The DCIT, Circle-1,, Surat v. Shri Nimeshchandra V. Vashi, Surat

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH D DD D BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI N NN N. .. .S. SAINI S. SAINI S. SAINI S. SAINI ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER AND AND AND AND SHRI SHRI SHRI SHRI MAHAVIR SINGH JUDICIAL MEMBER MAHAVIR SINGH JUDICIAL MEMBER MAHAVIR SINGH JUDICIAL MEMBER MAHAVIR SINGH JUDICIAL MEMBER DATE OF HEARING :3 2 11 DRAFTED ON: 3-2-11 ITA NO. 3442 /AHD/ 2008 ASSESSMENT YEAR : 2005-06 THE DEPUTY COMMISSIONER OF INCOMETAX CCIRCLE-1 ROOM NO.108 AAYAKAR BHAVAN MAJURA GATE SURAT. VS. SHRI NIMESHCHANDRA VASHI 26 JIVAN VIKAS SOCIETY NR.ADARSH SOCIETY ATHWALINES SURAT. PAN/GIR NO. : AAQPV 9274 R (A PPELLANT ) .. ( RESPON DENT ) DATE OF HEARING :3 2 11 DRAFTED ON: 3-2-11 ITA NO. 3443 /AHD/ 2008 ASSESSMENT YEAR : 2005-06 THE DEPUTY COMMISSIONER OF INCOMETAX CCIRCLE-1 ROOM NO.108 AAYAKAR BHAVAN MAJURA GATE SURAT. VS. SHRI ANAND N.VASHI 26 JIVAN VIKAS SOCIETY NR.ADARSH SOCIETY ATHWALINES SURAT. PAN/GIR NO. : AAQPV 9274 R APPELLANT BY : SHRI D.S.CHAUDHARY D.R. RESPONDENT BY: SHRI RASESH SHAH. O R D E R O R D E R O R D E R O R D E R PER N.S.SAINI ACCOUNTANT MEMBER :- THESE ARE THE APPEALS FILED BY THE REVENUE AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I SURA T DATED 12-8-2008. 2. THE FACTS AND ISSUE INVOLVED IN BOTH THESE APPEA LS ARE COMMON AND THEREFORE BOTH THE APPEALS ARE BEING DISPOSED OFF TOGETHER FOR THE SAKE OF CONVENIENCE. PAGE 2 OF 5 3. THE SOLE GROUND OF APPEAL IN BOTH THE APPEALS IS THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DELET ING THE ADDITION OF `. 25 LACS MADE UNDER SECTION 2(22)(E) OF THE INCOME TAX ACT AS DEEMED DIVIDEND. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS DECICDED THE ISSUE AS UNDER:- GROUND NO.1. 2.1. THIS IS REGARDING ADDITION OF `.25 LACS UNDER SECTION 2(22)(E) AS DEEMED DIVIDEND. IN THE ASSESSMENT ORDER THE LEARN ED ASSESSING OFFICER HAS STATED THAT A SHOW CAUSE NOTICE WAS ISS UED TO THE ASSESSEE AS TO WHY THE AMOUNT OF `.25 LACS RECEIVED FROM M/S . ENVIRO CONTROL ASSOCIATES PVT. LTD. BE NOT TAXED AS DEEMED DIVIDE ND UNDER SECTION. 2(22)(E). THE ASSESSEE STATED THAT IT HAD NOT RECEI VED ANY FRESH/NEW LOAN ADVANCE OR SECURITY DEPOSITS. IT HAS NOT RECE IVED ANY OTHER DEPOSITS OR LOANS FROM M/S. ENVIRO CONTROL ASSOCIATES PVT. L TD. THE AMOUNT OF `.25 LACS RECEIVED WAS WITH RESPECT TO REDEMPTION OF PRE FERENCE SHARES. THIS AMOUNT WAS RECEIVED ON REDEMPTION OF PREFERENCE SHA RES. IN VIEW OF THIS REASON THE ASSESSEE STATED THAT THE PROVISIONS OF SECTION 2(22)(E) DO NOT APPLY AT ALL. THE APPELLANT FURTHER STATED THAT AS PER THE PROVISIONS OF COMPANIES ACT PREFERENCE SHARES ARE TO BE COMPULSOR ILY REDEEMED WITHIN 10 YEARS OF ISSUE. PREFERENCE SHARES CAN BE REDEEMED OUT OF FRESH ISSUE OF EQUITY SHARES OR OUT OF RESERVES OF THE CO MPANY. THE ASSESSING OFFICER DID NOT ACCEPT THE ABOVE EXPLANATION AND ST ATED THAT THE MONIES ARE ADVANCED TO THE ASSESSEE BY M/S. ENVIRO CONTROL ASSOCIATES PVT. LTD. IN WHICH HE HAS SUBSTANTIALLY INTEREST. THIS IS A COLOURABLE DEVICE BY WHICH THE ASSESSEE HAS TRIED TO EVADE DUE TAX OVERL OOKING TO THE PROVISIONS OF SECTION 2(22)(E). ACCORDING TO THE A. O. THE MONIES ADVANCED TO THE ASSESSEE ARE NOT IN THE NATURAL COU RSE OF BUSINESS AND IN NO WAY THE ASSESSEES LENDING THE MONEY IS SUBST ANTIAL PART OF THE BUSINESS OF THE ASSESSEE. THE A.O. THEREFORE REJE CTED THE SUBMISSION AND MADE THE ADDITION OF `.25 LACS OF SHARE CAPITAL REDUCTION BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE. 2.2.1 DURING THE APPELLATE PROCEEDINGS THE APPELL ANT REPEATED THE SUBMISSION AND ARGUED THAT THE A.O. HAS WRONGLY TRE ATED REDEMPTION OF PREFERENCE SHARES AS MONEY ADVANCED TO THE ASSESSEE AND HAS THEREFORE TAXED THE AMOUNT AS DEEMED DIVIDEND UNDE R SECTION. 2(22)(E). ACCORDING TO THE APPELLANT THE ENTIRE LOGIC OF THE A.O. THAT THE MONEY PAID ON REDEMPTION OF PREFERENCE SHARES CAN BE TREA TED AS MONEY ADVANCED TO THE ASSESSEE IS WRONG. THE APPELLANT AR GUED THAT THERE IS NO QUESTION OF ADVANCING THE MONEY TO THE ASSESSEE BEC AUSE THE ASSESSEE HAD SUBSCRIBED TO THE PREFERENCE SHARES AS PER THE TERMS OF ISSUE OF THESE SHARES BY MAKING THE PAYMENT TO THE COMPANY. THE MONEY NOW RECEIVED BY THE ASSESSEE WAS THAT MONEY WHICH WAS D UE TO HIM ON REDEMPTION OF THE PREFERENCE SHARES. IT IS NEITHER A LOAN NOR ADVANCE OR DEPOSIT ATTRACTING THE PROVISIONS OF SECTION 2(22)( E). THE APPELLANT HAS FURTHER SUBMITTED THE DIFFERENCE BETWEEN THE REDEMP TION OF PREFERENCE SHARES AND ADVANCING MONEY WHICH IS REPRODUCED AS U NDER:- PAGE 3 OF 5 A THE AMOUNT OF PREFERENCE SHARES IS THE CAPITAL O F THE COMPANY AND APPEARS ON THE LIABILITY SIDE OF THE BA LANCE SHEET. HOWEVER LOANS/ADVANCES ARE ASSETS OF THE COMPANY A ND APPEAR ON THE ASSET SIDE OF THE BALANCE SHEET. B INCASE OF REDEMPTION OF PREFERENCE SHARES FIRST AMOUNT IS RECEIVED BY THE COMPANY AND REDEMPTION FOLLOWS THE ISSUE OF SHARES. HOWEVER IN CASE OF LOANS/ADVANCES FIRST M ONIES ARE GIVEN AND THE TRANSACTION CREATES ASSETS. C REDEMPTION OF SHARES EXTINGUISHES THE RIGHT OF TH E SHAREHOLDERS AND COMPANY BOTH. IT CLOSES THE TRANSA CTION CREATED EARLIER. HOWEVER LOANS/ADVANCES CREATE RIGHT OF TH E COMPANY AND LIABILITIES OF BORROWER AND COMPANY BOTH. THIS CREA SES A NEW TRANSACTION. D IN CASE OF REDEMPTION OF SHARES WHAT IS RETURNED TO THE SHAREHOLDER THAT IS DUE TO HIM IN THE FORM PREFEREN CE SHARE. IN CASE OF LOANS/ADVANCES NOTHING IS DUE TO THE SHARE HOLDER BUT AMOUNT IS LENT AFRESH CREATING NEW SET OF TRANSACTI ONS. 2.2.2. IN VIEW OF THE ABOVE THE APPELLANT HAS STATED THA T THE REMARKS OF THE A.O. SHOW THAT HE HAS NOT UNDERSTOOD THE ISSUE. THERE IS NO COLOURABLE DEVICE HERE. THE ASSESSEE HAS MADE THE P AYMENT FIRST AND RECEIVED THE PREFERENCE SHARES. THESE PREFERENCE SH ARES ARE NOW REDEEMED AND THE ASSESSEE HAS RECEIVED BACK THE AMO UNT WHICH HE HAD PAID EARLIER. THE APPELLANT HAS ALSO STATED THAT TH E REDEMPTION WAS AT PAR AT FACE VALUE AND NOT AT PREMIUM. 2.3 I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT AND OBSERVATION MADE BY THE A.O. FROM THE ABOVE DISCUSSION AND THE DISCUSSION MADE IN THE ASSESSMENT ORDER IT IS CLEAR THAT THE A.O. HAD MADE NO EFFORTS TO UNDERSTAND THE FACTS. PREFERENCE SHARES ARE ISSUED BY THE COMPANY AS PER THE TERMS OF THE ISSUE. IN ORDER TO RECEIVE PRE FERENCE SHARES THE ASSESSEE HAS MADE PAYMENT TO M/S. ENVIRO CONTROL AS SOCIATES PVT. LTD. IN THE PAST. NOW WHEN THE PREFERENCE SHARES ARE BEING DEEMED THE ASSESSEE IS GETTING THE BACK THE SAME AMOUNT. SINCE THERE IS NO QUESTION OF LOAN OR ADVANCE OR DEPOSIT THERE IS NO QUESTION OF APPLICABILITY OF SECTION 2(22)(E). IN THE INSTANT CASE THE COMPANY HAS MADE PAYMENT AGAINST THE PREFERENCE SHARES HELD BY THE ASSESSEE. HENCE THE ADDITION MADE BY THE A.O. IS WITHOUT ANY BASIS AND BASED ON WRONG UNDERSTANDING OF FACTS. HENCE THE ADDITION MADE BY THE A.O. IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSE E HAS RECEIVED `.25 LACS FROM M/S. ENVIRO CONTROL ASSOCIATES PVT. LTD. AND REQUIRED THE ASSESSEE TO EXPLAIN WHY THIS AMOUNT SHOULD NOT BE TAXED IN THE HANDS OF THE ASSESSEE AS PAGE 4 OF 5 DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. THE ASSESSEE EXPLAINED THAT THE AMOUNT OF `.25 LACS WAS RECEIVED ON REDEMP TION OF PREFERENCE SHARES. THE LEARNED ASSESSING OFFICER DID NOT ACCEPT THE EX PLANATION OF THE ASSESSEE AND OBSERVED THAT THIS WAS A COLOURABLE DEVICE BY W HICH THE ASSESSEE TRIED TO EVADE DUE TAX OVERLOOKING THE PROVISIONS OF SECTION 2(22)(E). ACCORDINGLY HE TAXED `.25 LACS IN THE HANDS OF THE ASSESSEE AS DEE MED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. ON APPEAL THE LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) DELETED THE DISALLOWANCE BY OBSERVING AS UNDER:- 2.3 I HAVE CONSIDERED THE SUBMISSION OF THE APPE LLANT AND OBSERVATION MADE BY THE A.O. FROM THE ABOVE DISCUSSION AND THE DISCUSSION MADE IN THE ASSESSMENT ORDER IT IS CLEAR THAT THE A.O. HAD MADE NO EFFORTS TO UNDERSTAND THE FACTS. PREFERENCE SHARES ARE ISSUED BY THE COMPANY AS PER THE TERMS OF THE ISSUE. IN ORDER TO RECEIVE PRE FERENCE SHARES THE ASSESSEE HAS MADE PAYMENT TO M/S. ENVIRO CONTROL AS SOCIATES PVT. LTD. IN THE PAST. NOW WHEN THE PREFERENCE SHARES ARE BEING DEEMED THE ASSESSEE IS GETTING THE BACK THE SAME AMOUNT. SINCE THERE IS NO QUESTION OF LOAN OR ADVANCE OR DEPOSIT THERE IS NO QUESTION OF APPLICABILITY OF SECTION 2(22)(E). IN THE INSTANT CASE THE COMPANY HAS MADE PAYMENT AGAINST THE PREFERENCE SHARES HELD BY THE ASSESSEE. HENCE THE ADDITION MADE BY THE A.O. IS WITHOUT ANY BASIS AND BASED ON WRONG UNDERSTANDING OF FACTS. HENCE THE ADDITION MADE BY THE A.O. IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTE D THE ORDER OF THE ASSESSING OFFICER. NO SPECIFIC DEFECT OR ERROR IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) COULD BE POINT ED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT IS OBSERVED THAT TH E ASSESSEE ALSO DULY EXPLAINED BEFORE THE LEARNED ASSESSING OFFICER THAT `.25 LACS RECEIVED BY HIM M/S. ENVRIO CONTROL ASSOCIATES PVT. LTD. WAS ON AC COUNT OF REDEMPTION OF PREFERENCE SHARES AND NOT IN THE NATURE OF ANY LOAN OR ADVANCE TO THE ASSESSEE BY THE SAID COMPANY. NO MATERIAL WAS BROUGHT ON RE CORD BY THE LEARNED ASSESSING OFFICER TO CONTROVERT THE ABOVE EXPLANATI ON OF THE ASSESSEE AND TO SHOW THAT `.25 LACS RECEIVED BY THE ASSESSEE WAS IN THE NATURE OF LOAN OR ADVANCE. IN ABSENCE OF ANY SUCH MATERIAL BROUGHT O N RECORD IN OUR CONSIDERED OPINION THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) WAS FULLY JUSTIFIED IN DELETING THE ADDITION OF `.25 LACS WE THEREFORE CONFIRM THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AND DI SMISS THE GROUNDS OF APPEAL OF THE REVENUE. PAGE 5 OF 5 7. IN THE RESULT BOTH THE APPEALS OF THE REVENUE A RE DISMISSED. ORDER SIGNED DATED AND PRONOUNCED IN THE COURT ON 4 TH DAY OF FEBRUARY 2011. SD/- SD/- ( MAHAVIR SINGH) (N.S. S AINI) JUDICIAL MEMBER A CCOUNTANT MEMBER DATED: AHMEDABAD 4 TH DAY OF FEBRUARY 2011. COMPILED AND COMPARED BY: PATKI COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-I SURAT. 5. THE DR AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER //TRUE COPY// (DY./ASSTT.REGISTRAR) ITAT AHMEDABAD DATE INITIALS 1. DRAFT DICTATED ON 3-2-2011 -------------- ----- 2. DRAFT PLACED BEFORE AUTHORITY 3-2-2011 ------ ------------- 3. DRAFT PROPOSED & PLACED 3-2-2011 ------------ ------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED 3-2-2011 ----------- -------- JM/AM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S 4-2-2011 ---------- ---------- 6. KEPT FOR PRONOUNCEMENT ON 4-2-2011 ---------- ---------- 7. FILE SENT TO THE BENCH CLERK 4-2-2011 -------- ------------ 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- A.R. 9. DATE OF DISPATCH OF ORDER ---------------- --- ------------------