Padmasingh Issac, Chennai vs Department Of Income Tax

The Assistant Commissioner of Sh. Padmasingh Isaac, Income Tax, v. G-1174, Ross Residency, Central Circle II(3), 15th Street, Belly Area, Chennai - 600 034. Anna Nagar West, Chennai - 600 040.

PAN : AIDPP 3634 L (अपीलाथ+/Appellant) (,-यथ+/Respondent)

अपीलाथ+ क. ओर से/Appellant by : Sh. Pathlavath Peerya, CIT ,-यथ+ क. ओर से/Respondent by : Sh.M. Narayanan, Retd. Addl. CIT

सन ु वाई क. तार ख/Date of Hearing : 12.05.2015 घोषणा क. तार ख/Date of Pronouncement : 29.05.2015

आदे श /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

This appeal of the Revenue is directed against the order of

the Commissioner of Income Tax (Appeals)-I, Chennai, dated

11.03.2013 and pertains to assessment year 2008-09. 2 I.T.A. No.1266/Mds/13

2. The first issue arises for consideration is with regard to

addition of `1,76,39,625/- under Section 2(22)(e) of the Income-tax

Act, 1961 (in short 'the Act').

3. Sh. Pathlavath Peerya, the Ld. Departmental

Representative, submitted that the assessee is one of the major

shareholders in M/s Aachi Masala Foods Private Limied. According

to the Ld. D.R., the assessee has inflated purchases to the extent of

`10.64 Crores in the case of Nazareth Enterprises and paid the

same to Pandian Enterprises. According to the Ld. D.R., Pandian

Enterprises is a proprietary concern of one Shri Ramesh Pandian,

who is none other than the brother-in-law of the assessee. The

money paid to Pandian Enterprises was actually taken back by the

assessee. Therefore, according to the Ld. D.R., the accumulated

profit of M/s Aachi Masala Foods Private Limited was paid to the

assessee by giving credit in the books in the name of Nazareth

Enterprises as if it was paid to Pandian Enterprises. According to

the Ld. D.R., since the assessee was holding substantial interest in

the company, the amount paid by the assessee to the extent of

`1,76,39,625/- is treated as deemed dividend.

4. On the contrary, Shri M. Narayanan, the Ld. representative

for the assessee, submitted that the assessee is in the business of 3 I.T.A. No.1266/Mds/13

manufacturing food masala. In the course of business activity, the

assessee purchased spices from Nazareth Foods Pvt. Ltd.

According to the Ld. representative, the assessee made payment to

Nazareth Food Pvt. Ltd. However, on the instruction of Nazareth

Food Pvt. Ltd., an amount of `10,81,20,000/- was transferred to the

account of Pandian Enterprises. This transfer of amount is only

towards purchase of spices from Nazareth Foods Pvt. Ltd.

According to the Ld. representative, the assessee has no bank

transaction with M/s Pandian Enterprises. Therefore, according to

the Ld. representative, it is not a case of deemed dividend under

Section 2(22)(e) of the Act.

5. We have considered the rival submissions on either side and

perused the relevant material on record. We have carefully gone

through the provisions of Section 2(22)(e) of the Act, which reads as

follows:-

"2 (22)

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment 4 I.T.A. No.1266/Mds/13

by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;

but "dividend" does not include--

(i) a distribution made in accordance with sub-clause (c) or subclause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;

[(ia) a distribution made in accordance with sub-clause

(c) or subclause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [and before the 1st day of April, 1965] ;]

(ii) any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

[(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);

(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).]

Explanation 1.--The expression "accumulated profits", wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948, and before the 1st day of April, 1956.

Explanation 2.--The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) 5 I.T.A. No.1266/Mds/13

shall include all profits of the company up to the date of liquidation, [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government or a corporation owned or controlled by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place].

[Explanation 3.--For the purposes of this clause,--

(a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;

(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern ;]"

From the above it is obvious that for the purpose of treating an

amount as deemed dividend, the following conditions should be

fulfilled:-

(i) The assessee should have a substantial interest on the company, not less than 10% voting power.

(ii) There should be payment by company by means of advance or loan.

In this case, admittedly, the assessee is having substantial interest,

having more than 10% voting power. It is nobody's case that the

assessee has borrowed loan or advance. The case of the Revenue

is that the assessee has inflated the purchase made from Nazareth

Foods Pvt. Ltd. and the amount was paid to Pandian Enterprises by

crediting the amount in the account of Nazareth Foods Pvt. Ltd. 6 I.T.A. No.1266/Mds/13

The question arises for consideration is merely because the

purchase was inflated and paid to the other company, such

payment can be treated as loan or advance? This Tribunal is of the

considered opinion that the payment of money by inflating the

purchase cannot be construed as loan or advance. In the case of

loan or advance, the recipient has the obligation to repay the

amount. In the case of inflating the purchase amount, at the best,

we can say that the recipient has to appropriate the amount.

Therefore, it cannot be construed as loan or advance within the

meaning of Section 2(22)(e) of the Act. Once it cannot be

construed as loan or advance, the provisions of Section 2(22)(e) are

not applicable. If there is any evidence to show that M/s Aachi

Masala Foods Pvt. Ltd. has inflated the purchase, it is for the

Assessing Officer to examine and disallow the expenditure claimed

by M/s Aachi Masala Foods Pvt. Ltd. towards purchase of spices.

At any stretch of imagination, such inflated purchase cannot be

treated as loan or advance. Therefore, this Tribunal is of the

considered opinion that here is no infirmity in the order of the

CIT(Appeals) and the same is confirmed.

6. The next ground of appeal is with regard to addition of

`1,21,20,000/- under Section 69 of the Act.

7 I.T.A. No.1266/Mds/13

7. Sh. Pathlavath Peerya, the Ld. D.R. submitted that on

17.09.2009, while recording the statement of the assessee, he

claimed that an unaccounted amount of `46,20,000/- was invested

in a property at Athipattu Village, Ambattur and another sum of

`75,00,000/- was invested in a property at Anna Nagar, Chennai.

The assessee though offered explanation, he could not offer any

explanation with regard to investment of `1,21,20,000/-. Therefore,

the Assessing Officer made an addition under Section 69 of the Act.

However, the CIT(Appeals) found that the investments in the

immovable property were made out of the borrowings, without

discussing anything further. According to the Ld. D.R., in the

absence of any material to show that the investment was made from

the borrowed funds, CIT(Appeals) is not justified in allowing the

claim.

8. On the contrary, Shri M. Narayanan, the Ld. representative

for the assessee, submitted that the Assessing Officer completed

the assessment hurriedly. The CIT(Appeals), after viewing the

statement filed by the assessee, found that the entire investments

were made from the borrowed funds. Therefore, he deleted the

addition made by the Assessing Officer.

8 I.T.A. No.1266/Mds/13

9. We have considered the rival submissions on either side and

perused the relevant material on record. The Assessing Officer

came to a conclusion that the assessee admitted on 17.09.2009

that he made unaccounted sum of `46,20,000/- for purchase of a

property at Athipattu Village, Ambattur. A copy of the sworn

statement recorded from the assessee is available at page 1 of the

paper-book. This sworn statement does not show any admission

made by the assessee for investment of unaccounted amount of

`46,20,000/-. It is not known whether any other statement was

recorded from the assessee. The Revenue could not file any

material to show that the assessee has admitted the unaccounted

sum of `46,20,000/- for purchase of Athipattu Village, Ambattur.

The CIT(Appeals) found that the investments in immovable property

were made out of the borrowed funds. However, the details of

borrowed funds were not available on record. In those

circumstances, this Tribunal is of the considered opinion that the

matter needs to be re-examined by the Assessing Officer. The

Assessing Officer shall find out the details of the borrowed funds

and its nexus for making investments in immovable property.

Accordingly, we set aside the orders of the lower authorities and the

issue is remitted back to the file of the Assessing Officer to

reconsider the same. The Assessing Officer shall reconsider the 9 I.T.A. No.1266/Mds/13

issue afresh and thereafter decide the same in accordance with law

after giving reasonable opportunity to the assessee.

10. In the result, the appeal of the Revenue is partly allowed for

statistical purposes.

Order pronounced on 29th May, 2015 at Chennai.

sd/- sd/- (A.Mohan Alankamony) (N.R.S. Ganesan) (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) लेखा सद य/Accountant Member या यक सद य/Judicial Member

चे नई/Chennai, th 4दनांक/Dated, the 29 May, 2015.

Kri.

आदे श क. , त5ल6प अ7े6षत/Copy to: 1. अपीलाथ+/Appellant 2. ,-यथ+/Respondent 3. आयकर आयु8त (अपील)/CIT(A)-I, Chennai 4. आयकर आय8 ु त/CIT, Central-II, Chennai 5. 6वभागीय , त न ध/DR 6. गाड' फाईल/GF.