Karnataka Turned Components Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 1050/BANG/2011

• Counselvise Citation: 105021114 RSA 2011
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 11-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE JT
• Assessee Lawyers: NAGINCHAND KHINCHA
• Keywords: Depreciation; Deemed dividend; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.1050/BANG/2011 ASSESSMENT YEAR : 2007-08 KARNATAKA TURNED COMPONENTS PVT. LTD., 474/1, 4 TH CROSS, 8 TH BLOCK, KORAMANGALA, BANGALORE 560 095. PAN : AABCK 0584F VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI NAGINCHAND KHINCHA, C.A. RESPONDENT BY : SMT. SUSAN THOMAS JOSE, JT. CIT(DR) DATE OF HEARING : 10.10.2012 DATE OF PRONOUNCEMENT : 12.10.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 08.08.2011 OF THE CIT(APPEALS)-I, BANGALORE FOR THE ASSESSMENT YEAR 2007-08. 2. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR N O ADJUDICATION. GROUND NO.2 RAISED BY THE ASSESSEE IS WITH REGARD T O THE ACTION OF THE CIT(A) IN TREATING THE EXPENSES INCURRED ON PURCHAS E OF COMPUTER SOFTWARE AS CAPITAL IN NATURE AND ALLOWING DEPRECIATION THER EON @ 60%, AS AGAINST ITA NO. 1050/BANG/2011 PAGE 2 OF 8 THE CLAIM OF THE ASSESSEE THAT THE ENTIRE EXPENDITU RE SHOULD BE TREATED AS REVENUE EXPENDITURE. 3. ON THE ABOVE ISSUE, IT IS NO DOUBT TRUE THAT THE CIT(A) HAS NOT CONSIDERED THE ACTUAL NATURE OF THE SOFTWARE AND TH E ROLE IT PLAYS IN THE BUSINESS OF THE ASSESSEE. NEVERTHELESS, CONSIDERIN G THE QUANTUM OF THE AMOUNT IN DISPUTE, WE ARE OF THE VIEW THAT THAT THE ORDER OF THE CIT(A) IS TO BE UPHELD WITHOUT GOING INTO THE NATURE OF SOFTWARE AND THE ROLE IT PLAYS IN THE BUSINESS OF THE ASSESSEE. GROUND NO.2 IS THERE FORE DISMISSED. 4. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FOLL OWS:- 3. THE AUTHORITIES BELOW HAVE ERRED IN TAXING A SU M OF RS.72,90,352 GIVEN BY KARNATAKA AUTOMATS PVT. LTD. TO THE APPELLANT AS DEEMED DIVIDEND BY INVOKING THE PROVIS IONS OF SECTION 2(22)(E) OF THE I.T. ACT. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE PROVISIONS OF SECTION 2(22)(E) ARE NOT APPLICABLE AT ALL AND THE ADDITION MADE AS DEEMED DIVIDEND IS TO BE DELETED. 5. THE FACTS IN THIS REGARD ARE THAT THE ASSESSEE C OMPANY RECEIVED A SUM OF Q 72,90,352 AS LOAN FROM A COMPANY, M/S. KARNATAKA A UTOMATS PVT. LTD. THE ASSESSEE DID NOT HOLD SHARES IN KARNATAK A AUTOMATS PVT. LTD. HOWEVER, ONE OF THE DIRECTORS OF THE ASSESSEE VIZ., SHRI RAJKUMAR HELD 46.25% SHARE HOLDING IN THE ASSESSEE COMPANY AND AL SO 46.95% SHARE HOLDING IN KARNATAKA AUTOMATS PVT. LTD. SIMILARLY ANOTHER DIRECTOR BY NAME SHRI G. SATYAKUMAR WAS HOLDING 45.75% SHARE HO LDING IN KARNATAKA AUTOMATS PVT. LTD. AND 46.25% SHARE HOLDING IN THE ASSESSEE COMPANY. THE AO INVOKED THE PROVISIONS OF SECTION 2(22)(E) O F THE ACT AND TAXED THE RECEIPT BY THE ASSESSEE OF LOAN AS DEEMED DIVIDEND. IN SO TAXING THE LOAN AS DEEMED DIVIDEND, THE AO RELIED ON THE FACT THAT THE ASSESSEE IS A ITA NO. 1050/BANG/2011 PAGE 3 OF 8 CONCERN IN WHICH SUBSTANTIAL SHARE HOLDING IS HELD BY A PERSON, WHO ALSO IS A SUBSTANTIAL SHAREHOLDER IN LENDER COMPANY. 6. BEFORE THE CIT(APPEALS), IT WAS SUBMITTED THAT T HE ASSESSEE WAS NOT A SHAREHOLDER IN KARNATAKA AUTOMATS PVT. LTD. AND T O INVOKE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, IT WAS NECESSARY TH AT THE ASSESSEE MUST BE A SHAREHOLDER IN THE LENDER COMPANY. APART FROM THE ABOVE, THE ASSESSEE ALSO SUBMITTED THAT THE AMOUNTS GIVEN BY KARNATAKA AUTOMATS PVT. LTD. TO THE ASSESSEE WAS NEITHER A LOAN NOR AN ADVANCE AND IT WAS A TRANSACTION ON CURRENT ACCOUNT BASIS BETWEEN THE TWO COMPANIES. THE CIT(A) DID NOT ADJUDICATE ON THE FIRST ARGUMENT, BUT CONFIRMED THE ORDER OF THE AO ON THE BASIS OF SECOND ARGUMENT RAISED BY THE ASSESSEE. T HE FINDINGS OF THE CIT(A) IN THIS REGARD WERE AS FOLLOWS:- 9. I HAVE GONE THROUGH THE RIVAL SUBMISSION. I FIN D THE A.R. ARGUES THAT - (I) THE COMPANY M/S. KARNATAKA AUTOMATS PVT. LTD., IN SHORT KAP NOT A SHAREHOLDER IN THE APPELLANT COMPANY. AND (II) SECONDLY THE AMOUNT GIVEN BY THE APPELLANT TO M/S.KAP, CANNOT BE CHARACTERIZED AS LOAN. THEREFORE PROVISIONS OF S.2(22)(E) OF I.T.ACT IS NO T APPLICABLE TO THE FACTS OF THE SITUATION TO JUSTIFY THE ADDITION. HOWEVER, I FIND THE AR HAS NOT DISPUTED THE FINDING S OF THE A.O. THAT THE DIRECTORS OF THE APPELLANT COMPANY ARE ALS O SHAREHOLDERS OF KAP HAVING SUBSTANTIAL VOTING POWER. THEREFORE I F IT IS PROVED THAT THE AMOUNT GIVEN BY THE APPELLANT KAP IS LOAN THAN THE ADDITION WOULD STAND JUSTIFIED. THE AR OF THE APPE LLANT PLEADS THAT THE TRANSACTIONS ARE ON CURRENT ACCOUNT AS IS EVIDENCED THAT NO INTEREST HAS BEEN CHARGED THEREON. I CONSIDER TH E PRESUMPTION THAT CURRENT ACCOUNT TRANSACTIONS CANNOT BE CHARACT ERIZED AS LOAN OR ADVANCE HAS NO LEGS TO STAND. LOAN MAY BE WITH O R WITHOUT INTEREST. BUT IT ALWAYS PRESUPPOSES TWO PARTIES VIZ ., CREDITOR AND DEBTOR WHEREIN THE DEBTOR REPAYS THE LOAN PERIODICA LLY AGREED ITA NO. 1050/BANG/2011 PAGE 4 OF 8 BETWEEN THEM OR ON DEMAND. THUS THE BASIC FACTOR IS NOT PAYMENT OF INTEREST BUT THE CHARACTERISTICS OF REPAYMENT OF THE LOAN. HERE THERE IS NO DENIAL THAT SUCH AMOUNT HAD BEEN REPAID SUBSEQUENTLY AND THEREFORE THERE IS NO HESITATION IN MY PART TO HOLD THE PAYMENTS MADE TO KAP LTD, BY THE APPELLANT AS LOAN AND THUS THE PROVISIONS OF S.2(22)(E) OF I.T.ACT IS APPLICABLE T O ROPE IN THE SAME AS TAXABLE INCOME OF THE APPELLANT UNDER THE D EEMING PROVISION OF S.2(22)(E) OF I.T.ACT. HENCE ADDITION IS FOUND JUSTIFIED GROUNDS OF APPEAL IS DISMISSED. 7. AT THE TIME OF HEARING OF THIS APPEAL, IT WAS BR OUGHT TO OUR NOTICE THAT SPECIAL BENCH OF THE ITAT IN THE CASE OF BHAUMIK COLOUR (P.) LTD. 118 ITD 1 (MUM) (SB) HAS TAKEN A VIEW THAT ADDITION ON ACCOUNT OF DEEME D DIVIDEND CANNOT BE MADE IN THE HANDS OF A PERSON, W HO IS NOT A SHAREHOLDER OF THE LENDER COMPANY. THE AFORESAID V IEW HAS SINCE BEEN CONFIRMED BY THE HONBLE DELHI HIGH COURT IN THE CA SE OF CIT V. ANKITECH (P) LTD. 199 TAXMANN 341 (DEL) AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. UNIVERSAL MEDICARE (P) LTD. 324 ITR 263 (BOM) . 8. THE LD. DR HOWEVER SUBMITTED BEFORE US THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. NATIONAL TRAVELS SERVICES, 202 TAXMANN 327 (DEL) HAS TAKEN A CONTRARY VIEW. THE FACTS IN THE CASE OF NATIONAL TRAVELS SERVICES (SUPRA) WERE THAT THE ASSESSEE WAS A PARTNERSHIP FIRM CONSISTING OF THREE PARTNERS. THE FIRM HAD TAKEN A LOAN FROM M/S. JET AIR PVT. LTD. THE FIRM HELD 48.18% OF THE SHARES OF J ET AIR PVT. LTD., NOT IN ITS NAME, BUT THE SHARES WERE PURCHASED IN THE NAME OF TWO PARTNERS. IN THE ABOVE FACTUAL BACKGROUND, THE QUESTION BEFORE THE H ONBLE DELHI HIGH ITA NO. 1050/BANG/2011 PAGE 5 OF 8 COURT WAS AS TO WHETHER A DEEMING PROVISION U/S. 2( 22)(E) OF THE ACT CAN BE INVOKED TO BRING TO TAX THE LOAN GIVEN BY JET AI R PVT. LTD. TO THE ASSESSEE AS DEEMED DIVIDEND. THE HONBLE DELHI HIGH COURT H ELD AS FOLLOWS:- THE EXPRESSION 'BEING A PERSON AS A BENEFICIAL OWN ER OF SHARES' QUALIFIES THE WORD SHAREHOLDER. THUS TO ATTRACT T HE PROVISIONS OF S. 2(22)(E) THE PERSON TO WHOM THE LOAN OR ADVANCE IS MADE SHOULD BE A SHAREHOLDER AS WELL AS BENEFICIAL OWNER. THIS BRING S TO THE MORE IMPORTANT ISSUE VIZ. WHETHER THE ASSESSEE FIRM CAN BE TREATED AS A SHAREHOLDER HAVING PURCHASED SHARES THROUGH ITS PAR TNERS IN THE COMPANY WHICH HAS PAID THE LOANS OR IS IT NECESSARY THAT A SHAREHOLDER HAS TO BE A REGISTERED SHAREHOLDER. IF THE CONTEN TION OF THE ASSESSEE IS ACCEPTED, IN NO CASE A PARTNERSHIP FIRM CAN COME WI THIN THE MISCHIEF OF S. 2(22)(E) BECAUSE OF THE REASON THAT SHARES WOULD BE PURCHASED BY THE FIRM IN THE NAME OF ITS PARTNERS AS THE FIRM IS NOT HAVING ANY SEPARATE ENTITY OF ITS OWN. WITH THE NAME OF THE PA RTNER ENTERING INTO THE REGISTER OF MEMBERS OF THE COMPANY AS SHAREHOLD ER, THE SAID PARTNER SHALL BE THE SHAREHOLDER IN THE RECORDS O F THE COMPANY BUT NOT THE BENEFICIAL OWNER AS BENEFICIAL OWNER IS THE P ARTNERSHIP FIRM. THIS WOULD MEAN THAT THE LOAN OR ADVANCE GIVEN BY THE CO MPANY WOULD NEVER BE TREATED AS DEEMED DIVIDEND EITHER IN THE H ANDS OF THE PARTNERS OR IN THE HANDS OF PARTNERSHIP FIRM. IN TH IS WAY THE VERY PURPOSE FOR WHICH THIS PROVISION WAS ENACTED WOULD GET DEFEATED. THE OBJECT BEHIND THIS PROVISION IS SUCCINCTLY STATED I N THE CIRCULAR NO. 495 OF 22ND SEPT., 1987 PARTICULARLY IN THE EXPLANATORY NOTES TO FINANCE ACT, 1987 WHEN THIS PROVISION WAS AMENDEDRAMESHWAR LAL SANWARMAL VS. CIT (1980) 14 CTR (SC) 372 : (1980) 122 ITR 1 ( SC) AND CIT VS. C.P. SARATHY MUDALIAR (1972) 83 ITR 170 (SC) RELIED ON. (PARAS 18 & 19) NO DOUBT, WHEN S. 2(22)(E) ENACTS A DEEMING PROVISI ON, IT HAS TO BE STRICTLY CONSTRUED. AT THE SAME TIME, IT IS ALSO TR ITE THAT SUCH A DEEMING PROVISION HAS TO BE TAKEN TO ITS LOGICAL CONCLUSION . IF THE PARTNERSHIP FIRM WHICH HAS PURCHASED THE SHARES IS NOT TREATED AS SHAREHOLDER MERELY BECAUSE THE SHARES WERE PURCHASED IN THE NAM E OF THE PARTNERS, THAT TOO BECAUSE OF THE LEGAL COMPULSION THAT SHARE S COULD NOT BE ALLOTTED TO THE SAID PARTNERSHIP FIRM WHICH IS A NO N-LEGAL ENTITY, IT WOULD BE IMPOSSIBLE FOR SUCH A CONDITION TO BE FULFILLED. THAT IS NOT THE PURPOSE OF LAW. THE PARTNERSHIP FIRM IS SYNONYM OF THE PART NERS. AS PER THE CIRCULAR ISSUED BY THE SEBI DT. 13TH MARCH, 1975 IN TERPRETING S. 187C OF THE COMPANIES ACT, RELIED BY THE LEARNED COUNSEL FO R THE ASSESSEE HIMSELF, A PARTNERSHIP FIRM IS NOT A PERSON CAPABLE OF BEING A MEMBER WITHIN THE MEANING OF S. 47 OF THE COMPANIES ACT. I T IS FURTHER EXPLAINED THAT SINCE A PARTNERSHIP FIRM IS NOT A LE GAL ENTITY BY ITSELF BUT ONLY A COMPENDIOUS WAY OF DESCRIBING THE PARTNERS C ONSTITUTING THE FIRM, IT IS NECESSARY THAT THE NAMES OF ALL THE MEM BERS OF THE PARTNERSHIP FIRM SHOULD BE ENTERED IN THE REGISTER OF MEMBERS. OBVIOUSLY THEN, WITH THE PURCHASE OF SHARES BY THE FIRM IN THE NAME OF ITS PARTNERS, IT IS THE FIRM WHICH IS TO BE TREATED AS SHAREHOLDER FOR THE PURPOSES OF S. 2(22)(E). THEREFORE FOR THE PURPOSE OF S. 2(22)(E) PARTNERSHIP FIRM IS TO BE TREATED AS THE SHAREHOLDE R AND IT IS NOT NECESSARY THAT IT HAS TO BE 'REGISTERED SHAREHOLDER '. (PARAS 21 & 23) ITA NO. 1050/BANG/2011 PAGE 6 OF 8 THE COURT FINALLY CONCLUDED THAT PARTNERSHIP FIRM W HICH HAS PURCHASED SHARES OF COMPANY THROUGH ITS PARTNERS, THOUGH NOT REGISTERED SHAREHOLDER, BEING BENEFICIAL OWNER, IS TO BE TREATED AS SHAREHO LDER FOR PURPOSE OF S. 2(22)(E). 9. THE LD. DR SUBMITTED BEFORE US THAT THE PROVISIO NS OF SECTION 2(22)(E) OF THE ACT CAN BE EASILY CIRCUMVENTED BY A N ASSESSEE BY TAKING A PLEA THAT IT WAS NOT A SHAREHOLDER IN THE LENDER CO MPANY, BUT IN REALITY THE COMMON DIRECTORS WOULD BE CONTROLLING THE AFFAIRS O F BOTH THE COMPANIES AND FRUSTRATING THE INTENT AND SPIRIT OF THE PROVIS IONS OF SECTION 2(22)(E) OF THE ACT. 10. THE LD. COUNSEL, ON THE OTHER HAND, SUBMITTED B EFORE US THAT THE LENDER IN THE PRESENT CASE IS A COMPANY AND THEREFO RE THE FACTUAL SITUATION AS IT PREVAILED IN THE CASE DECIDED BY THE HONBLE DELHI HIGH COURT VIZ., NATIONAL TRAVELS SERVICES (SUPRA) WILL NOT BE APPLICABLE. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. WE A RE OF THE VIEW THAT THE FACTUAL BACKGROUND IN WHICH THE HONBLE DELHI H IGH COURT DECIDED THE CASE OF NATIONAL TRAVELS SERVICES (SUPRA) ARE MATERIALLY DIFFERENT FROM THE FACTS OF THE PRESENT CASE. IN THE PRESENT CASE , THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND M/S. KARNATAKA AUTOMATS PVT. LTD. IS ALSO A PRIVATE LIMITED COMPANY. IN THE CASE OF NATIONAL TRAVELS SERVICES (SUPRA) , THE ASSESSEE TOOK A LOAN FROM A PRIVATE LIMITED C OMPANY. THE ASSESSEE FIRM HAD INVESTED IN THE SHARES OF THE PRI VATE LIMITED COMPANY IN THE NAME OF TWO OF ITS DIRECTORS. THE HONBLE COUR T IN THE AFORESAID CIRCUMSTANCES CAME TO THE CONCLUSION THAT A PARTNER SHIP FIRM IS NOT A ITA NO. 1050/BANG/2011 PAGE 7 OF 8 PERSON CAPABLE OF BEING A MEMBER IN A LIMITED COMPA NY AND THEREFORE THE SHARES WERE PURCHASED BY THE FIRM IN THE NAME OF TH E PARTNERS. THE HONBLE COURT THEREFORE CAME TO THE CONCLUSION THAT THE PARTNERSHIP FIRM WAS A BENEFICIARY OWNER AND THE FACT IT WAS NOT A R EGISTERED OWNER WAS NOT MATERIAL. THE HONBLE COURT THEREFORE CARVED OUT A N EXCEPTION TO ITS OWN DECISION RENDERED IN THE CASE OF ANKITECH (P) LTD. (SUPRA) . IN OUR OPINION, THE FACTS IN THE PRESENT CASE ARE MATERIAL LY DIFFERENT AND IT IS NOT POSSIBLE TO HOLD IN THE PRESENT CASE THAT THE ASSES SEE WAS THE BENEFICIARY OWNER OF THE SHARES HELD BY ITS TWO DIRECTORS IN KA RNATAKA AUTOMATS PVT. LTD. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THA T THE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF ANKITECH (P) LTD. (SUPRA) WILL BE APPLICABLE TO THE FACTS OF THE PRESENT CASE. SI NCE THE ASSESSEE WAS NOT A SHAREHOLDER IN KARNATAKA AUTOMATS PVT. LTD., THE DEEMING PROVISION OF SECTION 2(22)(E) OF THE ACT ARE NOT ATTRACTED. WE THEREFORE HOLD THAT THE ADDITION MADE BY INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT CANNOT BE SUSTAINED. THE SAME IS THEREFORE DIRECTE D TO BE DELETED. GROUND NO.3 RAISED BY THE ASSESSEE IS ALLOWED. 12. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF OCTOBER, 2012. SD/- SD/- ( JASON P.BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMB ER BANGALORE, DATED, THE 12 TH OCTOBER , 2012. DS/- ITA NO. 1050/BANG/2011 PAGE 8 OF 8 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.