Rajmal Lakhichand Vs JCIT (ITAT Pune)
Deemed dividend under section 2(22)(e) attracted even in case of ‘beneficial shareholder’ and not only in case of registered shareholder
Provisions of section 2(22)(e) get attracted not only in the case of registered share holder but also in the case of concern in which such shareholder is a member or partner having substantial interest. In the present case as pointed earlier the assessee firm is holding share in group companies through Shri Ishwarlal S. Lalwani, who is having 40% share in the assessee firm. Hence, Shri Ishwarlal S. Lalwani has substantial interest in the assessee firm. The assessee is a beneficial shareholder of group companies and is amenable to provisions of section 2(22)(e) of the Act.
In view of Explanation 3 to section 2(22)(e) of the Act which has been elucidated by Hon’ble Apex Court in National Travel Services Vs. Commissioner of Income Tax reported as 401 ITR 154, we are of view that the provisions of section 2(22)(e) would be applicable to the assessee firm.
AO cannot set-off of brought forward loss before allowing remuneration to partner
Computation of book profit is as per section 40(b) and remuneration to partner is based on current year’s “Book Profits”, while set-off of brought forward losses is to be granted in terms of section 72. Therefore, while arriving at business income, deduction of section 40(b) is to be given first and then if at all there remains positive income, brought forward losses are to be set off.
FULL TEXT OF THE ITAT JUDGMENT
These cross appeals by the assessee and the Revenue are directed against the order of Commissioner of Income Tax (Appeals)-2, Nashik dated 31-03-2015 for the assessment year 2010-11.
2. The brief facts of the case as emanating from records are: The assessee is a partnership firm engaged in the business of making gold and silver ornaments and sale of bullion. The assessee filed its return of income for the impugned assessment year on 26-09-2010 declaring total income as Nil. The case of the assessee was selected for scrutiny under CASS. Accordingly, statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) was issued to the assessee on 23-09-2011. During the course of scrutiny assessment proceedings, the Assessing Officer made additions/disallowances on various counts which inter alia includes :
i. Addition u/s. 2(22)(e) Rs.10,16,06,967/-.
ii. Disallowance of interest u/s. 36(1)(iii) Rs.3,08,889/-.
iii. Disallowance u/s. 40A(2)(a) Rs.33,31,94,731/-.
iv. Disallowance u/s. 14A Rs.6,21,87,068/-.
v. Disallowance of Advertisement Expenses Rs.37,70,543/-.
vi. Disallowance of Remuneration to partners Rs.17,50,000/-.
vii. Disallowance of interest paid to partners Rs.38,61,612/-.
Aggrieved by assessment order dated 26-09-2013, the assessee filed appeal before the Commissioner of Income Tax (Appeals). During the First Appellate Proceedings, the Commissioner of Income Tax (Appeals) apart from making GP addition of Rs.5,65,54,895/- @1.20% on sales, confirmed, addition u/s. 2(22)(e) and disallowance of interest u/s. 36(1)(iii). Further, the Commissioner of Income Tax (Appeals) deleted disallowance u/s. 40A(2)(a), disallowance u/s. 14A, disallowance of advertisement expenses, disallowance of remuneration to partners, and disallowance of interest paid to partners. Against the findings of Commissioner of Income Tax (Appeals), both, the assessee and the Revenue are in appeal before us.
3. The assessee in its appeal has raised 5 grounds of appeal. Shri Sunil Pathak appearing on behalf of the assessee stated at the Bar that the assessee does not wish to press ground No. 1 relating to time barred assessment. The ground No. 2 raised in the appeal is general in nature.
3.1 In respect of ground No. 3 relating to GP addition of Rs.5,65,54,895/-, the ld. AR submitted that that the GP addition has been made by Commissioner of Income Tax (Appeals) in respect of bullions/ornaments purchased by assessee from its sister concerns allegedly at higher rates. The ld. AR contended that the assessee purchased bullions/ornaments from sister concerns located at Jalgaon at the rates prevailing at the time of purchase at Jalgaon. The assessee also purchases bullions/ornaments form parties situated outside Jalgaon depending upon its requirements at the rates prevailing at the time and place of purchase. Purchase rates of gold ornaments from sister concerns are inclusive of making charges, whereas the gold ornaments sold by sister concerns to third parties are excluding making charges. Making charges are separately charged by sister concerns from third parties. The assessee has been consistently following this method of transacting with sister concerns for a long time. The ld. AR pointed that identical issue had travelled up to the Tribunal in assessee‟s own case in assessment year 2009-10 in ITA Nos. 532 & 663/PN/2013 decided on 16-01-2015. The Tribunal estimated GP of the assessee at 1.20% instead of 1.13% declared by assessee. Thus, the Tribunal made addition of 0.07% in the GP declared by assessee. In the assessment year under appeal, the assessee has declared GP of 0.61%, the Commissioner of Income Tax (Appeals) estimated GP at 0.90%. The addition of 0.29% in the assessment year 2010-11 by Commissioner of Income Tax (Appeals) is very much on higher side. The turnover of assessee in assessment year 2010-11 is Rs.1961 crores as compared to Rs.955 crores in assessment year 2009-10. Since, the turnover in the assessment year under appeal is higher than the turnover in immediately preceding assessment year, the GP would go down. Thus, the addition made by Commissioner of Income Tax (Appeals) is not justified. The ld. AR referred to trading account (at page 42 of the paper book) for the assessment years 2009-10 and 2010-11 taking into consideration sale to third parties only. The ld. AR pointed that the GP for the assessment year 2009-10 from sales to third party is 0.41%, whereas in assessment year 2010-11 the GP from sale to third parties is 1.52%.
3.2 The ld. AR contended that the sales/purchases with sister concerns are made on cost to cost basis, therefore, there is no element of profit in such transactions. The ld. AR further pointed that for assessment year 2012-13 on turnover of Rs.3110 crores, the assessee has declared GP of 0.55%. The Assessing Officer made addition of only 0.02%. In assessment year 2013-14 the assessee declared GP at 0.28% against the turnover of Rs.3535 crores. The Assessing Officer accepted the GP declared by assessee. The ld. AR pointed that in view of the decision of Tribunal in assessment year 2009-10 and the trend of reducing GP with increase of turnover, the addition made by Commissioner of Income Tax (Appeals) in the assessment year under appeal is not justified.
3.3 In respect of ground No. 4 with regard to addition of Rs.10,16,06,967/- u/s. 2(22)(e), the ld. AR submitted that the provision of section 2(22)(e) are not attracted. It has been alleged that the assessee has received deemed dividend by way of loans/advances from the group companies as under :
