SANGEETA VIJAY KUMAR, MUMBAI V. ITO WD 25(2)(3), MUMBAI

ITA 7709/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75909 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 05-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 10-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: N R AGARWAL
• Keywords: Deemed dividend
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUM BAI , %, & BEFORE SHRI SANJAY ARORA, A.M. AND SHRI AMIT SHUKL A, J.M. ./ I.T.A. NO. 7709/MUM/2010 ( * * * * * * * * / / / / ASSESSMENT YEAR: 2007-08) MS. SANGEETA VIJAY KUMAR. BANGLOW. NO.2 PLOT NO.87, SHRIKRISHNA NAGAR BORIVALI (E), MUMBAI-400 066 / VS. I.T.O. WARD 25(2)(3), BANDRA KURLA COMPLEX, MUMBAI- ./ ./ PAN/GIR NO. ACEPV2427L ( *. / ASSESSEE ) : ( / REVENUE ) *. / / ASSESSEE BY : SHRI N.R. AGARWAL / / REVENUE BY : SHRI RAVIPRAKASH / 1 / // / DATE OF HEARING : 05.03.2014 / 1 / DATE OF PRONOUNCEMENT : 14 .03.2014 / O R D E R PER AMIT SHUKLA, J. M.: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAI NST IMPUGNED ORDER DATED 03.09.2010 PASSED BY THE CIT(A)-35, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) THE FOR ASSESSMENT YEAR 2007-08, ON FOLLOWI NG GROUNDS OF APPEAL. 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDI TION MADE BY THE LEARNED AO RS.29,40,933/- ON ACCOUNT OF DEEMED DIVIDEND U/S 2( 22)(E) OF THE ACT. 2.THE LEARNED CIT(A) ERRED IN CONFIRMING AD-HOC ADD ITION OF RS.102235/- BEING 10% OF VARIOUS EXPENSES.. 2 ITA NO. 7709/MUM/2010 MS.SANGEETA VIJAY KUMAR 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF REGISTRATION OF DOCUMENTS FROM HER PROPRIETARY C ONCERN, M/S. VIJAYKUMAR ASSOCIATES. SHE WAS ALSO A DIRECTOR IN A COMPANY, M/S. TANVI CO NSTRUCTION CO.(P) LTD, WHEREIN, SHE HAD INTEREST IN EXCESS OF 10% OF VOTING POWER. TH E ASSESSING OFFICER HAS FROM THE AUDITED ACCOUNTS NOTED THAT THE ASSESSEE HAS OBTAIN ED LOAN OF RS.1,23,00,000/-, IN HER PROPRIETARY CONCERN, M/S. VIJAYKUMAR ASSOCIATES AND RS.80,50,000/- IN HER PERSONAL CAPACITY, FROM M/S. TANVI CONSTRUCTION CO.(P) LTD.. IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY THE DEEMING PROVISION OF SECTION 2(22)(E) SHOULD NOT BE INVOKED, THE ASSESSEE SUBMITTED THAT DURING THE NORMAL COURSE OF CONDUCTI NG THE BUSINESS, THE REGISTRATION OF THE PROPERTY SOLD BY M/S. M/S. TANVI CONSTRUCTION CO.(P ) LTD, IS CONDUCTED BY M/S.VIJAYKUMAR ASSOCIATES, ITSELF AND HENCE THE SAI D COMPANY HAS PAID CERTAIN ADVANCE AS DEPOSITS TOWARDS SMOOTH AND SPEEDY REGISTRATION OF DOCUMENTS IN RESPECT OF FLATS SOLD BY M/S. TANVI CONSTRUCTION CO.(P) LTD. AS ON THE LA ST DAY UNUSED BALANCES ARE TO BE RETURNED BACK TO THE COMPANY. SINCE, THE TRANSACTIO N WAS DURING THE COURSE OF BUSINESS, SAME SHOULD NOT BE TREATED AS DEEMED DIVIDEND. HOWE VER THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTION AND AFTER INVOKING THE PR OVISION OF 2(22)(E), MADE THE ADDITION OF RS.29,40,933/- TO THE TUNE OF ACCUMULATED PROFIT OF THE SAID COMPANY. THIS HAS ALSO BEEN CONFIRMED BY THE LEARNED CIT(A). 3. BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT HE WAS NOT DISPUTING THE APPLICABILITY OF PROVISION OF DEEMED DIVIDEND IN T HIS CASE, BUT HE IS DISPUTING ONLY THE QUANTUM OF DISALLOWANCE MADE BY THE AO. HE SUBMITTE D THAT THE CURRENT YEAR PROFITS SHOULD BE EXCLUDED FOR THE PURPOSE OF CONSIDERING T HE ACCUMULATED PROFITS. IN SUPPORT OF HIS CONTENTION HE STRONGLY RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. V.DAMODARAN (1980) 121 ITR 572 AND ALSO THE COORDINATE BENCH DECISION IN THE CASE OF M/S. ITL FABRICS PRIVATE LTD. VS. ACIT, IN ITA NO.7 247/M/2010 ORDER DATED 05.09.2012. HE ALSO FILED A COPY OF BALANCE SHEET AND THE PROFIT AND LOSS ACCOUNT FOR THE YEAR END OF 31 ST MARCH 2007, FROM WHICH HE POINTED OUT THAT THE ACC UMULATED 3 ITA NO. 7709/MUM/2010 MS.SANGEETA VIJAY KUMAR PROFIT BROUGHT FROM THE LAST YEAR WAS ONLY RS.18,64 ,751/- AND THEREFORE THE QUANTUM OF DISALLOWANCE SHOULD BE RESTRICTED TO THIS AMOUNT IN STEAD OF RS.29,40,933/-. 4. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON T HE FINDINGS OF THE CIT(A) AND SUBMITTED THAT ACCUMULATED PROFIT SHOULD ALSO INCLU DE CURRENT YEAR PROFIT. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. THE ONLY ISSUE INVOLVED BEFORE US IS THE QU ANTUM OF DISALLOWANCE WHICH HAS TO BE SUSTAINED FOR THE PURPOSE OF DEEMED DIVIDEND U/S.2( 22)(E). FROM THE PERUSAL OF THE BALANCE SHEET AND THE PROFIT AND LOSS ACCOUNT FOR T HE 31 ST MARCH 2007, IT IS SEEN THAT, RESERVE AND SURPLUS AS ON 31 ST MARCH 2006 STOOD AT RS.18,64,751/- AND AS AT 31 ST MARCH 2007 IT WAS RS.29,40,933/- WHICH ALSO INCLUDED THE CURRENT YEAR PROFIT OF RS.10,76,183/-. THE ISSUE, WHETHER THE PROFIT EARNED BY THE COMPANY DURING THE YEAR IN WHICH THE LOANS WERE ADVANCED THAT IS, THE CURRENT PROFIT CAN BE CO NSIDERED TO BE INCLUDED WITHIN THE ACCUMULATED PROFITS OF THE COMPANY, HAS BEEN SETT LED BY CATENA OF DECISIONS. THE HONBLE SUPREME COURT IN CASE OF CIT VS. V.DAMODARA N (SUPRA) AFTER TAKING NOTE OF VARIOUS DECISIONS HAS HELD THAT THE WORD ACCUMULAT ED PROFIT, CAN NOT MEAN TO CONSTRUE TO INCLUDE CURRENT PROFIT FOR THE PURPOSE OF DEEMED DIVIDEND. THE RELEVANT OBSERVATIONS AND THE CONCLUSION BY THEIR LORDSHIPS AFTER ANALYZI NG VARIOUS DECISION ARE AS UNDER: 8. THE QUESTION IS WHETHER THE PROFITS EARNED BY TH E COMPANY DURING THE YEAR IN WHICH THE LOANS WERE ADVANCED TO THE ASSESSEE, THAT IS TO SAY, THE CURRENT PROFITS, CAN BE REGARDED AS INCLUDED WITHIN THE ACCUMULATED PROFITS OF THE COMPANY. IT WILL BE NOTICED THAT THE EXPRESSION ACCUMULATED PROFITS OCCURS IN S. 2(6A)(C) OF THE ACT. CONSTRUING THAT CLAUSE IN GIRDHARDAS & CO. LTD. VS. CIT (1957) 31 ITR 82 (BOM) : TC41R.120 THE BOMBAY HIGH COURT SAID: THE LIMITATION IMPOSED BY THE LEGISLATURE IS THAT THE PROFITS MUST IN THE FIRST PLACE BE ACCUMULATED IN CONTRADISTINCTION TO THE PROFITS BEI NG CURRENT.... THE MADRAS HIGH COURT IN CIT VS. M. V. MURUGAPPAN ( 1966) 62 ITR 382 (MAD) : TC41R.124 TOOK THE SAME VIEW. IT ANALYSED THE CONCE PT OF ACCUMULATED PROFITS AND IN THAT CONNECTION PARTICULARLY REFERRED TO THE OBSERV ATIONS OF ISSACS AND RICH II. IN HOOPER & HARRISON LTD. (IN LIQUIDATION) VS. FEDERAL COMMIS SIONER OF TAXATION 35 CLR 458, WHO RELIED ON HOLLIS VS. ALLAN (1866) 14 WR 980 AND SPROULE VS. BOUCH (1885) 29 CH D 635 (CA) AND IRC VS. BLOTT (1921) 2 AC 171 (HL) WHE RE THE DISTINCTION BETWEEN CURRENT PROFITS AND ACCUMULATED PROFITS WAS GRAPHICALLY BRO UGHT OUT. THE DECISION OF THE MADRAS HIGH COURT WAS AFFIRMED IN APPEAL BY THIS COURT IN CIT VS. M. V. MURUGAPPAN (1970) 77 ITR 818 (SC) : TC41R.121 AND IT WAS OBSERVED THAT 4 ITA NO. 7709/MUM/2010 MS.SANGEETA VIJAY KUMAR ....THE PROFITS OF THE YEAR IN THE COURSE OF WHICH THE COMPANY WAS ORDERED TO BE WOUND UP NOT BEING ACCUMULATED PROFITS WERE NOT PART OF T HE DIVIDENCH THEREAFTER, THE BOMBAY HIGH COURT IN CIT VS. P. K. BADIANI (1970) 76 ITR 369 (BOM) TC41R.276 WHILE INTERPRETING S. 2(6A)(E) OF THE ACT , APPLIED THE SAME CONSTRUCTION AND HELD THAT THE EXPRESSION ACCUMULATED PROFITS IN T HAT CLAUSE MUST MEAN PROFITS WHICH HAD ACCUMULATED PRIOR TO THE ACCOUNTING YEAR OF WHI CH THE INCOME PROFITS AND GAINS WERE BEING ASSESSED, WHILE CURRENT PROFITS WOULD MEAN TH E PROFITS OF THE ACCOUNTING YEAR. IN A RECENT CASE, CIT VS. G. SHANKARAN (1978) 111 ITR 22 0 (MAD) : TC41R.125, THE MADRAS HIGH COURT HAS REAFFIRMED THAT THE EXPRESSION ACCU MULATED PROFITS IN S. 2(6A)(E) CANNOT TAKE IN CURRENT PROFITS. 9. THE POSITION APPEARS TO BE WELL-SETTLED. EXCEPT FOR T. SUNDARAM CHETTIAR VS. CIT AND T. MANICKAVASAGAM CHETTIAR VS. CIT (1963) 49 ITR 28 7 (MAD) : TC41R.314 IN WHICH THE RATIO IS FAR FROM CLEAR, A LONG LINE OF JUDICIAL DE CISIONS HAS TAKEN THE VIEW THAT THE WORDS ACCUMULATED PROFITS IN S. 2(6A) OF THE INDIAN IT ACT, 1922, CANNOT BE CONSTRUED TO INCLUDE CURRENT PROFITS. WE ARE IN AGREEMENT WITH T HAT VIEW, BEING PERSUADED IN THAT BEHALF BY THE REASONING WHICH HAS PREVAILED IN THE AFOREMENTIONED CASES. THE DISTINCTION BETWEEN ACCUMULATED PROFITS AND CURRENT PROFITS HAS LONG HELD THE FIELD, AND AS THE LEARNED JUDGES OF THE HIGH COURT OF AUSTRALIA OBSER VED IN HOOPER & HARRISON LTD. (SUPRA), IT HAS BEEN WELL KNOWN IN JUDICIAL DECISIO NS AND IN THE MERCANTILE WORLD FOR WELL OVER A CENTURY. MOREOVER, THIS COURT IN M. V. MURUG APPAN (SUPRA) HAS ALSO TAKEN THE VIEW THAT CURRENT PROFITS CANNOT BE INCLUDED IN ACC UMULATED PROFITS. IT APPEARS TO BE NOW THE ESTABLISHED LAW OF THE LAND. AN ATTRACTIVE SUBM ISSION WAS RAISED ON BEHALF OF THE REVENUE THAT IN THE TWELFTH REPORT OF THE LAW COMMI SSION OF INDIA (P. 324, ITEM 17), THE AUTHORS OF THE REPORT CONSIDER THAT THE INTENTION O F THE LEGISLATURE WAS TO INCLUDE CURRENT PROFITS IN THE EXPRESSION ACCUMULATED PROFITS IN S. 2(6A) AND THAT THE PRESENT DEFINITION OF ACCUMULATED PROFITS BY EXPLN. 2 TO S. 2(22) OF THE IT ACT, 1961, ONLY CLARIFIES WHAT THE TRUE INTENT WAS ALL ALONG. IN THE VIEW WHICH HA S FOUND FAVOUR WITH US, WE ARE NOT PERSUADED BY THAT SUBMISSION. 6. IN VIEW OF THE ABOVE ESTABLISHED PROPOSITION OF LAW, WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL, THAT THE ACCUMULATED PROFIT S SHOULD NOT INCLUDE THE CURRENT PROFIT AND THEREFORE, THE DISALLOWANCE OF DEEMED DIVIDEND SHOULD BE RESTRICTED TO THE ACCUMULATED PROFIT, BROUGHT FORWARD FROM EARLIER YE ARS AND NOT THE CURRENT YEAR PROFIT. THUS, THE DISALLOWANCE ON ACCOUNT OF DEEMED DIVIDEN D U/S.2(22)(E), WILL BE RESTRICTED TO RS. 1,864,751/- IN THIS AD-HOC AND THE BALANCE DISA LLOWANCE WILL GET DELETED. WE ORDER ACCORDINGLY. 7. IN THE RESULT GROUND NO.1 IS TREATED AS PARTLY A LLOWED. 5 ITA NO. 7709/MUM/2010 MS.SANGEETA VIJAY KUMAR 8. IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE AD-HOC ADDITION OF RS.10,2,235/- BEING 10% OF VARIOUS EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAS CLAIMED EXPENSES UN DER FOLLOWING HEADS : (RS.) 1. COMPUTER EXPENSES 1,39,354 2. CONVEYANCE EXPENSES 2,39,134 3. MISC. EXPENSES 39,816 4. XEROX CHARGES 2,81,005 5. TELEPHONE CHARGES 1,60,646 6. PRINTING & STATIONERY 59,029 7. STAFF WELFARE EXPENSES 1,03,370 TOTAL 10,22,354 THE ASSESSING OFFICER OBSERVED THAT SOME OF THE EX PENSES HAVE BEEN INCURRED IN CASH AND PERSONNEL ELEMENT OF EXPENDITURE CANNOT BE RULED OUT. ACCORDINGLY, HE MADE THE AD-HOC DISALLOWANCE OF 10%. 9. BEFORE THE CIT(A), IT WAS SUBMITTED BY THE ASSES SEE THAT THE ASSESSEE IS MAINTAINING REGULAR BOOKS OF ACCOUNT WHICH ARE SUBJ ECT TO AUDIT U/S.44AB AND WITHOUT POINTING OUT ANY SPECIFIC DEFECT EITHER IN THE BOOK S OF ACCOUNT OR IN THE VOUCHERS, NO AD- HOC DISALLOWANCE CAN BE MADE. HOWEVER, THE LEARNED CIT(A) CONFIRMED THE ESTIMATED DISALLOWANCE OF 10%. 10. BEFORE US THE LEARNED COUNSEL REITERATED THE S UBMISSIONS MADE BEFORE CIT(A), WHEREAS THE LEARNED DR STRONGLY RELIED UPON FINDING S OF THE AO AS WELL AS CIT(A). 11. AFTER CAREFULLY CONSIDERING THE RELEVANT FINDIN GS OF THE AO AS WELL AS CIT(A), WE FIND THAT THE AO HAS MADE THE AD-HOC DISALLOWANCES, MAINLY ON THE GROUND THAT SOME OF THESE EXPENSES HAVE BEEN INCURRED IN CASH AND NECES SARY EVIDENCES REQUIRED IN RESPECT OF THE SAID CLAIM ARE NOT PROPERLY VOUCHED. SOME PERSO NAL ELEMENT OF EXPENSES ALSO CANNOT 6 ITA NO. 7709/MUM/2010 MS.SANGEETA VIJAY KUMAR BE RULED OUT. THIS FINDING OF THE AO HAS NOT BEEN REBUTTED BEFORE US. HOWEVER LOOKING TO THE NATURE OF EXPENSES AS INCORPORATED ABOVE, WE FI ND THAT AS FAR AS CONVEYANCE EXPENSES AND TELEPHONE CHARGES ARE CONCERNED, PERSONAL ELEM ENT CANNOT BE RULED OUT AS THE ASSESSEE IS AN INDIVIDUAL. THE OTHER EXPENSES ALSO, THOUGH ARE FOR THE BUSINESS PURPOSES, BUT DUE TO LACK OF PROPER EVIDENCES, ENTIRE CLAIM C ANNOT BE SAID TO BE FULLY VERIFIABLE. UNDER THESE FACTS AND CIRCUMSTANCES, WE FEEL THAT D ISALLOWANCE SHOULD BE RESTRICTED TO 5%. THUS, THE DISALLOWANCE OF RS.102235/- SHOULD BE REDUCED TO HALF. 12. IN THE RESULT, GROUND NO.2 IS PARTLY ALLOWED. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON MARCH 14 TH , 2014 SD/- SD/- (SANJAY ARORA) (AMIT SH UKLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 3 DATED :14.03.2014 A.K. PATEL, PS / 45 65 / 45 65 / 45 65 / 45 65/ COPY OF THE ORDER FORWARDED TO : 1. 7 / THE APPELLANT 2. 487 / THE RESPONDENT 3. 9() / THE CIT(A) 4. 9 / CIT - CONCERNED 5. 5 4, , / DR, ITAT, MUMBAI 6. * / GUARD FILE / BY ORDER, / // / (DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI