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TMI Blog2016 (10) TMI 1249X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of clause-(iii) of Rule 8D(2) of the IT Rules, 1962. Therefore, the order of the CIT (A) on this issue stands. Thus, Ground no.1 raised by the assessee is allowed in the above mentioned manner. Addition in respect of transactions reported in AIR qua the interest income - HELD THAT:- Addition made by the AO and confirmed by the CIT (A) is required to be deleted ads if in case of double taxation in both the AYs. Relevant facts and conclusions of the CIT (A) in this regard are given in paras 6.1 to 6.3 of the CIT (A)'s order. As per the assessee, interest income accrued from the Bank of Baroda is ₹ 4,53,453/- and the same is credited to the P & L Account on the basis of the entries appearing in the bank statements. However, in Form No.26AS, an amount of ₹ 4,68,250/- was reflected. Assessee claims that as per the principle of mercantile system of accounting, which is consistently followed by the assessee, an excess amount was offered. Assessee further submitted that when the amount shown in Form No.26AS is lesser, in such cases the addition of ₹ 14,797/- is uncalled for. - Decided in favour of assessee. Disallowance in respect of advances written off - HELD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the CIT (A) erred in confirming the disallowance made by the AO u/s 14A of the Act as per Rule 8D of the IT Rules, 1962 at ₹ 2,07,144/-. 1.2. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in upholding the action of the AO in rejecting the working of disallowance u/s 14A of the Act made by the appellant on reasonable basis. 1.3. On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in computing disallowance u/s 14A of the Act by invoking Rule 8D without giving any reasons for non-satisfaction with the correctness of the disallowance made by the appellant. 1.4. On the facts and in the circumstances of the case and in law, the CIT (A) erred in not appreciating that no borrowed funds have been used for the purpose of making investments in shares yielding exempt income and the entire investments have been made out of own funds. 1.5. On the facts and in the circumstances of the case and in law, CIT (A) erred in not appreciating that the appellant has not incurred any interest expenditure for the purpose of earning exempt income. 1.6. On the facts and in the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of investment. 4. Taxability u/s 115-O: 4.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that by gifting the shares of United Phosphorus Limited (UPL) and Uniphos Enterprises Ltd (UEL) to Nerka Chemicals Private Limited (NCPL) there was an indirect disguised distribution of accumulated profits by the appellant to its shareholders / members of the Shroff family which is covered u/s 2(22)(a) of the Act. 4.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that the appellant is liable to pay dividend distribution tax u/s 115-O of the Act in respect of the shares transferred to NCPL held to be deemed dividend u/s 2(22)(a) of the Act. 4.3. On the facts and in the circumstances of the case and in law, the CIT (A) erred in giving directions to the AO to levy dividend distribution tax u/s 115-O without issuing a cause notice and consequently violating the principles of natural justice by not providing an adequate and reasonable opportunity of being heard. 5. Gift of UPL and UEL shares is a colourable device: 5.1. On the facts and in the circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e donee assessee-company. Considering the precedent involving in similar donor concern, which was adjudicated by the Hon‟ble Jurisdictional High Court in the case of Nerka Chemicals P Ltd (371 ITR 280) as well as Ahmedabad High Court judgment in the case of M/s. Prakriya Pharmachem vs. ITO in Special Civil Application No.20492 of 2015, dated 18.1.2016, we have adjudicated the identical issue in the said cases of Ultima Search and Shroffs (supra) and the said gift ransactions are held by us as gift‟ transactions. The decision is in favour of the assessee. The decision is in favour of the assessee. While deciding the issue the above cases, we have considered the view of the Hon‟ble High Court that the title of he agreement should not come on the way of the substance of the transaction. We have also examined the applicability of the provisions of section 2(22)(a) of the Act and upheld the interpreting of the said provisions by the principles of strict interpretation‟. We have also held that it is not a case of distribution of accumulated profits to its shareholders. It is an undisputed fact that NCPL per se is not a shareholder in the assessee-company. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve also perused the order of Honble Bombay High Court in the case of the recipient company NECL reported in 371 ITR 280 during the Stay Petition related proceedings and find that the assessee‟s claim of gift agreement is prima facie approved. The relevant para 5 and 6 of the said judgment is extracted as under: 5. The AO in the assessment order held that the transfer agreement is purely in he nature of transfer as it does not mention the word gift‟. He rejected the contention that the transfer of the shares was by way of gift‟ as the agreement is titled as Transfer Agreement . He observed that if it had been a gift it would have been a gift deed . 6. The petitioner has more than just a strong prima facie vase in this regard. The title given to a document is not determinative of its true character. he purport of the document must be ascertained on a consideration of he contents thereof. The respondents do not deny that no consideration in the terms of money or money s worth was paid by the petitioner to the transferors. 12. Regarding the arguments relating to if the gift transaction is done only between he biological persons and not the firms and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e device. In the process, CIT(A) rejected the assessee‟s claim of transfer agreement‟ as gift agreement‟ and eventually rejected to applicability of the provisions of section 47(iii) which considers such gift transfer as exempt transfer‟ for the purpose of capital gains. However, CIT(A) granted relief to assessee on holding that it is case of ransfer without consideration. He however, confirmed the addition for the other reasons narrated above. We shall now deal with each of them in the succeeding paragraphs of this order. 14. Applicability of the provisions of clause (a) of section 2(22)/section 115-0 of the Act: In this regard, Ld Counsel for the assessee brought our attention o the relevant provisions and submitted that the assessee is an individual and herefore, the question of distribution of dividend does not arise for invoking the provisions of clause (a) of section 2(22) of the Act. 15. After hearing both the parties, we have perused the relevant provisions of section 2(22)(a) of the Act and the same reads as under:- Sec. 2(22) dividend includes- (a) any distribution by a company of accumulated profits, whether capitalised or not, . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 2(22) constitutes deemed dividend and must receive a strict interpretation‟ [CIT vs Martin Burn Ltd (136 ITR 805) (Cal)]. The judgment of the Hon‟ble Apex Court in the case of CIT v. Nalin Behari Lall Singha [1969] 74 ITR 849 (SC) is relevant for the proposition that every receipt by the shareholder is not a dividend‟. The expression accumulated profits appearing in the above clause-(a) to section 2(22) of the Act is required to be understood in a sense of commercial profits‟, PK Badiani v. CIT [1976] 105 ITR 642 (SC). It is also a settled proposition in law that the expression release of capital assets‟ is not attracted in factual matrix where certain bogus shares are issued without any consideration by the company to the shareholders [CIT vs. Dalmia Investment Company Limited [52 ITR 567 (SC)]. It implies transfer of shares of a company ipso facto does not amount to release of any capital asset of the company as it only creates certain rights for the shareholders (21 ITR 12) (Bom). Therefore, he transfer of shares of UPL and UEL owned by the assessee-company to NCPL is outside the scope of the provisions of clause-(a) of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee reiterated the submissions made before the lower authorities. 13. On the other hand, Ld DR for the Revenue relied on the orders of the Revenue Authorities. 14. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties and on perusal of the orders of the Revenue Authorities as well as the submissions made before us, we find, there is no dispute so far as the disallowance under Rule 8D(2)(i) is concerned. Whereas, regarding the attracting the provisions of clause-(ii) and (iii) of Rule 8D(2) of IT Rules, 1962, Ld Counsel for the assessee was critical of the CIT (A)‟s conclusions in para 5.3.2. On perusal of the said para 5.43.2 of the CIT (A)‟s order, we find, the CIT (A) has not honoured the legal proposition relating to the transaction relating to presumption said by the jurisdictional High Court vide its judgment in the case of CIT vs. Reliance Utilities and Power Ltd (313 ITR 340) (Bom.). Considering the same, we are of the opinion that he same requires reconsideration. In case, if interest free funds are found available, he presumption of use of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Chemicals vs. ITO (ITA No.1355/Mum/2010) (ITAT Mum) (Unreported) 16. After going through the reasoning given by the CIT (A) in para 6.3 of his order and the written submissions extracted above, we are of the opinion, the addition lacks in merits. Accordingly, we allow this part of the ground in favour of the assessee. Thus, Ground no.2 raised by the assessee is allowed. 17. Ground no.3 relates to the disallowance in respect of advances written off. Giving brief facts in this regard, Ld Counsel for the assessee submitted that the said amount was advanced by the various companies, which were merged with the assessee-company conclusively. Consequently, their advances have become the advances of the assessee-company. Assessee wrote off such advances in its books of account of the year. The same is claimed as allowable deduction considering the fact relating to the claim of merger of the said companies viz Sovereign Holdings Private Limited; Shivpada Holdings Private Limited and Rakshak Chemicals Private Limited with the assessee-company w.e.f 1.4.2002 as per the order of the Bombay High Court sanctioning the Scheme of Amalgamation (para 7.3.2 of the CIT (A)‟s order). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded as belonging to the new owner................ 8. It seems to us that even if the debt had been taken into account in computing the income of the predecessor-firm only and had subsequently been written off as irrecoverable in the accounts of the assessee, the assessee would still have been entitled to a deduction of the amount written off as a bad debt. It is not imperative that the assessee referred to in sub-clause (a) must necessarily mean the identical assessee referred to in sub-clause (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of sub-clause (b). The successor assessee, in effect, steps into the shoes of his predecessor. 18. Further, it is evident that the Revenue disallowed the claim of the assessee for want of evidence that the said advances are given in ordinary course of business of hat merged companies. Para 7.3.2 of the CIT (A) order is relevant in this regard. herefore, we are of the opinion, the matter is required to be remanded to the file of he AO for fresh adjudication. We order accordingly and direct the AO to examine he issue in the light of the above said precedents and facts of the case. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in holding that by gifting the shares of UPL and UEL by various donor companies to NCPL there was an indirect disguised distribution of accumulated profits by the donor companies to their shareholders / members of the Shroff family which is covered u/s 2(22)(a) of the Ac. 4. Gift of UPL and UEL shares is a colourable device: 4.1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO in holding the aforesaid transaction as a colourable device to avoid tax by applying the decision of the Supreme Court in the case of McDowell Co Ltd (154 ITR 148). 4.2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in making various observations which are factually incorrect and contrary to he facts available on record which the appellant carves leave to elucidate at he time of hearing, leading to perverse finding that the aforesaid transaction as a colourable device to avoid tax. 5. Addition as per 26AS: ₹ 3,405/- On the facts and in the circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in taxing an amount of ₹ 3,405/- being reconciled d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter to the file of the AO with a direction to verify / examine the assessee‟s claim that the said purchases were lying in closing stock as on 31.3.2010 as well as the evidence furnished by the assessee to prove the genuineness of purchases from M/s. K.C. Enterprises. Contents of para 6.3.2 of CIT (A)‟s order are relevant in this regard. Aggrieved, assessee is in appeal before the Tribunal. 24. During the proceedings before us, Ld Counsel for the assessee reiterated the submissions made before the lower authorities. Further, Ld AR submitted that since all the evidence was before the CIT (A) and he examined the same. It is the submission of the Ld AR, since the purchased items were lying in closing stock as on 31.3.2010, for which evidence was produced before the first appellate authority, the addition made in this regard is required to be deleted. 25. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. After hearing both the parties and on perusal of the facts and written submissions of the assessee, we find, it is an undisputed fact that the items purchased were already partly sold a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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