TMI Blog2020 (8) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... the records, we are in agreement with the contention of the Ld. AR that the amount of ₹ 2,26,500/-, which was pertaining to expenses of ROC, was also a part of total expenditure at ₹ 26,22,677/- and, thus, double disallowance has been made on this account. We accordingly direct deletion of this double disallowance. As perused the profit and loss account and have also considered the submissions made in this regard - perusal of the audited financial statements that investments were made by the company during the year under consideration also as the assessee company is an investment company. Merely because no income/revenue resulted from such activity, it does not mean that the business was not set up or was not in a running condition. It has been held in the following judicial precedents that once the business is set up, the expenditure is allowable - See Western India Vegetable Products Ltd. [ 1954 (3) TMI 59 - BOMBAY HIGH COURT] , Sarabhai Management Corporation Ltd [ 1991 (8) TMI 6 - SUPREME COURT] Similarly, there are judicial precedents to the effect that even if there is no business, expenses incurred for retaining the status of the company are allowable. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration, no business activity was carried out. The return of income was filed declaring a loss of ₹ 26,22,677/- . The case was selected for scrutiny and subsequently, the assessment was completed at an income of ₹ 3,62,27,890/- after disallowing the expenditure claimed in the profit/loss account and after further making the following additions/disallowances: i) Disallowance of fees paid to ROC ₹ 2,26,500/- ii) Disallowance u/s 14A ₹ 22,22,893/- iii) Deemed Dividend u/s 2(22)(e) ₹ 2,90,27,890/- iv) Addition of credits u/s 68 ₹ 72,00,000/- 2.1 Aggrieved, the assessee approached the Ld. First Appellate Authority challenging the additions and disallowances. The Ld. CIT (A) partly allowed the assessee s appeal by deleting the disallowance u/s 14A but upheld the addition pertaining to payment of fees to ROC, addition pertaining to deemed dividend and addition u/s 68. The Ld. CIT (A) also upheld the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erving the principles of natural justice. 6. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in exceeding/assuming the jurisdiction by observing that the said amount of ₹ 72,00,000/- can also be treated as an advance received form M/s. Goyal Engineers Polymers Ltd. and shall be liable to charged to tax u/s 2(22)(e) and that too by recording incorrect facts and findings and without observing the principles of natural justice. 7. That in any case and in my view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making addition of ₹ 72,00,000/- on account of unsecured loan u/s 68, is bad in law and against the facts and circumstance of the case. 8. That having regard to the facts and circumstances of the ease, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234B and 234D of Income Tax Act, 1961. 9. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other. 3.0 The Ld. AR submitted that as far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chennai) in this regard. The second proposition raised by the Ld. AR was that the assessee company was not even the shareholder in the third company i.e. M/s. Gurgaon Polyplastics Pvt. Ltd. as on 31.3.2014. Our attention was drawn to the audited financial statements of that company placed at 51 of the paper book where from it was demonstrated that the assessee company was not the shareholder in the lending company. It was further submitted that the AO has also admitted to this fact on page 6 Para 7.1 of the assessment order. It was submitted that it is settled law that unless the assessee is a shareholder in the lender company no deemed dividend can be brought to tax. The third proposition in this regard, as raised by the Ld. AR, was that the entire transactions related to the business of the company and were entered into the normal course of business. It was submitted that as the assessee company is an investment company, the provisions of section 2(22)(e) of the Act were not attracted. In this regard also reliance was placed on numerous judicial precedents which have been incorporated in the written submissions and are produced elsewhere in this order. The Ld. AR emphasised that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which would show that ROC expenses of ₹ 2,26,500/- is part of such other expenses and hence disallowed twice. In light of the above stated facts, additions sustained may please be kindly deleted. GROUND NO.2 Ld. A.O. made disallowance of ₹ 26,22,6771- confirmed by Ld. CIT(A) on the ground that since there was no business activities, expense cannot be allowed. This issue has been discussed by Ld. A.O. at page 4-5 of the assessment order, whereas Ld. CIT(A) has discussed this issue at page 46-47 of the appeal order. In fact, both the authorities were impressed upon with the help of submissions and profit and loss account and balance sheet, that the business of the assessee has been duly set up and merely because no revenue has been earned by the assessee during the year, expenses cannot be disallowed, more so, when such expenses are of administrative character. PB 18-25 is the copy of acknowledgment of return, computation of income, balance sheet and profit loss account of the assessee company for the A.Y. 2014-15 to show that the business was set up, investments were made and expenses incurred in running the business. PB 29-32 is the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss is to be allowed as deduction. For this reason also, the disallowance made by the AO was not justified, and the CIT(A) rightly deleted the same. - CIT vs. Ganga Properties Ltd., (1993) 199 ITR 94 (Cal), - Nakodar Bus Service (P) Ltd. vs. CIT, (1989) 179 ITR 506 (P H), - CIT vs. Rampur Timbery Turnery Co. Ltd., (1981) 129 ITR 58 (All) - L.VE. Vairavan Chettiar vs. CIT, (1969) 72 ITR 114 (Mad) Thus, applying the nitty-gritty of the above quoted judgements to the present case, the additions made by the Ld. AO are unwarranted and may please be deleted. GROUND NO. 3-4 Ld. A.O. has made an aggregate addition of ₹ 2,90,27,890/- on account of deemed dividend u/s 2(22)(e) on the ground that assessee has received loans from three companies and there were accumulated profits available with these lender companies and accordingly treated the amount of loans received to the extent of accumulated profit of these companies as deemed dividend namely M/s Goyal Engineering Polymers P. Ltd. (GEPPL) of ₹ 13,00,000/-, M/s Gurgaon Poly Plastic Ltd. (GPPL) of ₹ 43,15,216/-, M/s Poly Plastic Automotive India P. Ltd. (PAIPL) of ₹ 2,34,12,674/-, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having more than 51% share of both the above companies PB 74-78 is the copy of reply filed by the assessee on the above lines. 2. That the assessee company was not even shareholder in GPPL as is evident from the audited financial statement of M/s Gurgaon Polyplastic (P) Ltd. as at 31-03-2014 (PB 49-55) wherein at PB 51 shows that assessee company is not the shareholder in the lender company. This fact is even admitted by Ld. AO at page 6 (para 7.1) of the assessment order. It is a settled law that unless assessee is shareholder in the lender company no dividend can be brought to tax as held by Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. Ors. 340 ITR 14, which has been affirmed by Hon'ble Supreme Court in the case of CIT vs Madhur Housing and Development Company, 401 ITR 152 (SC) 3. That the entire transactions were of the business nature and entered on regular course of business. In this regard it is respectfully submitted that the impugned amount received by the assessee were in business nature and were undertaken in regular course of business as the assessee company is in nature of investment company. In the following judicial pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar business transactions-It could not have been treated as 'loan' or 'advances', so as to make disputed amounts as deemed dividend , as defined uls.2(22)( e)--AO wrongly passed order for assessment of 'deemed dividend assessment of 'deemed dividend'-Revenue's appeals dismissed. - CIT vs Ambassador Travels (P) Ltd., 318 ITR 376 (DHC) Dividend-Deemed dividend under s. 2(22)( e)-Transactions in the ordinary course of business-Assessee, a travel agency, booking resorts for the customers of the companies, they were normal business transactions and could not be treated as deemed dividend under s. (22)( e) because of shareholding pattern-No substantial question of law arises - CIT vs Creative Dyeing Printing (P) Ltd., 318 ITR 476 (DHC) Dividend-Deemed dividend under s. 2(22)( e)-Advance for commercial purpose-Assessee company received funds for expansion of production capacity from PE Ltd. which has 50 per cent shareholding in the assessee and has common directors with the assessee-Transaction in question was a business transaction which would benefit both assessee company and PE Ltd.-Admittedly, the amount is to be adjusted against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013 and assessee company became shareholder in M/s PAIPL on 28.10.2013 only, and thus loans to the assessee company by M/s PAIPL prior to 28.10.2013 cannot be treated as deemed dividend under any circumstances, and position of accumulated profits will have to be seen in the hands of M/s PAIPL after this date on the date of each loan granted by M/s PAIPL to the assessee company. PB 56-64 is the copy of return and balance sheet of M/s PAIPL, wherein at PB 59 it is coming out clearly the assessee became shareholder during the year. PB 125-127 is the copy of ledger a/c of PAIPL in the books of assessee. Perusal of same unambiguously ascertains that out of total alleged loan of ₹ 3,84,60,867/- amount of ₹ 2,56,00,000/- were received before the shares of PAIPL were acquired by the company and only ₹ 1,28,60,867/- were received after the transfer. PB 128 is the copy of ledger a/c of the assessee in books of PAIPL. PB 130 is the copy of ledger a/c of M/s Goyal Engineering Polymers Pvt. Ltd. in the books of assessee PB 132 is the copy of ledger a/c of assessee III the books of M/s Goyal Engineering Polymers Pvt. Ltd. PB 131 is the copy of ledger a/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Mega Trading Corporation in response to notice U/S 133(6). PB 134 is the copy of bank statement of M/s Mega Trading Corporation evidencing that impugned amount was disbursed by M/s Mega Trading Corporation. PB 85-124 is the copy of submissions made before Ld. CIT (A) on various issues. It is further highlighted that the impugned amount of ₹ 72,00,000/- were subsequently repaid to M/s Mega Trading Corporation further evidencing the genuinity of transaction and thus, the additions made by the Ld. AO being without any merit may kindly be deleted. 4.0 In response, the Ld. Sr. DR placed extensive reliance on the findings recorded by the AO and as confirmed by the Ld. CIT (A). The Ld. Sr. DR also filed written submissions which were taken on record and are being reproduced hereunder for a ready reference:- In the above case, it is humbly submitted that the following points may kindly be considered with regard to deemed dividend u/s 2(22)(e) of I.T. Act in the present case: 1. The assessee has claimed that the loan availed by it from related parties is in the nature of Inter- Corporate Deposits (ICDs). ICDs are short term borrowings which are ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear the unmistakable characteristic of gratuitous loans. It may also be mentioned that interest amount has been shown only in respect of one borrowing viz. from M/s Gurgaon Polyplastics Pvt Ltd. [Page 72 of PB] wherein the assessee itself has mentioned the transaction being in the nature of unsecured loan. It essentially means that assessee has availed interest free loans claiming them to be ICDs which is against the very character and purpose of ICDs as discussed above. It may also be stated here that ICDs are essentially loan transactions. Hence, with respect to certain instances cited by the appellant where concession has been granted to ICD transactions, it is emphasized that the present matter pertains to transactions between companies controlled by the same set of individuals. It makes it convenient for them, as has been executed in the matter at hand, to create selfserving documents and award whatever nomenclature they deem fit and suitable to the transactions undertaken by them. Resolutions, parallel entries in the books of accounts and audit reports are nothing more than self-serving nomenclatures. Under these circumstances, if the concession on the plea of ICDs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or its own benefit and not for the benefit of other subsidiaries in the ordinary course of business. It may also be mentioned that the judgment in the case of CIT vs. Ankitech referred at page 28 of the order of Ld. CIT(A) has been stayed by the Hon'ble Supreme Court of India in the case of National Travel Services finding the same as erroneous. In light of the same, cases cited by the assessee which are based on the said judgment do not represent the applicable law as it stands. CIT vs. Navyug Promoters Pvt. Ltd [203 Taxman 618] and CIT-I vs. Bikaner Cuisine (Pvt.) Ltd [233 Taxman 106] , therefore, do not state the settled position of law. 5.0 We have heard the rival submissions and have also perused the material on record. We now take up the issues one by one for adjudication. 5.1 Ground No. 1 pertains to disallowance of ₹ 2,26,500/- on account of fees paid to ROC which was disallowed by the AO by holding that the same was of capital in nature. The limited point alleged by the Ld. AR on this issue is that out of the total amount of ₹ 2,26,500/- an amount of ₹ 5,500/- pertains to fee for filing of annual return with the ROC. We agree with the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that even if there is no business, expenses incurred for retaining the status of the company are allowable. To quote a few: - CIT vs. Ganga Properties Ltd., (1993) 199 ITR 94 (Cal), - Nakodar Bus Service (P) Ltd. vs. CIT, (1989) 179 ITR 506 (P H), - CIT vs. Rampur Timbery Turnery Co. Ltd., (1981) 129 ITR 58 (All) - L.VE. Vairavan Chettiar vs. CIT, (1969) 72 ITR 114 (Mad) 5.4 Respectfully following the judicial precedents enumerated above we delete the disallowance of ₹ 26,22,677/-. 5.5 Ground Nos. 3 and 4 are in respect of addition of ₹ 2,90,27,890/- as deemed dividend u/s 2(22)(e) of the Act. We have considered the submission of the assessee as well as the arguments of the Ld. Sr. DR on the issue. After taking into consideration the documents to which our attention has been drawn by the Ld. AR and which are placed in the paper book filed by the assessee, it is apparent that there are pleadings which were not made before the authorities below. It will be in fitness of things if this issue is restored to the file of the AO to examine and adjudicate this issue afresh after giving proper opportunity to the assessee. The assessee shall be at liberty to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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