Tca/512/2018 Of The Commissioner Of Incometax v. M/S.t.abdul Wahid & Co

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE Mr. JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE Mrs. JUSTICE V.BHAVANI SUBBAROYAN M/s T.Abdul Wahid & Co., No.55, Vepery High Road,Chennai - 600 003..Respondent in both the appealsPAN: AAAFT0482B Tax Case Appeals filed under Section 260-A of the Income TaxAct, 1961, are directed against the Common Order passed by theIncome Tax Appellate Tribunal “A” Bench in I.T.ANos.1796/Mds/2017 and 1797/Mds/2017 dated 17.10.2017 for theassessment years 2012-2013 and 2014-2015. against the order dated 27/06/2017 in ITA.Nos. 155 and174/CIT (A)-5/ 2016-17 on the file of the Commissioner ofIncome Tax (Appeals) -5, Chennai and against the order dated29/11/2016 and 30/12/2016 and made in PAN Nos. onthe file of the Assistant Commissioner of Income Tax, NonCorporate Circle 4 (1), Chennai -6. T.S.SIVAGNANAM, J. These appeals have been filed by the Revenue underSection 260-A of the Income Tax Act, 1961 [the 'Act' forbrevity] challenging the common order dated 17.09.2017 inI.T.A.Nos.1796/Mds/2017 and I.T.A.Nos.1797/Mds/2017 passed bythe Income Tax Appellate Tribunal Madras 'A' Bench, Chennaihttps://hcservices.ecourts.gov.in/hcservices/[hereinafter referred to as 'Tribunal'] for the assessment years [for brevity 'AY'] 2012-2013 and 2014-2015. 2. Appeals were admitted on 11.09.2018 to decide thefollowing substantial question of law:“Whether the Tribunal was right in holding thatthe deemed dividend under Section 2(22) (e) is to beassessed in the hands of the share holder and not inthe hands of the firm, which is contrary to theruling of the Apex Court in the case of NationalTravel Services passed in Civil Appeal No.2086 to2071 of 2012 dated 18.01.2018”Since the facts are identical for both the assessment years,it would suffice to refer to the facts for the assessment year2012-2013. 3. The assessee filed the return of income on 30.09.2012admitting the total income of Rs.1,19,26,530/-. An order waspassed under Section 143(3) of the Act on 25.03.2015 assessingthe said income. The assessment was reopened by issuance ofnotice under Section 148 of the Act dated 05.02.2016. Thereason being that a sum of Rs.2 Crores was shown as unsecuredloan obtained from M/s Abdul Wahid Tanneries Pvt., Ltd.,[hereinafter referred to as the 'company'] by the assesseefirm; One of the partners of the assessee firm, namely,Mr.T.Rafeeq Ahmed, who holds 35% stake in the assesseepartnership firm, is also a share holder in the companyholding 26.25% shares. Therefore, it was stated that theshare holder of the company had substantial interest in thefirm and consequently, the concept of deemed dividend underSection 2(22)(e) of the Act would apply. 4. The assessee objected to the reopening and filedwritten submissions. However, the assessing officer confirmedthe proposal in the notice under Section 148 of the Act andcompleted the assessment vide order dated 29.12.2016 underSection 143(3) read with Section 147 of the Act for theassessment year 2012-2013 and under Section 143(3) of the Actfor the assessment year 2014-2015 by an order dated30.12.2016. Aggrieved by the same, the assessee preferredappeals before the Commissioner of Income Tax [Appeals] - 5,Chennai (CIT(A)), who dismissed the appeals by order dated27.06.2017. Challenging the same, the assessee filed appealsbefore the Tribunal, which was allowed by the Tribunal,challenging the same, the Revenue is before us by way of theseTax Case Appeals. 5. Mr.T.Ravikumar, learned senior standing counsel forthe appellant referred to Section 2(22)(e) and explained theconcept of deemed dividend. Referring to the facts recordedby the assessing officer in the assessment order dated29.12.2016, it is submitted that the assessee firm had shown asum of Rs.2 Crores as unsecured loan obtained from the companyduring the year and one of the partner of the assessee firmhttps://hcservices.ecourts.gov.in/hcservices/was having 35% stake in the assessee firm and he was also a major share holder in the company holding 26.25% shares andtherefore, the partner is substantially interested in thefirm. Further, the company was having accumulated profit ofRs.3,90,02,578/- for the year ending 31.03.2012. Further, itis submitted that the assessee themselves claimed that thesaid amount as unsecured loan and auditor had also certifiedin the balance sheet as unsecured loan; the payment for thepurposes of Section 2(22)(e) need not be cash payments; ajournal entry is sufficient for creditor or debtor between theshare holder and the company is sufficient. 