M.J. INTERNATIONAL, MUMBAI V. ACIT 12(3), MUMBAI

ITA 6617/MUM/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3977 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 19-10-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 29-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H N MOTIWALLA
• Assessee Lawyers: NARESH K BALODIA
• Keywords: Unexplained cash credit; Question of law; Deemed dividend
• Section: 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 399/MUM/2010 (ASSESSMENT YEAR: 2006-07) ACIT - 12 (3) M/S. M.J. INTERNATIONAL ROOM NO. 121, AAYAKAR BHAVAN 119, JOLLY MAKER CHAMB ER NO. 2 M.K. ROAD, MUMBAI 400020 VS. NARIMAN POIINT, MUMBAI 400021 PAN - AABFM 0179 P APPELLANT RESPONDENT ITA NO. 6617/MUM/2009 (ASSESSMENT YEAR: 2006-07) M/S. M.J. INTERNATIONAL ACIT - 12 (3) C/O. H.N. MOTIWALLA & CO ROOM NO. 121, AAYAKAR BHAV AN 508 SHARDA CHAMBERS VS. M.K. ROAD, MUMBAI 400020 33, NEW MARINE LINES, MUMBAI 020 PAN - AABFM 0179 P APPELLANT RESPONDENT APPELLANT BY: SHRI NARESH K. BALODIA RESPONDENT BY: SHRI H.N. MOTIWALLA O R D E R PER B. RAMAKOTAIAH, A.M. THESE ARE CROSS APPEALS BY THE REVENUE AND ASSESSEE AGAINST THE ORDER OF THE CIT(A) XXII, MUMBAI DATED 12.11.2009. IN ITA NO. 399/MUM/2010 THE REVENUE IS CONTESTING THE ISSUE OF ADDITION MAD E UNDER SECTION 2(22)(E) WHICH WAS DELETED BY THE CIT(A) WHEREAS IN ITA NO. 6617/MUM/2009 THE ASSESSEE IS CONTESTING THE ISSUE OF ADDITION UNDER SECTION 41(1) CONFIRMED BY THE CIT(A) WHERE AS THE A.O. MADE ADDITION UNDER SE CTION 68. ITA NO. 399/MUM/2010 2. IN THIS APPEAL THE REVENUE HAS RAISED FIVE GROUNDS ON THE ISSUE OF ADDITION OF ` 36,11,523/- UNDER SECTION 2(22)(E) OF THE ACT. 3. BRIEFLY STATED, DURING THE COURSE OF ASSESSMENT PRO CEEDINGS THE A.O. NOTICED THAT THE ASSESSEE HAS SHOWN A BALANCE OF ` ,45,43,017/- AGAINST ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 2 M/S. FINE FRAGRANCES PVT. LTD. ON THE LIABILITY SID E OUT OF WHICH AN AMOUNT OF ` 36,11,523/- HAS BEEN RECEIVED DURING THE YEAR. SINC E THE COMPANY IS A SISTER CONCERN OF THE ASSESSEE FIRM AND AS THE PART NERS OF THE FIRM OWN SUBSTANTIAL SHARES IN THE COMPANY THE A.O. SHOW CAU SED THE ASSESSEE WHY THE SAME SHOULD NOT BE TREATED AS DEEMED DIVIDEND U NDER SECTION 2(22)(E). ASSESSEE OBJECTED TO THE SAME STATING THAT THE ASSE SSEE IS NOT A REGISTERED SHAREHOLDER IN THE SAID COMPANY, M/S. FINE FRAGRANC E PVT. LTD. AND RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. C.P. SARATHY MUDALIAR 83 ITR 170 AND CIT VS. RAMESHWARLA L SANWARMAL 83 ITR 628 FOR THE PROPOSITION THAT SHAREHOLDER MEANS A RE GISTERED SHAREHOLDER AND NOT THE BENEFICIAL OWNER. THE A.O., HOWEVER, DID NO T ACCEPT THE PLEA HOLDING THAT THE CONDITIONS SPECIFIED IN SECTION 2(22)(E) H AVE BEEN SATISFIED AS THE SAID COMPANY IS A PRIVATE LIMITED COMPANY AND THE D IRECTORS OF THE COMPANY ARE PARTNERS IN THE FIRM ALSO AND THE THREE PARTNER S ARE HOLDING 24.8%, 11.85% AND 11.85% SHARES OF THE COMPANY AND ACCORDI NGLY HELD THAT PROVISIONS OF SECTION 2(22)(E) ARE ATTRACTED AS PER EXPLANATION 3 TO THE SECTION. HE, THEREFORE, CONSIDERED AN AMOUNT OF ` 36,11,523/- AS TAXABLE DURING THE YEAR. THE CIT(A) CONSIDERED ASSESSEES E XPLANATION AND ALSO THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CA SE OF ACIT VS. BHAUMIK COLOUR (P) LTD. 27 SOT 270 (MUM) (SB), DELETED THE ADDITION AS THE ASSESSEE FIRM IS NOT A SHAREHOLDER IN THE COMPANY AND THE AD DITION SHOULD HAVE BEEN MADE IN THE HANDS OF THE SHAREHOLDER PARTNER, NOT I N THE HANDS OF THE PARTNERSHIP FIRM, I.E. THE ASSESSEE, WHICH IS NOT A SHAREHOLDER. THE REVENUE IS AGGRIEVED. 4. THE LEARNED D.R. SUBMITTED THAT THE FACTS INDICATE THAT THE COMPANY HAS ADVANCED FUNDS TO THE FIRM IN WHICH THE DIRECTO RS OF THE COMPANY ARE ALSO PARTNERS HOLDING SUBSTANTIAL INTEREST AND THE CIT(A)S ACTION IN DELETING THE ADDITION ON THE PRETEXT THAT THE ASSESSEE FIRM IS NOT A SHAREHOLDER IS NOT CORRECT AS THAT CONTENTION WOULD MAKE THE PROVISION REDUNDANT. IT IS THE INTENTION OF THE LEGISLATURE THAT THE FUNDS ADVANCE D TO THE CONCERN IN WHICH THE SHAREHOLDER IS HAVING SUBSTANTIAL INTEREST ALSO COVERED BY THE PROVISIONS OF SECTION 2(22)(E) AND THIS FINER ASPECT HAS NOT B EEN CONSIDERED BY THE SPECIAL BENCH AND ACCORDINGLY HE PRESSED FOR REVERS ING THE DECISION OF THE ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 3 CIT(A). HE ALSO FURTHER SUBMITTED THAT THE FIRM CAN NOT BE A SHAREHOLDER IN THE COMPANY AND THE INDIVIDUAL PARTNERS ARE HOLDING THE SHARES OF THE COMPANY AND ACCORDINGLY IF THE OPINION OF THE SPECI AL BENCH IS TO BE ACCEPTED THEN THERE WILL BE NO CASE OF CONSIDERING THE AMOUNTS ADVANCED TO THE FIRM AS DEEMED DIVIDEND EVENTHOUGH THE PROVISIO NS OF THE IT. ACT SPECIFIES SO. 5. THE LEARNED COUNSEL IN REPLY SUBMITTED THAT THERE I S NO FINDING THAT THE FIRM HAS INVESTED FUNDS AND THERE IS ALSO NO F INDING THAT THE MONEY IS ADVANCED FOR THE BENEFIT OF THE PARTNERS. IT WAS HI S SUBMISSION THAT THE PROVISIONS OF SECTION 2(22)(E) CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER PARTNERS WHETHER THE MONEY WAS RECEIVED DIRECTLY AS A SUBSTANTIAL SHAREHOLDER OR INDIRECTLY THROUGH A CON CERN IN WHICH THE SAID SHAREHOLDER HAS SUBSTANTIAL INTEREST. IN EITHER OF THE CONDITIONS IT IS NECESSARY THAT THE PERSON SHOULD BE A SHARE HOLDER SO AS TO ATTRACT PROVISIONS OF SECTION 2(22)(E). HE ALSO SUBMITTED T HAT THE DECISION OF THE SPECIAL BENCH IN THE CASE OF BHAUMIK COLOUR PVT. LT D. (SUPRA) WAS CONSIDERED AND APPROVED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICARE PVT. LTD. 324 ITR 263 AN D REFERRED TO PARA 9 OF THE JUDGEMENT TO SUBSTANTIATE THAT THE DECISION OF THE CIT(A) IS CORRECT ON FACTS AND LAW. 6. AFTER CONSIDERING THE SUBMISSIONS OF THE L EARNED D.R. AND THE LEARNED COUNSEL WE ARE OF THE OPINION THAT THE DECISION OF THE CIT(A) IS CORRECT BOTH ON FACTS AND ON LAW. IT IS A FACT THAT THE ASSESSEE FIRM RECEIVED ADVANCE OF ` 36,11,523/- FROM M/S. FINE FRAGRANCE PVT. LTD.. IT ALSO A FACT THAT THE PARTNERS OF THE FIRM, SHRI A.J. SHAH HAS 24.18% SH ARE HOLDING IN THE SAID COMPANY AND 50% SHARE IN THE PROFITS OF THE FIRM. M R. J.M. SHAH AND SMT. A.S. MEHTA ARE ALSO HOLDING 11.85% EACH OF SHARING HOLDING M/S. FINE FRAGRANCE PVT. LTD. AND ALSO HAS 40% AND 10% SHARE OF PROFITS RESPECTIVELY IN THE FIRM. IT IS ALSO A FACT THAT THE ASSESSEE FI RM DOES NOT HAVE ANY SHARES IN THE COMPANY AND IT IS NOT THE CASE OF THE REVENU E THAT THESE PARTNERS ARE HOLDING SHARES IN THE COMPANY ON BEHALF OF THE FIRM . THE QUESTION OF ATTRACTING PROVISIONS OF SECTION 2(22)(E), I.E. DEE MED DIVIDEND HAVE BEEN ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 4 ANALYSED BY THE ITAT SPECIAL BENCH IN M/S BHAUMIK C OLOUR (P) LTD. (SUPRA) WHEREIN HELD THAT THE DEEMED DIVIDEND CAN BE ASSESS ED ONLY IN THE HANDS OF THE PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPA NY AND NOT IN THE HANDS OF THE PERSON OTHER THAN THE SHAREHOLDER. THE TRIBU NAL HAS STATED THAT WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTION 2(22 )(E) DO NOT SPELL OUT AS TO WHETHER THE INCOME HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER OR THE CONCERN (NON-SHAREHOLDER). THE PROVISIONS ARE AMBIG UOUS. IT IS THEREFORE NECESSARY TO EXAMINE THE INTENTION BEHIND ENACTING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. . THE INTENTION BEHIND THE P ROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. TH E DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPA NY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTI ON OF THE LEGISLATURE IS THEREFORE TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN. RESPECTFULLY FOLLOWING THE ABOVE SAID DECISION OF THE SPECIAL BENCH OF ITAT THE LEARNED CIT(A) HAS HELD T HAT THE DEEMING PROVISIONS OF SECTION 2(22)(E) CAN ONLY BE APPLIED IN THE HANDS OF THE SHAREHOLDER PARTNERS BUT NOT IN THE HANDS OF THE AS SESSEE FIRM WHEN THE ASSESSEE IS NOT A SHARE HOLDER IN THE SAID COMPANY. 6. THIS ISSUE IS ALSO DECIDED IN THE CASE OF CIT VS. U NIVERSAL MEDICARE P. LTD. 324 ITR 273 (BOM) WHEREIN THE FOLLOWING QUESTI ON HAS BEEN RAISED SPECIFICALLY: - 2. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL IN LAW, WAS RIGHT IN HOLDING THAT THE ASSE SSING OFFICER HAS NOT ESTABLISHED THAT THE MONEY WAS ADVANCED FOR THE BEN EFIT OF ANY SHAREHOLDER AND THE SAME HAS TO BE TAXED IN THE HAN DS OF SUCH SHAREHOLDER WHO OBTAINED THE BENEFIT AND NOT IN THE HANDS OF THE ASSESSEE-COMPANY, FOLLOWING THE RATIO OF THE DECISI ON IN THE CASE OF ASST. CIT V. BHAUMIC COLOUR P. LTD. [2009] 313 ITR 9AT) 1 46 (MUMBAI); 27 SOT 270 [SB}? 7. THE FACTS IN THE SAID CASE WAS THAT THE AMOUNT OF ` 32 LAKHS WAS TRANSFERRED FROM THE BANK ACCOUNT OF A COMPANY BY T HE NAME OF CAPSULATION SERVICES PVT. LTD. (CSPL) TO THE ACCOUNT OF THE ASS ESSEE, UNIVERSAL MEDICARE ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 5 P. LTD. MAINTAINED IN THE CHEMBUR BRANCH OF THE STA TE BANK OF INDIA. ONE MR. VIKRAM TANNAN WAS A DIRECTOR OF CSPL, WHO HELD OVER 10% OF THE EQUITY CAPITAL OF CSPL AND ALSO OVER 20% OF THE EQUITY CAP ITAL OF UNIVERSAL MEDICARE P. LTD. THE A.O., IN THE COURSE OF ASSESSMENT RELIE D ON THE PROVISIONS OF SECTION 2(22)(E) AND TREATED THE AMOUNT OF ` 35,00,000/- AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE AND DIRECTED THE AMOUN T TO BE ADDED BACK TO THE INCOME. IT WAS THE CONTENTION OF THE ASSESSEE T HAT ONE MR. TEREDESAI, VICE PRESIDENT (FINANACE) HAD MISAPPROPRIATED LARGE SUMS OF MONEY AND CONTESTED THE ACTION OF THE A.O. IN TREATING THE AM OUNT AT DEEMED DIVIDEND. IN APPEAL THE COMMISSIONER OF INCOME TAX AFFIRMED T HE ORDER OF THE A.O., SAVE AND EXCEPT WITH A MODIFICATION THAT THE ACTUAL AMOUNT WHICH HAS BEEN RECEIVED BY THE ASSESSEE WAS HELD TO BE ` 32,00,000/- AND NOT ` 35,00,000/-. THE TRIBUNAL, IN APPEAL, HAS REVERSED THE FINDINGS OF THE CIT(A) ON TWO GROUNDS; FIRSTLY, IT WAS HELD THAT THE PROVISIONS O F SECTION 2(22)(E) WOULD BE ATTRACTED IF A LOAN WAS TAKEN BY THE SHAREHOLDER FR OM A CLOSELY HELD COMPANY. IN THE PRESENT CASE THE TRIBUNAL NOTED THA T THE AMOUNT OF FRAUD COMMITTED ON THE PART OF THE ASSESSEE AND THE TRANS ACTION WAS NOT REFLECTED IN THE BOOKS OF ACCOUNT. SECONDLY, THE TRIBUNAL HEL D THAT EVEN OTHERWISE THE AMOUNT WOULD HAVE BEEN TAXED IN THE HANDS OF THE SH AREHOLDER WHO OBTAINED THE BENEFIT AND NOT IN THE HANDS OF THE AS SESSEE, RELYING ON THE DECISION OF THE SPECIAL BENCH IN THE CASE OF ACIT V S. BHAUMIK COLOUR P. LTD. 313 ITR (AT) 146 (MUM); 27 SOT 270 (SB). AMONGST OT HER THINGS THE REVENUE HAS CONTESTED THE ISSUE OF APPLICATION OF P RINCIPLES LAID DOWN BY THE ABOVE SPECIAL BENCH IN THE QUESTION RAISED ABOV E. THE HON'BLE BOMBAY HIGH COURT HAS CONSIDERED THE PROVISIONS AS UNDER: - BY PROVIDING AN INCLUSIVE DEFINITION OF THE EXPRE SSION DIVIDEND, CLAUSE 2(22) BRINGS WITHIN ITS PURVIEW ITEMS WHICH MAY NOT ORDINARILY CONSTITUTE THE PAYMENT OF DIVIDEND. PARLIAMENT HAS EXPANDED THE AMBIT OF THE EXPRESSION DIVIDEND BY PROVIDING AN INCLUS IVE DEFINITION. IN ORDER THAT THE FIRST PART OF CLAUSE (E) OF SECT ION 2(22) IS ATTRACTED, THE PAYMENT BY A COMPANY HAS TO BE BY WAY OF AN ADV ANCE OR LOAN. THE ADVANCE OR LOAN HAS TO BE MADE, AS THE CASE MAY BE, EITHER TO A SHAREHOLDER, BEING A BENEFICIAL OWNER HOLDING NOT L ESS THAN TEN PER CENT OF THE VOTING POWER OR TO ANY CONCERN OF WHICH SUCH A SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTI AL INTEREST. THE TRIBUNAL IN THE PRESENT CASE HAS FOUND THAT AS A MA TTER OF FACT NO LOAN OR ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 6 ADVANCE WAS GRANTED TO THE ASSESSEE, SINCE THE AMOU NT IN QUESTION HAD ACTUALLY BEEN DEFALCATED AND WAS NOT REFLECTED IN T HE BOOKS OF ACCOUNT OF THE ASSESSEE. THE FACT THAT THERE WAS A DEFALCATION SEEMS TO HAVE BEEN ACCEPTED SINCE THIS AMOUNT WAS ALLOWED AS A BUSINES S LOSS DURING THE COURSE OF THE ASSESSMENT YEAR 1996-07. CONSEQUENTLY , ACCORDING TO THE TRIBUNAL THE FIRST REQUIREMENT OF THERE BEING AN AD VANCE OR LOAN WAS NOT FULFILLED. IN OUR VIEW, THE FINDING THAT THERE WAS NO ADVANCE OR LOAN IS A PURE FINDING OF FACT WHICH DOES NOT GIVE RISE TO AN Y SUBSTANTIAL QUESTION OF LAW. HOWEVER, EVEN ON THE SECOND ASPECT WHICH HA S WEIGHED WITH THE TRIBUNAL, WE ARE OF THE VIEW THAT THE CONSTRUCTION WHICH HAS BEEN PLACED ON THE PROVISIONS OF SECTION 2(22)(E) IS CORRECT. S ECTION 2(22)(E) DEFINES THE AMBIT OF THE EXPRESSION DIVIDEND. ALL PAYMENTS BY WAY OF DIVIDEND HAVE TO BE TAXED IN THE HANDS OF THE RECIPIENT OF T HE DIVIDEND NAMELY THE SHAREHOLDER. THE EFFECT OF SECTION 2(22) IS TO PROV IDE AN INCLUSIVE DEFINITION OF THE EXPRESSION DIVIDEND. CLAUSE (E) EXPANDS THE NATURE OF PAYMENTS WHICH CAN BE CLASSIFIED AS A DIVIDEND. CLA USE (E) OF SECTION 2(22) INCLUDES A PAYMENT MADE BY THE COMPANY IN WHI CH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED BY WAY OF AN ADVANCE O R LOAN TO A SHAREHOLDER OR TO ANY CONCERN OF WHICH SUCH SHAREHO LDER IS A MEMBER OR PARTNER, SUBJECT TO THE FULFILMENT OF THE REQUIREME NTS WHICH ARE SPELT OUT IN THE PROVISION. SIMILARLY, A PAYMENT MADE BY A CO MPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER IS TREATED BY CLAUSE (E) TO BE INCLUDED IN THE EXPRESSION DIVIDEND. CONSEQUENTLY, THE EFFECT OF CLAUSE (E) OF SECTION 2(22) IS TO BROADEN THE AMBIT OF THE EXPRESSION DIVIDEND BY INCLUDING CERTAIN PAYMENTS WHICH THE COMPANY HAS MADE BY WAY OF A LOAN OR ADVANCE OR PAY MENTS MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. THE DEFINITION DOES NOT ALTER THE LEGAL POSITION TH AT DIVIDEND HAS TO BE TAXED IN THE HANDS OF THE SHAREHOLDER. CONSEQ UENTLY IN THE PRESENT CASE THE PAYMENT, EVEN ASSUMING THAT IT WAS A DIVIDEND, WOULD HAVE TO BE TAXED NOT IN THE HANDS OF THE ASSE SSEE BUT IN THE HANDS OF THE SHAREHOLDER. THE TRIBUNAL WAS, IN THE CIRCUMSTANCES, JUSTIFIED IN COMING TO THE CONCLUSIO N THAT, IN ANY EVENT, THE PAYMENT COULD NOT BE TAXED IN THE HANDS OF THE ASSESSEE. WE MAY IN CONCLUDING NOTE THAT THE BASIS ON WHICH THE ASSESSE E IS SOUGHT TO BE TAXED IN THE PRESENT CASE IN RESPECT OF THE AMOUNT OF ` 32,00,000/- IS THAT THERE WAS A DIVIDEND UNDER SECTION 2(22)(E) AND NO OTHER BASIS HAS BEEN SUGGESTED IN THE ORDER OF THE ASSESSING OFFICER. FOR THE AFORESAID REASONS, THE FIRST AND SECOND QU ESTIONS WILL NOT GIVE RISE TO ANY SUBSTANTIAL QUESTIONS OF LAW. (EMPHASIS SUPPLIED) 8. THUS THE HON'BLE BOMBAY HIGH COURT HAS UPHELD THE D ECISION OF THE SPECIAL BENCH ON THE PRINCIPLE THAT THE DEEMED DIVI DEND COULD NOT HAVE BEEN TAXED IN THE HANDS OF THE ASSESSEE WHO IS NOT THE SHAREHOLDER. ACCORDINGLY THE DECISION OF THE CIT(A) DELETING THE AMOUNT BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE FIRM IS CORRECT ON THE PR INCIPLES OF LAW AS WELL AS ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 7 ON FACTS. IN VIEW OF THIS, THERE IS NO NEED TO INTE RFERE WITH THE ORDER OF THE CIT(A) AND ACCORDINGLY REVENUES APPEAL IS DISMISSE D. ITA NO. 6617/MUM/2009 9. IN THIS APPEAL THE ASSESSEE HAS RAISED THREE GROUND S ON THE ISSUE OF CONFIRMING THE ADDITION OF ` 1,82,08,880/- UNDER SECTION 41(1) OF THE I.T. ACT, WHICH IS ORIGINALLY BROUGHT TO TAX UNDER SECTION 68 BY THE A.O. 10. BRIEFLY STATED, THE A.O. NOTICED THAT THE ASSESSEE WAS SHOWING OUTSTANDING DEPOSIT OF ` 1,82,08,880/- FROM M/S. CONCORD MOTORS LTD. AND ENQUIRED ABOUT THE NATURE OF THE DEPOSIT. IT WAS SU BMITTED THAT THE SAID COMPANY HAD TAKEN A PROPERTY ON RENT AT D BUILDIN G, SHIV SAGAR ESTATE, DR. ANNIE BESANT MARG, WORLI, MUMBAI FROM M/S. M.J. INTERNATIONAL AND ITS GROUP CONCERN AND HAD MADE A DEPOSIT OF ` 5.92 CRORES AS PER THE AGREEMENT DATED 07.09.2001. THE PROPERTY IS BEING USED BY M/S . CONCORDE MOTORS LTD. TILL F.Y. 2002-03 AND AFTER ADJUSTMENT OF RENT PAYA BLE BY THE COMPANY AN AMOUNT OF ` 1,8S,08,880/- REMAINED AS BALANCE AND THIS AMOUNT H AS SINCE THEN REMAINED WITH THE ASSESSEE FIRM. THE A.O. ISSU ED A SHOW CAUSE NOTICE DATED 23.12.2008 ASKING WHY THE DEPOSITS OF CONCORD E MOTOR LTD. WAS NOT WRITTEN BACK AS THERE IS NO CLAIM/SUIT FILED BY THE COMPANY FOR RECOVERY OF THE DEPOSIT. IT WAS SUBMITTED BY THE ASSESSEE THAT THE SAID COMPANY VACATED THE PREMISES PREMATURELY BEFORE THE EXPIRY DATE AND THERE WERE DISPUTES REGARDING THE COMPENSATION RECEIVED AND ACCORDINGLY THE AMOUNT WAS SHOWN AS OUTSTANDING IN THE YEAR UNDER CONSIDERATIO N WHEREAS THE SAME WAS WRITTEN BACK IN A.Y. 2007-08 AND WAS OFFERED TO TAX. THE A.O. DID NOT ACCEPT THE ABOVE CONTENTION AND GAVE A FINDING THAT THE ASSESSEE HAS NOT WRITTEN BACK THE AMOUNT AND BROUGHT THE AMOUNT TO T AX UNDER SECTION 68 OF THE ACT AS A CASH CREDIT. HE ALSO FURTHER TREATED T HE AMOUNT AS VALUE OF ANY BENEFIT OR PERQUISITE ARISING FROM THE BUSINESS AS THE ASSESSEE HAS LET OUT THE PROPERTY AS PART OF BUSINESS AND ALSO WAS TAXAB LE UNDER SECTION 28(IV) OF THE ACT. THE CIT(A), BASED ON THE FINDINGS GIVEN BY THE A.O., CONFIRMED THE ADDITION INVOKING THE PROVISIONS OF SECTION 41(1) W HILE OPINING THAT PROVISIONS OF SECTION 68 ARE NOT APPLICABLE AS THE AMOUNT WAS NOT FOUND ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 8 CREDITED DURING THE YEAR UNDER CONSIDERATION. THE A SSESSEE IS AGGRIEVED ON THE ABOVE CONFIRMATION OF THE CIT(A). 11. THE LEARNED COUNSEL SUBMITTED THAT IT WAS THE CONTE NTION OF THE ASSESSEE THAT THERE WERE DISPUTES BETWEEN THE ASSES SEE FIRM AND THE SAID COMPANY WITH REFERENCE TO THE COMPENSATION PAYABLE FOR PREMATURE VACATION OF THE PREMISES AND ACCORDINGLY THE AMOUNT WAS TREA TED AS INCOME IN A.Y. 2007-08 AND OFFERED TO TAX, THE FACT OF WHICH COULD BE VERIFIED FROM THE BALANCE SHEET AND COMPUTATION OF INCOME WHEREAS BOT H THE A.O. AND THE CIT(A) HAS GIVEN A WRONG FINDING THAT THE SAME WAS NOT WRITTEN BACK IN A.Y. 2007-08. IT IS ALSO FURTHER SUBMITTED THAT THE AMOU NT CANNOT BE TREATED A INCOME UNDER SECTION 41(1)AS THE LIABILITY DID NOT CEASE TO EXIST DURING THE YEAR AND THE ASSESSEE, AFTER SETTLING THE AMOUNT, H AS OFFERED THE SAME IN THE LATER YEAR AS INCOME. IT IS THE CONTENTION THAT THE YEAR OF TAXABILITY HAS TO BE CONSIDERED UNDER SECTION 41(1) AND WITHOUT EXAMININ G THIS FACT THE CIT(A) HAS CONFIRMED THE ADDITION ON ALTERNATE SECTION WHE REAS THE A.O. TREATED THE SAME AS INCOME UNDER SECTION 68 OF THE I.T. ACT WHE REAS THE CIT(A) GIVES A FINDING THAT THE SAID SECTION IS NOT APPLICABLE. IT IS HIS CONTENTION THAT THE ASSESSEE HAS ALREADY OFFERED THE AMOUNT IN A.Y. 200 7-08 WHEN THE LIABILITY CEASED TO EXIST AND HENCE THE SAME CANNOT BE TAXED IN THE YEAR UNDER CONSIDERATION. 12. THE LEARNED D.R. RELIED ON THE ORDER OF THE CIT(A). 13. ON AN ENQUIRY WHETHER THE YEARLY RENT WAS OFFERED T O TAX WHEN THE PROPERTY WAS VACATED AND THE DEPOSIT WAS AVAILABLE WITH THE ASSESSEE, THE LEARNED COUNSEL SUBMITTED THAT THE YEARLY RENT WAS OFFERED TO TAX AND ONLY THE BALANCE AMOUNT AFTER ADJUSTING THE AMOUNT WAS O UTSTANDING AND AT THAT POINT OF TIME THE CLAIMS WERE MADE FOR COMPENSATION . HE FAIRLY ADMITTED THAT THIS ASPECT HAS NOT BEEN EXAMINED BY THE A.O. AND H E HAS NO OBJECTION IF THE MATTER IS RESTORED BACK TO THE FILE OF THE A.O. FOR EXAMINATION OF THE FACTS. 14. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE RECOR D. AS SEEN FROM THE FACT OF THE CASE THE ASSESSEE HAS SHOWN THE OUT STANDING AMOUNT OF ` 1,82,80,880/- AND AS CAN BE SEEN FROM THE ASSESSMEN T ORDER THERE WAS A ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 9 STATEMENT FROM THE COMPANY THAT AFTER ADJUSTMENT OF THE RENT PAYABLE BY THE COMPANY AN AMOUNT OF ` 1,82,08,880/- REMAINED AS BALANCE AND THIS AMOUNT HAS SINCE THEN REMAINED WITH THE ASSESSEE FI RM. THE PROPERTY WAS VACATED IN F.Y. 2002-03. IT IS NOT KNOWN WHETHER TH E RENT PAYABLE YEARLY HAS BEEN ADJUSTED AFTER THAT YEAR AND HOW THE AMOUNT OF ` 1,82,80,880/- STATED TO BE OUTSTANDING DURING THE YEAR. THE A.O. HAS NOT EXAMINED WHETHER THIS AMOUNT WAS OUTSTANDING FROM THE EARLIER YEARS OR YE ARLY RENTS WERE ADJUSTED EVEN AFTER THE PROPERTY WAS VACATED PREMATURELY. WE , HOWEVER, AGREE WITH THE FINDINGS OF THE CIT(A) THAT THE AMOUNT CANNOT B E BROUGHT TO TAX AS UNEXPLAINED CASH CREDIT UNDER SECTION 68 AS THE AMO UNT WAS NOT A CREDIT DURING THE YEAR. HOWEVER, HER ACTION IN CONFIRMING THE AMOUNT UNDER SECTION 41(1) ALSO CANNOT BE UPHELD AS THE ISSUE HA S TO BE EXAMINED WHETHER THE LIABILITY HAS CEASED TO EXIST DURING TH E YEAR UNDER CONSIDERATION. THIS ASPECT HAS NOT BEEN EXAMINED BY THE CIT(A). IT WAS ASSESSEES CONTENTION THAT THERE WERE DISPUTES BETW EEN THE ASSESSEE FIRM AND THE SAID COMPANY WITH REFERENCE TO COMPENSATION PAYABLE FOR PREMATURE VACATION OF THE PREMISES. IT IS ALSO ASSESSEES SUB MISSION THAT THE ABOVE SAID DEPOSIT OF ` 1,82,80,880/- WAS WRITTEN BACK AND OFFERED AS INCOM E IN A.Y. 2007-08 FOR WHICH THE ASSESSEE RELIED ON THE BALANC E AND P & L ACCOUNT OF THAT YEAR. THE A.O. HAS GIVEN A FINDING THAT NO SUC H INCOME WAS OFFERED WHICH WAS THE BASIS FOR CIT(A)S ALSO THAT THE SAME WAS NOT WRITTEN BACK. WE ARE OF THE VIEW THAT THIS ASPECT HAS NOT BEEN EXAMI NED CORRECTLY AND THE ASSESSEE HAS NO OBJECTION FOR SETTING ASIDE IT TO T HE FILE OF THE A.O. FOR EXAMINATION OF THE FACTS. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE A.O. AND THE CIT(A) ON THIS ISSUE AND RESTORE THE MATTER BAC K TO THE FILE OF THE A.O. TO EXAMINE; (A) YEARLY RENTS OFFERED (B) THE DISPUTE B ETWEEN THE ASSESSEE AND THE SAID COMPANY, AND (C) WHETHER THE LIABILITY CEA SED TO EXIST DURING THIS YEAR OR IN THE LATER YEAR, I.E. A.Y. 2007-08 WHEN T HE ASSESSEE HAS SUO MOTO WRITTEN BACK TO THE P & L ACCOUNT AS STATED. THE A. O. IS DIRECTED TO EXAMINE THE FACTS AFRESH AFTER GIVING DUE OPPORTUNITY TO TH E ASSESSEE. WITH THIS DIRECTION THE ISSUE IS RESTORED TO THE FILE OF THE A.O. FOR FRESH EXAMINATION OF FACTS. GROUNDS ARE CONSIDERED ALLOWED. ITA NOS. 399&6617/MUM/2010 M/S. M.J. INTERNATIONAL 10 15. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED A ND THAT OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH NOVEMBER 2010. SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 4 TH NOVEMBER 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXIII, MUMBAI 4. THE CIT XII, MUMBAI CITY 5. THE DR, B BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.