DCIT, Ludhiana V. M/s Eastman Impex, Ludhiana

ITA 802/CHANDI/2011

• Counselvise Citation: 80221514 RSA 2011
• Duration Of Justice: 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 12-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY SHARMA
• Keywords: Earning of tax free income; Bad and doubtful debts; Deemed dividend
• Section: 143(3); 40(b); 2(22)(e); 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE MS SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO.802/CHD/2011 ASSESSMENT YEAR: 2007-08 D.C.I.T. C-1, LUDHIANA V. EASTMAN IMPEX INDUSTRIAL AREA C DHANDARI KALAN LUDHIANA PAN: AAAFE 3448 C (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AJAY SHARMA RESPONDENT BY: SHRI ASHWANI KUMAR DATE OF HEARING: 26.09.2011 DATE OF PRONOUNCEMENT: 29 .09.2011 ORDER PER SUSHMA CHOWLA, JM THE APPEAL BY THE REVENUE IS AGAINST THE ORDER OF C IT(A), LUDHIANA DATED 26.5.2011 RELATING TO ASSESSMENT YEAR 2007-08 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT, 1961. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE LD. CIT(A) ERRED IN LAW AND ON FACTS I N DELETING THE ADDITION OF RS. 9,89,320/- ON ACCOUNT OF DEEME D DIVIDEND BY MISINTERPRETING THE PROVISIONS OF SECTION 2(22)(E) AS THERE IS COMBINED SHARE OF PROFIT OF 48% WHICH IS SUBSTANTIA L. 2. THAT THE LD. CIT(A) ERRED IN LAW AND ON FACTS B Y DELETING THE ADDITION MADE BY APPLYING TO PROVISIONS OF SECT ION 40(B) AS THE SAME WAS NOT WARRANTED BY THE PARTNERSHIP DEED ON ACCOUNT OF INTEREST PAID TO PARTNERS AT RS. 9,76,635/- FOR THE PERIOD FROM 1.12.2006 TO 25.3.2007. 3 THAT THE LD. CIT(A) ERRED IN LAW AND ON FACTS BY DELETING THE ADDITION AT RS. 1,73,238/- MADE ON ACCOUNT OF INTEREST EXPENDITURE INCURRED ON EARNING OF THE DIVIDEND INC OME WHICH DOES NOT FORM PART OF THE INCOME-TAX ACT. 4 THAT THE LD. CIT(A) ERRED IN LAW AND ON FACTS BY DELETING THE ADDITION MADE AT RS. 29,25,275/- ON ACCOUNT OF BAD DEBTS WRITTEN OFF DEBITED TO THE PROFIT AND LOSS ACCOUNT DESPITE OF THE FACT THAT THE ASSESSEE HAD REGULAR TRANSACTIONS WIT H THE PARTIES EVEN AFTER OCCURRENCE OF TRANSACTION UNDER CONSIDER ATION. 2 3. THE ISSUE RAISED IN GROUND NO. 1 IS AGAINST DELE TION MADE ON ACCOUNT OF DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD RECEIVED LOAN OF RS . 80 LAKHS FROM M/S ASHOKA ENGINEERS P LTD, A SISTER CONCERN OF THE ASS ESSEE. THE ASSESSEE FIRM CONSTITUTES OF PARTNERS OUT OF WHICH THREE PARTNERS I.E. SHRI VINAY SINGAL (15% SHARE), SHRI RAJIVA SINGAL (18% SHARE) AND SHR I JAGDEEP SINGAL (15% SHARE) WERE HAVING SHARE HOLDING IN THE SISTER CONC ERN. THE AO IN VIEW OF THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT CONCL UDED THAT THREE PARTNERS COLLECTIVELY HELD 48% OF SHARE IN THE ASSESSEE-FIRM AND HENCE SATISFY THE CONDITIONS OF HAVING SUBSTANTIAL INTEREST IN THE SI STER CONCERN. THE AO DISALLOWED THE SUM OF RS. 98,320/- BY INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE OBSERVING AS UNDER:- 4 I HAVE CONSIDERED THE BASIS OF ADDITION MADE BY THE AO AND THE ARGUMENTS OF THE APPELLANT. I DONT AGREE WITH THE INTERPRETED OF THE AO WHEREIN THE SHARE OF THREE INDIVIDUALS IN THE AS SESSEE FIRM HAS BEEN CLUBBED SO AS TO SATISFY THE PROVISIONS OF SEC TION 2(22)(E) ON THE ISSUE OF SUBSTANTIAL INTEREST. IT IS CLEAR THAT IN DIVIDUALLY NONE OF THE PARTNERS HAVE SHARE HOLDING IN THE ASSESSEE FIRM EX CEEDING THE MANDATORY REQUIREMENT OF 20%. IT ONLY MEANS THAT T HE AO HAS STEPPED INTO THE SHOES OF LAW MAKERS TO MAKE PRESUMPTION WH ICH HAVE NOT BEEN MANDATED IN THE INCOME-TAX ACT. I AGREE THAT THERE IS SOME LOGIC IN THE AOS SUSPICION THAT THE SHARE HOLDING IN ASSESS EE FIRM HAS BEEN DESIGNED TO CIRCUMVENT THE PROVISIONS OF SECTION 2( 22)(E) BUT THE SAME CAN NOT BE SUBSTITUTED FOR CLEAR LANGUAGE OF THIS S ECTION. THE DEEMING PROVISIONS IS IN PLACE TO TAX RECEIPT WHICH IN THE ORDINARY COURSE OF BUSINESS WOULD NOT BE TREATED AS INCOME AND THEREFO RE AN-ARTIFICIAL CLOTHING IS REQUIRED TO MAKE IT LOOK LIKE INCOME. T HEREFORE, THERE IS NO ROOM IN A DEEMING PROVISION FOR FURTHER PRESUMPTION S/EXTRAPOLATION. SINCE THE PROVISIONS CONTAINED IN SECTION 2(22)(E) ARE NOT SATISFIED THE ADDITION MADE BY THE AO TO THE TUNE OF RS. 9,89,320 /- IS DELETED. 5. ON HEARING THE RIVAL CONTENTIONS AND PERUSING TH E RECORD, WE FIND NO MERIT IN THE GROUND RAISED BY THE REVENUE. UNDER T HE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, THE SECTION POSTULATES THE APP LICATION WHERE ANY 3 PAYMENT IS MADE BY A COMPANY, NOT BEING PUBLIC LTD COMPANY, TO SHARE HOLDER, WHO IS BENEFICIAL OWNER OF SHARE HOLDING BU T NOT LESS THAN 10% OF THE VOTING POWER OR A CONCERN IN WHICH SUCH SHARE H OLDER IS A MEMBER / PARTNER AND IN WHICH HE HAD SUBSTANTIAL INTEREST OR ANY PAYMENT BY SUCH COMPANY FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAR EHOLDER TO THE EXTENT TO WHICH THE COMPANY POSSESSES ACCUMULATED PROFITS. IN EXPLANATION 3 TO SAID SUB-CLAUSE PERSON IS DEEMED TO HAVE SUBSTANTIAL INT EREST IN THE CONCERN, IF HE HAD NOT LESS THAN 20% INTEREST IN THE INCOME OF SUC H CONCERN. APPLYING ABOVE SAID PROVISION TO THE FACTS OF THE CASE, WE F IND THAT THREE PARTNERS REFERRED TO BY THE AO HAD LESS THAN 20% SHARE IN TH E PARTNERSHIP FIRM CONCERN, TO WHICH SISTER CONCERN M/S ASHOKA ENGINEE RS P LTD HAD MADE ADVANCE OF RS. 80.00 LAKHS. IN VIEW OF THE PROVISI ONS OF THE ACT, WE FIND NO MERIT IN THE ORDER OF AO IN TAKING THE CUMULATIVE T OTAL OF THE SHARE HOLDING OF THREE PARTNERS IN ORDER TO INVOKE THE PROVISION S OF SEC 2(22)(E) OF THE ACT. WE ARE IN AGREEMENT WITH THE ORDER OF LD. CIT (A) AND DISMISS THE GROUND NO. 1 RAISED BY THE REVENUE. 6. THE ISSUE IN GROUND NO. 2 RAISED BY THE REVENUE WAS ON ACCOUNT OF ALLOWANCE OF INTEREST PAID TO THE PARTNERS U/S 40(B ) OF THE ACT. 7. THE FACTS RELATING TO THE ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD EXECUTED A PARTNERS HIP DEAD DATED 1.4.2006 IN WHICH CLAUSE OF INTEREST AND REMUNERATION TO BE PAID TO PARTNERS HAD BEEN PROVIDED. ANOTHER AMENDED DEAD WAS EXECUTED ON 25. 3.2007, WHICH WAS MADE EFFECTIVE FROM 1.12.2006 UNDER WHICH INTEREST WAS PROVIDED TO THE OTHER PARTNERS ADMITTED TO THE PARTNERSHIP. THE CLA IM OF THE ASSESSEE WAS THAT IN THE DEAD DATED 1.4.2006, THE CLAUSE OF PAYM ENT OF INTEREST TO PARTNERS WAS PROVIDED AND THE SUBSEQUENT AMENDMENT DEED WAS IN ORDER TO PROVIDE INTEREST TO THE OTHER PARTNERS. THE AO REJECTING T HE CLAIM OF THE ASSESSEE DISALLOWED THE INTEREST RELATING TO THE PERIOD ON 1 .12.2006 TO 25.3.2007 TOTALING RS. 9,76,635/-. THE CIT(A) ALLOWED THE CL AIM OF THE ASSESSEE IN VIEW OF THE CLAUSE RELATING TO PAYMENT OF INTEREST AND REMUNERATION AT A 4 PARTICULAR RATE REMAINING UNCHANGED FROM EARLIER PA RTNERSHIP DEED. HOWEVER, THE STAMP PAPER FOR THE AMENDED DEEMED WER E PURCHASED ON 1.12.2006 BUT ONLY DEED WAS EXECUTED ON 25.3.2007. THE CIT(A) HELD THAT AS THE PAYMENT OF INTEREST HAS BEEN MADE TO EXISTIN G PARTNERS, THERE WAS NO REASON TO ATTRIBUTE ANY MOTIVES THIS ACCOUNT TO THE ASSESSEE AS HELD BY THE AO. WE ARE OF THE VIEW THAT IN THE PRESENT FACTS A ND CIRCUMSTANCES, THE INTEREST DUE TO PARTNERS IS DULY ALLOWABLE AS THE O RIGINAL PARTNERSHIP DEED DATED 1.4.2006 PROVIDED FOR THE INTEREST AND REMUNE RATION TO THE PARTNERS. THE AMENDED DEED WAS ONLY GIVING EFFECT TO THE EARL IER DEED AND THOUGH EXECUTED ON 25.3.2007 WAS TO BE MADE EFFECTIVE FOR THE PERIOD FROM 1.12.2006. UPHOLDING THE ORDER OF LD. CIT(A), WE D ISMISS GROUND NO. 2 RAISED BY THE REVENUE. 8. THE ISSUE RAISED IN GROUND NO. 3 IS RELATING TO DISALLOWANCES OF INTEREST EXPENDITURE IN VIEW OF THE PROVISIONS OF S ECTION 14A OF THE ACT. THE AO INVOKING THE PROVISIONS OF SECTION 14A OF TH E ACT DISALLOWED A SUM OF RS. 1,73,238/-. TOTAL DIVIDEND INCOME OWNED BY THE ASSESSEE DURING THE YEAR WAS RS. 1,81,249/-. THE AO MADE DISALLOWANCES OUT OF INTEREST EXPENDITURE BEING ATTRIBUTABLE TO THE INVESTMENT I N SHARE OF INDIAN COMPANIES, INCOME FOR WHICH WERE EXEMPT FROM TAX. T HE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE AS THE AO HAD FAILED TO S PECIFY CONNECTION BETWEEN THE EXEMPT INCOME AND EXPENDITURE IN THE FORM OF IN TEREST DEBITED TO PROFIT AND LOSS ACCOUNT. THE CIT(A) RELIED ON THE RATIO L AID DOWN IN CIT V. WINSOME TEXTILE INDUSTRIES LTD (2009) 319 ITR 204 ( P & H) AND ITA NO. 331 OF 2009 IN THE CASE OF CIT-II V. HERO CYCLE LTD DECIDED BY THE HON'BLE PUNJAB & HARYANA HIGH COURT ON NOVEMBER 4, 2009). 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE DISALLOWANCES OF INTEREST EXPENDITURE HAD BEEN MADE IN THE HANDS OF THE ASSESSEE BY THE AO INVOKING PROVISIONS OF SECTION 1 4A OF THE ACT. WE FIND THAT THE ISSUE IN THE PRESENT CASE IS COVERED BY TH E RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT V. WINSO ME TEXTILE INDUSTRIES 5 LTD (SUPRA) AND ITA NO. 331 OF 2009 IN THE CASE OF CIT-II V. HERO CYCLE LTD (SUPRA) WHEREIN SIMILAR DISALLOWANCES OF INTEREST A GAINST THE DIVIDEND INCOME WAS HELD TO BE NOT ALLOWABLE WITHOUT ESTABLI SHING THE NEXUS BETWEEN THE LOAN TAKEN FOR BUSINESS AND THE INVESTMENT MADE , INCOME FROM WHICH WAS EXEMPT. FOLLOWING THE ABOVE SAID RATIO, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS GROUND NO. 3 RAISED BY THE REVENUE. 10. THE ISSUE RAISED IN GROUND NO. 4 RAISED BY THE REVENUE IS AGAINST THE DELETION OF ADDITION MADE ON ACCOUNT OF BAD DEBTS W RITTEN OFF. 11. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATIO N HAD CLAIMED BAD DEBTS TOTALING TO RS. 39,00,367/-. ADMITTEDLY THE SAID BAD DEBTS WERE WRITTEN OFF DURING THE YEAR. THE AO RESTRICTED THE CLAIM OF THE ASSESSEE TO 25% OF THE BAD DEBTS WRITTEN OFF AND DISALLOWED 75% OF THE SAME AMOUNTING TO RS. 29,25,275/-. THE EXPLANATION OF THE ASSESSE E BEFORE THE CIT(A) IS INCORPORATED UNDER PARA 12 AT PAGES 10 12 OF THE APPELLATE ORDER. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE OBSERVING THAT THE DISALLOWANCES MADE BY THE AO WAS UNDER SUSPICION RATHER THAN ANY LOGICAL REASONING. IN VIEW OF THE AMENDMENT WE.F. 1.4.89, THE CIT(A) HELD THAT THE STATUTE DOES NOT REQUIRE THE ASSESSEE TO ESTABLISH THAT BAD DEBT S BECOMES BAD OR WAS RECOVERABLE AND THE ONLY REQUIREMENT WAS THAT THE S AME SHOULD BE WRITTEN OFF IN THE BOOKS OF ACCOUNT. THE CIT(A) RELIED ON THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN TRF LTD (2010) 323 ITR 397 (SC) ALLOWED THE CLAIM OF THE ASSESSEE. 12 THE DR FOR THE REVENUE HAS FAILED TO CONTROVERT THE FINDINGS OF CIT(A). ADMITTEDLY THE BAD DEBTS HAD BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNT AND IN VIEW OF THE RATIO LAID BY THE HON'BL E APEX COURT IN TRF LTD (SUPRA) SUCH AMOUNTS WHICH HAVE BEEN WRITTEN OFF I N THE BOOKS OF ACCOUNT AS BAD DEBTS, ARE TO BE ALLOWED AS DEDUCTION UNDER THE AMENDED PROVISIONS OF THE ACT. THE AO HAD ALLOWED 25% OF THE CLAIM AN D DISALLOWED 75% OF 6 BAD DEBTS. UPHOLDING THE ORDER OF CIT(A), WE DISMIS S THE GROUND NO. 4 RAISED BY THE REVENUE. 13 IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 29 DAY OF SEPT, 2011. SD/- SD/- (MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 29 SEPT, 2011 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR