This Tax Case Appeal has been filed against the order dated 07.03.2007 passed by the Income Tax Appellate Tribunal, “B” Bench, Chennai, in I.T.A.No.896/Mds/2006.
2. The brief facts of the case are as follows:
The assessee is engaged in the business of sale of Electrical Conductors. For the assessment year 1998-99, the assessee viz., M/s.Prem Electrical Conductors Pvt. Ltd., hereinafter referred to as PEC, filed its return of income on 18.01.1999 admitting a total income of Rs.29,660/-. The return was processed under section 143(1A) of the Income Tax Act on 28.09.1999. Subsequently, a notice under section 148 of the Act was issued on 31.03.2005 and it was served on the assessee on 02.04.2005. The assessee, vide letter dated 24.02.2005, requested that the return filed on 18.01.1999 be treated as the one filed in response to the notice under section 148 of the Act. The assessment under section 143(3) read with section 147 of the Act was completed on 30.09.2005. The said order was revised by the Commissioner of Income Tax, Chennai III on 31.01.2006 on the ground that the assessee had received a sum of Rs.1.78 crores from Madras Electrical Conductors Pvt. Ltd., which is a sister concern of the assessee and that the amount received from the sister concern from October 1997 amounted to “deemed dividend” within the meaning of section 2(22)(e) of the Act since the assessee had stopped all business activities from the said period. Challenging the said order, the assessee filed an appeal before the Income Tax Appellate Tribunal and the Tribunal, by order dated 07.03.2007, allowed the appeal filed by the assessee. Aggrieved by the same, the Revenue has filed the present appeal.
3. We have heard the learned counsel appearing on either side and perused the entire materials available on record.
4. At the time of admitting the appeal, the following substantial question of law was framed:
“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in quashing the revision order made by the Commissioner of Income Tax under section 263, even though the Commissioner of Income Tax had found that the Income Tax Officer had omitted to enquire into the question of applicability of section 2(22)(e) as regards credit of about Rs.2 crores with the caption “To PREM KRISHI” is valid?”
5. It is the case of the Revenue that the Assessing Officer, without considering the materials available on record, has passed the assessment order dated 30.09.2005. It is also their case that the Tribunal has committed an error in quashing the order passed by the Commissioner under section 263 of the Act since, the Commissioner has rightly exercised the revisional power conferred on him under the said section on the ground that the Assessing Officer has not gone into the materials available on record before passing the assessment order, thereby causing prejudice to the interest of the Revenue. In support of the said submission, learned counsel appearing for the Revenue relied upon a Division Bench judgment of this court in the case reported in (2003) 259 ITR 507 (C.I.T. Vs. P.K.Abubucker) and a decision of the Hon'ble Supreme Court of India in the case reported in (2007) 290 ITR 433 (Commissioner of Income Tax Vs. Mukundray K. Shah). However, learned counsel appearing for the assessee submitted that the order passed by the Tribunal cannot be interfered with in any manner. In support of her case, learned counsel appearing for the assessee relied upon two decisions of the Delhi High Court in the cases reported in (2009) 318 ITR 462 (Commissioner of Income Tax Vs. Raj Kumar) and (2009) 318 ITR 476 (Commissioner of Income Tax Vs. Creative Dyeing and Printing P. Ltd.) respectively.
6. It is not in dispute that the assessee filed its return of income for the assessment year 1998-99 on 18.01.1999 admitting a total income of Rs.29,660/-; the return was processed under section 143(1) of the Act ; a notice under section 148 of the Act was issued and the assessment was completed on 30.09.2005. At the time of processing the assessment records, the Commissioner of Income Tax found that the assessee received a sum of Rs.1.78 crores approximately from Madras Electrical Conductors Pvt. Ltd. (now known as MEC International Pvt. Ltd.) - (hereinafter referred to as MEC), which is a sister concern of the assessee. Therefore, the Commissioner, exercising the power of revision conferred on him under section 263 of the Act, revised the order passed by the Assessing Officer. While passing such an order under section 263 of the Act, the Commissioner found that the applicability of section 2(22)(e) of the Act was not examined by the Assessing Officer while completing the assessment, though Sri. Ashok P.Shah, who was a Director of the assessee company, was also the Director in Madras Electrical Conductors Pvt. Ltd.; even if it is taken that this transfer of funds was initially on account of business transaction, the assessee company stopped all business activities since October 1997 as per its own admission during the course of assessment proceedings; the said amount partakes the character of advance, so as to attract the provisions of section 2(22)(e) of the Act; this aspect was not looked into by the Assessing Officer while completing the assessment on 30.09.2005 and therefore, this constituted an error, which is prejudicial to the interest of the Revenue. Therefore, a show cause notice under section 263 of the Act was issued to the assessee on 24.11.2005. Subsequently, a revised assessment order dated 23.10.2006 was passed by the Assessing Officer under section 143(3) read with section 263 of the Act holding that, as per the provisions of section 2(22)(e) of the Act, the amounts received as loan or advance is taxable only to the extent of accumulated profits of the company from which these amounts were received; a perusal of the balance sheet of M/s.MEC International P. Ltd., for the assessment year 1998-99 reveals that the reserves and surplus come to Rs.1,09,45,448/-; out of this, a sum of Rs.2,86,658/- represents investment allowance reserve, which does not form part of accumulated profits; therefore it is excluded and that the amount of deemed dividend taxable in the hands of the assessee is restricted to Rs.1.06,88,453/-.
7. In the appeal filed by the assessee, the Commissioner, after hearing the assessee and on the basis of the materials available on record, held that Sri.Ashok P.Shah was not holding substantial interest in MEC and has no shareholding in PEC and therefore, the provisions of section 2(22)(e) are attracted to the present case. Before the Commissioner, it was argued that the transactions were in the nature of business advances and therefore the provisions of section 2(22)(e) would not apply. However, the Commissioner found that since the assessee company stopped all its business activities from October 1997 as per its own admission during the course of assessment proceedings, the amount of Rs.2,73,500/- received from MEC is taxable as deemed dividend under section 2(22)(e) of the Act during the assessment year 1998-99 in the hands of PEC. On the basis of the above finding, the Commissioner held that the entire sum of Rs.2,73,500/- received from October 1997 to March 1998 from MEC is liable to tax as “deemed dividend” and therefore directed the Assessing Officer to bring to tax the said sum of Rs.2,73,500/- in the hands of PEC as “deemed dividend” for the assessment year 1998-99 under section 2(22)(e) of the Act.
8. In addition to the above, the Commissioner also found from the materials available on record that, there was a credit of about Rs.2 crores on 03.03.1998 with the caption “To Prem Krishi”; this was a book adjustment, as the amount reflected in the books of M/s.Prem Krishi P Ltd., was transferred to PEC and that a debt could not be transferred by mere book entries. On the basis of the said finding, the Commissioner directed the Assessing Officer to verify whether any portion of the sum of Rs.2 crores was received during the said period by M/s.Prem Krishi P Ltd., from MEC and to bring such amount to tax in the hands of PEC as “deemed dividend” as per the provisions of section 2(22)(e) of the Act for the assessment year 1998-99, in addition to the sum of Rs.2,73,500/- referred to earlier. The Commissioner also directed the Assessing Officer to bring the entire amount of Rs.2 crores received on 03.03.1998 to tax in the hands of PEC as “deemed dividend” under section 2(22)(e) of the Act, if the Assessing Officer finds that the said sum does not represent monies transferred from MEC but represents the own money of M/s.Prem Krishi P Ltd.
9. In the appeal filed by the assessee before the Tribunal as against the order of the Commissioner dated 30.01.2006, the issue that came up for consideration was whether the Commissioner of Income Tax has erred in revising the assessment under section 263 of the Act, when the twin condition that the order is neither erroneous nor prejudicial to the interest of the Revenue is not satisfied. The Tribunal found that advances are in the nature of business advances and that they are not loans or deposits; Sri.Ashok P Shah is holding no shares in PEC; once it is established that the deposit or advance is in the nature of business transaction, it cannot be held that the same will attract the provisions of section 2(22)(e) of the Act; the assessment was framed under section 143(3) read with section 147 of the Act and all the details were available before the Assessing Officer at the time of completion of assessment. The Tribunal also found that it has not been established that there was an error in the assessment order and that the Commissioner has no power to review the said order under section 263 of the Act. On the basis of the above finding, the Tribunal quashed the order passed by the Commissioner exercising his revisional powers under section 263 of the Act. Pursuant to the said order dated 07.03.2007 passed by the Tribunal reversing the order dated 30.01.2006 passed by the Commissioner, the Assessing Officer has passed an order dated 31.05.2007 revising the order dated 23.10.2006 passed by him earlier thereby giving effect to the order dated 07.03.2007 passed by the Tribunal. It is submitted by the learned counsel appearing for the assessee that the assessee has filed an appeal before the Commissioner of Income Tax (Appeals) as against the order dated 23.10.2006 passed by the Assessing Officer and that the same is pending.
10. A cursory look at the assessment order dated 30.09.2005 shows that it has been passed without application of mind to the materials available on record. Therefore, it cannot be said that the Commissioner has wrongly exercised the power under section 263 of the Act to revise the order passed by the Assessing Officer. In the decision of the Hon'ble Supreme Court of India reported in (2007) 290 ITR 433 referred to above and relied upon by the learned counsel appearing for the Revenue, the Supreme Court has held as follows:
11. .................... The companies having accumulated profits and the companies in which substantial voting power lies in the hands of the person other than the public (controlled companies) are required to distribute accumulated profits as dividends to the shareholders. In such companies, the controlling group can do what it likes with the management of the company, its affairs and its profits. It is for this group to decide whether the profits should be distributed as dividends or not. The declaration of dividend is entirely within the discretion of this group. Therefore, the Legislature realised that though funds were available with the company in the form of profits, the controlling group refused to distribute accumulated profits as dividends to the shareholders but adopted the device of advancing the said profits by way of loan to one of its shareholders so as to avoid payment of tax on accumulated profits. This was the main reason for enacting section 2(22)(e) of the Act.” The Supreme Court has also held that “the concept of “deemed dividend” under section 2(22)(e) postulates two factors viz., whether the payment was a loan and whether on the date of payment, there existed accumulated profits and that, these two factors have to be correlated”. In that case, the Supreme Court has found that the Appellate Tribunal had done that exercise and therefore, the High Court ought not to have disturbed the finding of fact arrived at by the Appellate Tribunal.
11. In the present case, admittedly, the order dated 30.09.2005 passed by the Assessing Officer appears to be skeleton in nature viz., he has not even applied his mind to the materials available on record before passing such an order. Therefore, the Commissioner, suo motu, exercising the powers conferred on him under section 263 of the Act, revised the order of assessment passed by the Assessing Officer. However, learned counsel appearing for the assessee submitted that the Commissioner may be directed to re-consider the matter afresh, without in any way being influenced by any observation made by him in the earlier order of revision, having regard to the fact that the appeal filed by the assessee against the revised assessment order is pending consideration before the Commissioner of Income Tax (Appeals). Therefore, having regard to the said request made by the learned counsel for the assessee, without expressing any opinion on the merits of the case, we consider it appropriate to set aside the order passed by the Tribunal and remand the matter back to the Commissioner of Income Tax (A) with a direction to him to re-consider the matter afresh in the light of the Supreme Court decision referred to above and without in any way being influenced either by any observation made by him in the earlier order of revision or any observation made by us in this judgment and to pass appropriate orders in accordance with law. . No costs.