED 22 ND OCTOBER 2010 SALDANHA COPY TO: 1. ELEGANT EATERIES PVT. LTD. LEELA BAUG, SIR M V ROAD ANDHERI (EAST), MUMBAI 400 059 2. ACIT 8(1) 3.CIT-VIII 4.CIT(A)-VIII 5.DR I B ENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI