9911796707
TMI Blog2012 (5) TMI 367X X X X Extracts X X X X X X X X Extracts X X X X ..... nue as the Assessing Officer has failed to take into consideration Circular No.4/2007 dated 15.6.209097 and Instruction No.1527 dated 31st August, 1989 of the CBDT while computing the total income of the assessee - Appeal is rejected Regarding applicability of section 2(22)(e) - Ld CIT in his order u/s 263 of the Act has directed the Assessing Officer to enquire as to whether the partnership deed by which the assessee came into being was a device or not and if it was a device whether section 2(22)(e) of the Act was attracted in assessee's case - Held that: Ld. CIT has given specific finding on certain issues even though he has directed the AO to reframe the assessment as per the correct provisions of law and after giving the assessee adequate opportunity of being heard. We are of the considered opinion that he was not justified in giving such specific findings - Decided in favor of the assessee by way of remand to AO - ITA No. 1779/Del/2011, - - - Dated:- 25-11-2011 - Diva Singh, B.K. Haldar, JJ. Vinod Bindal and Sweety Kothari, CA for the Appellant Mohanish Verma, CIT-DR for the Respondent ORDER B.K. Haldar, Accountant Member 1. This is an appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share holder has a substantial interest and therefore the firm could not be covered under the deeming provisions of the said section and d) the deeming provisions should be given strict interpretation as per law and cannot be extended to cover those transactions which have not been provided by the Legislature. Thus the order passed U/S 263 ignoring the facts and provision of law should be quashed. 5. The appellant craves the leave to add, substitute, modify, delete or amend all or any ground of appeal either before or at the time of hearing. 3. In this case assessment for assessment year 2006-07 was completed by the Assessing Officer on 8.12.2008 by accepting the returned income of the assessee. Subsequently, the ld CIT issued notice u/s 263 of the Act dated 10.6.2009. The assessee is a firm consisting of four partners namely M/s Kwality Ice Creams (India) Pvt. Ltd. (ii) Kwality Processed Food Services and Equipments Pvt. Ltd. (iii) Pradeep Wig (HUF) and (iv) Smt. Neera Wig. Shri Pradeep Wig is the Managing Director of the above two companies. He is also the karta of the Pradeep Wig HUF and Smt. Neera Wig is his wife. The address of the assessee firm is the residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fession, it was submitted that the assessee did not intend to carry on the business of sale and purchase of securities etc. It intended to make long term investments. Thus, income declared under the head of short term capital gain could not be treated as income under the head business. For the above proposition it relied on plethora of case laws as enumerated by the Ld CIT in para 5 of the impugned order. 7. The Ld CIT was of the opinion that the transactions entered into by the assessee during the relevant previous year was required to be examined in terms of circular No.4/2007 of CBDT dated 15.6.2007. Analyzing the issue from various angles, it was held by him that the order of the Assessing Officer accepting the claim of the assessee that the income was required to be assessed as short term capital gain and not as business income was both erroneous and prejudicial to the interest of revenue. He, therefore, set aside the impugned assessment order and directed the Assessing Officer to frame the assessment as per the correct provisions of law and taking into account the applicability of the Circular No.4/2007 dated 15.6.2007 and Instruction No.1827 dated 31.8.1989. 8. As re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed profits. This was the main reason for enacting section 2(22)(e) of the Act. In the case of CIT V. L. Alagusundaram Chettiar (1977) 109 ITR 508, the Madras High Court held that the word "payment" in the said section means the act of paying and, therefore, in that case it was held that payment by the company to Karuppiah Chettiar was for the benefit of the assessee, the managing director of the company, L. Alagsundaram Chettiar, and was therefore assessable as dividend in the hands of the assessee. In the said judgment it has been held that the basic test to be applied in such cases is not whether the loan given is a benefit but whether payment by the company to Karuppiah Chettiar was for the benefit of the assessee who was the managing director of the paying company. Applying the above test to the facts of the present case, we are of the view that the Tribunal was right in holding, on examination of the cash flow statement, that MKSEPL had made payments to MKF and MKI for the benefit of the assessee which enabled the assessee to buy 9 per cent RBI Relief Bonds in the financial year 1999-2000. It is in the sense that the Tribunal was right in holding the two firms were used as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons from the two partner companies, which are substantially controlled by Sh. Pradeep Wig (as individual and as Karta of HUF) and his wife Smt. Neera Wig, who in turn are also majority stake holders in the assessee firm as partners, has not been brought to tax by the Assessing Officer. Therefore, considering the law laid down in judgments of the Hon'ble Supreme Court in the case of CIT vs. Mukundray K. Shah [2007J 290 ITR 433 (SC), as discussed above, the assessment order of the AO passed u/s 143(3) of the Income tax Act, 1961, dated 8.12.2008 is set aside with the directions to the assessing officer to frame the assessment afresh as per the correct provisions of law and after taking into account the applicability of the above judgment of the Hon'ble Supreme Court reported in 290 ITR 433. The assessee should be given sufficient opportunity of being heard before the assessment is framed afresh." 10. Aggrieved the assessee filed appeal before the Tribunal. 11. Before us Ld AR for the assessee submitted that this was the first year of assessment of the assessee firm. A copy of the partnership deed dated 12.7.2005 is available in assessee's paper book pages 22- 23 whereas the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es could not be considered as loan or advances. Thus, these amounts cannot be considered to be deemed dividend in the hands of the firm. In support of the above proposition, the Ld AR for the assessee relied on the following case laws;- 1. Judgment of Hon'ble Delhi High Court in I.T.A. No.462/2009 dated 11.5.2011 in the case of CIT v. Ankitech (P) Ltd. and others (Assessee's paper book pages 192 to 2440. 2. ACIT v. Bhoumic Colour Pvt. Ltd. 118 ITD 1 (SB) (Mumbai). 13. It was contended by the ld AR for the assessee that for assuming jurisdiction u/s 263 of the Act, it was obligatory on the part of the Ld CIT to show that the order of Assessing Officer was erroneous and prejudicial to the interest of revenue. If there were two possible views or if the Ld CIT only raised some kind of doubt on the correctness of the decision taken by the Assessing Officer, it would not be sufficient for him to assume jurisdiction u/s 263 of the Act. 14. As regards the applicability of section 2(22)(e) of the Act is concerned, it was pointed out by the Ld AR for the assessee that the Ld CIT proceeded on wrong facts. Actually the shares of profit and loss by the various partners have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer was required to apply his mind to the case. 17. It was further submitted by him that the partnership deed was signed on 12.7.2005 and the same was modified on 31.8.2005. It is the claim of the assessee that by modifying clause (2) of the partnership deed the transactions entered into by the assessee become investments made by the assessee and recouping of the same investment. The income,therefore, becomes taxable under the head capital gains. Thus, according to the assessee no business was carried on by it during the relevant assessment year. In the above facts, it is contended by him that the case was required to be examined keeping in view Board's Circular No.4 of 2007 supra. As the Assessing Officer has failed to do so the order passed by the Assessing Officer was prejudicial to the interest of revenue and the Ld CIT was justified in assuming jurisdiction u/s 263 of the Act. It was further submitted by the Ld DR that it was not necessary for the CIT to give specific direction in an order passed u/s 263 of the Act. He can also set aside the impugned assessment order and direct the Assessing Officer to do necessary enquiry which he has not done while frami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer was not aware of the instruction and that the same was not applied by him in coming to the conclusion that the income of the assessee was assessable under the head "capital gain". It was, therefore, contended by him that the impugned order of the Ld CIT u/s 263 be quashed. 22. The case was subsequently fixed for clarification when the Ld AR for the assessee was asked to clarify following points:- 1) Whether a partnership firm can exist for the purpose other than carrying on a business. 2) Purport of Hon'ble jurisdictional High Court's decision in the case of CIT v. M/s National Travels Services I.T.A. No.223 of 2010, 3) Effect of holding of shares of M/s Kwality Ice-creams India Pvt. Ltd. by the firm. 23. As regards the first query, it was submitted by the Ld AR for the assessee that the assessee intended to do business of money lending. Though there was no evidence of commencing business of money lending, as the assessee intended to do so, it was contended by the Ld AR for the assessee that the partnership was valid. It was also contended by him that a partnership could exist for a purpose other than the purpose of carrying on business. However, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d his submission that the impugned order of the of the Ld CIT may please be cancelled. 28. When asked by the Bench regarding the implication of the judgment of Hon'ble jurisdictional High Court in the case of Dalmia Cement Pvt. Ltd. wherein the Hon'ble High Court has held that despite specific and pointed queries in section 143(3) assessment, the Assessing Officer cannot be said to have formed any opinion if explicit opinion was not recorded, the Ld AR for the assessee was not able to enlighten us on the same. 29. We have heard the parties and perused the record. We have also gone through the case laws relied on by either of the parties. Before deciding the issues at hand, we would like to enumerate/reproduce the relevant material. i)The impugned assessment order dated 8.12.2008 is as under:- "The assessee firm filed its return of income on 29.07.2006 declaring income of Rs.418,84,945/-. The case was processed u/s 143(1) of the IT Act on 31.3.2008. Subsequently the case was selected for scrutiny under CASS. Notice u/s 143(2) of the Income Tax Act dated 18.7.2007 was sent through Speed Post. Another notice u/s 142(1) along with questionnaire dated 8.9.2008 was issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties of lending of monies for interest, or on other terms and conditions out of own fund or arranged funds in the name of the firm or such other names as may be mutually agreed to among the partners and for this purpose borrowing monies from any source or sources including banks, financial institutions, partners and or their associates or associated concern or relatives and other persons on such terms and conditions by offering as securities assets of the firm, partners, their associates concerns or relatives that may be mutually agreed among the partners from time to time." v). The Second partnership deed was entered on 31.8.2005. Para 2 of the page 2 reads as under:- "That the firm shall invest in stocks, shares, debentures, bonds. Mutual funds or any other securities and carry on the business of lending of monies for interest, or on other terms and conditions out of own funds or arranged funds in the name of the firm or such other names as may be mutually agreed to among the partners and for this purpose borrowing monies from any source of sources including banks, financial institutions, partners and or their associates or associated concerns or relatives and other perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nil 20% Nil With certain conditions. 30. Perusal of the above material would show that the issues involved were quite complex to which the Assessing Officer did not apply his mind and mechanically accepted the submissions of the assessee without any cogent reasons. 31. We also agree with the submissions of the Ld CIT (DR) that the issue before us is not assessibility of any amount on merit. We are to decide the issue of jurisdiction of the Ld CIT u/s 263 of the Act. We would, therefore, not discuss the submissions of the ld AR for the assessee on the issue of assessibility of any amount as income of the assessee. 32. It is not disputed that the transactions entered into by the assessee were with reference to mutual funds, the details of which are available in assessee's paper book pages 160 to 167. All the transactions were entered into from Ist August, 2005 to 31st March, 2006 i.e. within a period of 8 months. The transactions were made in the portfolio of 3685594217 . It has also been stated by the Ld AR for the assessee that all the transactions were through portfolio manager to whom portfolio management fees has been paid. The assessee did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into only to utilize the funds of the so-called partner companies by the other partners of the assessee firm may be correct. Even otherwise, as per the partnership deeds, initial capital contribution made by KICIPL and KPFSandEPL were to be 2000 lakhs and 500 lakhs respectively. There is no provision for fixed capital. As per copy of capital accounts, the maximum credit balance in the capital accounts of the two companies during the year were Rs.3000 lakhs and Rs.1073 lakhs(approx) respectively (APB 119-120). We have noticed that M/s Kwality Processed Food Services and Equipments Pvt. Ltd. contributed shares of M/s Kwality Ice Cream India Pvt. Ltd. at Rs.4,88,00,000/- as its capital in the assessee firm. The Assessing Officer did not enquire into this aspect of the case. From the details filed by the assessee before the ld CIT during the 263 proceedings, namely, the photo copy of balance sheet, Profit and Loss A/c of M/s Kwality Ice Cream India Pvt. Ltd., and M/s Kwality Processed Food Services and Equipment Ltd. available in assessee's paper book pages 129 to 154, it is noticed that the total number of shares issued by M/s Kwality Ice Cream India Pvt. Ltd. were 16000 out of whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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