UDAY K PRADHAN, MUMBAI V. ITO 26(2)(3), MUMBAI

ITA 8758/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75252 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 12-06-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 27-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJIV JAIN
• Assessee Lawyers: BHUPENDRA K SHAH
• Keywords: Opportunity of being heard; Deemed dividend
• Section: 143(3); 147

Judgement Text

F IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI . . , . , BEFORE SHRI I.P. BANSAL, JM AND SHRI KARUNAKARA RAO, AM ./I.T.A. NO.8758/M/2011 ( / ASSESSMENT YEAR: 2005 - 2006) UDAY K PRADHAN, 1 ST FLOOR, PARIJAT APT., OPP LILAVATI HOSPITAL, BANDRA RECLAMATION, BANDRA (W), MUMBAI 400 050. / VS. ITO - 26(2)(3), MUMBAI. ./ PAN : AAAPP 6068 R ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI BHUPENDRA K SHAH / RESPONDENT BY : SHRI SANJIV JAIN, DR / DATE OF HEARING : 30.12.2013 / DATE OF PRONOUNCEMENT : 08.01.2014 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE ASSESSEE ON 27.12.2011 IS AGAINST THE ORDER OF CIT (A) - 28, MUMBAI DATED 28.10.2011 FOR THE ASSESSMENT YEAR 2005 - 2006. IN THIS APPEAL, ASSESSEE RAISED THE FOLLOWING GROUNDS WHICH READ AS UNDER: 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN LAW, THE AO ERRED IN ADDING RS. 20,74,170/ - ON ACCOUNT OF DEEMED DIVIDEND U/S 2(22)(D) OF THE ACT. 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE AO FAILED TO APPRECIATE THAT THE APPELLANT RECEIVED REDEEMABLE PREFERENCE SHARES AGAINST VALUABLE CONSIDERATION I.E., AGAINST OUTSTANDING CAPITAL BALANCE LYING WITH THE PARTNERSHIP FIRM INTO A PRIVATE LIMITED COMPANY. 3 . IN THE FACTS AND CIRC UMSTANCES OF THE CASE AND ALSO IN LAW, THE LD CIT (A) ERRED IN APPRECIATING THE FACT THAT THE REDEMPTION IS MADE OUT OF THE 2 ORIGINAL AMOUNT OF SHARES ALLOTTED TO THE APPELLANT FOR VALUABLE CONSIDERATION AND THEREFORE, THERE IS NO DISTRIBUTION OF ANY PROFIT S BY THE COMPANY TO ITS SHAREHOLDERS ON REDUCTION OF CAPITAL. 4. IN THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND ALSO IN LAW, THE LD CIT (A) ALSO ERRED IN CONFIRMING ADDITION OF RS. 20,74,170/ - U/S 2(22)(D) WHICH IS AGAINST THE RELIEF GIVEN BY THE CIT ( A), SURAT AND D BENCH OF AHMEDABAD TRIBUNAL IN THE CASE OF ANOTHER PARTNER MR. ANANT VASHI ON THE SAME FACTS. 5. THE AO HAS ERRED IN LEVYING INTEREST U/S 234 - A, B, C AND ALSO INITIATING PENALTY U/S 271(1)(C) OF THE ACT. 3. AT THE OUTSET, SHRI BHUPENDRA K SHAH, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE BASIC FACTS AND MENTIONED THAT THE ASSESSEE IS A FIRM AND THE FIRM IS CONVERTED INTO A COMPANY BY NAME M/S. ENVIRO CONTROL ASSOCIATES INDIA PVT. LTD. AS PER THE BOOKS OF ACCOU NTS OF THE FIRM, ASSESSEES PARTNER HAD CREDIT BALANCE AS ON 31.3.2001 AMOUNTING TO RS. 38,74,178/ - . ON CORPORATIZATION OF THE FIRM, IN LIEU OF THE SAID CREDIT BALANCE, ASSESSEE RECEIVED RS. 2 LAKHS EQUITY SHARES AND 2,07,417 REDEEMABLE PREFERENCE SHARES . ON 18.6.2004, THE REDEEMABLE PREFERENCE SHARES WERE REDEEMED AND ASSESSEE RECEIVED THE PAYMENT OF RS. 20,74,170/ - I.E., RS. 10/ - PER EACH PREFERENCE SHARE. ON OBSERVING THE FACT THAT THE ASSESSEE RECEIVED THE SAID SUM WHICH HAS AN EFFECT OF REDUCTION I N THE CAPITAL BASE, AO INVOKED THE PROVISIONS OF SECTION 2(22)(D) OF THE ACT. ACCORDINGLY, AO MADE ADDITION OF RS. 20,74,170/ - VIDE ASSESSMENT ORDER DATED 14.12.2007 PASSED U/S 143(3) READ WITH SECTION 147 OF THE ACT. 4. DURING THE FIRST APPELLATE PROCEE DINGS, ASSESSEE RELIED ON THE ORDER OF THE ITAT, AHMADABAD BENCH IN THE CASE OF ANOTHER PARTNER OF THE FIRM, WHEREIN THE ITAT GRANTED RELIEF TO THAT ASSESSEE. FURTHER, IT WAS ARGUED THAT THE ASSESSEES TRANSACTION FALLS WITHIN THE EXCEPTIONS PROVIDED IN S UBCLAUSE (I) OF SECTION 2(22)(D ) OF THE ACT. ASSESSEE RELIED ON THE COMMENTARY OF SAMPAT IYENGAR LAW OF INCOME TAX, 10 TH EDITION TO ADVANCE HIS CASE. CIT (A) EXAMINED THE ABOVE SUBMISSIONS OF THE ASSESSEE AND VERIFIED THE CAPITAL ACCOUNT STRUCTURE OF THE P ARTNERS IN THE FIRMS ACCOUNTS A N D FOUND THAT THE CREDIT BALANCE TO THE TUNE OF RS. 25,75,116/ - , WHICH CONSTITUTES OF RS. 19.7 LAKHS ON ACCOUNT OF GOODWILL AND RS. 6,05,116/ - ON ACCOUNT OF INTEREST PAYMENT ON THE CAPITAL BALANCE OF THE ASSESSEE, CONSTI TUTES AN INFLATED CAPITAL BALANCE. THE ASSESSEE DID NOT ACTUALLY PAID TO THE FIRM. THUS, THE PREFERENCE SHARES RECEIVED BY THE ASSESSEE ARE FREE OF ANY PAYMENT BY THE ASSESSEE TO THE FIRM 3 / COMPANY. THUS, THE RECEIPT OF RS. 20,74,170/ - CONSTITUTES ANY D ISTRIBUTION BY THE COMPANY TO THE ASSESSEE , THE SHAREHOLDER WITHIN THE MEANING OF SECTION 2(22)(D) OF THE ACT . THUS, CIT (A) CONCLUDED BY STATING THAT IT IS A CASE OF COLOURABLE DEVICE FOR DISTRIBUTION OF ACCUMULATED PROFITS BY MANAGING TO ISSUE PREFERE NTIAL SHARES WITHOUT ANY PAYMENT WHICH WAS SUBSEQUENTLY REDEEMED BENEFITING THE ASSESSEE TO THE TUNE OF RS. 20,74,170/ - . ON THE ORDER OF THE TRIBUNAL (SUPRA) , CIT (A) DISTINGUISHED BY STATING THAT IT WAS A CASE OF SECTION 2(22)(E) AND NOT U/S 2(22)(D) OF THE ACT. AGGRIEVED WITH THE ABOVE DECISION OF THE CIT (A), ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL BY RAISING THE ABOVE MENTIONED GROUNDS. 5. DURING THE PROCEEDINGS BEFORE US, LD COUNSEL FOR THE ASSESSEE MENTIONED THAT THE PROVISIONS OF SECTION 2(22)(D) ARE NOT APPLICABLE TO THE PRESENT CASE FOR THE REASON THAT THE REDEEMABLE PREFERENTIAL SHARES ARE NOT PART OF THE CAPITAL, THEREFORE, REDEMPTION OF THE SAME DOES NOT AMOUNT TO REDUCTION IN THE CAPITAL COUPLED WITH DISTRIBUTION OF ANY PROFITS TO THE SHAREHO LDERS OF THE COMPANY. LD COUNSEL VEHEMENTLY ARGUED BY MENTIONING THAT THE IMPUGNED PAYMENT IS NOT THE REDUCTION OF CAPITAL OF THE COMPANY. IN SUPPORT OF THIS, LD COUNSEL BROUGHT OUR ATTENTION TO PAGE 27 OF THE PAPER BOOK AND READ OUT THAT SECTION 80(3) O F THE COMPANIES ACT, 1956. AS PER THE LD COUNSEL, REDEMPTION OF PREFERENTIAL SHARES BY A COMPANY WAS NOT TAKEN AS REDUCING THE AMOUNT OF ITS AUTHORIZED SHARE CAPITAL . THE SAME WAS MENTIONED IN THE CONTEXT OF POWER TO ISSUE REDEEMABLE PREFERENTIAL SHARES UNDER THE PROVISIONS OF THE COMPANY ACT. THESE ARGUMENTS WERE RAISED FOR THE FIRST TIME BEFORE THE TRIBUNAL. FURTHER, LD COUNSEL ALSO BROUGHT OUT ATTENTION TO THE PAGE 29 OF THE PAPER BOOK THE PROVISIONS OF SECTION 100 OF THE COMPANY ACT, 1956 AND MENTIO NED THAT FOR REDUCTION OF SHARE CAPITAL, THERE IS A REQUIREMENT OF SPECIAL RESOLUTION BY THE COMPANY WHICH WOULD BE CONFIRMED BY THE COURT. ADMITTEDLY, THESE ASPECTS WERE NOT PLACED BEFORE THE LOWER AUTHORITIES. ON FAIRER SAID, LD COUNSEL BROUGHT OUR ATT ENTION TO SCHEDULE - 1, WHERE THE SAID SHARES WERE PLACED ON PART OF THE PAID UP CAPITAL WHICH WAS SUBSEQUENTLY TRANSFERRED TO PREFERENTIAL SHARES REDEMPTION RESERVE VIDE SCHEDULE - 2 OF THE BALANCE SHEET. 6. ON THE OTHER HAND, LD DR HEAVILY RELIED ON THE OR DER OF THE AO AND THE CIT (A). IT IS THE CASE OF THE LD DR THAT THE ACCOUNTS OF THE FIRM ARE MANIPULATED TO 4 BOOST UP THE CAPITAL BASE OF THE ASSESSEE WITH THE FIRM BY AWARDING THE ASSESSEE WITH GOODWILL AND THE INTEREST ON THE CREDIT BALANCE IN THE CAPITA L ACCOUNT OF THE FIRM. THERE WAS NO EXAMINATION INTO THESE FACTS AS TO IF THE FIRM ENJOYED GOODWILL AT ALL AND THE VALUE OF THE SAME QUANTITATIVELY . FURTHER, BRINGING OUR ATTENTION TO THE PROVISIONS OF CLAUSE (D) OF SECTION 2(22), LD DR MENTIONED THAT A NY DISTRIBUTION TO ITS SHAREHOLDERS BY A COMPANY ON THE REDUCTION OF ITS CAPITAL SHOULD BE CONSIDERED AS A DEEMED DIVIDEND . IT IS THE ARGUMENT OF THE LD DR THAT THE IMPUGNED AMOUNT OF RS. 20,74,170/ - WAS EQUIVALENT OF PREFERENTIAL SHARES HELD BY THE AS SESSEE AND WITH THE REDEMPTION OF THE SAME , THE CAPITAL BASE OF THE COMPANY IS ACCORDINGLY REDUCED. ON THE ISSUE OF APPLICABILITY OF PROVISIONS OF SECTION 80(3) AND SECTION 10 0 OF THE COMPANIES ACT, 1956, LD DR MENTIONED THAT THESE ARE RAISED FOR THE FIRS T TIME BEFORE THE TRIBUNAL AND THEREFORE, THESE ASPECTS NEEDS TO BE REMANDED TO THE FILES OF THE CIT (A) FOR ADJUDICATING THE ISSUE AFRESH. AS PER THE LD DR, READING THE PROVISIONS OF THE COMPANIES ACT, 1956 OUT OF THE CONTEXT IS NOT FAIR. 7. WE HAVE HEAR D BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE RELEVANT MATERIAL PLACED BEFORE US. IT IS AN ADMITTED FACT THAT THE ASSESSEE DID NOT MAKE PAYMENTS AS SUCH TO THE FIRM / COMPANY TO THE EXTENT OF RS. 25,75,116/ - . IT INCLUDES THE SUM OF RS. 19.7 LAKHS , WHICH IS OBVIOUSLY THE GOODWILL , APPEARING ON THE CREDIT SIDE FOR THE FIRST TIME ON 31.3.2001 . EFFECTIVELY, RS. 20,74,170/ - WAS PAID BY THE COMPANY TO THE ASSESSEE IS OBVIOUSLY AGAINST THE NON - PAYMENT BY THE ASSESSEE TO THE FIRM / COMPANY THROUGH THE MODE OF ALLOTMENT OF REDEEMABLE PREFERENTIAL SHARES. THESE ASPECTS WERE NOT EXAMINED DEEPLY CONSIDERING THE RELEVANT LEGAL PROVISIONS UNDER THE COMPANIES ACT, 1956. FURTHER, IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS NOT RAISED THE ARGUMENTS RELEVANT TO THE PROVISIONS OF SECTION 80(3) AND SECTION 10 0 OF THE COMPANIES ACT, 1956. IT IS ALSO RELEVANT TO MENTION HERE THAT THERE IS NO CATEGORICAL FINDING ON THE ESSENTIAL ASPECT OF REDUCTION OF ITS CAPITAL BY THE LOWER AU THORITIES QUA THE REDEMPTION OF THE PREFERENTIAL SHARE CAPITAL. IT IS AN ADMITTED FACT THAT THE CAPITAL IS A WIDER CONNOTATION AND IT IS A GENERIC TERM . IN ALL FAIRNESS, WE ARE OF THE OPINION THAT THE ABOVE ISSUES MUST BE REMANDED TO THE FILES OF THE C IT (A) FOR A COMPREHENSIVE REMAND REPORT. THEREFORE, WE REMAND THESE ISSUES TO THE FILES OF 5 THE CIT (A) TO ADJUDICATE THE MATTER AFRESH AFTER PROVIDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESS EE ARE ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT O N 0 8 . 0 1 . 2 0 1 4 . S D / - S D / - ( I.P. BANSAL) (D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; 0 8 . 0 1 . 2 0 1 4 . . ./ OKK , 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 . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI