2008-VIL-428-ITAT-

Equivalent Citation: [2009] 314 ITR 29, ITD 120, 38, TTJ 121, 408,

Income Tax Appellate Tribunal MADRAS

Date: 14.03.2008

ASWANI ENTERPRISES.

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX.

BENCH

Member(s)  : N. VIJAYAKUMARAN., SHAMIM YAHYA.

JUDGMENT

These appeals by the assessee emanate out of common order of CIT(A)-XII, Chennai, dt. 5th Oct., 2006 and pertain to asst. yrs. 1998-99 and 1999-2000.

2. The first common issue raised is that the CIT(A) erred in confirming the reopening of assessment. The plea of the assessee is that there is no concealment on the part of the assessee, hence reopening beyond a period of four years after the end of the assessment year is without jurisdiction and is bad in law. It is further contended that reopening was mainly on the basis of change of opinion.

2.1 We have heard both the counsel and perused the relevant records. We find that for the asst. yr. 1999-2000, the original assessment was processed under s. 143(1). Hon'ble apex Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC) has held that an intimation under s. 143(1)(a) cannot be treated as an assessment order and hence reopening matter cannot be agitated on that account. Hence, the assessee's plea regarding reopening of assessment for the asst. yr. 1999-2000 is liable to be dismissed and the same is dismissed as such.

3. Before adjudicating upon the reopening issue for asst. yr. 1998-99, it will be appropriate to deal with the facts leading to reopening and addition in this case. After the processing of return under s. 143(1) for asst. yr. 1999-2000 and assessment under s. 143(3) for the asst. yr. 1998-99, the AO found that the assessee firm had received huge amounts as advances from the company Pallava Granite Industries (India) (P) Ltd. (PGIIPL) during the accounting periods ended 31st March, 1998 and 31st March, 1999 in which the two partners of the assessee firm are shareholders and are having substantial interest. He also found that the company possessed accumulated profits for both the accounting periods 1997-98 and 1998-99. Since the amount of advances received by the firm from the company to the extent of accumulated profits were subjectible to tax as deemed dividend within the meaning of s. 2(22)(e) of the IT Act and further since the firm had not admitted as income any amount towards deemed dividend in the returns of income filed, the AO was of the view that income chargeable to tax had escaped assessment and he initiated assessment/reassessment proceedings under s. 147 of the Act, by issue of notices under s. 148 on 29th March, 2005 for both the assessment years. The AO concluded the assessment/reassessment proceedings by passing orders under s. 143(3) r /w s. 147 of the IT Act dt. 31st March, 2006 in which he had subjected to tax sums of Rs. 2,22,34,064 and Rs. 1,33,13,307 as deemed dividend respectively for the asst. yrs. 1998-99 and 1999-2000.

3.1 In this context the assessee pleaded before the learned CIT(A) that all the relevant materials were before the AO in the original assessment under s. 143(3). The learned CIT(A) elaborately considered the issue. She came to the conclusion that beyond showing unsecured loans in the balance sheet from the company, the assessee firm had furnished no other details. She observed, that neither the assessee firm nor its representative had furnished any details regarding the shareholders of the company nor the details of accumulated profits of the company for the different accounting periods were filed at the time of original assessment. Further, she observed that the AO came into possession of the relevant information only on 23rd Feb., 2005 after completion of the original assessment on 19th March, 2001. Hence, the reopening of the assessment does not amount to change of opinion. She concluded that in the absence of such vital information as filed by the assessee firm, the AO cannot be said to have been in a position to arrive at any conclusion that the advances received by the firm from the company must be examined from the angle of taxability of the sum as deemed dividend under s. 2(22)(e).

3.2 Against this order assessee has appealed before us. We have heard both the counsel and perused the relevant records on this issue. We find that the learned CIT(A) has taken a correct view of the matter and the same does not need any interference on our part. When there was no information before the AO regarding the shareholding pattern of the company or its accumulated profits, it cannot be said that assessee has disclosed all the necessary materials for assessment in this regard. Hence the AO has no occasion to examine the advances received from the company from the angle of taxability of the sum under s. 2(22)(e). There can also not be said to have been any change of opinion. Hence, we affirm the order of the learned CIT(A) on this issue. Hence, the first issue raised regarding reopening of assessment is dismissed for both the appeals.

4. On merits, the issue raised is that the CIT(A) erred in confirming and enhancing the assessment with regard to advances received by the firm/assessee from the company to the extent of accumulated profits in terms of s. 2(22) of the IT Act.

4.1 Before adjudicating this issue at the threshold it will be necessary to refer to the provisions of s. 2(22)(e) of the IT Act. The same reads 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) made 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 power, 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 any such shareholder, to the extent to which the company in either case possesses accumulated profits;

but 'dividend' does not include-

(i) a distribution made in accordance with sub-cl. (c) or sub-cl. (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets;

(ia) a distribution made in accordance with sub-cl. (c) or sub-cl. (d) insofar as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965;

(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-cl. (e), to the extent to which it is so set off;

(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of s. 77A of the Companies Act, 1956 (1 of 1956);

(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)."

4.2 As regards the assessee's plea that this was a normal business transaction so as to escape from the provisions of s. 2(22)(e), the learned CIT(A) observed that,

"On going through the purchase agreement between the firm and the company, it is seen that however the sale was to take place only after the lease period was over. There is also a condition imposed in this agreement that the vendor i.e. the assessee firm will not take steps to view (sic) its quarry lease with the Government authorities, but this agreement had not been implemented and the sale had not been effected till date. Further it is seen that there are no witnesses' Signatures in this agreement. So, it is clear that seemingly there is an agreement entered into between the company and the firm as early as in 1st April, 1996 but the firm had never taken steps to carry this agreement to its logical end and executed the same. So, there seems to be a business deal on paper between these two concerns, for which advances are purported to have been received by the firm, but in actuality, there is no such deal. Nothing had taken place. The copy of the agreement as filed by the assessee's representative has no validity or it cannot be taken as proof for the business exigency that is supposed have prevailed between these two concerns. A copy of the ledger account of the company as per the books of the assessee firm shows that the firm is maintaining nothing but a running account with the company and there is nothing to indicate in these account statements that the amounts advanced by PGIIPL to the assessee firm were during the course of its business."

4.3 Having heard both the counsel on this issue, we note that on this issue the learned CIT(A) has given a finding that these have been mere statements and no documentary evidence was produced to oxygenate the claim that assessee firm was utilizing the money for procurement of the mine or mining equipments, etc. The fact remained that advances received by the firm from the company were utilized by the firm in its own business. Hence, this cannot be said to be a normal business transaction. Hence, the learned CIT(A)'s finding in this regard is confirmed.

4.4 Further, the learned CIT(A) had elaborately considered the case. She dealt with the following case laws of Hon'ble apex Court-CIT vs. G. Narasimhan (Died) & Ors. (1999) 151 CTR (SC) 94 : (1999) 236 ITR 327 (SC); Smt. Tarulata Shyam & Ors. vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC) and Navnit Lal C. Javeri vs. K.K. Sen, AAC (1965) 56 ITR 198 (SC) and concluded as under:

"1. The AO's action of subjecting to tax the advances received by the assessee firm from the company PGIIPL are to be treated as deemed dividend within the meaning of s. 2(22)(e) for both the assessment years since the company was possessing accumulated profits for the accounting periods relevant to both these assessment years. Therefore, the AO's action is upheld in principle.

2. But, however, as regards the amounts of deemed dividend to be considered for the accounting period, the position is as under:

(i) In view of the fact that no part of the advances received by the firm was subjected to tax as deemed dividend for any of the earlier assessment years, the amounts of advances received during these two years relevant to the assessment years are to be subjected to tax as deemed dividend and the Supreme Court's decision in 'the case of CIT vs. G. Narasimhan (Died) & Ors. (1999) 151 CTR (SC) 94 : (1999) 236 ITR 327 (SC) cannot be applied.

(ii) Actual amounts of advances received by the firm from PGIIPL during the two accounting periods are to be considered and not the balances outstanding as at the end of the accounting periods and also the accumulated profits as at the beginning of the accounting periods are to be taken into account according to the Supreme Court's decision in the case of Smt. Tarulata Shyam & Ors. vs. CIT 1977 CTR (SC) 275 : (1977) 108 ITR 345 (SC).

Thus, the amount to be taxed as deemed dividend for the asst. yr. 1998-99 should be Rs. 2,28,92,408 and the amount to be considered for the asst. yr. 1999-2000 should be Rs. 1,75,05,871."

Against this order of the CIT(A) assessee is in appeal before us.

4.5 Before us the learned counsel of the assessee submitted that, inasmuch as the company PGIIPL had been granting advances to the assessee firm during the earlier accounting periods also, the amounts so advanced should also be taken into consideration and the accumulated profits must be reduced by such advances since they were to be treated as deemed dividend for those years. The learned counsel of the assessee further argued that if this exercise was carried out, then there were no sufficient accumulated profits for the impugned accounting periods in view of the fact that the profits or the reserves and surpluses of the company were getting reduced year after year. Hence, it was pleaded that there was no accumulated profits available for the relevant accounting period in the hands of the company, so that the amount received as advance by the assessee firm from the company could be brought under the purview of s. 2(22)(e).

4.6 The learned counsel of the assessee had relied upon the decision of the Hon'ble apex Court in the case of CIT vs. G. Narasimhan (Died) & Ors. In this case, it was held as under:

"Any legal fiction will have to be carried to its logical conclusion. If the payment under s. 2 (22)(e) of the IT Act, 1961, is treated as a deemed dividend and is required to be so treated to the extent that the company possesses accumulated profits, the logical conclusion is that this payment must be considered as adjusted against the company's accumulated profits to the extent that it is treated as deemed dividend while calculating accumulated profits of the company. Whenever accumulated profits of the company are required to be determined, such an adjustment will have to be made."

From the above it clearly follows that only if the payment is treated as a deemed dividend, then the payment must be considered adjusted against company's accumulated profits. Admittedly, in this case, no part of advance received by the assessee firm before asst. yr. 1998-99 under consideration was considered as deemed dividend.

4.7 We further find that Hon'ble apex Court in the case of Smt. Tarulata Shyam & Ors. has held that,

"The statutory fiction created by s. 2 (6A)(e) of the Indian IT Act, 1922, would come into operation at the time of the payment of advance or loan to a shareholder by a company in which the public are not substantially interested and tax is attracted to the loan or advance to the extent to which the company possesses accumulated profits the moment the loan or advance is received. Even if the loan or advance ceases to be outstanding at the end of the previous year in which the loan or advance was taken, it can still be deemed to be 'dividend' if the conditions of s. 2(6A)(e) are satisfied. Except for the specific provision in s. 12(1B) for the asst. yr. 1955-56, the legislature has deliberately not made the subsistence of the loan or advance, or its remaining outstanding, on the last date of the previous year relevant to the assessment year a prerequisite for raising the statutory fiction."

4.8 From the above, it is clear that it is the amount that is advanced during the year that is to be considered as deemed dividend and not the balance outstanding at the end of the accounting period. Hence, in the background of aforesaid discussion and precedents, we do not find any infirmity in the order of the learned CIT(A) for the asst. yr. 1998-99 as no part of advance given has been treated as deemed dividend before this assessment year. Hence, we affirm the learned CIT(A)'s order for the asst. yr. 1998-99. As regards asst. yr. 1999-2000, we are not in agreement with the learned CIT(A) that deemed dividend for asst. yr. 1998-99 should not be adjusted from the balance of accumulated profits as on the close of asst. yr. 1998-99. Hon'ble apex Court's order in G. Narasimhan (Died) & Ors. case above is very clear on this point and we do not see any ambiguity in this regard. Hence, for asst. yr. 1999-2000, AO is directed to compute deemed dividend equal to the amount advanced during that year to the extent company had accumulated profits after adjustment of deemed dividend for asst. yr. 1998-99.

5. In the result, assessee's appeal in ITA No. 488/Mad/2007 for asst. yr. 1998-99 is dismissed and assessee's appeal in ITA No. 489/Mad/2007 for asst. yr. 1999-2000 is partly allowed.

 

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