The Tribunal Referred To In Para (1) Above v. Joint

HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No. 238 OF 2003 15-10-2014 BETWEEN Commissioner of Income Tax, Rajahmundry …Appellant And The India Fruits Limited, Kadiyam …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A No. 238 OF 2003 JUDGMENT:(per the Hon'ble Sri Justice Challa Kodanda Ram) This appeal is filed by the Revenue, under Section 260A ofthe Income Tax Act, 1961 (for short, ‘the Act’) raising the followingtwo substantial questions of law, said to be arising from the ordersof the Income Tax Appellate Tribunal, Visakhapatnam (for short,‘the Tribunal’) dated 09-10-2002 in ITA No.414/H/1994: “1. Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal is justified in holding thatthe amount advanced to the shareholder cannot be considered as deemed dividend within the purview ofSection 2(22)(e) of the I.T. Act, 1961? 2. Whether the finding of the Income Tax AppellateTribunal that lending of the amount to the shareholder is inthe ordinary course of its business and that the activity oflending of money constitutes substantial part of the businessof the company are based on material on record?” 2. The facts are that the assessee is a company which isholding 100% stake in another company under the name “M/s.Anam Machinery Fabricators Limited”. During the financial year1992-94 corresponding to the assessment year 1993-94, theassessee was assessed to a sum of Rs.27,59,932/- towardsdeemed dividend received from the subsidiary company. The saidamount represents the undistributed dividend of the subsidiarycompany. In view of the fact that the assessee companyborrowed certain amounts from the subsidiary company, the saidamount was sought to be taxed in the hands of the assessee byapplying the provisions of Section 2(22)(e) of the Act. The appealfiled by the assessee with the first appellate authority ended up indismissal and thereafter, it filed further appeal to the Tribunal. TheTribunal, after analysing the facts on record, gave a categoricalfinding that there were mutual transactions between the parties inthe normal course of business and the subsidiary company hadalso one of its objects, as lending money, and for the monies lentto the assessee company, the subsidiary company had chargedinterest at the rate of 13% per annum. Taking all these aspectsinto consideration, the Tribunal has set aside the order of theassessing officer. The department is in appeal raising thesubstantial questions of law said to be arising from the orders of the Tribunal referred to in para (1) above. 3. Sri S.R. Ashok, learned Senior Counsel for thedepartment by making a reference to the orders of the Tribunalsubmits that there was only one single transaction in the wholeyear and further it was not the business of the subsidiary companyto lend monies and there was no other transaction of lendingmoney to any other entity. He would also submit that thecontention of the department that this being the loan transaction,the resolution of the Board of the Directors of the subsidiarycompany was brought up for the purpose of assessment, was notadverted to and believed by the Tribunal. He has relied upon thejudgment of the Bombay High Court in Walchand & Co. Ltd., v.C.I.T[[1]]. 4. On the other hand, Ms.K. Neeraja, learned counsel forthe respondent – assessee supports the order of the Tribunal andhas specifically drawn the attention of this Court to the findings offact recorded by the Tribunal. She has placed reliance upon thejudgment of the Supreme Court in M. Janardhan Rao v. Joint Commissioner of Income Tax[[2]]. 5. We feel it necessary to notice the observations made bythe Tribunal at para 9 of its order which read as under: “On an over all analysis of the facts andcircumstances of the case along with the papers anddocuments placed before us and the relevant provisions ofdifferent statutes, we observe as follows: 4. On the other hand, Ms.K. Neeraja, learned counsel forthe respondent – assessee supports the order of the Tribunal andhas specifically drawn the attention of this Court to the findings offact recorded by the Tribunal. She has placed reliance upon thejudgment of the Supreme Court in M. Janardhan Rao v. Joint Commissioner of Income Tax[[2]]. 5. We feel it necessary to notice the observations made bythe Tribunal at para 9 of its order which read as under: “On an over all analysis of the facts andcircumstances of the case along with the papers anddocuments placed before us and the relevant provisions ofdifferent statutes, we observe as follows: Although the Assessment order and the order of the CIT (A) appear to have been made on a sound footing, buton a critical analysis of the provisions of the statute and on aperusal of the written submission filed by the learned AR ofthe assessee, after hearing the vociferous argument madeby the Senior Counsel Mr.K.K. Viswanathan in this regard,we are unable to ignore the technicalities of law clinching infavour of the assessee. Firstly, because as discussedabove, Clauses 9 and 10 of the Object clauses of theMemorandum of Association of M/s. Anam MachineryFabricators Ltd., authorise that company to accumulatefunds, to lend, invest or otherwise employ monies belongingto or entrusted to the company in securities and shares andother investments; to lend and advance money or give creditto such person, firms or companies and on such terms asmay seem expedient and to give guarantees or becomesureties for any such person, firms or companies, theincome of such concern. Although, it was never raised byboth the sides, analysing further in Clause to Explanation IIIof Sect.2(22)(e), we found that “concern” means a Hinduundivided family, or a firm or an association of persons or abody of individuals or a company. Hence, the technicalitiesof all these provisions fully favour the stand of the assesseewhich simply cannot be brushed aside just with a purpose tomake addition on the ground of “deemed dividend”. In addition to all this, the logical argument of theSenior Counsel on behalf of the appellant-company furthersubstantiate his stand on the ground that the appellant-company changed their accounting system from cash tomercantile with effect from 1.6.1988 in consonance with theprovisions of Sec.209 of the Companies Act and offered totax on mercantile basis thereafter. We also agree with hispoint that the term “substantial interest” and “substantialbusiness” not having been defined in the Act has to beconsidered only on the basis of 20% of the income as perclause (b) of Expl.III of Sec.2(22)(e) of the Act. On an over all consideration of the facts andcircumstances of the case read with statutory provisions ofthe Income Tax Act as well as Companies Act and thedocuments relied by the Appellant, we do not find any alternative than to delete this addition in favour of theassessee because of the technicalities adumbrated in therespective statues which were strictly complied with by theassessee-company.” 6. In the light of the findings recorded by the Tribunal and inview of the fact that there is no challenge to the findings recordedby the Tribunal, by raising a plea that such findings of fact areperverse, the findings of fact as recorded by the Tribunal arerequired to be accepted as final and binding on the Court underSection 260A of the Act. On an over all consideration of the facts andcircumstances of the case read with statutory provisions ofthe Income Tax Act as well as Companies Act and thedocuments relied by the Appellant, we do not find any alternative than to delete this addition in favour of theassessee because of the technicalities adumbrated in therespective statues which were strictly complied with by theassessee-company.” 6. In the light of the findings recorded by the Tribunal and inview of the fact that there is no challenge to the findings recordedby the Tribunal, by raising a plea that such findings of fact areperverse, the findings of fact as recorded by the Tribunal arerequired to be accepted as final and binding on the Court underSection 260A of the Act. 7. When we analyse the facts on record, it is evident thatthe assessee-company owed certain sum during the assessmentyear and it had a sum of Rs.1,12,24,745 to the credit of thesubsidiary company which is much in excess of the amount ofRs.27,59,932/- sought to be brought to tax under deemeddividend. Further, in the assessment order, the assessing officerrecorded a finding that the parties were maintaining a runningaccount and as on 31-03-1990, a sum of Rs.1,12,24,745/- waslying to the credit of the subsidiary company. It is also clear fromthe record that the subsidiary company was advancing money tothe assessee company for the purpose of purchase of rawmaterial and to make payments to M/s.Hindalco Limited to meettheir business/trading liabilities. Taking all these aspects intoconsideration, the Tribunal recorded a finding that there is noelement of deemed dividend and the amount of undistributeddividend of the subsidiary company cannot be said to be deemeddividend of the assessee company. 8. The judgment of the Bombay High Court in Walchand’scase (1 supra) is not applicable to the case on hand since in thesaid case it was not established that giving of loan or advance wasin the ordinary course of business of the first company or thatlending of money was a substantial part of its business. Further,in the said case a finding was recorded that there were only a fewisolated transactions and at the end of the year, the accounts werecompletely squared off, whereas in the present case, as noticedsupra, there was a running account between the parties andinterest was charged. Apart from that, a sum of Rs.1,12,24,745/-was standing to the credit of the subsidiary company. 9. For the aforesaid reasons, we see no reason to interferewith the orders of the Tribunal and accordingly, we answer thequestions of law raised in the appeal, against the Revenue and infavour of the assessee. 10. The appeal is accordingly dismissed. There shall be noorder as to costs. ___________________________ L. NARASIMHA REDDY, J 15-10-2014ksNote:LR copy to be marked. B/O ks ____________________________ CHALLA KODANDA RAM, J [1]100 ITR 598[2]273 ITR 50