SANDEEP BHARAT SINGH KOTHARI, MUMBAI V. ASST CIT 12(2), MUMBAI

ITA 8706/MUM/2011

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2122 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 21-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 23-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Assessee Lawyers: DEVENDRA A MEHTA
• Keywords: Opportunity of being heard; Earning of tax free income; Deemed dividend
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI N.K . BILLAIYA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG , JUDICIAL MEMBER / I .T.A. NO. 8706/MUM/2011 ( / ASSESSMENT YEAR : 2008 - 09 SHRI SANDEEP BHARAT SINGH KOTHARI, C/O RAVI & DEV, CHARTERED ACCOUNTANTS, 601 - A, AURUS CHAMBERS, BEHIND MAHENDRA TOWERS, S.S. AMRUTWAR MARG, WORLI MUMBAI - 400 013 / VS. THE ACIT - 12(2), MUMBAI ./ ./ PAN/GIR NO. : AKDPK 7812R ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI DEVENDRA A. MEHTA / RESPONDENT BY: SHRI PREMANAND J. / DATE OF HEARING : 2 1 .0 9 .2015 / DATE OF PRONOUNCEMENT : 07. 10 .2015 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) - 23 , MUMBAI D ATED 1 4 . 6 .201 1 PERTAINING TO ASSESSMENT YEAR 200 7 - 0 8 . 2. THE GRIEVANCE OF THE ASSESSEE IS TWO - FOLD. FIRSTLY, THE ASSESSEE IS AGGRIEVED BY THE ADDITION ON ACCOUNT OF DEEMED DIVIDEND U/S. ITA. NO. 8706/M/2011 2 2(22)(E) OF THE ACT AMOUNTING TO RS. 91,19,909/ - AND SECONDLY ON ACCOUNT OF DISAL LOWANCE U/S. 14A R.W. RULE 8D AMOUNTING TO RS. 4,12,825/ - . 2.1. THE ASSESSEE IS A PROPRIETOR OF NIRMAL TRADERS AND IS ENGAGED IN THE BUSINESS OF GENERAL COMMISSION AGENTS IN YARN & FABRICS. THE ASSESSEE IS ALSO A SHARE BROKER TRADING IN SHARES & COMMO DITIES. THE RETURN FOR THE YEAR WAS FILED ON 26.9.2008 DECLARING TOTAL INCOME AT RS. 31,96,208/ - . THE RETURNS WERE SELECTED FOR SCRUTINY ASSESSMENT. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSE E HAS TAKEN LOANS FROM - (I) SUMO INVESTMENT PVT. LTD., - RS. 73,10,000.0 AND (II) POLYYARN AGENCIES PVT. LTD., - RS. 1,27,71,834/ - . ON FURTHER PROBE, THE ASSESSING OFFICER FOUND THAT THE ACCUMULATED PROFITS OF M/S. POLYYARN AGENCIES PVT. LTD. WAS RS. 18,09,909/ - AND THE ASSESSEE WAS HOLDING 15.41% OF SHARES IN THE SAID COMPANY. THE ACCUMULATED PROFIT OF M/S. SUMO INVESTMENT PVT. LTD. WAS AT RS. 98,39,957/ - IN WHICH THE ASSESSEE WAS HOLDING 3 0 .39% OF SHARES. 2.2. THE AO WAS OF THE FIRM BELIEF THAT THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT SQUARELY APPLY ON THE FACTS OF THE CASE THEREFORE THE ASSESSEE WAS ASKED TO EXPLAIN WHY PROVISIONS OF SEC. 2(22)(E) SHOULD NOT BE APPLIED. 2.3. THE ASSESSEE FILED A DETAILED REPLY CLAIMING THAT THE ASSESSEE HAS FROM TIME TO TIME GIVEN LOAN TO THE COMPANIES ON WHICH THE COMPANIES HAVE PAID INTEREST TO THE ASSESSEE AFTER DEDUCTING TAX AT SOURCE. IN SUPPORT, THE ASSESSEE FILED THE COPIES OF THE LEDGER ACCOUNT. THE ASSESSEE CLAIMED THAT SINCE HE HAS GIVEN THE LOAN TO THE ITA. NO. 8706/M/2011 3 COMPANIES, THEREFORE, THE QUESTION OF DEEMED DIVIDEND DOES NOT ARISE. 3. THE REPLY OF THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE AO. ON SCRUTINIZING THE COPIES OF THE LEDGER ACCOUNT, THE AO FOUND THAT IN THE CASE OF M/S. POLYYARN AGENCIES PVT. LTD., THERE WAS A CREDIT BALANCE OF RS. 1,30,000/ - AT THE STARTING OF THE YEAR AND DURING THE YEAR THROUGH VARIOUS TRANSACTIONS, THE ASSESSEE HAS RECEIVED RS. 1,27,71,834/ - . IN SO FAR AS M/S. SUMO INVESTMENT PVT. LTD., IS CONCERNED, THE AO FOUND THAT THE SAID COMPANY HAS NOT SHOWN INCOME FROM MONEY LENDING BUSINESS AS SUBSTANTIAL PART OF ITS INCOME, THEREFORE THE CLAIM OF THE ASSESSEE THAT THE SAID COMPANY IS IN MONEY LENDING BUSINESS DOES NOT HOLD ANY WATER. 