The Commissioner Of Income Taxtamil Nadu – Iii, Madras v. M/S.prem Electric Conductors Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED:14.12.2011 CORAM THE HON'BLE MR.JUSTICE ELIPE DHARMA RAO&THE HON'BLE MR.JUSTICE R.SUBBIAH T.C.(A) NO.179 OF 2008 The Commissioner of Income TaxTamil Nadu – III, Madras ..Appellant Vs. M/s.Prem Electric Conductors Pvt. Ltd.6, Arcot Road, Vadapalani, Chennai – 26..Respondent Prayer: Tax Case Appeal against the order dated 07.03.2007passed by the Income Tax Appellate Tribunal, "B" Bench, Chennai inI.T.A.No.896/Mds/2006 and against the order of the Income TaxDepartment for A.Y. 1998-99 dated 30.09.2005 in PA/GIR No.AAACP5179-NGIR 10-P ( Order of the Commissioner of Income Tax, Chennai-III,Chennai) in C.NO.3033/10/III/2005.06 dated 30.1.2006 under Section263 of the Income Tax Act 1961) For Appellant : Mr.T.RavikumarFor Respondent : M/s.Dr.Anita Sumanth JUDGMENT (Judgment of the court was delivered by Justice Elipe Dharma Rao) This Tax Case Appeal has been filed against the order dated07.03.2007 passed by the Income Tax Appellate Tribunal, "B" Bench,Chennai, in I.T.A.No.896/Mds/2006. The assessee is engaged in the business of sale of ElectricalConductors. For the assessment year 1998-99, the assessee viz.,M/s.Prem Electrical Conductors Pvt. Ltd., hereinafter referred to asPEC, filed its return of income on 18.01.1999 admitting a total https://hcservices.ecourts.gov.in/hcservices/ income of Rs.29,660/-. The return was processed under section 143(1A) of the Income Tax Act on 28.09.1999. Subsequently, a noticeunder section 148 of the Act was issued on 31.03.2005 and it wasserved on the assessee on 02.04.2005. The assessee, vide letterdated 24.02.2005, requested that the return filed on 18.01.1999 betreated as the one filed in response to the notice under section 148of the Act. The assessment under section 143(3) read with section147 of the Act was completed on 30.09.2005. The said order wasrevised by the Commissioner of Income Tax, Chennai – III on31.01.2006 on the ground that the assessee had received a sum ofRs.1.78 crores from Madras Electrical Conductors Pvt. Ltd., which isa sister concern of the assessee and that the amount received fromthe sister concern from October 1997 amounted to "deemed dividend"within the meaning of section 2(22)(e) of the Act since the assesseehad stopped all business activities from the said period.Challenging the said order, the assessee filed an appeal before theIncome Tax Appellate Tribunal and the Tribunal, by order dated07.03.2007, allowed the appeal filed by the assessee. Aggrieved bythe same, the Revenue has filed the present appeal. 3. We have heard the learned counsel appearing on either sideand perused the entire materials available on record. 4. At the time of admitting the appeal, the followingsubstantial question of law was framed: "Whether on the facts and in the circumstances of thecase, the Income Tax Appellate Tribunal was right inquashing the revision order made by the Commissioner ofIncome Tax under section 263, even though the Commissionerof Income Tax had found that the Income Tax Officer hadomitted to enquire into the question of applicability ofsection 2(22)(e) as regards credit of about Rs.2 croreswith the caption "To PREM KRISHI" is valid?" 3. We have heard the learned counsel appearing on either sideand perused the entire materials available on record. 4. At the time of admitting the appeal, the followingsubstantial question of law was framed: "Whether on the facts and in the circumstances of thecase, the Income Tax Appellate Tribunal was right inquashing the revision order made by the Commissioner ofIncome Tax under section 263, even though the Commissionerof Income Tax had found that the Income Tax Officer hadomitted to enquire into the question of applicability ofsection 2(22)(e) as regards credit of about Rs.2 croreswith the caption "To PREM KRISHI" is valid?" 5. It is the case of the Revenue that the Assessing Officer,without considering the materials available on record, has passedthe assessment order dated 30.09.2005. It is also their case thatthe Tribunal has committed an error in quashing the order passed bythe Commissioner under section 263 of the Act since, the Commissionerhas rightly exercised the revisional power conferred on him under thesaid section on the ground that the Assessing Officer has not goneinto the materials available on record before passing the assessmentorder, thereby causing prejudice to the interest of the Revenue. Insupport of the said submission, learned counsel appearing for theRevenue relied upon a Division Bench judgment of this court in the case reported in (2003) 259 ITR 507 (C.I.T. Vs. P.K.Abubucker) and adecision of the Hon'ble Supreme Court of India in the case reportedin (2007) 290 ITR 433 (Commissioner of Income Tax Vs. Mukundray K.Shah). However, learned counsel appearing for the assessee submittedthat the order passed by the Tribunal cannot be interfered with inany manner. In support of her case, learned counsel appearing forthe assessee relied upon two decisions of the Delhi High Court inthe cases reported in (2009) 318 ITR 462 (Commissioner of Income TaxVs. Raj Kumar) and (2009) 318 ITR 476 (Commissioner of Income Tax Vs.Creative Dyeing and Printing P. Ltd.) respectively. case reported in (2003) 259 ITR 507 (C.I.T. Vs. P.K.Abubucker) and adecision of the Hon'ble Supreme Court of India in the case reportedin (2007) 290 ITR 433 (Commissioner of Income Tax Vs. Mukundray K.Shah). However, learned counsel appearing for the assessee submittedthat the order passed by the Tribunal cannot be interfered with inany manner. In support of her case, learned counsel appearing forthe assessee relied upon two decisions of the Delhi High Court inthe cases reported in (2009) 318 ITR 462 (Commissioner of Income TaxVs. Raj Kumar) and (2009) 318 ITR 476 (Commissioner of Income Tax Vs.Creative Dyeing and Printing P. Ltd.) respectively. 6. It is not in dispute that the assessee filed its return ofincome for the assessment year 1998-99 on 18.01.1999 admitting atotal income of Rs.29,660/-; the return was processed under section143(1) of the Act ; a notice under section 148 of the Act was issuedand the assessment was completed on 30.09.2005. At the time ofprocessing the assessment records, the Commissioner of Income Taxfound that the assessee received a sum of Rs.1.78 croresapproximately from Madras Electrical Conductors Pvt. Ltd. (now knownas MEC International Pvt. Ltd.) - (hereinafter referred to as MEC),which is a sister concern of the assessee. Therefore, theCommissioner, exercising the power of revision conferred on him undersection 263 of the Act, revised the order passed by the AssessingOfficer. While passing such an order under section 263 of the Act,the Commissioner found that the applicability of section 2(22)(e)of the Act was not examined by the Assessing Officer whilecompleting the assessment, though Sri. Ashok P.Shah, who was aDirector of the assessee company, was also the Director in MadrasElectrical Conductors Pvt. Ltd.; even if it is taken that thistransfer of funds was initially on account of business transaction,the assessee company stopped all business activities since October1997 as per its own admission during the course of assessmentproceedings; the said amount partakes the character of advance, soas to attract the provisions of section 2(22)(e) of the Act; thisaspect was not looked into by the Assessing Officer while completingthe assessment on 30.09.2005 and therefore, this constituted anerror, which is prejudicial to the interest of the Revenue.Therefore, a show cause notice under section 263 of the Act wasissued to the assessee on 24.11.2005. Subsequently, a revisedassessment order dated 23.10.2006 was passed by the Assessing Officerunder section 143(3) read with section 263 of the Act holding that,as per the provisions of section 2(22)(e) of the Act, the amountsreceived as loan or advance is taxable only to the extent ofaccumulated profits of the company from which these amounts werereceived; a perusal of the balance sheet of M/s.MEC International P.Ltd., for the assessment year 1998-99 reveals that the reserves and surplus come to Rs.1,09,45,448/-; out of this, a sum ofRs.2,86,658/- represents investment allowance reserve, which does notform part of accumulated profits; therefore it is excluded and thatthe amount of deemed dividend taxable in the hands of the assesseeis restricted to Rs.1.06,88,453/-. surplus come to Rs.1,09,45,448/-; out of this, a sum ofRs.2,86,658/- represents investment allowance reserve, which does notform part of accumulated profits; therefore it is excluded and thatthe amount of deemed dividend taxable in the hands of the assesseeis restricted to Rs.1.06,88,453/-. 7. In the appeal filed by the assessee, the Commissioner, afterhearing the assessee and on the basis of the materials available onrecord, held that Sri.Ashok P.Shah was not holding substantialinterest in MEC and has no shareholding in PEC and therefore, theprovisions of section 2(22)(e) are attracted to the present case.Before the Commissioner, it was argued that the transactions were inthe nature of business advances and therefore the provisions ofsection 2(22)(e) would not apply. However, the Commissioner foundthat since the assessee company stopped all its business activitiesfrom October 1997 as per its own admission during the course ofassessment proceedings, the amount of Rs.2,73,500/- received from MECis taxable as deemed dividend under section 2(22)(e) of the Actduring the assessment year 1998-99 in the hands of PEC. On the basisof the above finding, the Commissioner held that the entire sum ofRs.2,73,500/- received from October 1997 to March 1998 from MEC isliable to tax as "deemed dividend" and therefore directed theAssessing Officer to bring to tax the said sum of Rs.2,73,500/- inthe hands of PEC as "deemed dividend" for the assessment year 1998-99under section 2(22)(e) of the Act. 8. In addition to the above, the Commissioner also found fromthe materials available on record that, there was a credit of aboutRs.2 crores on 03.03.1998 with the caption "To Prem Krishi"; this wasa book adjustment, as the amount reflected in the books of M/s.PremKrishi P Ltd., was transferred to PEC and that a debt could not betransferred by mere book entries. On the basis of the said finding,the Commissioner directed the Assessing Officer to verify whetherany portion of the sum of Rs.2 crores was received during the saidperiod by M/s.Prem Krishi P Ltd., from MEC and to bring suchamount to tax in the hands of PEC as "deemed dividend" as per theprovisions of section 2(22)(e) of the Act for the assessment year1998-99, in addition to the sum of Rs.2,73,500/- referred toearlier. The Commissioner also directed the Assessing Officer tobring the entire amount of Rs.2 crores received on 03.03.1998 totax in the hands of PEC as "deemed dividend" under section 2(22)(e)of the Act, if the Assessing Officer finds that the said sum doesnot represent monies transferred from MEC but represents the ownmoney of M/s.Prem Krishi P Ltd. 9. In the appeal filed by the assessee before the Tribunal asagainst the order of the Commissioner dated 30.01.2006, the issuethat came up for consideration was whether the Commissioner ofIncome Tax has erred in revising the assessment under section 263 ofthe Act, when the twin condition that the order is neither erroneousnor prejudicial to the interest of the Revenue is not satisfied. TheTribunal found that advances are in the nature of business advancesand that they are not loans or deposits; Sri.Ashok P Shah is holdingno shares in PEC; once it is established that the deposit oradvance is in the nature of business transaction, it cannot be heldthat the same will attract the provisions of section 2(22)(e) of theAct; the assessment was framed under section 143(3) read with section147 of the Act and all the details were available before theAssessing Officer at the time of completion of assessment. TheTribunal also found that it has not been established that therewas an error in the assessment order and that the Commissioner has nopower to review the said order under section 263 of the Act. On thebasis of the above finding, the Tribunal quashed the order passed bythe Commissioner exercising his revisional powers under section 263of the Act. Pursuant to the said order dated 07.03.2007 passed bythe Tribunal reversing the order dated 30.01.2006 passed by theCommissioner, the Assessing Officer has passed an order dated31.05.2007 revising the order dated 23.10.2006 passed by him earlierthereby giving effect to the order dated 07.03.2007 passed by theTribunal. It is submitted by the learned counsel appearing for theassessee that the assessee has filed an appeal before theCommissioner of Income Tax (Appeals) as against the order dated23.10.2006 passed by the Assessing Officer and that the same ispending. 10. A cursory look at the assessment order dated 30.09.2005shows that it has been passed without application of mind to thematerials available on record. Therefore, it cannot be said thatthe Commissioner has wrongly exercised the power under section 263 ofthe Act to revise the order passed by the Assessing Officer. In thedecision of the Hon'ble Supreme Court of India reported in (2007) 290ITR 433 referred to above and relied upon by the learned counselappearing for the Revenue, the Supreme Court has held as follows:11. .................... The companieshaving accumulated profits and the companies inwhich substantial voting power lies in the handsof the person other than the public (controlledcompanies) are required to distribute accumulatedprofits as dividends to the shareholders. In such https://hcservices.ecourts.gov.in/hcservices/ companies, the controlling group can do what itlikes with the management of the company, itsaffairs and its profits. It is for this group todecide whether the profits should be distributedas dividends or not. The declaration of dividendis entirely within the discretion of this group.Therefore, the Legislature realised that thoughfunds were available with the company in the formof profits, the controlling group refused todistribute accumulated profits as dividends to theshareholders but adopted the device of advancingthe said profits by way of loan to one of itsshareholders so as to avoid payment of tax onaccumulated profits. This was the main reason forenacting section 2(22)(e) of the Act." The Supreme Court has also held that "the concept of "deemeddividend" under section 2(22)(e) postulates two factors viz., whetherthe payment was a loan and whether on the date of payment, thereexisted accumulated profits and that, these two factors have to becorrelated". In that case, the Supreme Court has found that theAppellate Tribunal had done that exercise and therefore, the HighCourt ought not to have disturbed the finding of fact arrived at bythe Appellate Tribunal. The Supreme Court has also held that "the concept of "deemeddividend" under section 2(22)(e) postulates two factors viz., whetherthe payment was a loan and whether on the date of payment, thereexisted accumulated profits and that, these two factors have to becorrelated". In that case, the Supreme Court has found that theAppellate Tribunal had done that exercise and therefore, the HighCourt ought not to have disturbed the finding of fact arrived at bythe Appellate Tribunal. 11. In the present case, admittedly, the order dated 30.09.2005passed by the Assessing Officer appears to be skeleton in natureviz., he has not even applied his mind to the materials available onrecord before passing such an order. Therefore, the Commissioner,suo motu, exercising the powers conferred on him under section 263of the Act, revised the order of assessment passed by the AssessingOfficer. However, learned counsel appearing for the assesseesubmitted that the Commissioner may be directed to re-consider thematter afresh, without in any way being influenced by any observationmade by him in the earlier order of revision, having regard to thefact that the appeal filed by the assessee against the revisedassessment order is pending consideration before the Commissioner ofIncome Tax (Appeals). Therefore, having regard to the saidrequest made by the learned counsel for the assessee, withoutexpressing any opinion on the merits of the case, we consider itappropriate to set aside the order passed by the Tribunal and remandthe matter back to the Commissioner of Income Tax (A) with adirection to him to re-consider the matter afresh in the light ofthe Supreme Court decision referred to above and without in any way being influenced either by any observation made by him in the earlierorder of revision or any observation made by us in this judgment andto pass appropriate orders in accordance with law. No costs. Sd/Assistant Registrar /True Copy/Sub Assistant Registrar VSITo1 The Assistant Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan, III Floor,Besant Nagar, Madras-902 The Commissioner of Income Tax (Appeals), Tamil Nadu-III,Chennai3 The Income Tax Appellate Tribunal, "B" Bench, Chennai+1 CC to M/s.Dr.Anita Sumanth, Advocate, Sr.No.76395+1 CC to Mr.T.Ravikumar, Advocate, Sr.No.76706 T.C.NO.179 OF 2008 SGL(CO)MS:10/01/2012 https://hcservices.ecourts.gov.in/hcservices/