ITO 19(3)(2), MUMBAI V. KISHORE KUMAR KATARUKHA, MUMBAI

ITA 6987/MUM/2011

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9243 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 14-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: AMAR GAHLOT
• Keywords: Capital asset; Gift; Cost of acquisition; Deemed dividend

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A MUMBAI . , , BEFORE SHRI D. M ANMOHAN , V ICE P RESIDENT (M.Z.) AND SHRI SANJAY ARORA , ACCO UNTANT MEMBER ITA NO. 6987/MUM/2011 (A.Y.200 8 - 09 ) INCOME TAX OFFICER - 19(3)(2) ROOM NO.306, 3 RD FLOOR PIRAMAL CHAMBERS, PAREL,LALBAUG MUMBAI - 400 012. (APPELLANT ) VS. M/S. KISHORE KUMAR KATARUKHA , 71, LAND MARK, 175 CARTER ROAD BANDRA (W) MUMBAI - 400 050 . GIR NO./ PAN : APXPK 3340 B (RESPONDENT) APPELLANT BY : SHRI V.K. BORA RESPONDENT BY : SHRI AMAR GAHLOT DATE OF HEARING : 17 /0 3 /2015 DATE OF PRONOUNCEMENT : 27 /0 3 /2015 ORDER PER SANJAY ARORA, AM : TH E PRESENT APPEAL IS FILED BY THE REVENUE . IT IS DIRECTED AGAINST THE ORDER PASSED BY LD. CIT(A) - 36, MUMBAI , DATED 30/08/2011 FOR THE ASSESSMENT YEAR 200 8 - 09 . THE BRIE F FACTS LEAD ING TO THE PRESENT APPEAL ARE AS FOLLOWS. 2. THE RESPONDENT ASSESSEE , IS AN INDIVIDUAL DERIVING INCOME UNDER THE HEAD S OF SALARY, BUSINESS, CAPITAL GAINS AND FROM OTHER SOURCES . F OR THE ASSESSMENT YEAR 2008 - 09 , T HE ASSESSEE FILED RETURN OF INC OME ON 20.03.2009 DECLARING TOTAL INCOME OF RS.5,26,470/ - . THE SAID RETURN OF 2 ITA NO. 6987/M/11 INCOME WAS PROCESSED UNDER THE PROVISIONS OF SECTION 143 (1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) . SUBSEQUENTLY, THE CA S E WAS SELECTED FOR SCRUTINY ASSESSMENT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSEE FILED CERTAIN DETAILS FROM WHICH THE AO NOTICED RECEIPT OF LOAN FROM THE COMPANY IN WHICH HE HAS SUBSTANTIAL INTEREST , NAMELY M/S. FASHION EXIM PVT. LTD. , A CLOSELY HELD COMPANY. THE AO ON PERUSAL OF THE LEDGER ACCOUNT OF THE ASSESSEE WITH M/S. FASHION EXIM PVT. LTD. , NOTICED THAT A SUM OF RS.70,52,240/ - WAS RECEIVED BY THE ASSESSEE IN THE FORM OF LOAN OR ADVANCE FROM THE SAID COMPANY. ON NOTICING SUCH TRANSACTION THE AO SHOW CAUSED THE ASSESSEE AS TO WHY THE SAID TRANSACTION SHOULD NOT BE BROUGHT TO TAX UNDER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. IN RESPONSE TO SAID NOTICE , THE ASSESSEE SUBMITTED AS FOLLOWS : - 'DURING THE YEAR, THE COMPANY HAS INVESTED RS. 70 , 52 , 240/ - IN FIXED DEPOSITS WI TH BANKS IN THE NAME OF SHRI KISHORE KUMAR KATARUKA AS DIRECTOR OF THE COMPANY. THE AMOUNT OF DEPOSIT HAS BEEN SHOWN UNDER THE HEAD LOANS AND ADVANCES. AS P E R THE TERMS OF SANCTION OF CREDIT LIMITS TO THE COMPANY, THE BANK HAS STIPULATED CONDITION TO KEEP CERTAIN AMOUNT AS MARGIN MONEY FOR AVAILING THE BILLS DISCOUNTING LIMIT. THE RATE OF INTEREST WAS HIGHER IN THE CASE, WHERE THE MONEY IS INVESTED IN. THE NAME OF ITS DIRECTOR SHRI KISHORE KUMAR KATARUKA AS SENIOR CITIZEN. THE COMPANY DECIDED TO ROUTE THE F UND THROUGH KISHORE KUMAR KATARUKA AS DIRECTOR, FOR COMPLYING THE TERMS OF SANCTION. THERE FDR WERE KEPT WITH THE BANK AS MARGIN MONEY. THE DIRECTOR KISHORE KUMAR KATARUKA HAS REIMBURSED THE ENTIRE INTEREST EARNED ON FDR TO THE COMPANY. NO DIRECT OR INDIR ECT BENEFITS WERE AVAILED BY THE SAID DIRECTOR. TO SUPPORT THIS SUBMISSION THE COPY OF THE LEDGER ACCOUNT OF SRI KISHORE KUMAR KATARUKA IN THE BOOKS OF FASHION EXIM INDIA PUT LTD IS ANNEXED HEREWITH. YOU WILL OBSERVE THAT THE INTEREST EARNED RS. 4189711 - HAS BEEN REIMBURSED TO THE COMPANY . FURTHER SUBMITTED THAT IN FACT THERE IS NO ADVANCE GIVEN BY THE COMPANY TO THE DIRECTOR SHRI KISHORE KUMAR KATARUKA. TO COMPLY WITH THE TERMS OF MARGIN MONEY AS STIPULATED AS CONDITIONS OF THE CREDIT LIMIT SANCTION, TH E 3 ITA NO. 6987/M/11 ARRANGEMENT WAS WITH THE SAID DIRECTOR IN THE INTEREST OF THE COMPANY AND THE FUNDS WERE KEPT IN FDRS TO EARN MORE INTEREST. IN VIEW OF THE ABOVE, THERE IS NO ADVANCE IS GIVEN IN TERMS OF SECTION 2(22)(E) OF THE I.T ACT, 1961'. 2.1 THE ABOVE EXPLANAT ION HAD BEEN REJECTED BY THE AO RELYING ON CERTAIN JUDICIAL PRECEDENTS QUOTED VIDE PARA 5.3 OF THE ASSESSMENT ORDER AND BROUGHT TO TAX A SUM OF RS.70,52,240/ - AS DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT. FURTHER, T HE AO WHILE COMPUTING THE CAPITAL GAINS ARI SING OUT OF DEVELOPMENT OF PROPERTY DEVOLVED UPON THE ASSESSEE BY VIRTUE OF WILL DATED 20.8.1987 WHICH HAS BEEN PROBATED BY 3 RD ADDITIONAL DISTRICT & SESSIONS JUDGE, PATNA ON 6.12.1990, HAD NOT GIVEN THE BENEFIT OF COST INDEXATION, I.E., FROM THE DATE FROM WHICH THE ORIGINAL OWNER ACQUIRED THE PROPERTY. 3. AGGRIEVED BY THE ABOVE ORDER THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO PARTLY ALLOWED THE APPEAL OF THE ASSESSEE . THE LD. CIT(A) DELETED THE ADDITION MADE U/S. 2(22)(E) OF THE ACT BY PLAC ING RELIANCE ON THE FOLLOWING DECISIONS: - I) SUNIL SETHI VS. DY. COMMISSIONER OF INCOME - TAX (26 SOT 95) ; AND II) CIT VS. PRAVEEN (220 CTR 639) . 3.1 AS REGARDS TO THE BENEFIT OF INDEXATION THE LD. CIT(A) FOLLOWING THE DECISION OF SPECIAL BENCH OF THE TRIB UNAL IN THE CASE DCIT VS. MANJULA SHAH (318 ITR 417) (AT) ALLOWED THE CLAIM OF THE ASSESSEE . 4 ITA NO. 6987/M/11 4. AGGRIEVED BY THE ABOVE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) THE REVENUE HAS PREFERRED THE INSTANT APPEAL BY RAISING THE FOLLOWING GROUNDS OF APPE AL : - '1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE U/S. 2(22)(E) OF THE I. T. ACT, 1961 AFTER HOLDING THAT THE AMOUNT OF RS. 70,52,240/ - RECEIVED BY THE ASSESSEE FROM M/S. FASHION EXIM PVT. LTD. FOR THE BUSINESS PURPOSE OF THE COMPANY FOR KEEPING THE MARGIN MONEY WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS EARNED INTEREST ON THE LOAN WHICH IS ADVANCED TO HIM BY THE CLOSELY HELD COMPANY. 2. ON THE FACTS AND IN THE CIRCUMSTA NCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE JUDICIAL PRONOUNCEMENT OF THE HONBLE APEX COURT IN THE CASE OF CIT VS. MUKUNDRAY K. SHAH [290 ITR 433 (SC)]. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, TH E LEARNED CIT(A) HAS ERRED IN DIRECTING TO ALLOW INDEXATION FROM 1981 IN WHICH THE PREVIOUS OWNERS FIRST HELD THE ASSET WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE BECAME THE OWNER OF PROPERTY AFTER THE DEATH OF HIS FATHER LATE KASHI PRASAD KATARUKA ON 29.12.1988. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT THE EXPLANATION (III) TO SECTION 48 CLEARLY STATES THAT THE COST INFLATION INDEX SHALL BE ADOPTED FROM THE FIRST YEAR I N WHICH THE ASSET WAS HELD BY THE ASSESSEE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MUNJULA J. SHAH(318 ITR (A T) 417) HAS NOT BEEN ACCEPTED BY THE DEPARTMENT. 5 . GROUND NO.1 AND 2 RELATES TO THE ADDITION OF RS.70,52,240/ - U/S. 2(22)(E) OF THE ACT. THE AO BROUGHT THIS AMOUNT TO TAX BY HOLDING THAT THE PROVISIONS OF SECTION 2(22)(E) SHOULD BE CONSTRUED STRICTLY AND T HE FACT, THAT THE LOAN WAS SQUARED UP DURING THE YEAR OR SUBSEQUENTLY , DOES NOT MAKE ANY DIFFERENCE . WHEREAS THE RESPONDENT ASSESSEES SUBMISSION WAS THAT THE IMPUGNED AMOUNT WAS RECEIVED BY THE ASSESSEE ONLY FOR THE BENEFIT OF THE SAID COMPANY I.E. M /S. FASHION EXIM PVT. LTD. AND MONEY 5 ITA NO. 6987/M/11 WAS UTILI S ED SOLELY FOR THE PURPOSE OF COMPANY S BUSINESS AND , THEREFORE, NO BENEFIT HAD ACCRUED TO THE ASSESSEE AS A RESULT OF THIS TRANSACTION . T HEREFORE, THE PROVISIONS OF SECTION 2(22)(E) CANNOT BE APPLIED. IN SUPP ORT OF THIS LEGAL PROPOSITION HE HAS RELIED UPON CERTAIN JUDICIAL PRECEDENTS WHICH ARE AS UNDER : - I) SUNIL SETHI VS. DCIT (2008) 26 SOT 95; II) CIT VS. F. PRAVEEN 220CTR 639 (MAD.); III) ACIT VS. SUNIL CHOPRA (2010) 2 ITR (TRIB.) 469; IV) CIT VS. RAJ KUMAR (2009) 318 ITR 462; V) ACIT VS. HARSHAD V. DOSHI (2011) 49 DTR 181 AND VI) CIT VS. CREATIVE DYEING & PRINTING (P) LTD. (2009) (318 ITR 476) 5 .1 ON THE OTHER HAND THE LD. DR VEHEMENT LY ARGUED THAT THE MATERIAL ON RECORD DOES NOT SUPPORT THE CONTENTIONS OF THE ASSESSEE AND THE CIT(A) WAS NOT JUSTIFIED IN ALLOWING THE APPEAL FILED BY THE ASSESSEE . 6 . WE HAVE HEARD THE RIVAL PARTIES, PERUSED THE MATERIAL AVAILABLE ON RECORD. WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO DISPUTE ABOUT THE LEGAL PROPOSITION ADVANCED BY THE LD. AR THAT WHEN THE AMOUNTS WERE ADVANCED BY THE COMPANY FOR ITS BUSINESS PURPOSES, THE PROVISIONS OF SEC.2(22)(E) CANNOT BE APPLIED. BUT WE F I ND NO MATERIAL IN SUPPORT OF SUCH LEGAL PROPOS I TION. THE ASSESSEE HA S NOT FILED COPIES OF SANCTION LETTER / S OF CREDIT FACILITY TO THE COMPANY NOR THE COPIES OF THE FIXED DEPOSIT RECEIPTS. THEREFORE, IT I S NOT CLEAR WHETHER THESE FIXED DEPOSITS WERE REALLY MADE FOR BUSINESS PURPOSES OF THE COMPANY. IF THE LIEN ON FIXED DEPOSIT HELD IN THE NAME OF THE ASSESSEE WAS M ARKED IN FAVOUR OF THE BANKERS, IT MAY CLEARLY DEMONSTRATE THAT THE AMOUNTS WERE ADVANCED FOR COMPANY PURPOSE TO THE 6 ITA NO. 6987/M/11 ASSESSEE. IN THE ABSENCE OF SUCH MATERIAL ON RECORD , WE ARE NOT ABLE TO COME TO A DEFINITE CONCLUSION THAT THE COMPANY HAD ADVANCED THIS MO NEY TO THE ASSESSEE ONLY FOR ITS OWN BUSINESS PURPOSES. FURTHER, A MERE PERUSAL OF THE LEDGER EXTRACTS OF THE ACCOUNTS OF THE ASSESSEE COMPANY (AT PAGE 2,3, AND 4 OF THE PAPER BOOK ENCLOSED), IT WAS NOT CLEAR AS TO WHY TWO LEDGER ACCOUNTS WERE MAINTAINED I N THE NAME OF THE ASSESSEE FOR THE FINANCIAL Y EAR 2007 - 08. 6.1 MERE RELIANCE ON LEGAL PROPOSITION WITHOUT FURNISHING THE SUPPORTING MATERIAL DOES NOT HELP THE CA U SE OF THE ASSESSEE. IT ONLY AMOUNTS TO A BALD CLAIM . THE M INUTES OF MEETING OF THE BOARD OF D IRECTORS CANNOT BE THE SOLE BASIS FOR COMING TO ANY CONCLUSION, MORE SO, IN THE CASE OF A CLOSELY - HELD COMPANY. THEREFORE, WE DEEM IT FIT AND PROPER TO RESTORE GROUND NOS. 1 AND 2 TO THE FILE OF THE AO TO MAKE FRESH ASSESSMENT AFTER AFFORDING DUE OPPORTUNI TY TO THE ASSESSEE TO FURNISH MATERIAL IN SUPPORT OF THE LEGAL PROPOSITIONS ADVANCED BY HIM. ACCORDINGLY, GROUND NO.1 AND 2 ARE DISPOSED OFF. 7. GROUND NO.3, 4 AND 5 RELATE TO THE GRANTING OF BENEFIT OF INDEXATION IN RESPECT OF COMPUTATION OF CAPITAL GA INS ARISING OUT OF DEVELOPMENT OF PROPERTY DEVOLVED UPON THE ASSESSEE BY VIRTUE OF WILL DATED 20.8.1987 WHICH HAS BEEN PROBATED BY 3 RD ADDITIONAL DISTRICT & SESSIONS JUDGE, PATNA ON 6.12.1990, FROM THE DATE FROM WHICH THE ORIGINAL OWNER ACQUIRED THE PROPER TY. 7 ITA NO. 6987/M/11 7.1 LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE PLACING RELIANCE IN THE CASE OF DCIT VS. MANJULA J. SHAH (318 ITR 417) . WE FIND THAT THE SAID DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL WAS AFFIRMED BY THE HON'BLE BOMBAY HIGH COURT VIDE (2012) 204 TAXMAN 691/[2011] 16 TAXMANN.COM 42(BOMBAY) .V IDE PARA 17 TO 18 OF THE JUDGMENT IT WAS HELD AS UNDER : - 17. WE SEE NO MERIT IN THE ABOVE CONTENTION. AS RIGHTLY CONTENDED BY MR. RAI, LEARNED COUNSEL FOR THE ASSESSEE, THE INDEXED COST OF ACQUISITION HAS TO BE DETERMINED WITH REFERENCE TO THE COST INFLATION INDEX FOR THE FIRST YEAR IN WHICH THE CAPITAL ASSET WAS 'HELD BY THE ASSESSEE'. SINCE THE EXPRESSION 'HELD BY THE ASSESSEE' IS NOT DEFINED UNDER SECTION 48 OF THE ACT, THAT EXPRESSION HAS TO BE UNDERSTO OD AS DEFINED UNDER SECTION 2 OF THE ACT. EXPLANATION 1(I)(B) TO SECTION 2(42A) OF THE ACT PROVIDES THAT IN DETERMINING THE PERIOD FOR WHICH AN ASSET IS HELD BY AN ASSESSEE UNDER A GIFT, THE PERIOD FOR WHICH THE SAID ASSET WAS HELD BY THE PREVIOUS OWNER SH ALL BE INCLUDED. AS THE PREVIOUS OWNER HELD THE CAPITAL ASSET FROM 29/1/1993, AS PER EXPLANATION 1 (I)(B) TO SECTION 2(42A) OF THE ACT, THE ASSESSEE IS DEEMED TO HAVE HELD THE CAPITAL ASSET FROM 29/1 / 1993. BY REASON OF THE DEEMED HOLDING OF THE ASSET FROM 29/1 / 1993, THE ASSESSEE IS DEEMED TO HAVE HELD THE ASSET AS A LONG TERM CAPITAL ASSET. IF THE LONG TERM CAPITAL GAINS LIABILITY HAS TO BE COMPUTED UNDER SECTION 48 OF THE ACT BY TREATING THAT THE ASSESSEE HELD THE CAPITAL ASSET FROM 29/1/1993, THEN, NAT URALLY IN DETERMINING THE INDEXED COST OF ACQUISITION UNDER SECTION 48 OF THE ACT, THE ASSESSEE MUST BE TREATED TO HAVE HELD THE ASSET FROM 29/1/1993 AND ACCORDINGLY THE COST INFLATION INDEX FOR 1992 - 93 WOULD BE APPLICIB1E IN DETERMINING THE INDEXED COST O F ACQUISITION. 18. IF THE ARGUMENT OF THE REVENUE THAT THE DEEMING FICTION CONTAINED IN EXPLANATION 1(I)(B) TO SECTION 2(42A) OF THE ACT CANNOT BE APPLIED IN COMPUTING THE CAPITAL GAINS UNDER SECTION 48 OF THE ACT IS ACCEPTED, THEN, THE ASSESSEE WOULD N OT BE LIABLE FOR LONG TERM CAPITAL GAINS TAX, BECAUSE, IT IS ONLY BY APPLYING THE DEEMED FICTION CONTAINED IN EXPLANATION 1(I)(B) TO SECTION 2(42A) AND SECTION 49( 1 )(II) OF THE ACT, THE ASS E SSEE IS DEEMED TO HAVE HELD THE ASSET FROM 29/1 / 993 AND DEEMED TO HAVE INCURRED THE COST OF ACQUISITION AND ACCORDINGLY MADE LIABLE FOR THE LONG TERM CAPITAL GAINS TAX. THEREFORE, WHEN THE LEGISLATURE BY INTRODUCING THE DEEMING FICTION SEEKS TO TAX THE GAINS ARISING ON TRANSFER OF A CAPITAL ASSET ACQUIRED UNDER A GIFT O R WILL AND THE CAPITAL GAINS UNDER SECTION 48 OF THE ACT HAS TO BE COMPUTED BY APPLYING THE 8 ITA NO. 6987/M/11 DEEMED FICTION, IT IS NOT POSSIBLE TO ACCEPT THE CONTENTION OF REVENUE THAT THE FICTION CONTAINED IN EXPLANATION 1 (I)(B) TO SECTION 2(42A) OF THE ACT CANNOT BE APPL IED IN DETERMINING THE INDEXED COST OF ACQUISITION UNDER SECTION 48 OF THE ACT . 7.2 RESPECTFULLY F OLLOWING THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MANJULA J. SHAH (SUPRA), WE DISMISS THE GROUNDS OF APPEAL FILED BY THE REVEN UE ON THIS ISSUE. 8 . IN THE RESULT, ITA NO. 6987/MUM/ 2011 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 /03/ 2015 27 / 03 / 2015 SD/ - SD/ - ( . / D. M ANMOHAN ) ( / SANJAY ARORA ) / V ICE P RESIDENT / ACCOUNTANT MEMBER MUMBAI ; DATED 27 / 03/ 2015 . . ./ JV , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI .