2016 (7) TMI 902 - AT - Income Tax

Tribunal Upholds Assessee's Appeal, Rejects CIT's Order. AO's Assessment Deemed Valid. Legal Precedents Key

M/s The Hooghly Mills Co. Ltd. C/o, Salarpuria Jajodia & Co. Versus DCIT, Central Circle-VII, Kolkata

The Tribunal allowed the assessee's appeal, quashing the CIT's order under Section 263. The AO's original assessment was upheld as it was found to be ... Revision u/s 263 - deemed dividend addition u/s 2(22) - Held that:- From the foregoing discussion we find that all the disclosures regarding the sales and purchases of jute materials were available before the AO at the time of assessment. The transaction has been duly reported by the assessee in the tax audit report as required u/s 40A(2)(b) of the Act. There was no adverse remark in the tax audit report. After considering the material information placed before us, we are of the considered view that AO was in possession of sufficient information about the aforesaid transaction. Accordingly he formed the opinion that the transaction is in the nature of current account and out of the purview of the provisions of section 2(22)(e) of the Act. Section 2(22)( e) of the Act covers only such situations, where the shareholder alone benefits from the loan. In the instant case the company benefits from the said transaction, it will take the character of a commercial transaction and hence will not qualify to be dividend. Now it can be said that sec. 2(22)(e) of the Act covers only those transactions which benefit the shareholder alone and results in no benefit to the company. On the other hand, if the transaction is mutual by which both sides are benefited, it is undoubtedly outside the purview of provisions of sec. 2(22)(e) of the Act. From the above, it is clear that the loan account differs from current account and the provisions of section 2(22)( e) of the Act, being a deeming section, cannot be applied to current account. In such circumstances, the order of the ld. CIT under section 263 of the Act is not sustainable in law. Payment of gratuity - Held that:- From the facts of the case, we find that AO has given a very clear finding that claim of gratuity was not made in assessee’s books of account but it was claimed separately in the computation of income which was not allowed by AO while framing original assessment order. So in the instant case, we find that the question for the deduction on account of gratuity in the computation of total income does not arise. Disallowance under section 14A - Held that:- In our view of the fat that some enquiry was made is sufficient to debar the authorities from exercising the powers u/s 263 of the Act. The Tribunal was accordingly justified in setting aside the order passed u/s 263 of the Act. We do not find any substantial question of law arising for consideration the appeal is accordingly dismissed. In the case on hand, the AO has made an addition by invoking the provision of section 14A of the Act after making the necessary enquiry. The instant case is duly covered with the decision of Hon’ble Allahabad High Court M/s Ashok Handloom Factory Pvt. Ltd. (2016 (3) TMI 650 - ALLAHABAD HIGH COURT ) wherein held that it is settled law that the commissioner of income tax can exercise his jurisdiction u/s 263 of the Act only in cases where no enquiry is made by the Assessing Officer, therefore relying on the same, we reverse the order of Ld. CIT for u/s 263 of the Act. - Decided in favour of assessee Issues Involved:1. Whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interest of revenue.2. Applicability of Section 2(22)(e) of the Income Tax Act regarding advances taken by the assessee.3. Deduction of gratuity liability.4. Deduction of employees' contribution to Provident Fund (PF) and Employees' State Insurance (ESI).5. Disallowance under Section 14A of the Income Tax Act.Detailed Analysis:1. Erroneous and Prejudicial Order:The primary issue raised by the assessee was that the Commissioner of Income Tax (CIT) erred in holding the AO's order as erroneous and prejudicial to the interest of revenue. The CIT invoked Section 263 of the Income Tax Act to revise the AO's order, arguing that the AO did not examine certain aspects during the assessment proceedings.2. Applicability of Section 2(22)(e):The CIT contended that the assessee, being a substantial shareholder of M/s Hooghly Mills Projects Ltd. (MHMPL), received an advance of Rs. 5,58,93,000, attracting the provisions of Section 2(22)(e). The assessee argued that the transactions with MHMPL were purely commercial and involved the purchase and sale of jute goods, thus falling outside the purview of Section 2(22)(e). The Tribunal relied on the judgments in Pradip Kumar Malhotra vs. CIT and COMMISSIONER OF INCOME TAX vs. CREATIVE DYEING & PRINTING (P) LTD., concluding that the transactions were business transactions benefiting both parties and not gratuitous loans or advances. Hence, Section 2(22)(e) was not applicable.3. Deduction of Gratuity Liability:The CIT observed that the AO did not disallow the gratuity expense of Rs. 4,19,58,203 in the computation of income, although it was not debited in the profit and loss account. The assessee argued that the gratuity claim was made in the computation of income and not in the books of accounts, and the AO had already disallowed it. The Tribunal found that the AO's order had merged with the appellate order of the CIT(A), making the CIT's revision under Section 263 unsustainable. The Tribunal relied on the judgment in RITZ LTD. & ANR. vs. UNION OF INDIA & ORS., holding that once an order of assessment is subject to appeal, the whole of it merges with the appellate order.4. Deduction of Employees' Contribution:The CIT argued that the AO erroneously allowed the deduction for employees' contributions to PF and ESI, amounting to Rs. 64,96,988, which were not paid on or before the due date. The assessee cited the Supreme Court judgment in CIT vs. Vinay Cement Ltd., asserting that contributions made before the filing of the return are allowable. The Tribunal upheld this view, referencing the Rajasthan High Court's decision in COMMISSIONER OF INCOME TAX vs. UDAIPUR DUGDH UTPADAK SAHAKARI SANGH LTD., which supported the assessee's claim.5. Disallowance under Section 14A:The CIT noted that the AO did not make a proportionate disallowance for interest-bearing funds used for investments yielding exempt income, except for Rs. 25,000. The assessee argued that the AO had considered the issue and made an appropriate disallowance. The Tribunal referenced the Allahabad High Court's decision in Principal Commissioner of Income Tax vs. M/s Ashok Handloom Factory Pvt. Ltd., stating that the AO's enquiry, though not detailed, was sufficient to debar the CIT from invoking Section 263. The Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the interest of revenue.Conclusion:The Tribunal allowed the assessee's appeal, quashing the CIT's order under Section 263. The AO's original assessment was upheld as it was found to be neither erroneous nor prejudicial to the interest of revenue. The Tribunal's decision was based on detailed legal precedents and a thorough examination of the facts and circumstances of the case.