3.1. APPLYING THE PROVISIONS OF SEC. 2(22)(E ) OF THE ACT, THE AO COMPUTED THE DEEMED DIVIDEND IN THE CASE OF M/S. SUMO INVESTMENT PVT. LTD. AT RS. 73,10,000/ - AND IN THE CASE OF M/S. POLYYARN AGENCIES PVT. LTD. AT RS. 18,09,909/ - , TOTAL ADDITION WAS MADE U/S. 2(22)(E) OF THE ACT AT RS. 91,19,909/ - . 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 5. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. DRAWING OUR ATTENTION TO THE COPIES OF THE LEDGER ACCOUNTS O F THE TWO COMPANIES, THE LD. COUNSEL STATED THAT IN THE CASE OF M/S. POLYYARN AGENCIES PVT. LTD. UPTO 7.6.2007, THERE WAS A DEBIT BALANCE OF RS. 5,166/ - . DRAWING OUR ATTENTION TO THE VARIOUS TRANSACTIONS AS EXHIBITED IN THE ACCOUNTS LEDGER, THE LD. COUNSE L STATED THAT MOST OF THE TIME, IT WAS THE ITA. NO. 8706/M/2011 4 COMPANY WHICH OWED TO THE ASSESSEE, THEREFORE IT IS INCORREC T TO SAY THAT THE ASSESSEE HAS BORROWED RS. 1,27,71,834/ - FROM THE SAID COMPANY. SAME IS THE SITUATION WITH M/S. SUMO INVESTMENT PVT. LTD. THE LD. COUNSEL FURTHER DREW OUR ATTENTION TO EXHIBIT - 24 OF THE PAPER BOOK AND STATED THAT EVEN THE CALCULATION O F DEEMED DIVIDEND AS TAKEN BY THE AO IS ON WRONG FACTS AND THE CORRECT POSITION FIGURE COMES TO RS. 66,35,285/ - . IN SUPPORT OF HIS SUBMISSION, THE LD. COUNSEL RELIED UPON THE DECISION OF THE HONBLE HIGH COURT OF CALCUTTA IN THE CASE OF M UKUNDRAY K. SH AH VS CIT 277 I TR 128 AND HONBLE MADRAS HIGH COURT IN THE CASE OF SUNIL KAPOOR VS CIT 375 ITR 01. 6. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE REVENUE AUTHORITIES. 7. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE CAREFULLY GONE THROUGH THE RELEVANT DOCUMENTS RELIED UPON BY THE LD. COUNSEL. BEFORE PROCEEDING FURTHER, LET US UNDERSTAND THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT WHICH READ AS UNDER: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) 24MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT. OF THE VOTING POWE R, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF AN Y SUCH SHAREHOLDER, TO THE ITA. NO. 8706/M/2011 5 EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS; 8. A PERUSAL OF THE AFOREMENTIONED SECTION CLEARLY SHOWS THAT THE LOAN/ADVANCE TO THE SHAREHOLDER CAN BE TREATED AS DEEMED DIVIDEND ONLY TO THE EXTENT TO WHICH THE COMPANY POSSESS ACCUMULATED PROFIT. THE COMPUTATION OF DEEMED DIVIDEND AS PER THE WORKING OF THE ASSESSEE AS EXHIBITED AT PAGE - 24 OF THE PAPER BOOK IS AS FOLLOWS: NAME OF THE PARTY AMOUNT DEEMED DIVIDEND POLYARN AGENCIES PVT. LTD. LOAN RECEIVED FREE RESERVES UPTO THE DATE OF LOAN DEEMED DIVIDEND RESTRICTED TO LOWER OF THE FREE RESERVES OR LOAN RECEIVED 2,694,668/ - 1,745,285/ - 1,745,285/ - SUMO INVESTMENT PVT. LTD. LOAN RECEIVED FREE RESERVES UPTO THE DATE OF LOAN DEEMED DIVIDEND RESTRICTED TO LOWER OF THE FREE RESERVES OR LOAN RECEIVED 4,890,000/ - 9,082,825/ - 4,890,000/ - 6,635,285/ - 9. THE DEEMED DIVIDEND CALCULATED BY THE AO IS AS UNDER: SR. NO. NAME OF THE COMPANY FROM WHOM LOAN IS ACCEPTED AMOUNT OF LOAN DEEMED DIVIDEND UPTO THE EXTENT OF ACCUMULATED PROFITS. ITA. NO. 8706/M/2011 6 1. SUMO