Case Law Details

Case Name : Dinesh Kumar Agarwal Vs. ITO (ITAT Hyderabad)
Appeal Number : ITA No. 1235/Hyd/2017
Date of Judgement/Order : 12/01/2018
Related Assessment Year : 2014-15
Courts : All ITAT (5030) ITAT Hyderabad (295)

Dinesh Kumar Agarwal Vs. Income-tax Officer (ITAT Hyderabad)

Assessee is an individual running a proprietary business in the name of V3 Staffing Solutions providing manpower services mainly to Google India Pvt. Ltd. Along with his wife Nisha Agarwal commenced closely held companies in the name of M/s Life Science Mechanics Pvt. Ltd. and M/s V3 Staffing Solutions Pvt. Ltd., which are also in the business of providing manpower services, holding 50% shares in each company.

During the AY under consideration, assessee has taken loans from the closely held companies for the purpose of discharging payment of salaries in the proprietary business. i.e. V3 Staffing Solutions. Since V3 Staffing Solutions is a proprietary concern owned by the assessee and also this concern does not extend services of manpower to any of the closely held companies, it cannot be treated as a commercial transaction. Ld. AR relied, mainly, on the CBDT Circular No. 19/2017 in support of the contention that taking loan from closely held company to discharge the payment of salary is to be treated as a commercial transaction. We are not in agreement with the submissions of the ld. AR as the salary commitment is in the proprietary concern, in which, assessee is the sole owner and any loan taken from the closely held company wherein assessee is holding substantial interest will definitely attract provisions of section 2(22)(e).

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal is preferred by the assessee against the order of CIT(A) – 6, Hyderabad, dated 05/05/2017 for the AY 2014-15.

2. Briefly the facts of the case are, assessee an individual, filed his return of income for the AY 2014-15 on 28/11/2014 declaring total income of Rs. 5,62,000/-. Subsequently, the case was selected for scrutiny under CASS and notices u/s 143(2) and 142(1) of the Income-tax Act, 1961 (in short ‘the Act’) were issued and duly served on the assessee. During the course of assessment proceedings, the AO noticed that in Annexure to Form 3CD report ‘statement of loan for the year ended 31/03/2014’, the assessee had taken a loan of Rs. 66,43,000/- from M/s Life Science Mechanics Pvt Ltd., and Rs. 78,90,000/- from M/s V3 Staffing Solutions Pvt. Ltd. Both the above said companies are closely held companies and the assessee is a shareholder holding 50% shares in both the companies. Further, AO observed that M/s Life Science Mechanics Pvt. Ltd. and M/s V3 Staffing Solutions Pvt. Ltd. had reserves and surplus of Rs. 38,92,074/- and Rs. 1,19,742/- respectively as on 31/03/2014. Since the assessee had taken loan from the above said companies, which are closely held and also having accumulated profit, provisions of section 2(22)(e) get attracted and accordingly, the assessee was asked to explain as to why the amount of loan should not be treated as deemed dividend u/s 2(22)(e) of the Act. In response, assessee had filed a reply on 19/12/2016, which is extracted as under:

“The assessee is a proprietor of V3 Staffing Solutions providing man power services mainly to Goggle India Pvt. Ltd. The assessee along with his wife Nisha Agarwal has started two private limited companies. Life Science Mechanics India Pvt. Ltd. and V3 Staffing Solutions Pvt. Ltd., in which both are only the directors and also shareholders. The V3 Staffing Solutions Pvt. Ltd. provides manpower services mainly to Google India Pvt. Ltd. and Life Science Mechanics Pvt. Ltd. provides man power services to other companies. As the assessee provides man power service, they have to pay salaries in time and hence far that they transfer fund from these two sister concerns temporarily for the payment of salaries. The transfer of fund from these companies, has not derived any monetary benefit to the assessee so as to be treated as deemed dividend. Hence assessee requests your good self to kindly, accept the above submissions.

2.1 After considering the reply of the assessee, AO observed that as the accumulated profit is less than the loan taken from the companies, treated the loan amount taken by the assessee from the closely held companies to the extent of Rs. 40,01,816/- as deemed dividend in the hands of the assessee.

3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).

4. Before the CIT(A), the assessee had reiterated the submissions as made before the AO. After considering the submissions of the assessee, CIT(A) dismissed the appeal of the assessee by relying on the decision of Honorable Supreme Court in the case of Tarulata Shyam Vs. CIT, 108 ITR 345 and in the case of P. Sarada Vs. CIT, 229 ITR 444 (SC).

5. Aggrieved with the above order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal:

“1. The order of the learned Commissioner of Income Tax (Appeals) is against the principle of natural justice and bad in law.

2. The Commissioner of Income Tax (Appeals) ought to deleted the additions made by the assessing officer u/s 2(22)(e).

3. The Commissioner of Income Tax (Appeals) ought to have considered the submissions made by the assessee.

4. The Commissioner of Income Tax (Appeals) ought to have considered that the loan and advances are in normal course of business and not deemed dividend.

5. Any other ground that may be urged at the time of hearing.”

6. Considered the rival submissions and perused the material facts on record. Assessee is an individual running a proprietary business in the name of V3 Staffing Solutions providing manpower services mainly to Google India Pvt. Ltd. Along with his wife Nisha Agarwal commenced closely held companies in the name of M/s Life Science Mechanics Pvt. Ltd. and M/s V3 Staffing Solutions Pvt. Ltd., which are also in the business of providing manpower services, holding 50% shares in each company. During the AY under consideration, assessee has taken loans from the closely held companies for the purpose of discharging payment of salaries in the proprietary business. i.e. V3 Staffing Solutions. Since V3 Staffing Solutions is a proprietary concern owned by the assessee and also this concern does not extend services of manpower to any of the closely held companies, it cannot be treated as a commercial transaction. Ld. AR relied, mainly, on the CBDT Circular No. 19/2017 in support of the contention that taking loan from closely held company to discharge the payment of salary is to be treated as a commercial transaction. We are not in agreement with the submissions of the ld. AR as the salary commitment is in the proprietary concern, in which, assessee is the sole owner and any loan taken from the closely held company wherein assessee is holding substantial interest will definitely attract provisions of section 2(22)(e). Therefore, we are in agreement with the conclusions drawn by the CIT(A) and thus, we uphold the order of the CIT(A). Accordingly, the grounds raised by the assessee are dismissed.

7. In the result, appeal of the assessee is dismissed.

Pronounced in the open court on 12th January, 2018.

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Category : Income Tax (27257)
Type : Judiciary (11455)
Tags : ITAT Judgments (5215) Section 2(22)(e) (54)

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