6. It is further submitted such loan or advance has to betreated as dividend to the extent of accumulated profits[excluding capitalized profit]. Further, loan or advance maybe given directly to a share holder or it may be given for thebenefit of share holder or on behalf of share holder. Thus,it is submitted that the assessing officer rightly treated theloan as deemed dividend under Section 2(22)(e) of the Act. Itis further submitted that before the CIT(A), a new ground wascanvassed by the assessee stating that the assessee waspurchasing finished leather from the company for manufactureof shoe and shoe uppers and during the financial year ending31.03.2012, the assessee firm had to pay a sum ofRs.6,31,49,598/- to the company towards the supply of leather.Further, to maintain working capital ratio for the purpose ofretaining existing working capital facility from the bank,Rs.2 crores was transferred from the sundry creditors fortrade running account of the company, as deferred liability,which was shown under the balance sheet under the head of''unsecured loan'', since the amount was payable after oneyear, otherwise, the assessee firm should have declared thesame under 'current liability' payable within a day. 7. It is also submitted that this reasoning was rightlynot accepted by the CIT[A]. However, without considering thefactual and the legal position, the Tribunal erroneouslyreversed the orders passed by the assessing authority asconfirmed by the CIT(A). In support of his contention, thelearned counsel referred to the decisions in the case of Gopaland Sons (HUF) Vs. Commissioner of Income Tax reported in(2017) 145 DR 0289 (SC); Miss. P.Sarada Vs. Commissioner ofIncome Tax reported in [1998] 229 ITR 444 (SC); Commissionerof Income Tax V. National Travel Services reported in (2012)347 ITR 0305; National Travel Services Vs. Commissioner ofIncome Tax, reported in (2018) 401 ITR 0154 (SC), whichdoubted the correctness of the decision in the case ofCommissioner of Income Tax Vs. Ankitech Private Limitedreported in (2012) 340 ITR 0014. The decision of Sahir SamiKhatib and another Vs. Income Tax Officer reported in [2019]411 ITR 637 (Bombay) and the decision of the Hon'ble DivisionBench of this Court in Bagawathi Velan Vs. DeputyCommissioner of Income Tax, Corporate Circle-6(1) Chennaireported in (2019) 106 Taxmann.Com Page 67 (Madras).https://hcservices.ecourts.gov.in/hcservices/ 8. Mr.R.Sivaraman, learned counsel appearing for therespondent submitted that the fundamental error committed bythe assessing officer and the CIT(A) is on facts because theamount of Rs.2 Crores paid to the assesseee firm is neither aloan nor an advance, but a deferred liability. The assesseefirm is not a beneficial share holder or a registered shareholder. The share holder is a partner of the assessee firmand the shares held by him in the Private Limited Company is,in his individual capacity and therefore, the firm is not abeneficial owner. Referring to the balance sheet of therespondent, as on 31.03.2012, it is submitted that theinvestments have been showed in Schedule D appended to thebalance sheet and no where, this, amount of Rs.2Crores figures, therefore, the assessing officer and the CIT[A] erred in holding that it is an investment in the name ofthe assessee. The learned counsel referred to the circularissued by the Central Board of Direct Taxes dated 12.06.2017,wherein it has been stated that trade advances, which are inthe nature of commercial transactions would not fall withinthe ambit of word "advance" in Section 2(22)(e) of the Act.Reference was made to the decision of Division Bench of thisCourt in the case of Commissioner of Income Tax Vs. C.SubbaReddy in T.C.A.No.1465 of 2007 dated 19.12.2016. The Ledgeraccounts were referred to show that the transaction was abusiness transaction. Further, the learned counsel submittedthat the decision in the National Travel Services is clearlydistinguishable on facts and in that regard referred to thefacts noted in Paragraph No.3 of the said Judgment. 9. Further, it is submitted that the decision in Gopaland Sons also is distinguishable on facts as in ParagraphNo.17 of the Judgment, the Court has specifically recordedthat the assessee in the said case is the beneficial shareholder, whereas on facts, it is not so, in the assessee'scase. Further, it is submitted that a batch of civil appealsin Civil Appeal No. 3961 of 2013 etc., batch in C.I.T., Delhi-II Vs. Mathur Housing and Development Company was dismissedby the Hon'ble Supreme Court by Judgment dated 05.10.2017,wherein the correctness of the Judgment in the case ofAnkitech Private Limited was also considered and the Judgmentsstood affirmed. Further, on facts it is submitted that it isincorrect on the part of the CIT(A) to observe that theassessee had raised the contention that the amount of Rs.2Crores was a business transaction, was never raised by theassessee at any earlier point of time, when the fact remainsit was raised and it was noted by the assessing officerhimself in the assessment order for AY-2014-2015. 10. We have elaborately heard Mr.T.Ravikumar, learnedsenior standing counsel for the appellant / revenue andMr.R.Sivaraman, learned counsel appearing for the respondent /assessee. https://hcservices.ecourts.gov.in/hcservices/11. Section 2(22)(e) of the Act, which defines dividend, an inclusive definition, includes any payment by a company,not being a company in which the public are substantiallyinterested, of any sum made after the 31.05.1987, by way ofadvance or loan, to a share holder, being a person, who is thebeneficial owner of shares holding not less than 10% of thevoting power, or to any concern in which such share holder isa member or a partner and in which he has a substantialinterest or any payment by any such company on behalf, or forthe individual benefit, of any such share holder, to theextent to which the company in either case possessesaccumulated profits. https://hcservices.ecourts.gov.in/hcservices/11. Section 2(22)(e) of the Act, which defines dividend, an inclusive definition, includes any payment by a company,not being a company in which the public are substantiallyinterested, of any sum made after the 31.05.1987, by way ofadvance or loan, to a share holder, being a person, who is thebeneficial owner of shares holding not less than 10% of thevoting power, or to any concern in which such share holder isa member or a partner and in which he has a substantialinterest or any payment by any such company on behalf, or forthe individual benefit, of any such share holder, to theextent to which the company in either case possessesaccumulated profits. 12. The said provision would stand attracted when apayment is made by a company, in which public are notsubstantial interested by way of advance or loan to a shareholder, being a person who is the beneficial owner of theshares. On facts, it is clear that the payment has been madeto the assessee, a partnership firm. The partnership firm isnot a share holder in the company. If such is the factualposition, the decision in the case of National Travel Servicesrelied on by the revenue cannot be applied, nor the case ofGopal and Sons, as they are factually distinguishable. Therecords placed before the assessing officer clearly shows thenature of transaction between the firm and the company and itis neither a loan nor an advance, but a deferred liability.These facts have been noted by the assessing officer. Insuch circumstances, this Court is of the view that theTribunal rightly reversed the order passed by the CIT(A)affirming the order of the assessing officer. For the above said reasons, we find no grounds tointerfere with the order passed by the Tribunal andaccordingly, dismisses the present appeals and answer thesubstantial question of law against the Revenue. Consequently,connected miscellaneous petition is closed. No costs. Assistant Registrar ssd Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal “A” Bench Chennai. Chennai. 2.The Commissioner of Income Tax, Chennai. Chennai. https://hcservices.ecourts.gov.in/hcservices/ 3.The Commissioner of Income Tax (Appeals)-5, 121, Mahatma Gandhi Road, Nungambakkam, Chennai 34. 121, Mahatma Gandhi Road, Nungambakkam, Chennai 34. 4.The Assistant Commissioner of Income Tax, Non Corporate Circle 4 (1), No.16, Greams Road, Anna Salai, Chennai -6. Non Corporate Circle 4 (1), No.16, Greams Road, Anna Salai, Chennai -6. +1cc to Mr.T.Ravikumar, Advocate, S.R.No. 30685 T.C.A.Nos.512 and 513 of 2018VD(CO)GN(15/10/2020)