INVESTMENT PVT. LTD., RS. 73,10,000/ - RS. 73,10,000/ - 2. POLYYARN AGENCIES PVT. LTD. RS. 1,27,71,834/ - RS. 18,09,909/ - 3. DEEMED DIVIDEND RS. 91,19,909/ - 10. THUS, IT CAN BE SEEN THAT THERE IS FACTUAL ERROR IN COMPUTING THE DEEMED DIVIDEND. SURPRISINGLY, THERE IS NO REFERENCE TO THE COMPUTATION MADE BY THE ASSESSEE IN THE ASSESSMENT ORDER. IN OUR CONSIDERED OPINION, WITHOUT POINTING OUT ANY F LAW OR ERROR IN T HE CALCULATION MADE BY THE ASSESSEE, THE AO SHOULD NOT HAVE PROCEEDED BY CALCULATING THE DEEMED DIVIDEND OF ITS OWN. FURTHER, THE AO HAS NOT GIVEN ANY BASIS AS TO HOW HE HAS COME TO THE ACCUMULATED PROFIT OF THE RESPECTIVE COMPANIES. THIS ISSUE CANNOT BE DECIDED ON INCORRECT FACTS THEREFORE, WE RESTORE THIS ISSUE TO THE FILE OF THE AO. THE AO IS DIRECTED TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE WORKINGS GIVEN BY THE ASSESSEE AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROU ND NO. 1 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 11. GROUND NO. 2 RELATES TO THE DISALLOWANCE MADE U/S. 14A R.W. RULE 8D . 12. WHILE SCRUTINIZING THE RETURN OF INCOME, THE AO FOUND THAT THE ASSESSEE HAS RECEIVED DIVIDEND OF RS. 2,62,194/ - . THE AO NOTICED THAT THE ASSESSEE HAS NOT ALLOCATED ANY EXPENSE FOR EARNING OF THE EXEMPT INCOME. THE ASSESSEE WAS ASKED TO EXPLAIN WHY EXPENSE SHOULD NOT BE ALLOCATED AS PER PROVISIONS OF SEC. 14A R.W. RULE 8D. 12.1. THE ASSESSEE CLAIMED THAT NO EXPENSES HA VE BEEN INCURRED FOR EARNING THE SAID INCOME. THE AO RUBBISHED THE CLAIM OF THE ASSESSEE AND PROCEEDED BY COMPUTING THE DISALLOWANCE APPLYING THE ITA. NO. 8706/M/2011 7 PROVISIONS OF SEC. 14A R.W. RULE 8D AND COMPUTED THE DISALLOWANCE AT RS. 4,12,825/ - . 13. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 14. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STRAIGHTAWAY RELIED UPON THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF JOINT INVESTMENTS PVT. LTD., IN ITA N O. 117 OF 2015. THE LD. COUNSEL ALSO RELIED UPON THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. DAGA GLOBAL CHEMICALS PVT. LTD. IN ITA NO. 5592/M/2012. IT IS THE SAY OF THE LD. COUNSEL THAT THE DISALLOWANCE OF EXPENDITURE CANNOT EXCEED THE TAX EXEMP T INCOME. 15. PER CONTRA, THE LD. DR SUPPORTED THE FINDINGS OF THE REVENUE AUTHORITIES. 16. WE HAVE CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF THE DECISIONS RELIED UPON BY THE LD. COUNSEL. THE HONBLE HIGH COURT OF DELHI IN THE CAS E OF JOINT INVESTMENTS PVT. LTD (SUPRA) HAS HELD THAT THE WINDOW FOR DISALLOWANCE IS INDICATED IN SEC. 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME . THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE. 17. A SIMILAR VIEW WAS TAKEN BY THE CO - ORDINATE BENCH IN THE CASE OF M/S. DAGA GLOBAL CHEMICALS PVT. LTD (SUPRA) WHEREIN IT HAS BEEN HELD THAT DISALLO WANCE U/S. 14A R.W. RULE 8D CANNOT EXCEED THE EXEMPT INCOME. ITA. NO. 8706/M/2011 8 18. RESPECTFULLY FOLLOWING THE AFOREMENTIONED DECISIONS , WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE TO RS. 2,62,194/ - . GROUND NO. 2 IS PARTLY ALLOWED. 19. IN THE RESULT, THE APPEAL FILE D BY THE ASSESSEE IS ALLOWED IN PART FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH OCTOBER , 2015 SD/ - SD/ - ( SANJAY GARG ) (N.K. BILLAIYA) /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 7 TH OCTOBER, 2015 . . ./ RJ , 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