AL-AZI POLYMERS, MUMBAI V. ASST CIT WD 21(3), MUMBAI

ITA 633/MUM/2013

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0636 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-04-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 23-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR YADAV
• Keywords: Question of law; Deemed dividend
• Section: 80HHC; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A, MUMBAI BEFORE SHRI D.T. GARASIA, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.633/M/2013 ASSESSMENT YEAR: 2009-10 M/S. AL-AZI POLYMERS, 1 NET INDUSTRIAL ESTATE, ANDHERI KURLA ROAD, ANDHERI EAST, MUMBAI 400 072 PAN: AAGFA4589A VS. THE ASST. COMMISSIONER OF INCOME TAX, WARD 21(3), MUMBAI (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI BHARAT GANDHI, A.R. REVENUE BY : SHRI RAJESH KUMAR YADAV, D.R. DATE OF HEARING : 08.01.2018 DATE OF PRONOUNCEMENT : 09.02.2018 O R D E R PER D.T. GARASIA , JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSES SEE AGAINST THE ORDER DATED 30.01.2012 THE COMMISSIONER OF INCO ME TAX (APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)] R ELEVANT TO ASSESSMENT YEAR 2009-10. 2. THE FIRST GROUND RELATES TO ADDITION UNDER SECTI ON 2(22)(E) OF THE ACT. THE SHORT FACTS OF THE CASE ARE THAT DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER (HEREI NAFTER REFERRED TO AS THE AO) NOTICED THAT TWO PARTNERS OF THE ASSESSE E FIRM WERE ITA NO.633/M/2013 M/S. AL-AZI POLYMERS 2 HOLDING 53.76% & 24.61% OF SHARES RESPECTIVELY. DU RING THE COURSE OF HEARING IT WAS EXPLAINED BEFORE THE AO THAT ASSE SSEE HAD PURCHASED MACHINERY FROM M/S. DEEP ENTERPRISES FOR A SUM OF RS.14,56,000/- OUT OF WHICH A SUM OF RS.5,06,000/- WAS PAID FROM THE BOOKS OF ASSESSEE GROUP COMPANY. THEREAFTER, A SSESSEE HAS SHOWN THAT IT IS PAID FROM ASSESSEES GROUP COMPANY . THEREFORE, AO WAS OF A VIEW THAT ASSESSEE FIRM IS NOT REGISTERED SHAREHOLDER WITH COMPANY, BUT THE PAYMENT IS MADE BY THE COMPANY, TH EREFORE, SECTION 2(20)(E) IS APPLICABLE TO THE FACTS OF THE CASE. 3. MATTER CARRIED TO THE LD. CIT(A) AND THE LD. CIT (A) HAS DISMISSED THE APPEAL OF THE ASSESSEE. 4. THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS MAD E TRANSACTIONS WITH THE FIRM WHICH ARE NOT REGISTERED SHARE HOLDER OF THE ASSESSEE COMPANY BUT IT IS A NORMAL BUSINESS TRANSACTIONS W HICH ARE OUT OF PURVIEW OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) O F THE ACT. HE RELIED UPON THE DECISION OF HONBLE DELHI HIGH COUR T IN THE CASE OF CIT VS. AMBASSADOR TRAVELS (P) LTD. 318 ITR 376. T HE LD. A.R. ALSO RELIED UPON THE DECISION OF HONBLE BOMBAY HIG H COURT IN THE CASE OF CIT VS. JIGNESH P. SHAH. 5. ON THE OTHER HAND, THE LD. D.R. RELIED UPON THE ORDER OF REVENUE AUTHORITIES. ITA NO.633/M/2013 M/S. AL-AZI POLYMERS 3 6. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE P ARTIES. WE FIND THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AMBASSADOR TRAVELS (P) LTD. (SUPRA) HELD AS UNDER: THE ASSESSEE WAS A TRAVEL AGENCY AND THE TWO CONCE RNS THAT IT HAD DEALINGS WITH, THAT IS, HRPL AND ATPL WERE ALSO IN THE TOURISM BUS INESS. THE ASSESSEE WAS INVOLVED IN THE BOOKING OF RESORTS FOR THE CUSTOMER S OF THESE COMPANIES AND ENTERED INTO NORMAL BUSINESS TRANSACTIONS AS A PART OF ITS DAY-TO-DAY BUSINESS ACTIVITIES. THE FINANCIAL TRANSACTIONS CANNOT IN ANY CIRCUMSTANCES BE TREATED AS LOANS OR ADVANCES RECEIVED BY THE ASSESSEE FROM THESE TWO CONCERNS. THE TRIBUNAL WAS RIGHT IN COMING TO THE CONCLUSION THAT THE PROVISIONS OF S.2(22)(E) ARE NOT APPLICABLE. NO SUBSTANTIAL QUESTION OF LAW ARISES. CONCLUSION: ASSESSEE, A TRAVEL AGENCY, BOOKING RESORTS FOR THE CUSTOMERS OF THE COMPANIES, THEY WERE NORMAL BUSINESS TRANSACTIONS AND COULD NOT BE TREATED AS DEEMED DIVIDEND UNDER S. (22)(E) BECAUSE OF SHAREHOLDING PATTERN. 7. WE ALSO FIND THAT SIMILAR ISSUE HAD COME UP BEFOR E HONBLE SUPREME COURT IN THE CASE OF CIT VS. MATRU HOUSING WHEREIN HONBLE SUPREME COURT HAS HELD AS UNDER: U/S 2(22)(E), ANY PAYMENT BY A CLOSELY-HELD COMPAN Y BY WAY OF ADVANCE OR LOAN TO A CONCERN IN WHICH A SUBSTANTIAL SHAREHOLDER IS A M EMBER HOLDING A SUBSTANTIAL INTEREST IS DEEMED TO BE DIVIDEND' ON THE PRESUMPT ION THAT THE LOANS OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLD ERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE LEGAL FICTION IN S. 2(22)(E) E NLARGES THE DEFINITION OF DIVIDEND BUT DOES NOT EXTEND TO, OR BROADEN THE CONCEPT OF, A 'SHAREHOLDER'. AS THE ASSESSEE WAS NOT A SHAREHOLDER OF THE PAYING COMPANY, THE 'D IVIDEND' WAS NOT ASSESSABLE IN ITS HANDS. 8. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF HON BLE DELHI HIGH COURT AND HONBLE SUPREME COURT WE ARE OF THE VIEW THAT IT IS A NORMAL BUSINESS TRANSACTION WHICH IS OUTSIDE THE PURVIEW OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. WE ALSO HOLD THAT ONLY A PERSON WHO IS A REGISTERED SHARE HOLDER , THE SECTION 2(22)(E) CAN BE INVOKED. THE DEFINITION OF SHAREHO LDER CANNOT BE ENLARGED BY WAY OF FIXATION TO INCLUDE OTHER PERSON S. WE FIND THAT IN ITA NO.633/M/2013 M/S. AL-AZI POLYMERS 4 THIS CASE THE ASSESSEE HAS MADE PURCHASE AND ASSESS EE IS NOT A REGISTERED SHARE HOLDER AND DIVIDEND CAN BE ASSESSE D ONLY IN THE HANDS OF REGISTERED SHARE HOLDER BUT NOT IN THE HAN DS OF NON SHAREHOLDERS. THEREFORE, RESPECTFULLY FOLLOWING TH E SAME, WE ALLOW THIS GROUND OF APPEAL. 9. THE SECOND GROUND IS WITH REGARD TO CONFIRMATION OF INTEREST INCOME OF RS.2,08,396/- CREDITED TO PROFIT AND LOSS ACCOUNT TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES AND EXCL UDED WHILE COMPUTING THE DEDUCTION UNDER SECTION 80IB. 10. THE SHORT FACTS OF THE CASE ARE THAT THE AO WHI LE GRANTING DEDUCTION U/S. 80IB EXCLUDED A SUM OF RS.2,08,396/- WHICH WAS INTEREST ON FDRS WITH BANK ON THE GROUNDS THAT THE INTEREST INCOME WAS ASSESSABLE UNDER THE HEAD 'INCOME FROM OTHER SO URCES' AND IT WAS NOT DERIVED BY ELIGIBLE ACTIVITY OF INDUSTRIAL UNDERTAKING. 11. MATTER CARRIED TO THE LD. CIT(A) AND THE LD. CI T(A) HAS DISMISSED THE SAME. 12. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES. THE CONTENTION OF THE LD. AR CANNOT BE ACCEPTED. THE PL EAS OF THE ASSESSEE THAT THE INTEREST OF FDRS HAS NEXUS TO THE ACTIVITY OF THE UNDERTAKING CANNOT BE ACCEPTED BECAUSE IN ORDER TO EARNED INCOME OF UNDERTAKING TO BE ELIGIBLE FOR DEDUCTION U/S.80IB T HERE SHOULD BE A DIRECT AND FIRST LEVEL NEXUS BETWEEN THE INCOME EAR NED AND THE ACTIVITY OF THE UNDERTAKING. IN VIEW OF THE DECISIO N LAID DOWN BY THE ITA NO.633/M/2013 M/S. AL-AZI POLYMERS 5 APEX COURT IN THE CASE OF LIBERTY INDIA 317 ITR 218 (SC) THE INTERSECTION FDRS AND MARGIN MONEY EARNED BY THE AS SESSEE CANNOT BE TAKEN AS DERIVED BY THE UNDERTAKING AND HENCE TH E SAME IS NOT ELIGIBLE FOR DEDUCTION U/S.80IB. IN CASE OF SHAH O RIGINALS 232 CTR ITR 228(BOM) IN THE CONTEXT OF SECTION 80HHC ALSO, IT HAS BEEN HELD THAT THE TERM 'DERIVED' IS OF NARROWER CONNOTATION THAN THE TERM ATTRIBUTABLE TO AND POSTULATES THE EXISTENCE OF A D IRECT AND PROXIMATE NEXUS WITH THE EXPORT ACTIVITY. ACCORDINGLY THE GAI N DUE TO EXCHANGE FLUCTUATION ON EEFC A/C HAVING EXPORT PROCEEDS WAS HELD NOT TO BE ELIGIBLE FOR DEDUCTION U/S 80HHC ON GROUNDS THAT TH E NEXUS WITH EXPORTS IS ONLY UPTO THE POINT OF RECEIPT OF THE EX PORT PROCEEDS AND THEREAFTER ANY GAIN DUE TO EXCHANGE FLUCTUATION ON EXPORT PROCEEDS LYING EEFC A/C HAS NO PROXIMATE AND DIRECT NEXUS WI TH EXPORT. THE INCOMES WHICH HAVE NO NEXUS TO EXPORT ARE INDEPENDE NT INCOMES AND NOT THE OPERATIONAL INCOME AND HENCE THEY ARE NOT T O BE REDUCED UNDER EXPLANATION (BAA) OF 80HHC AS HELD IN CASE OF K RAVINDRANATHAN NAIR 295 ITR 228(SC) AND DRESSER RAN D INDIA LTD 232 CTR 52 (BOM). THIS VIEW IS ALSO SUPPORTED BY TH E DECISION IN CASE OF SWORD GLOBAL 122 ITD 103(CHENNAI), GLOBAL V ANTEDGE P. LTD. 1 ITR (TRIB) 326(DEL), ETC. THE ACTIVITY OF MA KING FDR WAS NOT THE BUSINESS ACTIVITY OF THE UNDERTAKING AND HENCE EVEN IF SUCH DEPOSIT IS REQUIRED FOR THE PURPOSE ELIGIBLE BUSINE SS SO FAR AS THE REQUEST OF THE APPELLANT FOR NETTING OF THE INTERES T IS CONCERNED THE SAME CANNOT BE ALLOWED, ONCE THE INTEREST EARNED ON THE FDRS WAS NOT FOR THE PURPOSE OF ELIGIBLE BUSINESS OF THE UND ERTAKING. THE INTEREST EARNED ON FDRS IS ASSESSABLE UNDER THE HEA D INCOME FROM ITA NO.633/M/2013 M/S. AL-AZI POLYMERS 6 OTHER SOURCES WHEREAS THE INTEREST PAID ON LOANS US ED FOR BUSINESS IS ALLOWABLE AS BUSINESS EXPENSE/ DEDUCTION U/S 36(1)( III) AND HENCE THE BUSINESS EXPENSE CANNOT BE SET OFF AGAINST THE INCO ME FROM OTHER SOURCES AND HENCE THE REQUEST OF THE LD. AR FOR NET TING OF INTEREST ALSO CANNOT BE ACCEPTED. THEREFORE THE ALTERNATE PL EA OF THE APPELLANT IN NETTING OF INCOME EARNED THE INTEREST PAID BY TH E ASSESSEE ALSO CANNOT BE ACCEPTED BECAUSE THE INTEREST EARNED IS A SSESSABLE UNDER THE INCOME FROM OTHER SOURCES AND HAS NO DIRECT NEX US WITH THE ACTIVITY OF THE UNDERTAKING. HON'BLE BOMBAY HIGH CO URT IN THE CASE OF ASIAN STAR CO. 326 ITR 56 (BOM) HAS HELD THAT IN TEREST EARNED ON THE FDRS CANNOT BE TREATED AGAINST THE INTEREST INC URRED BY THE ASSESSEE FOR THE PURPOSE OF CLAIMING DEDUCTION U/S. 80HHC. SINCE PROVISIONS OF SEC.80IB ARE PARI-MATERIA TO THE PROV ISIONS OF 80HHC, THEREFORE NETTING OF THE INTEREST CANNOT BE ALLOWED FOR PURPOSE OF COMPUTING DEDUCTION 80IB ALSO. THIS VIEW IS ALSO S UPPORTED FROM THE DECISION IN THE CASE OF LIBERTY FOOTWEARS 287 I TR 339 (P & H). IN VIEW OF THE ABOVE, THIS GROUND OF THE APPEAL IS DISMISSED. 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 09.02.2018. SD/- SD/- (RAJESH KUMAR) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 09.02.2018. * KISHORE, SR. P.S. ITA NO.633/M/2013 M/S. AL-AZI POLYMERS 7 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.