SHRI PRADIPKUMAR R. SHAH, MUMBAI V. THE ITO 4(3)(1), MUMBAI

ITA 919/MUM/2008

• Counselvise Citation: 91919914 RSA 2008
• Duration Of Justice: 3 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 06-07-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 08-02-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K SHIVARAM AW MR RAHUL HAKANI
• Keywords: Deemed dividend; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI, J. SUDHAKAR REDDY, ACCOUNTANT MEMBER A ND SMT. ASHA VIJAYRAGHAVAN, JUDICIAL MEMBER ITA NO. 919/MUM./2008 (ASSESSMENT YEAR : 2002-03 ) DATE OF HEARING 6.7.2011 MR. PRADIPKUMAR R. SHAH SHREEJI BHUVAN, 2 ND FLOOR MANGALDAS ROAD, LOHAR CHAWL MUMBAI 400 002 PAN AAKPS6292G .. APPELLANT V/S INCOME TAX OFFICER WARD-4(3)(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... RESPONDENT ITA NO. 1380/MUM./2008 (ASSESSMENT YEAR : 2002-03 ) INCOME TAX OFFICER WARD-4(3)(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .. APPELLANT V/S MR. PRADIP KUMAR R. SHAH SHREEJI BHUVAN, 2 ND FLOOR MANGALDAS ROAD, LOHAR CHAWL MUMBAI 400 002 PAN AAKPS6292G .... RESPONDENT ASSESSEE BY : MR. K. SHIVARAM A/W MR. RAHUL HAKANI REVENUE BY : MR. PARTHASARATHI NAIK MR. PRADIPKUMAR R. SHAH ITA NO. 919/MUM./2008 ITA NO. 1380/MUM./2008 2 O R D E R PER J. SUDHAKAR REDDY, A.M. THESE CROSS APPEALS ARE DIRECTED AGAINST THE IMPUG NED ORDER DATED 21 ST DECEMBER 2007, PASSED BY THE COMMISSIONER (APPEALS )-XIV, MUMBAI, FOR ASSESSMENT YEAR 2002-03. 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE IS A N INDIVIDUAL AND IS A FULL TIME DIRECTOR OF M/S. PRADIPKUMAR PHARMA PVT. LTD. THE ASSESSEE HOLDS SUBSTANTIAL INTEREST IN THE SAID COMPANY. AS AN EMP LOYEE, HE DRAWS ANNUAL REMUNERATION OF ` 11,18,283. THE ASSESSEE FILED RETURN OF INCOME ON 31 ST DECEMBER 2002, WHICH WAS PROCESSED UNDER SECTION 14 3(1) OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) ON 28 TH FEBRUARY 2003. LATER, ON OBSERVING THAT THE ASSESSEE HAS TAKEN A LOAN OF ` 27,06,600 FROM M/S. PRADIPKUMAR PHARMA P. LTD., THE ASSESSING OFFICER I SSUED NOTICE UNDER SECTION 148, RE-OPENING THE ASSESSMENT. THE ASSESSM ENT WAS COMPLETED UNDER SECTION 143(3) R/W 147 OF THE ACT ON 28 TH MARCH 2007. HE ASSESSED THE INCOME AT ` 44,98,030, AFTER ADDING A DEEMED DIVIDEND INCOME U NDER SECTION 2(22)(E) OF THE ACT. THE ASSESSEES CONTENT ION THAT THE HOUSING LOAN HAS BEEN TAKEN AS AN EMPLOYEE OF THE COMPANY AND NO T IN THE CAPACITY OF A SHAREHOLDER, HAS BEEN REJECTED. THE PLEA THAT THE A SSESSEE IN HIS INDIVIDUAL CAPACITY, HAS ADVANCED ` 17,60,000 APPROXIMATELY AND IN HIS HUF CAPACITY, HAS LENT ` 24,71,000 TO THE COMPANY AND THAT HIS WIFE HAS LEN T ` 5,13,000 TO THE COMPANY TOTALING ` 47,45,000, AND WHEREAS, THE HOUSING LOAN RECEIVED WAS ONLY ` 27,06,000 AND THAT NO FUNDS OF THE COMPANY WERE DI VERTED TO THE ASSESSEE AS LOAN, WAS ALSO NOT ACCEPTED BY THE ASSE SSING OFFICER. 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN FIRST APPEAL, WHEREIN THE COMMISSIONER (APPEALS) REJECTED THE CONTENTION OF T HE ASSESSEE THAT THE LOAN HAS BEEN TAKEN IN THE CAPACITY OF AN EMPLOYEE AND NOT IN THE CAPACITY OF A SHAREHOLDER. NEVERTHELESS, HE CONSIDERED THE F ACTUAL POSITION THAT THE COMPANY HAD TAKEN CERTAIN AMOUNTS FROM THE ASSESSEE AND HELD THAT THE MR. PRADIPKUMAR R. SHAH ITA NO. 919/MUM./2008 ITA NO. 1380/MUM./2008 3 AMOUNT OF ` 9,45,834 I.E., ` 27,06,600 (-) ` 17,60,766, HAS TO BE ONLY TAXED AS DEEMED DIVIDEND. HE HELD THAT THOUGH THERE WERE TWO LOAN ACCOUNTS, THE SUM AND SUBSTANCE IS THAT, THE ASSESSEE HAS BORROWE D ONLY AMOUNT OF ` 9,45,000 FROM THE COMPANY. AGGRIEVED, THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE US, LEARNED COUNSEL, DR. K. SHIVARAM, REITER ATED THE SUBMISSIONS MADE BEFORE THE COMMISSIONER (APPEALS). HE SUBMITS THAT THE RE-OPENING IS BAD-IN-LAW, AS ALL THE FACTS WERE BEF ORE THE ASSESSING OFFICER BY WAY OF RETURN OF INCOME FILED BY THE ASSESSEE. O N MERITS, HE SUBMITS THAT THE LOAN AND ADVANCE IS NOT GIVEN TO THE ASSESSEE I N THE CAPACITY OF A SHAREHOLDER. HE ADVANCED A DUAL CAPACITY THEORY AND ARGUED THAT GIVING A HOUSING LOAN WAS OUT OF COMMERCIAL EXPEDIENCY. HE P OINTS OUT THAT ANOTHER EMPLOYEE DIRECTOR MR. UMESH R. SHAH, HAD AVAILED SU CH HOUSING LOAN. HE SUBMITS THAT PROVISIONS OF SECTION 2(22)(E) APPLIES ONLY IF A LOAN IS GIVEN TO A SHAREHOLDER IN HIS CAPACITY AS SHAREHOLDER. REFERRI NG TO THE OBJECTIVE OF SECTION 2(22)(E), HE SUBMITS THAT ON THE FACTS OF T HIS CASE, THE AMOUNT RECEIVED CANNOT BE TREATED AS DEEMED DIVIDEND. THE LEARNED COUNSEL POINTS OUT THAT THE ASSESSEE ALONG WITH HUF AND WIFE HAVE ADVANCED LOANS TO THE COMPANY TO THE EXTENT OF ` 47,45,958, IN THE ASSESSMENT YEAR 2002-03, AND HAD JUST ACCEPTED HOUSING LOAN OF ` 27,06,000 AND THIS PROVES THAT THERE IS NO NET OUTFLOW OF FUNDS FROM THE COMPANY. HE RELIED ON THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN NAV KETAN INTE RNATIONAL FILMS PVT. LTD. V/S CIT, (1993), 209 ITR 976 (BOM.), FOR THE PROPOS ITION THAT THE PROVISIONS OF SECTION 40(C)(I) WOULD BE ATTRACTED ONLY TO THOS E CASES WHERE THE DIRECTOR OF THE COMPANY IS PAID REMUNERATION OR OTHER AMENIT IES IN HIS CAPACITY AS A DIRECTOR. CERTAIN OTHER CASE LAWS ARE ALSO REFERRED TO IN SUPPORT OF DUAL CAPACITY THEORY. WITHOUT PREJUDICE, THE LEARNED COU NSEL RELIED ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN ANIL KU MAR AGRAWAL V/S ITO, (2011) 51 DTR (TRIB.) 251 (MUM.), FOR THE PROPOSITI ON THAT DEBENTURE IS TO BE CONSIDERED AS A LOAN AND HAS TO BE TAKEN INTO AC COUNT IN DETERMINING DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. MR. PRADIPKUMAR R. SHAH ITA NO. 919/MUM./2008 ITA NO. 1380/MUM./2008 4 5. LEARNED DEPARTMENTAL REPRESENTATIVE, MR. PARTHASARA THI NAIK, ON THE OTHER HAND, OPPOSED THE CONTENTIONS OF THE LEARNED COUNSEL AND SUBMITS THAT SECTION 2(22)(E) DOES NOT ALLOW AN INTERPRETATION, WHEREIN IT CAN BE SAID THAT LOANS HAVE BEEN TAKEN IN DUAL CAPACITY. HE SUBMITS THAT IF SUCH A THEORY IS ACCEPTED, THEN IT WOULD LEAD TO AN ABSURD SITUATION IN WHICH A DIRECTOR CAN TAKE BENEFIT OF SEVERAL LOANS UNDER VARIOUS HEADS I N THE CAPACITY OF AN EMPLOYEE. HE RELIED ON THE FINDINGS OF THE COMMISSI ONER (APPEALS). 6. ON THE ISSUE OF RE-OPENING, THE LEARNED DEPARTMENTA L REPRESENTATIVE SUBMITS THAT THE ORIGINAL RETURN WAS PROCESSED UNDE R SECTION 143(1) AND THE ASSESSING OFFICER, ON RECEIVING THE INFORMATION THA T THE ASSESSEE HAS TAKEN LOAN, FORMED A REASONABLE BELIEF THAT INCOME ESCAPE D ASSESSMENT AND HAS ACCORDINGLY ISSUED NOTICE FOR THE RE-OPENING. ON TH E ISSUE OF QUANTIFICATION OF THE ADDITION, THE LEARNED DEPARTMENTAL REPRESENTATI VE, SUBMITS THAT THE ASSESSEES SUBMISSIONS WAS THAT THE HOUSING LOAN TA KEN WAS A SEPARATE TRANSACTION AND THE LOAN GIVEN BY THE DIRECTOR TO T HE COMPANY WAS A SEPARATE TRANSACTION AND IN SUCH SITUATION, IT IS N OT PROPER TO NET OUT BOTH THESE TRANSACTIONS AND BRING ONLY THE NET AMOUNT OF TAX. HE ACCORDINGLY PRAYED THAT THE REVENUES APPEAL BE ALLOWED AND THA T OF THE ASSESSEE BE DISMISSED. 7. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAP ERS ON RECORD, AS WELL AS THE CASE LAWS CITED BEFORE US, WE HOLD AS FOLLOWS:- 8. ON THE ISSUE OF RE-OPENING, WE AGREE WITH THE FINDI NGS OF THE COMMISSIONER (APPEALS). THE ASSESSING OFFICER NOTIC ED DURING THE ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2003-04, THAT THE ASSESSEE HAD TAKEN LOAN IN THE EARLIER ASSESSMENT YEAR AND T HAT THE PROVISIONS OF SECTION 2(22)(E) MIGHT BE APPLICABLE. THIS IS A REA SONABLE BELIEF AND NUMEROUS ARGUMENTS RAISED BY THE ASSESSEE, IN OUR C ONSIDERED OIPINION, ARE DEVOID OF MERIT. MERELY BECAUSE CERTAIN INFORMATION CAME TO THE NOTICE OF THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS OF A SPECIFIC MR. PRADIPKUMAR R. SHAH ITA NO. 919/MUM./2008 ITA NO. 1380/MUM./2008 5 ASSESSMENT YEAR, IT CANNOT BE SAID THAT THE RE-OPEN ING OF AN ASSESSMENT OF AN EARLIER YEAR IS BAD-IN-LAW. THE REASONS RECORDED ARE BASED ON MATERIAL GATHERED AND HAVE A LIVE LINK WITH THE ESCAPEMENT O F INCOME. HENCE, WE UPHOLD THE SAME. 9. COMING TO THE DUAL CAPACITY THEORY, WE AGREE WITH T HE CONTENTION OF THE ASSESSING OFFICER AS WELL AS THE COMMISSIONER ( APPEALS) THAT SECTION 2(22)(E) DOES NOT CONTEMPLATE SUCH AN INTERPRETATIO N. THE COMMISSIONER (APPEALS), AT PAGE-4/PARA4.3 OF HIS ORDER, HAS RIGH TLY HELD AS FOLLOWS:- 4.3. THUS, IN MY OPINION THE FACT WHETHER THE LOAN WAS GIVEN IN THE CAPACITY OF DIRECTOR OR IN THE CAPACIT Y OF SHARE HOLDER DOES NOT MAKE ANY DIFFERENCE WITH REGARD TO THE APPLICABILITY OF PROVISIONS OF SECTION 2(22)(E) OF THE I.T. ACT. IF A DIFFERENT INTERPRETATION IS TAKEN, IT WILL LEAD TO AN ABSURD SITUATION IN WHICH THE DIRECTORS CAN TAKE THE BENEFIT OF SEVE RAL LOAN UNDER VARIOUS HEADS IN THE CAPACITY OF EMPLOYEE AND CAN G ET EXEMPTION FROM THE APPLICATION OF PROVISIONS OF SEC TION 2(22)(E) WHICH WILL BE DISCRIMINATING WITH REGARD TO THE SHA RE HOLDERS. THIS CANNOT BE THE INTENTION OF LAW. CONSIDERING TH E FACT THAT THE DIRECTORS WORK IN THE FIDUCIARY CAPACITY, THEY DESE RVE TO BE PUT ON A STRICTER DISCIPLINE COMPARED TO THE SHAREHOLDE RS. THEREFORE, IN MY OPINION, THE PROVISIONS OF SECTION 2(22)(E) W ERE CLEARLY APPLICABLE IN THE PRESENT CASE. THE AFORESAID DECISION OF THE COMMISSIONER (APPEALS ) IS IN LINE WITH THE PROPOSITION LAID DOWN BY THE HONBLE GUJARAT HIGH C OURT IN RAVINDRA D. AMIN V/S CIT, (1993) 208 ITR 815 (GUJ.). 10. WE NOW CONSIDER THE CROSS APPEAL AND THE ISSUE IS, WHETHER OR NOT THE COMMISSIONER (APPEALS) WAS RIGHT IN HOLDING THAT, I N SUM AND SUBSTANCE, LOAN ONLY TO THE EXTENT OF ` 9,45,834, WAS RECEIVED BY THE ASSESSEE FROM THE COMPANY, AS THE ASSESSEE HAD ADVANCED AN AMOUNT OF ` 17,60,766, TO THE COMPANY. BEFORE WE CONSIDER THIS QUESTION, WE FIND THAT THE COMMISSIONER (APPEALS), AT PAGE-4, HELD THAT THE BASIC PURPOSE F OR WHICH THE LOAN WAS TAKEN BY THE ASSESSEE UNDER THE GRAB OF HOUSING LOA N WAS TO AVAIL THE BENEFIT OF DEDUCTION ON ACCOUNT OF INTEREST ADMISSI BLE ON HOUSING LOAN. HE MR. PRADIPKUMAR R. SHAH ITA NO. 919/MUM./2008 ITA NO. 1380/MUM./2008 6 HELD THAT THIS IS AN ARRANGED AFFAIR TO GIVE A COLO UR TO THE LOAN AS HOUSING LOAN. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENT ATIVE ALSO CONTENDED THAT THE THEORY OF HOUSING LOAN PROPOUNDED BY THE A SSESSEE WAS ONLY AFTER THOUGH AND THAT THIS IS EVIDENT FROM THE DATE OF EX ECUTION OF THE HOUSING LOAN AGREEMENT. WE AGREE WITH THIS FINDING OF THE C OMMISSIONER (APPEALS) AS WELL AS THE SUBMISSIONS OF LEARNED DEPARTMENTAL REPRESENTATIVE ON THIS POINT. CONSEQUENTLY, WE HOLD THAT WHAT WAS TAKEN BY THE ASSESSEE WAS A LOAN SIMPLICITOR. 11. WHEN OUR FINDING IS THAT THE ASSESSEE HAD TAKEN CER TAIN FUNDS FROM THE COMPANY, WE HAVE TO CONSIDER THE ADVANCE MADE BY TH E ASSESSEE, BOTH IN HIS INDIVIDUAL CAPACITY AS WELL AS IN HIS HUF CAPAC ITY TO THE COMPANY AND FIND OUT WHETHER THERE IS A NET OUTFLOW OF FUNDS FROM TH E COMPANY TO THE ASSESSEE SHAREHOLDER. WHEN THERE IS NO OUTFLOW OF F UNDS FROM THE COMPANY TO ITS SHAREHOLDER, IT CANNOT BE HELD THAT THERE IS A LOAN GIVEN TO THE SHAREHOLDER. A LOAN CAN BE SAID TO BE GIVEN ONLY WH EN THE FUND OF THE COMPANY ARE DIVERTED TO THE SHAREHOLDER FOR HIS USE . WHEN THE FUND OF THE COMPANY HAVE NOT BEEN DIVERTED, DUE TO THE FACT THA T THE ASSESSEE HIMSELF HAS CONTRIBUTED CERTAIN AMOUNT TO THE COMPANY, AS A DVANCE AND LOANS, THEN IN SUM AND SUBSTANCE, IT CANNOT BE SAID THAT LOAN H AS BEEN ADVANCED BY THE COMPANY TO THE ASSESSEE. IN THE CASE ON HAND, THE A SSESSEE HAD GIVEN TOTAL LOAN OF ` 42,32,162 BOTH IN HIS INDIVIDUAL AS WELL AS HUF CA PACITY TO THE COMPANY AND WHEREAS HE HAD LATER TAKEN A LOAN OF ` 27,06,600 FROM THE COMPANY. THIS LEAVES AN AMOUNT OF ` 15,25,562 WITH THE COMPANY. THE COMMISSIONER (APPEALS) CONSIDERED ONLY THE AMOUNT G IVEN IN THE INDIVIDUAL CAPACITY AND GRANTED PART RELIEF TO THE ASSESSEE. W E ARE OF THE CONSIDERED OPINION THAT THE AMOUNT ADVANCED IN THE CAPACITY OF HUF SHOULD ALSO BE TAKEN INTO ACCOUNT AND THE BENEFIT GIVEN TO THE ASS ESSEE. AS IN REALITY, THERE IS NO MONEY LENT BY THE COMPANY TO THE ASSESSEE, WE ARE OF THE CONSIDERED OPINION THAT INVOCATION OF PROVISIONS OF SECTION 2( 22)(E) ON THE FACTS AND CIRCUMSTANCES OF THE CASE IS UNWARRANTED. CONSEQUEN TLY, WE DELETE THE MR. PRADIPKUMAR R. SHAH ITA NO. 919/MUM./2008 ITA NO. 1380/MUM./2008 7 ADDITION MADE UNDER SECTION 2(22)(E) OF THE ACT AND ALLOW THE GROUND RAISED BY THE ASSESSEE AND DISMISS THAT OF THE REVENUE. 12. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED AND REV ENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.7.2011 SD/- ASHA VIJAYRAGHAVAN JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 29.7.2011 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A), MUMBAI, CONCERNED; (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, K BENCH, ITAT, MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI