ACIT vs M/s. Mohan Export (India) Pvt. Ltd.

PER MANISH AGARWAL, AM :

The present appeal is filed by Revenue against the order dated 05.11.2021 passed by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-6/10200/2018-19 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 25.12.2016 passed u/s 143(3) of the Act pertaining to Assessment Year 2016-17.

At the time of hearing, no one appeared on behalf of the assessee. From the order sheet entry, it is observed that on earlier occasions in most of the hearings, none appeared on behalf of the assessee. However, on some occasions, same AR from the assessee had appeared however, had sought adjournment on every occasion. It is further observed that in some occasions, notice of hearing issued returned unserved though the date was noted by the assessee or their representative counsel. Under these circumstances, we proceed to decide the appeal in the absence of any representation on behalf of the assessee as it is an old appeal and more than 20 adjournments/dates were allowed in the instant case to both the parties.

Brief facts of the case are that the assessee has e-filed the return of income, declaring total income of INR 9,28,60,077/- on 14.10.2016 under normal tax provision and book profit of INR 10,96,45,676/- was declared u/s 115JJB of the Act. The assessee is engaged in the business of export of garments. The case of the assessee was selected for scrutiny under CASS and notice u/s 143(2) on 27.09.2017 followed by notice u/s 142(1) of the Act alongwith questionnaires issued from time to time. After considering the submissions made by the assessee, assessment order was passed u/s 143(3) of the Act dated 25.12.2018 by making disallowance of out of foreign travelling expenses of INR 2.50 crores; addition u/s 14A of INR 1,32,69,325/- and addition on account of deemed dividend u/s 2(22)(e) of the Act of INR 1,29,29,426/-. Accordingly, total income of the assessee was assessed at INR 4,16,61,330/- and book profits is also assessed at INR 12,76,39,225/-.

Against the said order, the assessee preferred an appeal before Ld. CIT(A) who vide impugned order dated 05.11.2021, has partly allowed the appeal of the assessee.

Aggrieved by the said order, the Revenue is in appeal before the Tribunal by taking following grounds of appeal:

Heard the contention of Ld. Sr. DR and perused the material on record. Ground of appeal No.1 raised by the Revenue is with respect to the deletion of INR 2.50 crores, made out of disallowance on foreign travelling expenses. From the perusal of the order of Ld. CIT(A), it is observed that Ld. CIT(A) vide para No. 6.1.6 of its order has reduced the disallowance to INR 64,22,868/- by granting the relief to the assessee of INR 1,85,77,713/- however, the Revenue is in its Grounds of appeal has taken incorrect amount of INR 2.50 crores as deleted by Ld. CIT(A). From the perusal of the order of AO, it is observed that the assessee has claimed total foreign travel expenses of INR 8,13,82,214/- as against the total turnover of INR 16,03,56,429/- and itself disallowed a sum of INR 2.50 crores in the computation of income. The AO by observing that the foreign travelling expenses claimed were substantially high as compared to turnover and further the foreign visits of the Directors to those countries where neither any business transactions nor any office was situated. Therefore, the AO out of the total foreign travelling expenses claimed at INR 6,42,22,868/- incurred on the traveling by the Directors has held the expenses of INR 1,42,22,868/- as reasonable and remaining was disallowed. Since the assessee itself has disallowed INR 2.50 crores and the remaining amount of INR 2.50 crores was added to the total income. Ld. CIT(A) though partly accepted the allegations of the AO however, has restricted the disallowance to INR 64,22,287/- in addition to the disallowance of INR 2.50 crores suo-moto made by the assessee and accordingly total disallowance out of foreign travelling expenses was upheld at INR 3,14,22,287/-. While doing so, Ld. CIT(A) refer the judgements of preceding assessment years in the case of the assessee itself where 10% of the total foreign travelling expenses were disallowed by the AO/upheld in appellate proceedings however, looking to the facts that this year, the turnover has reduced substantially but the foreign travelling expenses incurred were increased abnormally, therefore, ld. CIT(A) has sustained further disallowance of INR 64,22,287/-.

Considering the overall facts of the case and the nature of expenses incurred and further looking to the fact that expenses were incurred for visit of Directors to those countries where no business transactions were carried out during the year. With respect to the claim of the assessee that the buyers preferred to meet at those places, we find that Ld. CIT(A) has allowed sufficient relief on this score. Accordingly, we find no error in the order of Ld. CIT(A) who has confirmed the disallowance of INR 64,22,287/- in addition to INR 2.50 crores already disallowed and offered for tax by the assessee itself. Accordingly, Ground of appeal No.1 of the Revenue is dismissed.

Now coming to Ground of appeal No.2 raised by the Revenue which is in respect to the deletion of addition of INR 1,32,69,325/-under section 14A of the Act r.w. Rule 8D(2) of the Income Tax Rules, 1962.

The AO observed that the assessee has paid interest of INR 8,86,01,164/- and average investment made in the equity shares was of INR 50,05,65,821/-. Though the assessee itself has made disallowance of INR 47,24,224/- u/s 14A of the Act being 1% of the average value of investment however, the AO observed that assessee has not made proportionate disallowance of the interest paid and therefore, as per Rule 8D(ii), he further disallowed interest payment and after reducing the disallowance already made by the assessee out of the total sum worked out as per Rule 8D(ii), the net disallowance of INR 1,32,69,325/- was made by the AO. Ld. CIT(A) observed that no fresh investments were made in the year under appeal and when investments were made in the preceding years, no borrowed funds were involved. He further observed that assessee has sufficient interest free funds in the shape of Share Capital, Reserves and interest free advance of INR 161.47 crores and further by following the judgement of Co-ordinate Bench by following the judgement of Co-ordinate Bench in assessee’s own case in ITA No.6289/Del/2016 dated 05.04.2018 for AY 2012-13 and in ITA No.3571/Del/2011 dated 02.03.2012 for AY 2008-09 had deleted the addition so made by the AO. The relevant observations of Ld.CIT(A) in Para 6.2.3 to 6.2.7 are as under:-

It is observed that the assessee has made the investments in the equity shares in the year 2011-12 of INR 7554.46 Lakhs and had no borrowed funds when the investments were made. The said investment stood reduced to INR 4825.92 Lakhs during the year under appeal and assessee further claimed LTCG of INR 20,49,35,385/- on the sale of shares during the year under appeal and claimed the same as exempt u/s 10(38) of the Act.

All these facts were duly examined by Ld. CIT(A) while deleting the disallowance made by the AO. Looking to the entirety of the facts and by following the decisions of the coordinate bench of Tribunal in assessee’s own case, in our considered opinion, when the assessee has already disallowed INR 47,24,224/- which is more than the disallowance worked out under Rule 8D(iii) and therefore, we find no error in the order of Ld.CIT(A) which is hereby, upheld. Ground of appeal No.1 raised by the Revenue is accordingly, dismissed.

Ground of appeal Nos. 3 & 4 raised by the Revenue are with respect to the deletion of addition of INR 1,29,29,426/- made u/s 2(22)(e) of the Act. The AO while making the addition has observed that the assessee company has received loan from M/s Mohan Energy Corporation Pvt. Ltd. wherein the Directors of the assessee company namely Shri Mohan Puri & Smt. Neeru Puri are holding capital of 68% & 29.40% respectively. Further both the directors are holding capital of 46.83% and 50% respectively in the assessee company. Therefore, the AO made the addition of loan of INR 1,29,29,426/- received from M/s. Mohan Energy Corporation Pvt. Ltd. as deemed dividend in the hands of the assessee company u/s 2(22)(e) of the Act. Ld. CIT(A) deleted the same by observing that the appellant company holds only 0.72% equity in M/s. Mohan Energy Corporation Pvt. Ltd. which is less than 10% stipulated share holding as specified in the Act. Further, the Ld. CIT(A) has followed the order of hon’ble Jurisdictional High Court in the case of Ankitech (P.) Ltd. reported in [2011] 11 taxmann.com 100 (Delhi) and deleted the addition. Ld.CIT(A) further observed that judgement of Hon’ble Delhi High Court in the case of Ankitech (P.) Ltd. (supra) has been confirmed by the Hon’ble Supreme Court in the case of CIT vs Madhur Housing & Development Co. reported in [2018] 93 taxmann.com 502 (SC) wherein it is held that the legal fiction created u/s 2(22)(e) of the Act under which definition of dividend only and it cannot be extended further for broadening concept of shareholders.

13 Before us, the arguments of the Revenue is that the Hon’ble Supreme Court in the case of National Travel Services vs CIT reported in [2018] 899 taxmann.com 332 (SC) has held that aforesaid judgement of Hon’ble Delhi High Court in the case if Ankitech (P.) Ltd. (supra) should be referred to Larger Bench and thus requested that the very basis of deleting the additions following the order of Hon’ble Delhi High Court by Ld.CIT(A) in the case of Ankitech P. Ltd. (supra) deserves to be reversed and addition made by AO be restored. This argument of the revenue is contrary to the fact as the judgement of Hon’ble Supreme Court in the case of National Travel Services vs CIT (supra) has never been referred to the Larger Bench as the assessee has opted under VSV Scheme, 2020 and therefore, the order of Hon’ble Supreme Court in the case of Madhur Housing & Development Co. (supra) upholding the judgement of Hon’ble Delhi High Court in Ankitech (P) Ltd (supra) is still the correct legal position. Even for the sake of argument if it is considered that the legal position as enunciated by Supreme Court in Madhur Housing (supra) has been diluted by National Travel Services (supra), it is only one of the two aspects of taxability of deemed dividend has been discussed and referred for larger Bench. The position that the deemed dividend can be taxed only in the hands of shareholder, has not been diluted as held by Madhur Housing (supra). It is reiterated that the reference to larger Bench only seeks to dilute, the controversy regarding, whether shareholder should be both registered and beneficial shareholder and not the settled position that dividend ultimately can be taxed only in the hands of shareholder, be it registered or beneficial not otherwise. Thus, to that extent the judgement in the case of Ankitech (P) Ltd (supra) still holds ground.

As observed above, the appellant company is holding 0.73% shareholding in M/s. Mohan Energy Corporation Pvt. Ltd. which is less than 10% shareholding to attract the provision to section 2(22)(e) of the Act and thus the loan received by the assessee cannot be treated as deemed dividend. Therefore, by respectfully following the judgment of Hon’ble Supreme Court in the case of Madhur Housing & development Co. (supra), we find no error in the order of Ld.CIT(A) in deleting the addition made u/s 2(22)(e) of the Act. Accordingly, Ground of appeal Nos. 3 & 4 raised by the Revenue are dismissed.

In the result, the appeal of the Revenue is dismissed.