ACIT 2(3), MUMBAI v. SHREE BAL PROPERTIES & FINANCE P. LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I MUMBAI BEFORE SHRI. D.K. AGARWAL (J.M.) AND SHRI T.R. SOOD (A.M.) ITA NO.2403/MUM/2009 ASSESSMENT YEAR : 2005-2006 SHREE BAL PROPERTIES & FINANCE PVT. LTD. 4 BUONA CASA SIR P.M. RD. FORT MUMBAI 400 001. PAN : AACCS1776N VS. ACIT-2(3) R.NO.555 AAYAKAR BHAVAN MUMBAI. (APPELLANT) (RESPONDENT) ITA NO.2518/MUM/2009 ASSESSMENT YEAR : 2005-2006 ACIT-2(3) R.NO.555 AAYAKAR BHAVAN MUMBAI. VS. SHREE BAL PROPERTIES & FINANCE PVT. LTD. 4 BUONA CASA SIR P.M. RD. FORT MUMBAI 400 001. PAN : AACCS1776N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ARVIND SONDE & S.A. MUKADAM RESPONDENT BY : SHRI S.K. SINGH O R D E R PER D.K. AGARWAL J.M. THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE ORDER DATED 27.01.2009 PASSED BY THE LEAR NED CIT(A) FOR THE ASSESSMENT YEAR 2005-06. BOTH THESE APPEALS ARE DISPO SED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.2403/MUM/2009 ITA NO.2518/MUM/2009 2 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE COM PANY IS ENGAGED IN THE CONSTRUCTION OF FLATS/COMMERCIAL BUILDING S FILED RETURN DECLARING LOSS OF ` 44 44 700/-. HOWEVER THE ASSESSMENT WAS COMPLETED AT AN INCOME OF ` 10 63 970/- VIDE ORDER DATED 27.12.2007 PASSED U/S.143(3) OF THE INCOME TAX ACT 1961 (THE ACT). ON APPEAL THE LEARNED CIT(A) PARTLY ALLOWED THE APPEAL. 3. BEING AGREED BY THE ORDER OF THE LEARNED CIT(A) THE ASSESSEE AND REVENUE BOTH ARE IN APPEAL BEFORE US. ITA NO. 2403/MUM/2009 [ASSESSEES APPEAL] ASSESSMENT YEAR :2005-2006 4. THE SOLE GROUND TAKEN BY THE ASSESSEE READS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A)-XXX MUMBAI ERRED IN CONFIRMING HE A DDITION OF ` 15 24 930/- AS DEEMED DIVIDEND INCOME U/S.2(22)(E) MADE BY THE ASSESSING OFFICER AS INCOME FROM OTHER SOURCES . SINCE IT IS REGULAR CURRENT ACCOUNT TRANSACTION BETWEEN TWO SIS TER CONCERNS THE ADDITION MAY BE DELETED. 5. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT DURING T HE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO FILE THE SOURCE OF INVESTMENTS FOR PURCHASE OF SHARES IN AUTOMATIC ELECTRIC LTD . FOR ` 1 66 18 671/-. IT WAS SUBMITTED BY THE ASSESSEE THAT THE SOURCE OF INVESTMENT WAS FROM LOANS TAKEN FROM M/S. S.B. ESTATE P VT. LTD. OF ` 91 72 500/- AND SHREE BAL CONSTRUCTIONS PVT. LTD. (SB CPL) ` 1 04 03 767/-. IT WAS FURTHER SUBMITTED THAT ` 5 101/- WAS INVESTED IN EARLIER YEAR AND THE BALANCE AMOUNT OF ` 1 66 13 570/- WAS INVESTED DURING THE YEAR OUT OF INTEREST FREE DEPOSITS RECEIVED FROM THE SAID TWO COMPANIES. THE ASSESSEE ALSO FILED THE CONFIRMATI ONS FROM THE AFORESAID TWO COMPANIES. FROM THE PERUSAL OF THE STATEMENT OF ITA NO.2403/MUM/2009 ITA NO.2518/MUM/2009 3 ACCOUNTS IT WAS OBSERVED BY THE ASSESSING OFFICER THAT SHARE HOLDING PATTERN OF SBCPL AND THE ASSESSEE COMPANY IS AS FOLLOWS: NAME SHARE HOLDING IN SBCPL SHARE HOLDING IN ASSESSEES COMPANY VRINDA SHARAD BAL 56% 49% SHARAD DATTATRAYA BAL 44% 50% MS. PALLAVI S. BAL 1% ACCORDING TO THE ASSESSING OFFICER THE SHARE HOLDINGS PATTER N OF THE TWO COMPANIES SHOW THAT THERE ARE TWO COMMON SHARE HOLD ERS WHO HELD SHARES MORE THAN 10% OF THE VOTING POWER. ON B EING ASKED TO EXPLAIN WHY THIS LOAN/ADVANCE TAKEN FROM M/S. SBCPL O F ` 1 04 03 767/- SHOULD NOT BE TREATED AS DEEMED DIVIDEN D INCOME AS PER PROVISIONS OF SECTION 2(22)(E) IT WAS SUBMITTED BY THE ASSESSEE THAT THE AMOUNT RECEIVED DURING THE FINANCIAL YEAR 20 04-05 OF ` 1 04 03 768/- IS IN THE NATURAL COURSE OF BUSINESS BEING CURRENT ACCOUNT OPERATED BETWEEN TWO SISTER CONCERNS. THEREFORE IN VIEW OF DECISION OF THE TRIBUNAL IN THE CASE OF N.H. SECURITIES LT D. VS. DCIT THE SAID AMOUNT SHOULD NOT BE TREATED AS DIVIDEND. HOWEVER THE ASSESSING OFFICER DID NOT ACCEPT THE ASSESSESS SUBMISSION AND TR EATED THE EXCESS WITHDRAWAL OF ` 15 24 930/- AS DEEMED DIVIDEND UNDER THE PROVISIONS OF SEC.2(22)(E) OF THE ACT. ON APPEAL THE LE ARNED CIT(A) WHILE AGREEING WITH THE VIEWS OF ASSESSING OFFICER UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. 6. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT SINCE THE ASSESSEE COMPANY IS NOT A SHARE HOLDER THEREFORE IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS. BHAUMIK COLOUR P. LTD. [2009] 118 ITD 1 (MUM.)(SB) THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE THEREFORE THE ADDITION MADE BY THE ASSESSING OFFICER BE DELETED. ITA NO.2403/MUM/2009 ITA NO.2518/MUM/2009 4 7. ON THE OTHER HAND THE LEARNED DR SUPPORTS THE ORD ER OF THE ASSESSING OFFICER AND LEARNED CIT(A). 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RI VAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIN D THAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS IT IS ALSO NOT IN DISPUTE WITH THE ASSESSEE COMPANY IS NEITHER SHARE HOLDER NOR THE BENEFICIAL SHARE HOLDER IN THE COMPANY NAMELY SBCPL. IN BHAUMIK COLOUR (P.) LTD. (SUPRA) IT HAS BEEN HELD BY THE SPECIAL BENCH VIDE PAR -41 APPEARING AT PAGE 27 OF THE REPORT AS UNDER: ON THE FIRST QUESTION : DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION: THE EXPRESSION SHAREHOLDER REFERRED TO IN SECTION 2(22)(E) REFERS TO BOTH A REGIST ERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHAREHOLD ER THEN THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BROUGHT O N RECORD BY THE LEARNED DR WE RESPECTFULLY FOLLOWING THE DECISION OF T HE SPECIAL BENCH OF THE TRIBUNAL (SUPRA) HOLD THAT THE PROVISION OF SECT ION 2(22)(E) ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE AND ACCORDINGLY GROUND TAKEN BY THE ASSESSEE IS ALLOWED. ITA NO.2518/MUM/2009 [REVENUES APPEAL] ASSESSMENT YEAR 2005-2006 9. GROUNDS TAKEN BY THE REVENUE READ AS UNDER: ITA NO.2403/MUM/2009 ITA NO.2518/MUM/2009 5 1. THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE A SSESSING OFFICER TO ALLOW INTEREST PAID AGAINST THE LOAN USE D FOR CONSTRUCTION OF BUILDING OF ` 22 51 748/- AS PER SEC.24 OF THE I.T. ACT. 2. THE LEARNED CIT(A) HAS ERRED IN ACCEPTING ADDIT IONAL EVIDENCE UNDER RULE 46A. 3. THE LEARNED CIT(A) HAS FAILED TO GIVE OPPORTUNI TY TO ASSESSING OFFICER TO EXAMINE NEW EVIDENCE AND HAS T HEREBY VIOLATED THE PROVISIONS OF RULE 46A OF THE I.T. RUL ES. 4. THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THA T ASSESSEE HAS NOT BORROWED ANY FUND FOR ACQUISITION OF THIS P ROPERTY WHICH WAS GIVEN ON LEAVE AND LICENSE BASIS. ASSESSEE BO RROWED THE FUND FOR CONSTRUCTING COMPLEX AND INCLUDED INTEREST PORTION OVER THE PERIOD IN WORK IN PROGRESS. 5. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 10. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT DURING THE YEAR THE ASSESSEE COMPANY COMPLETED ONE COMMERCIAL BUILDING AND DUE TO SEVERAL FACTORS COULD NOT SALE THE SAME. THE ASSESSEE COMPANY DECIDED TO GIVE IT ON LEASE TO SISTER CONCERN. THUS THE A SSESSEE COMPANY RECEIVED ` 1 20 000/- BY WAY OF RENT FROM SISTER CONCERN FOR THE ENTIRE PREVIOUS YEAR WHERE TAXES ETC WERE TO BE PAID BY THE LICENSEE. THUS TAKING INTO CONSIDERATION THE MUNICIPAL TAXES PAYABLE BY THE LICENSEE THE TOTAL RENT RECEIVED WAS MORE THAN THE STANDARD RENT FIXED BY THE MUNICIPAL AUTHORITIES. THIS ASPECT HA S BEEN CONSIDERED AND DISCUSSED BY THE ASSESSING OFFICER. BESIDES T HE ASSESSEE COMPANY ALSO RECEIVED INTEREST FREE DEPOSIT/ADVANCE FROM THIS SISTER CONCERN TO WHOM THE PROPERTY WAS LEASED. TH E LEASE RENT OF ` 1 20 000/- WAS SHOWN AS BUSINESS INCOME. HOWEVER THE ASSESSIN G OFFICER TREATED THE SAME AS INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND COMPUTED THE SAME AT ` 80 000/-. ON APPEAL BEFORE THE LEARNED CIT(A) IT WAS INTERALIA SUBMITTED BY THE ASSES SEE THAT THE ITA NO.2403/MUM/2009 ITA NO.2518/MUM/2009 6 INTEREST PAID AGAINST LOAN USED FOR CONSTRUCTION OF BUIL DING BE ALLOWED PROPORTIONATELY OF ` 22 51 748/- U/S.24 OF THE ACT. AS THE ASSESSEE HAD UTILISED BORROWED FUNDS FOR CONSTRUCTION OF PROPERTY INTEREST PAYMENT REQUIRED TO BE ALLOWED AS DEDUCTION U/S.24. THE LEARNED CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSIONS ALLOWED TH E CLAIM OF INTEREST OF ` 22 51 748/- AND REJECTED THE CLAIM OF DEPRECIATION OF ` 15 64 285/-. 11. AT THE TIME OF HEARING THE LEARNED DR SUBMITS THA T SINCE THE LEARNED CIT(A) HAS ACCEPTED THE ASSESSEES PLEA OF DEDUCTION OF INTEREST OF ` 22 51 748/- WITHOUT PROVIDING OPPORTUNITY TO THE ASSESSING OFFICER THEREFORE THERE IS THE VIOLATION PROV ISIONS OF RULE 46A AND THEREFORE THE ISSUE MAY BE SET ASIDE TO THE FIL E OF THE ASSESSING OFFICER 12. ON THE OTHER HAND THE LEARNED COUNSEL FOR THE ASSE SSEE SUBMITS IN THIS CASE THE ASSESSEE HAS CLAIMED BANK INTEREST OF ` 28 90 892/- IN THE P & L A/C. APPEARING AT PAGE 11 OF THE ASSESSEES PAP ER BOOK. THE ASSESSING OFFICER WHILE TREATING THE LICENSE FEES RECEIVED ` 1 20 000/- UNDER THE HEAD INCOME FROM HOUSE PROPERTY AS AGAINST BU SINESS INCOME CLAIMED BY THE ASSESSEE HAS ALLOWED BANK INTEREST ` 28 90 892/- CLAIMED BY THE ASSESSEE AS REVENUE EXPENDITUR E AGAINST THE BUSINESS INCOME. IN OTHER WORDS THE ASSESSING OFFICER H AS MADE NO DISALLOWANCE OF INTEREST. BEFORE THE CIT(A) THE ASSE SSEE HAS CLAIMED THAT SINCE THE LICENSE FEES RECEIVED HAS BEEN ASSESSE D UNDER THE HEAD INCOME FROM HOUSE PROPERTY THEREFORE THE PRO PORTIONATE AMOUNT FOR INTEREST PERTAINING TO SAID INCOME BE ALLOW ED UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND THE LEARNED CIT(A ) AFTER CONSIDERING THE SAME HAS ALLOWED THE SAME. THUS THERE I S NO VIOLATION ITA NO.2403/MUM/2009 ITA NO.2518/MUM/2009 7 PROVISIONS OF RULE 46A OF THE I.T. RULES. HE FURTHER SUBMITS THAT HE HAS NO OBJECTION IF THE SAID AMOUNT OF INTEREST WHICH HA S BEEN ALLOWED BY THE LEARNED CIT(A) UNDER HEAD INCOME FROM HOUSE PR OPERTY MAY BE DISALLOWED UNDER THE HEAD INCOME FROM BUSINESS. HE FURT HER SUBMITS THAT TO THAT EXTENT THE ORDER PASSED BY THE LEARNED C IT(A) BE UPHELD. 13. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FI ND THAT THERE IS NO DISPUTE THAT THE ASSESSING OFFICER HAD ALLOWED ENTIRE AMO UNT OF INTEREST ` 28 90 892/- WHILE COMPUTING THE BUSINESS INCOME OF TH E ASSESSEE. HOWEVER THE LEARNED CIT(A) AFTER CONSIDERING T HE MATERIAL AVAILABLE ON RECORD HAS HELD THAT THE ASSESSEE IS ENTITLED TO CLAIM PROPORTIONATE AMOUNT OF INTEREST OF ` 22 51 748/- UNDER THE HEAD INCOME FROM HOUSE PROPERTY. CONSIDERING THE FACTS THAT THE ASSESSING OFFICER HAS ALLOWED THE TOTAL INTEREST OF ` 28 90 892/- THEREFORE THERE IS NO VIOLATION OF PROVISIONS OF RULE 46A AND THE LEAR NED CIT(A) HAS CORRECTLY ALLOWED THE INTEREST UNDER THE HEAD INCOME FR OM HOUSE PROPERTY ` 22 51 748/-. SINCE THE INTEREST ` 22 51 748/- HAS BEEN ALLOWED UNDER THE HEAD INCOME FROM HOUSE PROPERTY TH E CORRESPONDING DISALLOWANCE OF INTEREST UNDER THE HEAD IN COME FROM BUSINESS IS REQUIRED TO BE MADE AS THE ASSESSING OFFICER HAS A LLOWED ENTIRE AMOUNT OF INTEREST UNDER THE HEAD INCOME FROM BUSINESS. ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO MAKE NECESSARY ADJUSTMENT IN THIS REGARD. SUBJECT TO THE ABOVE THE GROUNDS TAKEN BY THE REVENUE ARE THEREFORE REJECTED. ITA NO.2403/MUM/2009 ITA NO.2518/MUM/2009 8 14. IN THE RESULT ASSESSEES APPEAL STANDS ALLOWED AND T HE REVENUES APPEAL IS DISMISSED AS INDICATED ABOVE. ORDER PRONOUNCED ON THIS 11 TH DAY OF FEBRUARY 2011. SD/- (T.R. SOOD) ACCOUNTANT MEMBER SD/- (D.K. AGARWAL) JUDICIAL MEMBER MUMBAI DATED 11 TH FEBRUARY 2011. JANHAVI COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- MUM BAI 4. COMMISSIONER OF INCOME TAX CITY- MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI