A.C.I.T.21(1), MUMBAI V. NARAYAN J PAGRANI, MUMBAI

ITA 7480/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7963 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 13-08-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 04-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V R PATIL
• Assessee Lawyers: DEVENDRA A MEHTA
• Keywords: Capital asset; Depreciation; Deemed dividend; Reassessment proceedings

Judgement Text

, CH CHCH CH INCOME TAX APPELLATE TRIBUNAL,MUMBAI - B BENCH. . . , , BEFORE S/SH.I.P.BANSAL, JUDICIAL MEMBE R & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO. 7480/MUM/2011, ! ! ! ! / ASSESSMENT YEAR-2005-06 ACIT CIRCLE 21(1), 6TH FLOOR, R.NO.601, PRATYAKSHAKAR BHAVAN, BANDRA-KURLA COMPLEX, BANDRA(E) MUMBAI-400051 VS SHRI NARAYAN J. PAGRANI, C/O HOTEL AIRLINK 75, OPP. NEHRU ROAD, NEAR CENTAUR AIRPORT, VILE PARLE (E), MUMBAI-400099 PAN: AAAPP6459Q ( '# / APPELLANT) ( $%'# / RESPONDENT) & ' / REVENUE BY : SHRI V.R. PATIL () () () () ' ' ' ' / ASSESSEE BY : SHRI DEVENDRA A. MEHTA & && & )* )* )* )* / DATE OF HEARING : 13-08-2014 +,! & )* / DATE OF PRONOUNCEMENT : 13-08-2014 , 1961 & && & 254 )1( )-) )-) )-) )-) . . . . ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM : CHALLENGING THE ORDER DATED.10.08.2011 OF THE CIT(A )-32,MUMBAI, ASSESSING OFFICER(AO) HAS RAISED FOLLOWING GROUNDS APPEAL: 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) HAS ERRED IN DIRECTING THE A.O TO RECOMPUTED THE ACCUMULATED PROFITS OF TH E COMPANY FOR THE PURPOSES OF SECTION 2(22)(E) AND TO REDUCE THE AMOUNTS OF CAPITAL SUBSIDY FROM T HE PROFITS OF THE COMPANY. 2THE APPELLANT PRAYS THAT THE ORDER OF LD. CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3THE APPELLANT CRAVES LEAVE TO AMEND OR TO ALTER A NY GROUND OR ADD A NEW GROUND, WHICH MAY BE NECESSARY. 2. ASSESSEE,AN INDIVIDUAL, FILED HIS RETURN OF INCOME ON 31.10.2005 DECLARING TOTAL INCOME OF RS. 24,57,970/-.ASSESSING OFFICER(AO)FINALISED THE ASSE SSMENT U/S.143(3) OF THE ACT,ON 24.12.2009, DETERMINING THE TOTAL INCOME AT RS.74,47,470/-. EFFECTIVE GROUND OF APPEAL IS ABOUT RECOMPUTING THE ACCUMULATED PROFITS OF THE COMPANY FOR THE PURPOSES OF SECTION 2(22)(E) AND REDUCING THE AMOUNTS OF CAPITAL SUBSIDY FROM THE PROFITS OF THE COMPANY. BRIEF FACTS: 2.1. DURING THE ASSESSMENT PROCEEDINGS,THE AO RECEIVED A N INFORMATION WAS THE ITO WARD 8(3)(4); WHO WAS ASSESSING THE CASE OF M/S UNIVERSAL HOTELS PVT.LTD.(UHPL);THAT THE SAID COMPANY HAD GIVEN THE LOANS TO THE ASSESSEE WHICH WAS OUTSTANDI NG ON 31/3/2005,THAT THE LOAN AMOUNT WAS RS. 49,89,498/-,THAT DURING THE YEAR HE WAS HOLDING 37. 59% OF THE SHARES OF THE SAID COMPANY.THE AO WAS OF THE OPINION THAT THE PROVISIONS OF SEC.2( 22)(E)OF THE ACT WERE ATTRACTED.ACCORDINGLY, THE CASE WAS REOPENED U/S.147 AFTER RECORDING OF RE ASONS.DURING THE REASSESSMENT PROCEEDINGS THE ASSESSEE ASKED TO EXPLAIN WHY THE PROVISIONS OF SEC TION (22)(E) SHOULD NOT BE APPLIED IN RESPECT OF THE AMOUNT RECEIVED BY HIM FROM UHPL.THE ASSESSEE F ILED ITS REPLY, ARGUING THAT THE CAPITAL SUBSIDY AND THE INVESTMENT ALLOWANCE APPEARING IN T HE RESERVES WAS NOT AVAILABLE FOR DISTRIBUTION ITA NO. 7480/MUM/2011 SHRI NARAYAN J. PAGRANI 2 AS DIVIDEND,THAT SAME WAS REQUIRED TO BE USED FOR P URCHASE OF CAPITAL ASSET AND SHOULD BE EXCLUDED FROM RESERVES AVAILABLE WITH COMPANY FOR THE PURPOS ES OF THE COMPUTATION OF DEEMED DIVIDEND. THE AO,HOWEVER ,DID NOT AGREE TO THE CONTENTIONS OF THE ASSESSEE ON THE GROUNDS THAT ADVANCES RECEIVED BY THE ASSESSEC FROM COMPANY WERE NOTHING BUT IN THE NATURE OF LOANS,THAT THE TOTAL AMOUNT OF RS.49,89,498/-,WHICH WAS OUTSTANDING AS O N 31/3/2005,WAS LIABLE TO BE TAXED AS DEEMED DIVIDEND AS PER THE PROVISIONS OF SECTION 2 (22)(E) OF THE ACT,THAT NO EVIDENCE HAD BEEN GIVEN FOR THE CAPITAL SUBSIDY RECEIVED BY UHPL. 2.2. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPEAL AUTHORITY (FAA).DURING THE APPELLATE PROCEEDINGS TH E ASSESSEE FILED THE NEW EVIDENCES IN THE FORM OF LETTER FROM JOINT DIRECTOR INDUSTIRES NASHI K AND SICOM LTD ALONG WITH BALANCE SHEET AND OTHER DETAILS TO PROVE THE RECEIPT OF CAPITAL INVES TMENT SUBSIDY OF RS 30 LACS BY THE COMPANY. SINCE THESE WERE NEW EVIDENCES, THE FAA FORWARDED T HE DOCUMENTS TO THE AO.HE FURNISHED THE REMAND REPORT VIDE LETTER DATED 4/5/2011,WHEREIN TH E AO ACCEPTED THE CONTENTION OF THE APPELLANT THAT CAPITAL SUBSIDY OF RS 30 LACS HAS TO BE EXCLUD ED FROM THE RESERVES,BUT THE INVESTMCNT ALLOWANCE RESERVES OF 1,33,159 NEEDED TO BE CONSIDE RED FOR CALCULATING DEEMED DIVIDEND,THAT THE ACCUMULATED PROFITS SHOULD ALSO INCLUDE THE PROFIT FOR THE YEAR UNDER CONSIDERATION.FAA SENT THE COPY OF THE REMAND REPORT TO THE ASSESSEE,WHO FURNI SHED THE REJOINDER VIDE REPLY DATED 28/7/2011 AND 10/8/2011. IT WAS CONTENDED THAT WHILE COMPUTIN G THE PROFIT FOR THE YEAR UNDER APPEAL OF RS 43,09,087/- THE AO HAS NOT CONSIDERED THE PROVISION FOR INCOME TAX OF RS 3,32,000/-, DIVIDEND PROPOSED OF RS 4,86,000/-,DIVIDEND DISTRIBUTION TAX OF RS.63,514/-,PRIOR PERIOD EXPENSES OF RS 5,85,477/-AND DEFERRED TAX LIABI1ITY OF RS.22,52,95 7/- WHICH WERE FURTHER PAID OR PROVIDED BY THE COMPANY,THAT SAME WERE NOT AT ALL AVAILABLE FOR BE ING TAKEN TO ACCUMULATED RESERVES,THAT ONLY THE FREE PROFITS WHICH ARE AVAILABLE FOR DISTRIBUTION A S DIVIDEND COULD ONLY BE CONSIDERED,THAT THE AMOUNTS WHICH WERE EITHER PAID OR PROVIDED WERE NOT AVAILABLE FOR DISTRIBUTION COULD NOT FORM PART OF ACCUMULATED PROFITS FOR PURPOSE OF DEEMED D IVIDEND,THAT THE INVESTMENT ALLOWANCE WAS NOT PART OF ACCUMULATED PROFIT,THAT AS PER PROVISIONS O F THE ACT IT COULD NOT BE USED FOR DISTRIBUTION AS DIVIDEND. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,T HE REMAND REPORT AND THE ASSESSMENT ORDER,THE FAA HELD THAT THE PROVISIONS OF SECTION 2(22)(E) WE RE DEEMING PROVISIONS AND THEY WOULD BE APPLICABLE ON ACCUMULATED RESERVES OUT OF THE PROFI TS IN COMMERCIAL SENSE,THAT FOR PURPOSE OF ACCUMULATE RESERVES THE PROFITS IN COMMERCIAL SENSE HAD TO BE CONSIDERED AND NOT THE PROFITS ASSESSABLE AS PER THE ACT,THAT ALL THE AMOUNTS WHICH WERE IN THE NATU RE OF PROFITS OF THE COMPANY WOULD BE PART OF ACCUMULATE PROFITS EVEN IF THEY WE RE TO BE KEPT ASIDE FOR SOME OTHER PURPOSES UNDER PROVISIONS OF ACT,THAT MERE TRANSFERRING THE PROFITS TO SPECIAL RESERVES FOR MEETING THE PROVISIONS OF THE ACT WOULD NOT TAKE AWAY THE CHARA CTER OF SUCH AMOUNTS BEING PART OF COMMERCIAL POFITS,THAT THE TAXES PAID BY COMPANY HA D TO BE REDUCED FOR ARRIVING AT COMMERCIAL PROFITS THOUGH THE SAME WERE NOT DEDUCTIBLE UNDER T HE ACT.HE RELIED UPON THE DECISION OF THE P K BADIANI(105ITR642)DELIVERED BY THE APEX COURT AND H ELD THAT THE RECEIPTS WHICH WERE PART OF COMMERCIAL PROFITS INITIALLY WOULD REMAIN PART OF C OMMERCIAL PROFITS EVEN IF THEY HAD BEEN DIVERTED TO OTHER PURPOSES UNDER STATUTORY PROVISIO NS,THAT THE SUM OF RS 1,33,159/-WILL HAVE TO BE CONSIDERED AS PART OF ACCUMULATED PROFITS AS IT WAS IN THE NATURE OF PROFITS BEFORE BEING TRANSFERRED TO INVESTMENT ALLOWANCE RESERVE U/S 32A,THAT THE PL EA OF THE ASSESSEE TO EXCLUDE THE PROPOSED ITA NO. 7480/MUM/2011 SHRI NARAYAN J. PAGRANI 3 DIVIDEND OF RS.4,86,000/- ALSO COULD NOT BE ACCEPTE D AS THE SAME WAS ALSO A DIVERSION OUT OF THE COMMERCIAL PROFITS ONLY,THAT THE DEFERRED LIABILITY OF 22,52,957/-WAS ALSO ONLY A NOTIONAL RESERVE AGAINST THE DIFFERENCE IN THE DEPRECIATION ALLOWANC E UNDER COMPANYS ACT AND THE ACT,THAT SAME DID NOT AFFECT THE COMMERCIAL PROFITS OF THE COMPAN Y,THAT THE DEFERRED TAX LIABILITY COULD NOT BE ALLOWED TO BE REDUCED FROM ACCUMULATED RESERVES,THA T THE COMPANY HAD RECEIVED CAPITAL INVESTMENT SUBSIDY OF RS.30 LACS WHICH WAS NEVER IN THE NATURE OF PROFITS,THAT SAME COULD NOT BE PART OF THE ACCUMULATED RESERVES OUT OF PROFITS,THA T INCOME TAX OF RS 3,32,000/- AND DIVIDEND DISTRIBUTION TAX OF RS 63,514/-HAD TO BE REDUCED FR OM THE PROFITS OF THE COMPANY TO ARRIVE AT THE COMMERCIAL PROFITS,THAT THE PRIOR PERIOD EXPENSES O F RS.5,85,474/- HAVING BEEN ACTUALLY SPENT BY THE COMPANY DURING THE YEAR HAD TO BE REDUCED TO AR RIVE AT THE COMMERCIAL PROFITS THOUGH NOT ALLOWABLE IN THE YEAR UNDER THE ACT.HE DIRECTED THE AO TO RE-COMPUTE THE ACCUMULATED PROFITS OF COMPANY FOR THE PURPOSES OF 2(22)(E)BY TAKING THE ACCUMULATED P ROFITS OF EARLIER YEARS AS WELL AS CURRENT YEAR PROFITS BEFORE TAX, AS REDUCED BY CAPI TAL INVESTMENT SUBSIDY OF RS 30 LACS, INCOME TAX PAID OF RS 3,32,000/-,DIVIDEND DISTRIBUTION TAX OF RS.63,514/- AND PRIOR PERIOD EXPENSES OF RS.5,85,474/-AND ONLY THEREAFTER TO MAKE THE ADDIT ION,TO THE EXTENT OF SUCH ACCUMULATED PROFITS, IN HANDS OF THE APPELLANT U/S 2(22)(E) OF THE ACT. 2.3. BEFORE US,DEPARTMENTAL REPRESENTATIVE(DR)SUPPORTED THE ORDER OF THE AO.AUTHORISED REPRE - SENTATIVE(AR)REFERRED TO REMAND REPORT SENT BY THE AO TO THE FAA DURING THE APPELLATE PROCEEDING. HE REFERRRED TO CASES OF K.C. RAJAN (12 TAXMANN. COM 498),RAJASTHAN WIRES (P.) LTD. (1 SOT 648),V.DAMODARAN (2 TAXMAN397),P.K. BADIANI (SUPRA) AND P.SATYA PRASAD(31 TAXMANN. COM 267). 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT BASIC ISSUE TO BE DECIDED IN THE CASE UNDER CONSIDERATION IS WHETHER THE CAPITAL SUBSIDY WOULD FORM PART OF ACCUMULATED PROFIT OR NOT FOR THE PURPOSE OF SEC TION 2(22)(E) OF THE ACT.HERE,WE WOULD LIKE TO REPRODUCE A PORTION OF THE REMAND REPORT,SENT BY TH E AO TO THE FAA,THAT DEALS WITH THE CAPITAL SUBSIDY READS AS UNDER: (A)CAPITAL SUBSIDY : AS REGARDS CAPITAL SUBSIDY OF RS 30 LACS REFLECTING IN THE BALANCE SHEET OF UNIVERSAL HOTELS PRIVATE LIMITED AS ON 31 MARCH 2004 AND 31 MARCH 203 HAVE EXAMINED THE PAPERS PRODUCED BEFORE ME. THE ASSESSEE HAS SUBMITTED A LETTER DATED 29-12-2 09 ISSUED BY JOINT DIRECTOR OF INDUSTRIES, NASIK CONFIRMING THAT UNIVERSAL HOTELS HAS BEEN GRANTED AND PAID CAP ITAL SUBSIDY OF RS 30 LACS BY SICOM LIMITED.THAT IS REFLECTED AS A SEPARATE LINE ITEM IN T HE AFORESAID BALANCE SHEET.CAPITAL SUBSIDY RECEIVED CANNOT BE CONSIDERED AS PART OF PROFITS ACCUMULATED PROFITS. IF THE AO HIMSELF HAD ADMITTED IN THE REMAND REPORT THAT CAPITAL SUBSIDY WAS NOT BE CONSIDERED A PART OF THE ACCUMULATE PROFIT,THEN WHY HAS HE FILED AN APPEAL ESPECIALLY WHEN THE FAA HAS ENDORSED HIS VIEW. THE STAND TAKEN BY THE AO IN THE GROUND OF APPEAL IS BEYOND OUR COMPREHEN- SION.INTIALLY HE HELD THAT NECESSARY DOCUMENTS WERE NOT PRODUCED BY THE ASSESSEE.IN OUR OPINION HIS STAND AT THAT POINT OF TIME COULD BE HELD TO BE JUSTIFIABLE.BUT,AFTER ADMITTING A PARTICULAR POSITION IN THE REMAND REPORT ABOUT THE NON INCLUSI ON OF CAPITAL SUBSIDY OUT OF ACCUMULATED PROFIT FOR THE PURPOSE OF CALCULATING DEEMED DIVIDEND,HE S HOULD NOT ACCEPTED THE DECISION OF THE FAA AND SHOULD NOT HAVE FILED THE APPEAL.THE FAA HAD DI RECTED THE AO TO RECOMPUTED THE ACCUMULATED PROFIT AFTER LYING DOWN CERTAIN PRINCIP LES.IN OUR OPINION DIRECTION GIVEN BY HIM ARE AS ITA NO. 7480/MUM/2011 SHRI NARAYAN J. PAGRANI 4 PER THE PROVISIONS OF LAW.HE HAS RIGHTLY HELD THAT INCOME TAX PAID,PROPOSE DIVIDEND DISTRIBUTION TAX AND PRIOR PERIOD EXPENSES CANNOT BE CONSIDERED FOR DETERMINING ACCUMULATED PROFITS.AS THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INF IRMITY,SO,CONFIRMING THE SAME WE DECIDE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. AS A RESULT,APPEAL F ILED BY THE AO STANDS DISMISSED. /)0 () VF/KDKJH & 1 & ) 23 . ORDER PRONOUNCED IN THE OPEN COURT ON 13TH AUGUST 2014 . . & +,! 4 5 13 -) , 201 4 , & - 6 SD/- SD/- . . / I.P. BANSAL) ( / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, 5 /DATE: 13.08 . 2014. SK . . . . & && & $)7 $)7 $)7 $)7 87!) 87!) 87!) 87!) / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / '# 2. RESPONDENT / $%'# 3. THE CONCERNED CIT(A)/ 9 : , 4. THE CONCERNED CIT / 9 : 5. DR B BENCH, ITAT, MUMBAI / 7;- $) CH , . . . 6. GUARD FILE/ - / %7) %7) %7) %7) $) $)$) $) //TRUE COPY// . / BY ORDER, < / 2 DY./ASST. REGISTRAR , /ITAT, MUMBAI