Case Law Details
IN THE ITAT HYDERABAD BENCH ‘A’
Jaypeem Granites (P.) Ltd.
v/s.
Income-tax Officer, Ward 14(3), Hyderabad
IT APPEAL NOS. 128, 129, 372 & 373 (HYD.) OF 2010
[ASSESSMENT YEARS 2005-06 & 2006-07]
JUNE 8, 2012
ORDER
D. Karunakara Rao, Accountant Member
These are cross appeals for two years, viz. assessment years 2005-06 and 2006-07. Hence, there are four appeals in all in this bunch. They are directed against a common order of the CIT(A) II, Hyderabad dated 30.12.2009, disposing off the appeals of the assessee, arising out of the orders of the assessing officer passed under S. 201(1)(1) and S. 201(1)(1A) of the Income-tax Act, 1961. Since common issues are involved, these appeals are being disposed off with this common order for the sake of convenience.
2. Facts of the case in brief are that the assessee is in the business of manufacture and export of granite products consisting of handicrafts and artistic stone products, tiles, slabs, monuments etc. A survey u/s. 133 A was conducted at the premises of the assessee on 19.8.2008. It was found during the course of survey that the assessee given advances to its sister concern, M/s. Odlings Memorial Pvt. Ltd. (OMPL), in which shareholders of the assessee are having substantial interest of more than 20% by way of shares. The assessing officer found that the advances given by the assessee were of Rs. 1,35,60,236 for the assessment year 2005-06 and Rs. 1,35,99,959 for the assessment year 2006-07. The assessing officer found that Shri Harvesh Marwaha and Smt. Asmita Gunti Marwaha are common shareholders in these two companies and that Shri Harvesh Marwaha who is a share-holder of M/s. Jaypeem Granites Pvt. Ltd., has more than 20% shareholding in OMPL, while his share holding in the appellant company is more than 10%. The assessing officer therefore, found that the aforesaid advances by the assessee company to OMPL constitute deemed dividend within the meaning of S. 2(22)(e) requiring deduction of tax at source u/s. 194. The assessing officer, accordingly initiated the proceedings under S. 201(1) and S. 201(1A), and after considering the objections of the assessee in response to the show-cause notice issued in that behalf, noted that the ledger extracts shows only cheques issued to OMPL, but did not show the payments made towards processing charges. He further noted that the assessee has not specified the nature of funds transferred in the ledger. He also found that there was no correlation between the advances given and the invoices, if any, for purchase or processing charges to treat the payments as trade advances. The assessing officer also found that the assessee company had flush of funds and there is always debit balance in the account of OMPL due to regular advances given by the assessee and such debit balances constitute dividend within the meaning of S. 2(22)(e). The assessing officer found that the main issue was deduction of tax at source u/s. 194 of the Act, which the assessee failed to deduct @ 22.44%. The assessing officer observed that for the limited purpose of TDS, it does not matter for him as to in whose hands, but such dividend is taxable. Accordingly, vide impugned orders both dated 14.9.2009, passed under S. 201(1) read with S. 194 and 201(1A) of the Act, treating the assessee as an assessee in default, raised demands of tax u/s. 201(1) amounting to Rs. 30,42,920 for the assessment year 2005-06 and of Rs. 28,20,079 for the assessment year 2006-07, besides corresponding interest levied under S. 201(1A) for both the assessment years.
3. On appeal, the CIT(A) observed that for the application of provisions of S. 2(22)(e) of the Act, there should be accumulated profits and the advances should be to a concern in which a shareholder of the assessee should have not less than 10% of registered ownership and such persons should hold more than 20% of registered as well as beneficial ownership in the recipient company. In the assessee’s case, the CIT(A) observed, these conditions were fulfilled and hence, the advances paid to OMPL by the assessee company is dividend within the meaning of S. 2(22) of the Act. Having held that the advances in question constitute dividend within the meaning of S. 2(22)(e) of the Act, the CIT(A) held that the provisions of S. 194 are also applicable, and the assessee is liable to deduct tax at source on payment of such advances. He distinguished the case-law relied upon by the assessee. The CIT(A) collected details of the advances in question made by the assessee to OMPL, duly categorized as trade advances and other than trade advances for the entire period in question. He held that the assessee is liable to deduct tax at source only in relation to cash advances made by it to OMPL of Rs.77,41,805 for the assessment year 2005-06 and Rs. 31,01,169 for the assessment year 2006-07, and accordingly directed the assessing officer to restrict the demands under the provisions of S. 201(1) and 201(1A) to the advances arrived at after due verification after excluding the trade advances to OMPL.
4. While the assessee preferred appeals, ITA Nos.128 and 129/Hyd/2012 for these two years, against the order of the CIT(A) aggrieved by the sustenance of the orders passed under S.201(1) and 201(1A) in relation to cash advances made by the assessee to OMPL, the Revenue is in appeal for both these years, vide ITA Nos. 372-373/Hyd/2012, aggrieved by the relief granted by the CIT(A) in relation to payments made by the assessee to OMPL by way of trade advances and processing charges.
Assessee’s Appeals:
ITA No.128/Hyd/2010 : Assessment year 2005-06
ITA No.129/Hyd/2010 : Assessment year 2006-07
5. Effective grounds of the assessee in both these appeals are identical, except for the amounts involved. The same, as taken from ITA No. 128/Hyd/2010 for assessment year 2005-06, read as follows-
“1. The order of the CIT is in gross violation of the provisions of law and hence is bad in law.
2. The CIT (Appeals) has erred in not considering the assessing officer’s action of initiating the proceedings after elapse of 4 years from the end of the relevant financial year.
3. The CIT(A) has erred in upholding the trade advances given by the company as advance given within the meaning of the provisions of sec. 2(22)(e) of the Income Tax Act, 1961.
4. The CIT(A) has erred in upholding that tax has to be deducted at source u/s. 194.
5. The CIT(A) has erred in upholding the assessee as an assessee in default for not deducting tax at source.
6. The CIT(A) has erred in upholding Rs. 77,41,804 as deemed dividend u/s. 2(22)(e) of the Act.
7. The CIT(A) has erred in upholding the demand raised by the assessing officer u/s. 201(1)
8. The CIT(A) has erred in upholding the demand raised by the assessing officer u/s. 201(1A)”
6. In the very beginning, learned counsel summed up by stating that there are couple of issues-one relating to legality and validity of the proceedings under S. 201(1) and 201(1A) of the Income-tax Act after lapse of a period of four years, and the second one relates to applicability of the TDS provisions in respect of the advances held as deemed dividends by the assessing officer under S. 2(22)(e) of the Act.
7. In connection with the first issue, learned counsel argued by stating that the proceedings initiated by the assessing officer under S. 201(1) and 201(1A) of the Act after a lapse of four years from the end of the relevant financial year amount to invalid proceedings. For this purpose, learned counsel relied on various decisions and provided relevant citations too.
8. On the other hand, the Learned Departmental Representative for the Revenue argued by stating that for the purpose of applicability of TDS provisions, six years is held to be a reasonable period. For this purpose, he relied on the decision of the Special Bench of the Tribunal in the case of Mahindra & Mahindra Ltd. v. Dy. CIT [2009] 30 SOT 374/[2010] 122 ITD 216 (Mum.)(SB).
9. We heard both the parties and perused the impugned orders of the lower authorities and other material on record. We have also perused the case-law relied upon by the parties. We find that the Special Bench of the Tribunal in the case of Mahindra & Mahindra Ltd. (supra) has decided the issue relating to the limitation in favour of the Revenue and against the assessee. The Special Bench of the Tribunal in that case has answered in the affirmative the question whether the maximum time limit for passing for initiating and completing proceedings under S. 201(1) and 201(1A) is same as prescribed under S. 149, i.e. four years or six years from the end of relevant assessment year, as the case may be, depending upon amount of income in respect of which person responsible is sought to be treated as assessee-in-default. It has also answered in the affirmative the question whether any order passed under S. 201(1) or 201(1A) cannot be held as barred by limitation if it is not passed within four years from the end of the relevant financial year. Respectfully following the recent decision of the Special Bench of the Tribunal referred to above, which has been rendered after detailed consideration of the relevant statutory provisions in the light of the case-law on the point, we decide the first issue in favour of the Revenue and against the assessee, and hold that the impugned proceedings under S. 201(1) and 201(1A) initiated by the assessing officer for these two years are not barred by limitation.
10. As regards the other issue relating to the applicability of the relevant TDS provisions to deemed dividend under S. 2(22)(e) of the Act, the learned counsel for the assessee argued by stating that this issue is covered in favour of the assessee by the decision of the Jaipur Bench of the Tribunal in the case of ANZ Reality (P.) Ltd. v. ITO [2009] 26 SOT 61 (JP) (URO), which is relevant for the proposition that payment of advances to non-share holders does not require TDS under S. 194 of the Act, and hence the assessee cannot be held to be an assessee-in default under S. 201(1) so as to attract interest under S. 201(1)(1A) of the Act. Learned counsel for the assessee narrated the chronology of facts of both the cases and relied on para 6 of the said order of the Jaipur Bench of the Tribunal in the case of ANZ Reality (P.) Ltd. (supra).
11. On the other hand, Learned Departmental Representative for the Revenue read out the relevant portion of para 6.3 of the impugned order of the CIT(A) and mentioned that the facts of the cited case are distinguishable, as held by the CIT(A) in the impugned order, and hence the impugned order of the CIT(A) is liable to be upheld.
12. We heard both the parties and perused the orders of the Revenue as well as the paper book field before us. we have also gone through the various citations filed before us by the learned counsel for the assessee in general and the decision of Jaipur Bench of the Tribunal in the case of ANZ Realities (P.) Ltd. (supra) in particular. In the first place and at the very outset, we hold that as far as trade advances are concerned, there is no question of applicability of the provisions of S. 194 of the Act, and consequently, applicability of provisions of S. 201(1) and S. 201(1)(1A) does not arises. As for the other advances as well, we have perused para 6 of the said order of the Tribunal. For the sake of completeness of this order, we reproduce the said para hereunder-
“6. We have heard the rival contentions and perused the facts of the case. The arguments made by Shri Rajeev Sogani, learned Authorised Representative, appear to be convincing that s. 194 casts obligation for TDS only when payment is made to a shareholder. It is undisputed fact in the present case that the funds have been advanced by the assessee company to the following companies, which are not shareholders of the assessee company:
(1) M/s. Citybuild Realtors (P) Ltd.
(2) M/s. Indiana Classic Realtors (P) Ltd.
(3) M/s. Minu Constructions (P) Ltd.
The shareholders of the assessee company are Shri Mohd. Rafi Bagdia -50 per cent and Shri Tehsin Rafi Bagdia – 50 per cent. The complete picture is depicted in the chart placed on record. The legislature have rightly restricted the TDS requirement only when payment is made to shareholders. Under the provisions of the Companies Act, 1965, every company is expected to maintain a register of shareholders under s. 150 of the Companies Act, 1956. Company is not obliged to maintain any register when details of such concerns may be maintained to which provisions of s. 2(22)(a) apply. Under these circumstances, when payment is made to a non-shareholder, it is impossible for the payer company to ascertain whether it will attract the provisions of s. 2(22)(e) of the IT Act 1961 or not. Therefore, in this view of the matter, law does not expect the payer company to deduct TDS when payment is made to a non-shareholder. This is the reason the law expressly provides for TDS requirement only when payment is made to a share-holder. Thus, s. 194 requires TDS only when payment is made to a shareholder. Payment to shareholder will cover both types of dividends i.e. normal dividend as well as deemed dividend. Otherwise also, deemed dividend will be taxed in the hands of the shareholder and not in the hands of non-share-holder payee. Therefore, s.194 does not require TDS when payment is made to a non-shareholder. Also, under s. 206 of the Companies Act, 1956, the dividend can be paid to a registered shareholder only. Therefore, s. 194 of the IT Act, 1961 is synchronized with the requirement of the Companies Act, 1956 contained in ss.150 and 206 of the Companies Act, 1956.”
In the light of the above decision, it is clear that it is only where the payee in relation to the payments in question is a share-holder, such payments may attract the provisions of S. 2(22)(e) of the Act, and consequently liability to TDS under S.194 of the Act. The points of distinction between the facts in the cited case and the case of the assessee, made out by the CIT(A) in the impugned order merely basing on the status of the assessee, in our opinion, are totally artificial and not valid. In this view of the matter, the ratio of the said decision of the Jaipur Bench of the Tribunal in the case of ANZ Reality (P.) Ltd. (supra), applies to the facts of the present case. Hence, in so far as the aspect of deemed divided involved in cash advances is concerned, assessee is entitled for relief in this regard. We accordingly allow the grounds of the assessee in this appeal.
13. In the result, assessee’s appeals are allowed.
Revenue’s Appeals:
ITA No. 372/Hyd/2010 : Assessment year 2005-06
ITA No. 373/Hyd/2010 : Assessment year 2006-07
14. Grounds of both the appeals are identical. There is a mistake in numbering of the grounds. The correct Sl. no and the grounds read as under-
“1. The Commissioner of Income Tax (Appeals) erred in facts as well as in law.
2. The Commissioner of Income-tax(Appeals) ought to have appreciated that Section 2(22)(e) contemplates all kinds of advances so as to treat as deemed dividend and no distinction is made between advances for trade and processing charges and other kind of advances.
3. The Commissioner of Income-tax (Appeals) ought to have appreciated hat future adjustment of advances for trade and processing charges does not alter the character of the advances so as to treat the same as deemed dividend, as held in the cases of
(a) CIT v. P.K. Abubucker (Mad.) 259 ITR 507
(b) Walchand & Co. Ltd. v. CIT (Bom.) 100 ITR 598
| 4 ** | ** | **” |
15. During the proceedings before us, learned counsel for the assessee argued stating that the CIT(A) rightly allowed the assessee’s appeals on (a) trade credits and (2) processing charges. However, the Learned Departmental Representative for the Revenue stated that there is no decision of CIT(A) on these issues.
16. We heard the parties and perused the impugned orders of the lower authorities and other material on record. We find on facts, as noted above, the CIT(A) collected the details of advances categorised into trade advances and processing charges. Though he restricted the applicability of TDS provisions only to cash advances, and took the other two types of advances as not attracting the TDS provisions, he has not passed any speaking order in that behalf. He has not elaborated any reasons to arrive at the conclusion that the trade advances and processing charges do not attract the TDS provisions. Considering totality of facts and circumstances of the case, we deem it fair and proper to set aside the impugned order of the CIT(A) on the issue relating to the applicability of TDS provisions to trade advances and processing charges and restore these matters to his file for fresh consideration and disposal of the appeal before him in accordance with law by passing a speaking order on the said aspects of the issue in dispute and after giving reasonable opportunity of hearing to the assessee.
17. In the result, both these appeals of the Revenue are allowed for statistical purposes.
18. To sum up, the appeals of the assessee, being ITA Nos. 128 and 129/Hyd/2012 are allowed and the appeals filed by the Revenue, being ITA Nos. 372 and 373/Hyd/2012, are allowed for statistical purposes.
