Sri. A. Dayanand Reddy, Secunderabad V. Dy.CIT, Circle-3(3), Hyderabad

ITA 682/HYD/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2595 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 06-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 11-04-2014
• Court: TRIBUNAL
• Department Lawyers: S SRINIVAS
• Assessee Lawyers: PAVAN KUMAR CHAKRAPANI
• Keywords: Reopening of assessment; Deemed dividend
• Section: 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 682/HYD/2014 ASSESSMENT YEAR: 2007-08 SRI A. DAYANAND REDDY, DIRECTOR, HYDERABAD. PAN ACFPA8850K VS. DY CIT CIRCLE- 3(3) HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PAVAN KUMAR CHAKRAPANI, REVENUE BY : SHRI S. SRINIVAS DATE OF HEARING : 20-04-2017 DATE OF PRONOUNCEMENT : 28-04-2017 ORDER PER B. RAMAKOTAIAH, AM THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF CIT(A)-IV, HYDERABAD DATED 10-01-2014. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO THE APPLICATION OF PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT, ON AN AMOUNT WHICH WAS OBTAINED BY THE MANAGING DIRECTOR ON INTEREST FROM THE COMPANY. ASSESSEE HAS RAISED THE GROUNDS AS WELL AS ADDITIONAL GROUNDS, HOWEVER, IN THE COURSE OF APPEAL, ASSESSEES COUNSEL HAS NOT PRESSED THE GROUNDS RELATING TO REOPENING OF ASSESSMENT U/S 147 OF THE IT ACT, ADDITIONAL GROUNDS RAISED AND ARGUED ONLY ON THE ISSUE OF TREATING THE AMOUNT OF LOAN TAKEN BY THE MANAGING DIRECTOR ON INTEREST AS DEEMED DIVIDEND. 2 ITA NO. 682/HYD/2014 SHRI A. DAYANAND REDDY, HYDERABAD 2. BRIEFLY STATED, ASSESSEE IS MANAGING DIRECTOR OF M/S. VASANTHA TOOL CRAFTS PVT. LTD. (VTC) AND ALSO HAS INTEREST IN ANOTHER COMPANY BY NAME M/S. RENUKA PLASTIC CRAFTS PVT. LTD. (RPC). ASSESSEE FILED RETURN OF INCOME ADMITTING TAXABLE INCOME OF RS. 10,90,695/- WHICH WAS ACCEPTED U/S 143(1) OF THE IT ACT. SUBSEQUENTLY, THE A.O NOTICED THAT ASSESSEE HAS RECEIVED AN AMOUNT OF RS. 56,31,320/- FROM M/S. VTC AND RS. 1,00,000/- FROM M/S. RPC AND BEING SUBSTANTIAL SHAREHOLDER, THESE AMOUNTS ARE TO BE ASSESSED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE IT ACT. ACCORDINGLY PROCEEDINGS U/S 147 OF THE IT ACT WERE INITIATED AND A NOTICE U/S 148 WAS ISSUED TO ASSESSEE. IT WAS SUBMITTED BY ASSESSEE THAT THESE AMOUNTS WERE RECEIVED ON INTEREST AND ASSESSEE HAS PAID THE INTEREST TO THE COMPANY, THEREFORE, THE AMOUNT CANNOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE IT ACT. HOWEVER A.O DID NOT ACCEPT THE CONTENTIONS AND TREATED THE AMOUNTS INVOLVED AS INCOME OF ASSESSEE. 3. IN APPEAL BEFORE THE CIT(A), ASSESSEE CONTESTED THE ISSUE OF REOPENING OF ASSESSMENT AS WELL AS THE ISSUE OF INVOKING THE PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS, LD. CIT(A) DID NOT ACCEPT THE GROUNDS PERTAINING TO REOPENING OF ASSESSMENT. EVEN THOUGH THE SAME WAS CONTESTED BEFORE THIS FORUM, THE GROUNDS PERTAINING TO REOPENING HAVE BEEN WITHDRAWN, THEREFORE, THE ISSUE NO LONGER REQUIRES ANY ADJUDICATION. 3.1 NOW COMING TO THE ISSUE OF INVOKING THE PROVISION OF SEC. 2(22)(E) OF THE IT ACT, ASSESSEE SUBMITTED BEFORE THE LD. CIT(A) THE INTERPRETATION OF SEC. 115 O OF THE IT ACT AND 3 ITA NO. 682/HYD/2014 SHRI A. DAYANAND REDDY, HYDERABAD 2(22)(E) OF THE IT ACT, CIRCULAR OF THE BOARD AND RELIED ON VARIOUS DECISIONS TO SUBMIT THAT THE LOAN OBTAINED BY ASSESSEE ON INTEREST DOES NOT COME WITHIN THE PURVIEW OF SEC. 2(22)(E) OF THE IT ACT. IT WAS FURTHER SUBMITTED THAT ASSESSEE STOOD AS GUARANTOR FOR THE COMPANY AND HAD GIVEN PERSONAL GUARANTEE TOWARDS WORKING CAPITAL FACILITY AND HE COULD NOT AVAIL ANY FURTHER PERSONAL LOAN FROM THE BANKS, THEREFORE, OBTAINED THE LOAN FROM THE COMPANY ON INTEREST. ASSESSEE RELIED ON THE DECISION IN THE CASE OF PRADEEP KUMAR MALHOTRA VS CIT [2011] 338 ITR 538 (CAL), G. SRIVIDHYA VS DEPARTMENT OF INCOME TAX (ITA NO. 1270/MDS/2011) AND MADHUVATHI SINGH AND BHEEM SINGH (ITAT, JAIPUR). 4. LD. CIT(A) DID NOT ACCEPT THE CONTENTIONS AND UPHELD THE ADDITION BY STATING AS UNDER: 5.7 THE FACT THAT THE COMPANY IN WHICH THE APPELLANT IS A DIRECTOR AND DECLARED SUBSTANTIAL DIVIDEND IN THE PAST IS NOT A RELEVANT CONSIDERATION FOR TAKING A DECISION ON THIS ISSUE SINCE THE ACT DOES NOT PROVIDE FOR THIS AS A MITIGATING CIRCUMSTANCE. 5.8 SIMILARLY, THE FACT THAT THE APPELLANT HAD STOOD GUARANTEE FOR THE COMPANY IN THE PAST AS A RESULT OF WHICH HIS PERSONAL LOAN-WORTHINESS IN THE EYES OF THE BANKS AND OTHER FINANCIAL INSTITUTIONS HAD BECOME PRECARIOUS, IS ALSO NOT A RELEVANT CONSIDERATION AS PER THE PROVISIONS OF THE SECTION. 5.9 THE AR HAS ALSO SUBMITTED, THAT THE RELATION BETWEEN THE APPELLANT AND THE COMPANY WAS THAT OF AN EMPLOYEE AND EMPLOYER AND THAT SIMILAR LOANS HAD BEEN ADVANCED TO VARIOUS OTHER EMPLOYEES OF THE COMPANY AS WELL. IN THIS ORDER, THE A.O HAS DISCUSSED THE DIFFERENCE BETWEEN THE NATURE OF LOANS ADVANCED TO THE OTHER EMPLOYEES, STRICTLY AS SALARY ADVANCES, WHEREAS THE LOAN TO THE APPELLANT IS NOT IN THAT CATEGORY. IN ANY EVENT, THE POSITION OF THE APPELLANT CANNOT BE, COMPARED TO OTHER EMPLOYEES AS FAR AS THE LOANS TO HIM FROM THE COMPANY IS 4 ITA NO. 682/HYD/2014 SHRI A. DAYANAND REDDY, HYDERABAD CONCERNED IN VIEW OF THE SPECIFIC PROVISIONS OF SEC.2(22)(E). 5.10 IN THIS FOURTH ORIGINAL GROUND OF APPEAL, THE APPELLANT HAD SUBMITTED THAT THE ASSESSING OFFICER HAD WRONGLY APPLIED SEC.2(22)(E) TO REPAYMENT OF LOANS BY THE COMPANY TO HIM. THE AR HAS NOT MADE ANY SUBMISSIONS IN THIS REGARD. I ALSO DO NOT FIND ANYTHING ON RECORD TO SUPPORT THIS CLAIM OF THE APPELLANT. 5.11 IN VIEW OF THE ABOVE, THE ASSESSMENT OF THE SUM OF RS. 57,31,320 AS DEEMED DIVIDEND U/S 2(22)(E) IS UPHELD. THE APPEAL IS DISMISSED ON THIS ISSUE. 5. LD. COUNSEL REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) AND SUBMITTED THAT AS FAR AS RS. 1,00,000/- FROM M/S RPC IS CONCERNED, THE AMOUNT WAS REPAYMENT OF LOAN, THEREFORE DOES NOT ATTRACT PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT. IT WAS SUBMITTED THAT THE NECESSARY DETAILS HAVE BEEN PLACED BEFORE CIT((A), THEREFORE, THE FINDING OF CIT(A) IN PARA 5.10 IS NOT CORRECT. COMING TO THE ISSUE OF LOAN FROM M/S VTC, IT WAS SUBMISSION THAT ASSESSEE HAS OBTAINED THE LOAN ON INTEREST AND FURTHER HAS GIVEN GUARANTEE TO ALL THE LOANS TAKEN BY THE COMPANY AND ACCORDINGLY THERE WAS A BENEFIT TO THE COMPANY. 5.1 LD. COUNSEL APART FROM THE RELYING ON THE PRINCIPLES LAID DOWN BY THE HONBLE KOLKATA HIGH COURT IN THE CASE OF PRADEEP KUMAR MALHOTRA VS CIT (SUPRA) ALSO RELIED ON THE COORDINATE BENCH DECISION IN THE CASE OF SMT. SANGITA JAIN V. ITO, 2016 TAXPUB(DT) 1322 (KOL-TRIB) IN ITA NO. 1817/KOL/2009 DATED 11-03-2016. 5 ITA NO. 682/HYD/2014 SHRI A. DAYANAND REDDY, HYDERABAD 6. LD. DR HOWEVER SUBMITTED THAT THE BASIC CONTENTIONS FOR INVOKING THE PROVISIONS OF SEC. 2(22)(E) HAVE BEEN SATISFIED THAT (I) ASSESSEE IS A MAJOR SHAREHOLDER HAVING 50% SHAREHOLDING (II) THE COMPANY HAS ACCUMULATED PROFITS (III) ASSESSEE HAS OBTAINED LOAN WHICH WAS USED FOR PERSONAL BENEFIT AND CONSTRUCTED A HOUSE. WITH REFERENCE TO THE ARGUMENT THAT PROVISIONS OF SEC. 115 O WILL APPLY, IT WAS SUBMITTED THAT PROVISION WILL APPLY FOR THE DECLARED DIVIDENDS, WHEREAS PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT ARE APPLICABLE FOR THE DEEMED DIVIDENDS WHICH ARE A CLASS APART AND CANNOT BE MIXED. IT WAS HOWEVER FAIRLY ADMITTED THAT THE AMOUNT OF RS. 1,00,000/- WAS A REPAYMENT TO THE COMPANY AND NOT A LOAN FROM THE COMPANY. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS AND DOCUMENTS PLACED ON RECORD. AS FAR AS THE AMOUNT OF RS. 1,00,000/- CONSIDERED AS DEEMED DIVIDEND AS A LOAN FROM M/S RPC IS CONCERNED, THIS IS NOT A LOAN OBTAINED DURING THE YEAR BUT REPAYMENT MADE DURING THE YEAR. THERE WAS AN OPENING BALANCE OF RS. 16,98,000/- AT THE BEGINNING OF THE YEAR AND ASSESSEE PAID AN AMOUNT OF RS. 1,00,000/- ON 08-07-2006 AND YEAR ENDING BALANCE HAS BEEN REDUCED TO RS. 15,98,000/-. SINCE THE AMOUNT IS A REPAYMENT TO THE COMPANY AND NOT A LOAN OBTAINED FROM THE COMPANY, INVOKING PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT ON THIS AMOUNT DOES ARISE, ACCORDINGLY, THIS AMOUNT IS DELETED. 6 ITA NO. 682/HYD/2014 SHRI A. DAYANAND REDDY, HYDERABAD 7.1 COMING TO THE ISSUE OF LOAN FROM M/S VTC, THE ACCOUNT COPY INDICATES THAT THERE WAS OPENING BALANCE AS WELL TO AN EXTENT OF RS. 1.08 CRORES. WE WERE INFORMED THAT NO PROCEEDINGS U/S 2(22)(E) OF THE IT ACT WERE INITIATED IN EARLIER YEAR. HOWEVER THESE AMOUNTS ARE NOT INTEREST FREE. ASSESSEE PAID INTEREST AT 8% PER ANNUM TO AN EXTENT OF RS. 9,92,477/- DURING THE YEAR, THUS, WE ARE OF THE OPINION THAT THIS AMOUNT IS NOT A BENEFIT OBTAINED BY ASSESSEE, BUT THERE IS A BENEFIT TO THE COMPANY. 8. COORDINATE BENCH IN THE CASE OF SMT. SANGITA JAIN VS. ITO (SUPRA) HAS EXAMINED SIMILAR ISSUE, WHEREIN THAT ASSESSEE ALSO RECEIVED A LOAN ON INTEREST AND A.O INVOKED PROVISIONS OF SEC. 2(22)(E) OF THE IT ACT. THE COORDINATE BENCH HAS HELD AS UNDER: 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. ONE OF THE MAIN CONTENTIONS RAISED BY THE LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BEFORE US IS THAT THE LOAN IN QUESTION TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) BY THE AUTHORITIES BELOW WAS TAKEN BY THE ASSESSEE FROM M/S. SURYA BUSINESS PVT. LIMITED ON INTEREST AND SINCE THE SAID COMPANY WAS COMPENSATED BY WAY OF INTEREST PAID BY THE ASSESSEE ON LOAN, THE ASSESSEE IN REAL SENSE DID NOT DERIVE ANY BENEFIT FROM THE FUNDS OF THE COMPANY SO I . T. A . N O. 1 8 1 7 / KO L . / 2 0 0 9 ASSESSMENT YEAR: 2006-2007 AS TO ATTRACT THE PROVISIONS OF SECTION 2(22)(E). ALTHOUGH THE LD. D.R. HAS VEHEMENTLY OPPOSED THIS CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE BY SUBMITTING THAT THE PAYMENT OF INTEREST ALONE CANNOT BE CONSIDERED FROM THE BENEFIT ANGLE AS ENVISAGED UNDER SECTION 2(22)(E), IT IS OBSERVED THAT THE JUDICIAL PRONOUNCEMENTS CITED BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY SUPPORT THE CASE OF THE ASSESSEE. 6. IN THE CASE OF PRADIP KUMAR MALHOTRA REPORTED IN 338 ITR 538 CITED BY THE LD. COUNSEL FOR THE ASSESESE, IT WAS HELD BY THE HON'BLE CALCUTTA HIGH COURT THAT THE PHRASE 'BY WAY OF ADVANCE OR LOAN' APPEARING IN SECTION 2(22)(E) 7 ITA NO. 682/HYD/2014 SHRI A. DAYANAND REDDY, HYDERABAD MUST BE CONSTRUED TO MEAN THOSE ADVANCES OR LOANS, WHICH A SHAREHOLDER ENJOYS FOR SIMPLY ON ACCOUNT OF BEING A PARTNER, WHO IS THE BENEFICIAL OWNER OF SHARES, BUT IF SUCH LOAN OR ADVANCE IS GIVEN TO SUCH SHAREHOLDER AS A CONSEQUENCE OF ANY FURTHER CONSIDERATION, WHICH IS BENEFICIAL TO THE COMPANY, RECEIVED FROM SUCH SHAREHOLDER, IN SUCH CASE, SUCH ADVANCE OR LOAN CANNOT BE SAID TO BE DEEMED DIVIDEND WITHIN THE MEANING OF THE ACT. IT WAS HELD THAT GRATUITOUS LOAN OR ADVANCE GIVEN BY A COMPANY TO THOSE CLASSES OF SHAREHOLDERS THUS WOULD COME WITHIN THE PURVIEW OF SECTION 2(22)(E) BUT NOT THE CASES WHERE THE LOAN OR ADVANCE IS GIVEN IN RETURN TO AN ADVANTAGE CONFERRED UPON THE COMPANY BY SUCH SHAREHOLDER. IN THE CASE OF ACIT -VS.- M/S. ZENON (INDIA) PVT. LIMITED, A LOAN TAKEN BY THE ASSESSEE WAS TREATED BY THE ASSESSING OFFICER AS DEEMED DIVIDEND UNDER SECTION 2(22)(E), BUT THE LD. CIT(APPEALS) DID NOT APPROVE THE ACTION OF THE ASSESSING OFFICER AFTER HAVING NOTICED THAT INTEREST AT THE RATE OF 9% PER ANNUM WAS PAID BY THE ASSESSEE ON SUCH LOAN, WHICH, ACCORDING TO HIM, WAS A CONSIDERATION RECEIVED FROM HER SHAREHOLDERS, WHICH WAS BENEFICIAL TO THE COMPANY AND THE ORDER OF THE LD. CIT(APPEALS) GIVING RELIEF TO THE ASSESSEE WAS UPHELD BY THE TRIBUNAL VIDE ITS ORDER DATED 29.06.2015 PASSED IN ITA NO. 1124/KOL/2012 BY RELYING ON THE DECISION OF THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF PRADIP KUMAR MALHOTRA (SUPRA). KEEPING IN VIEW THE SAID DECISION OF THE HON'BLE CALCUTTA HIGH COURT WHICH HAS BEEN FOLLOWED BY THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S. ZENON (INDIA) PVT. LIMITED I . T. A . N O. 1 8 1 7 / KO L . / 2 0 0 9 ASSESSMENT YEAR: 2006-2007 (SUPRA), WE HOLD THAT THE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE LD. CIT(APPEALS) UNDER SECTION 2(22)(E) ON ACCOUNT OF LOAN RECEIVED BY THE ASSESSEE FROM M/S. SURYA BUSINESS PVT. LIMITED ON WHICH CONSIDERATION IN THE FORM OF INTEREST WAS PAID BY THE ASSESSEE TO THE BENEFIT OF THE COMPANY IS NOT SUSTAINABLE. WE, THEREFORE, DELETE THE SAME AND ALLOW GROUNDS NO. 1 & 2 OF THE ASSESSEE'S APPEAL . 8.1 RESPECTFULLY FOLLOWING THE SAME, SINCE THE PRINCIPLES ESTABLISHED BY THE HONBLE KOLKATA HIGH COURT IN THE CASE OF PRADEEP KUMAR MALHOTRA (SUPRA) WAS ALSO CONSIDERED, WE ARE OF THE OPINION THAT THE ORDER MADE BY A.O AND SUSTAINED BY LD. CIT(A) ON ACCOUNT OF LOAN RECEIVED BY ASSESSEE, ON WHICH CONSIDERATION IN THE FORM OF INTEREST WAS PAID BY ASSESSEE TO THE BENEFIT OF THE 8 ITA NO. 682/HYD/2014 SHRI A. DAYANAND REDDY, HYDERABAD COMPANY, IS NOT SUSTAINABLE. WE THEREFORE DELETE THE SAME AND ALLOW THE ASSESSEES GROUNDS ON THIS ISSUE. 9. IN THE RESULT, APPEAL FILED BY ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 28 TH APRIL, 2017. SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED:28 TH APRIL, 2017. KRK 1) SHRI A. DAYANAND REDDY, C/OV.M CHAKRAPANI & CO, CAS, # 5-58/9&10, 2 ND FLOOR, SRINIVASA BUILDING, RANIGUNJ, SECUNDERABAD 03 2) DCIT, CIRCLE-3(3), HYDERABAD. 3) CIT(A) -IV, HYDERABAD 4) ADDL.CIT, RANGE-3 HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABAD. 6) GUARD FILE