ITO, CHENNAI V. Veeyan Associates, CHENNAI

ITA 1150/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4418 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 13-03-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Keywords: Deemed dividend

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . . . , .. ' #$, & '( BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.1150/MDS/2016 * +* / ASSESSMENT YEAR : 2010-11 THE INCOME TAX OFFICER, NON CORPORATE WARD 14(4), CHENNAI. V. M/S VEEYAN ASSOCIATES, KASI ARCADE, 1 ST FLOOR, NO.116/22, SIR THIYAGARAYA ROAD, T. NAGAR, CHENNAI - 600 017. PAN : AAIFV 2054 M (-./ APPELLANT) (/0-./ RESPONDENT) -. 1 2 / APPELLANT BY : SHRI A.V. SREEKANTH, JCIT /0-. 1 2 / RESPONDENT BY : SH. PHILIP GEORGE, ADVOCATE ' 1 3& / DATE OF HEARING : 13.03.2017 45+ 1 3& / DATE OF PRONOUNCEMENT : 31.05.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) -14, CHENN AI, DATED 29.01.2016 AND PERTAINS TO ASSESSMENT YEAR 2010-11. 2 I.T.A. NO.1150/MDS/16 2. THE ONLY ISSUE ARISES FOR CONSIDERATION IS ADDIT ION MADE UNDER SECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). 3. SHRI A.V. SREEKANTH, THE LD. DEPARTMENTAL REPRES ENTATIVE, SUBMITTED THAT THE ASSESSEE IS A PARTNERSHIP FIRM. THE ASSESSEE- FIRM RECEIVED ` 2.55 CRORES FROM M/S VKC FOREX SERVICES PVT. LTD. THE PARTNERSHIP FIRM OF THE ASSESSEE CONSISTED OF O NE SHRI VENKATASUBRAMANI AND SHRI NAGESWARAN, BOTH HAVING 5 0% SHARES. SHRI VENKATASUBRAMANI AND SHRI NAGESWARAN ARE ALSO DIRECTORS IN M/S VKC FOREX SERVICES PVT. LTD. THE ASSESSING OFF ICER FOUND THAT THE PAYMENT OF ` 2.55 CRORES TO THE ASSESSEE BY M/S VKC FOREX SERVICES PVT. LTD. WAS FOR THE BENEFIT OF PARTNERS. THE PARTNERS ARE ALSO SHAREHOLDERS OF THE COMPANY. THE AMOUNT RECEI VED BY THE ASSESSEE WAS SHOWN AS UNSECURED LOAN IN THE ACCOUNT S OF THE FIRM. THE PARTNERSHIP FIRM BEING THE BENEFICIAL OWNER, TH E ASSESSING OFFICER FOUND THAT THE AMOUNT OF ` 2.55 CRORES TO THE ASSESSEE-FIRM IS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE AC T, HENCE, ACCORDING TO THE LD. D.R., THE SAME HAS TO BE ADDED TO THE INCOME OF THE ASSESSEE. 3 I.T.A. NO.1150/MDS/16 4. ON THE CONTRARY, SH. PHILIP GEORGE, THE LD.COUNS EL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE-FIRM RECEIVED ` 2.55 CRORES FROM M/S VKC FOREX SERVICES PVT. LTD. AS ADVANCE. THE PARTNERSHIP FIRM IS NOT A SHAREHOLDER IN M/S VKC FO REX SERVICES PVT. LTD. REFERRING TO THE ORDER OF THE CIT(APPEA LS), THE LD.COUNSEL SUBMITTED THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF THE SHAREHOLDER OF THE COMPANY AND NOT IN THE HA NDS OF THIRD PARTY. REFERRING TO THE JUDGMENT OF MADRAS HIGH CO URT IN PRINTWAVE SERVICES (P) LTD. V. CIT (373 ITR 665), THE LD.COUN SEL SUBMITTED THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HA NDS OF THE REGISTERED OR OWNER OF THE SHARES AND NOT IN THE HA NDS OF THE THIRD PARTY. THEREFORE, ACCORDING TO THE LD. COUNSEL, TH E CIT(APPEALS) HAS RIGHTLY DELETED THE ADDITION MADE BY THE ASSESS ING OFFICER. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 2( 22)(E) OF THE ACT WHICH READS AS FOLLOWS:- 2(22) DIVIDEND INCLUDES- (A) .. .. (B) .. .. .. .. .. .. .. .. (C) .. .. .. .. .. .. .. (D) .. .. .. .. .. .. .. 4 I.T.A. NO.1150/MDS/16 (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WH O IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITL ED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIG HT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN P ER CENT. OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFE RRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPAN Y ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE PO SSESSES ACCUMULATED PROFITS ; BUT DIVIDEND DOES NOT INCLUDE (I) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLA USE (C) OR SUB-CLAUSE (D) IN RESPECT OF ANY SHARE ISSUED FOR F ULL CASH CONSIDERATION, WHERE THE HOLDER OF THE SHARE IS NOT ENTITLED IN THE EVENT OF LIQUIDATION TO PARTICIPATE IN THE S URPLUS ASSETS ; (IA) A DISTRIBUTION MADE IN ACCORDANCE WITH SUB-CLA USE (C) OR SUB-CLAUSE (D) IN SO FAR AS SUCH DISTRIBUTION IS AT TRIBUTABLE TO THE CAPITALISED PROFITS OF THE COMPANY REPRESENTING BONUS SHARES ALLOTTED TO ITS EQUITY SHAREHOLDERS AFTER TH E 31ST DAY OF MARCH, 1964, AND BEFORE THE 1ST DAY OF APRIL, 1965 ; (II) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER OR T HE SAID CONCERN BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY ; (III) ANY DIVIDEND PAID BY A COMPANY WHICH IS SET O FF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PR EVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEA NING OF SUB-CLAUSE (E), TO THE EXTENT TO WHICH IT IS SO SET OFF ; 5 I.T.A. NO.1150/MDS/16 (IV) ANY PAYMENT MADE BY A COMPANY ON PURCHASE OF I TS OWN SHARES FROM A SHAREHOLDER IN ACCORDANCE WITH THE PR OVISIONS OF SECTION 77A OF THE COMPANIES ACT, 1956 (1 OF 1956) ; (V) ANY DISTRIBUTION OF SHARES PURSUANT TO A DEMERG ER BY THE RESULTING COMPANY TO THE SHAREHOLDERS OF THE DEMERG ED COMPANY (WHETHER OR NOT THERE IS A REDUCTION OF CAP ITAL IN THE DEMERGED COMPANY). EXPLANATION 1. THE EXPRESSION ACCUMULATED PROFITS, WHEREVER IT OCCURS IN THIS CLAUSE, SHALL NOT INCLUD E CAPITAL GAINS ARISING BEFORE THE 1ST DAY OF APRIL, 1946, OR AF TER THE 31ST DAY OF MARCH, 1948, AND BEFORE THE 1ST DAY OF APRI L, 1956 ; EXPLANATION 2. THE EXPRESSION ACCUMULATED PROFITS, IN SUB-CLAUSES (A), (B), (D) AND (E), SHALL INCLUDE AL L PROFITS OF THE COMPANY UP TO THE DATE OF DISTRIBUTION OR PAYMENT R EFERRED TO IN THOSE SUB-CLAUSES, AND IN SUB-CLAUSE (C) SHAL L INCLUDE ALL PROFITS OF THE COMPANY UP TO THE DATE OF LIQUIDATIO N, BUT SHALL NOT, WHERE THE LIQUIDATION IS CONSEQUENT ON THE COM PULSORY ACQUISITION OF ITS UNDERTAKING BY THE GOVERNMENT OR A CORPORATION OWNED OR CONTROLLED BY THE GOVERNMENT U NDER ANY LAW FOR THE TIME BEING IN FORCE, INCLUDE ANY PR OFITS OF THE COMPANY PRIOR TO THREE SUCCESSIVE PREVIOUS YEARS IMMEDIATELY PRECEDING THE PREVIOUS YEAR IN WHICH SU CH ACQUISITION TOOK PLACE ; EXPLANATION 3. FOR THE PURPOSES OF THIS CLAUSE, (A) CONCERN MEANS A HINDU UNDIVIDED FAMILY, OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY ; (B) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY T IME DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LES S THAN TWENTY PER CENT. OF THE INCOME OF SUCH CONCERN ; 6. A BARE READING OF ABOVE PROVISIONS SHOWS THAT IF ANY PAYMENT WAS MADE BY WAY OF ADVANCE OR LOAN TO A SHA REHOLDER OR 6 I.T.A. NO.1150/MDS/16 TO ANY CONCERN IN WHICH THE SHAREHOLDER HAS A SUBST ANTIAL INTEREST, OR THE PAYMENT FOR THE INDIVIDUAL BENEFIT OF SUCH S HAREHOLDER, THE SAME SHALL BE TREATED AS DEEMED DIVIDEND TO THE EXT ENT OF THE ACCUMULATED PROFIT OF THE COMPANY. THE PAYMENT OF ADVANCE BY M/S VKC FOREX SERVICES PVT. LTD. TO THE ASSESSEE-FI RM IS NOT IN DISPUTE. THE ONLY CONTENTION OF THE ASSESSEE IS TH AT IF AT ALL THERE WAS ANY DEEMED DIVIDEND, IT HAS TO BE ASSESSED ONLY IN THE HANDS OF REGISTERED SHAREHOLDER AND THE BENEFICIAL SHAREH OLDER AND NOT IN THE HANDS OF THE ASSESSEE-FIRM. 7. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF D ELHI HIGH COURT IN CIT V. NATIONAL TRAVEL SERVICES IN ITA NO. 223 OF 2010, THE DELHI HIGH COURT HAS OBSERVED AS FOLLOWS AT PARA 21 OF ITS JUDGMENT:- 21. NO DOUBT, WHEN SECTION 2(22)(E) OF THE ACT ENACTS A DEEMING PROVISION, IT HAS TO BE STRICTLY CONSTRUED. AT THE SAME TIME, IT IS ALSO TRITE THAT SUCH A DEEMING PRO VISION HAS TO BE TAKEN TO ITS LOGICAL CONCLUSION. IF THE PART NERSHIP FIRM WHICH HAS PURCHASED THE SHARES IS NOT TREATED AS SHAREHOLDER MERELY BECAUSE THE SHARES WERE PURCHASE D IN THE NAME OF THE PARTNERS, THAT TOO BECAUSE OF THE L EGAL COMPULSION THAT SHARES COULD NOT BE ALLOTTED TO THE SAID PARTNERSHIP FIRM WHICH IS A NON LEGAL ENTITY, IT WO ULD BE IMPOSSIBLE FOR SUCH A CONDITION TO BE ITA 223/2010, 219/2010, 1204/2010, 309/2011 FULFILLED. THAT IS NOT THE PURPOSE OF LAW. THE PARTNERSHIP FIRM IS SYNONYM OF THE PARTNERS. AS PER THE CIRCULAR ISSUED BY THE SEBI DA TED 7 I.T.A. NO.1150/MDS/16 13 TH MARCH, 1975 INTERPRETING SECTION 187(C) OF THE COMPANIES ACT, RELIED BY THE LD.COUNSEL FOR THE ASS ESSEE HIMSELF, A PARTNERSHIP FIRM IS A NOT A PERSON CAPAB LE OF BEING A MEMBER WITHIN THE MEANING OF SECTION 47 OF TH E COMPANIES ACT. IT IS FURTHER EXPLAINED THAT SINCE A PARTNERSHIP FIRM IS NOT A LEGAL ENTITY BY ITSELF BU T ONLY A COMPENDIOUS WAY OF DESCRIBING THE PARTNERS CONSTITU TING THE FIRM, IT IS NECESSARY THAT THE NAMES OF ALL THE MEMBERS OF THE PARTNERSHIP FIRM SHOULD BE ENTERED IN THE RE GISTER OF MEMBERS. OBVIOUSLY THEN, WITH THE PURCHASE OF S HARES BY THE FIRM IN THE NAME OF ITS PARTNERS, IT IS THE FIRM WHICH IS TO BE TREATED AS SHAREHOLDER FOR THE PURPO SES OF SECTION 2(22)(E) OF THE ACT. 8. IN VIEW OF THE ABOVE OBSERVATION OF THE DELHI HI GH COURT, IN CASE A PARTNERSHIP FIRM PURCHASES SHARES BY INVESTI NG ITS OWN FUNDS, THEN MERELY BECAUSE THE SHARES WOULD STAND I N THE NAME OF THE PARTNERS, IT CAN BE SAFELY RENDERED THAT THE FI RM IS TO BE TREATED AS SHAREHOLDER. HOWEVER, THE FACTS ARE NOT CLEAR F ROM THE MATERIAL AVAILABLE ON RECORD WHETHER THE ASSESSEE-FIRM PURCH ASED THE SHARES BY INVESTING ITS OWN FUNDS IN THE NAME OF PA RTNERS OR THE PARTNERS THEMSELVES PURCHASED THE SHARES OF M/S VKC FOREX SERVICES PVT. LTD. BY INVESTING THEIR OWN FUNDS. T HEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATT ER NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER AND BRING ON RECORD WHETHER THE ASSESSEE-FIRM IS THE SHAREHOLDER AS HELD BY DEL HI HIGH COURT IN NATIONAL TRAVEL SERVICES (SUPRA) OR THE INDIVIDUAL PARTNERS OF THE FIRM ARE THE SHAREHOLDERS. 8 I.T.A. NO.1150/MDS/16 9. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF M ADRAS HIGH COURT IN PRINTWAVE SERVICES (P) LTD. (SUPRA). THE MADRAS HIGH COURT FOUND THAT THE DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT HAS TO BE ASSESSED ONLY IN THE HANDS OF THE REG ISTERED OR BENEFICIAL OWNER OF THE SHARES OF THE COMPANY. IN VIEW OF ABOVE, IT NEEDS TO BE FOUND OUT WHETHER THE INDIVIDUAL PARTNE RS OF THE ASSESSEE-COMPANY ARE THE SHAREHOLDERS OR THE ASSESS EE-FIRM IS THE SHAREHOLDER. ACCORDINGLY, THE ORDERS OF THE AUTHOR ITIES BELOW ARE SET ASIDE. THE ENTIRE ISSUE IS REMITTED BACK TO TH E FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL RE- EXAMINE THE MATTER AND FIND OUT WHETHER THE PARTNERSHIP FIRM PU RCHASED THE SHARES IN THE NAME OF INDIVIDUALS OR THE INDIVIDUAL PARTNERS HAVE PURCHASED THE SHARES BY INVESTING THEIR OWN FUNDS. THEREAFTER THE ASSESSING OFFICER SHALL DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW, AFTER GIVING A REASONABLE OPPORTUNITY TO THE A SSESSEE. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 9 I.T.A. NO.1150/MDS/16 ORDER PRONOUNCED ON 31 ST MAY, 2017 AT CHENNAI. SD/- SD/- ( . . ' #$ ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESAN) & / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 7 /DATED, THE 31 ST MAY, 2017. KRI. 1 /3#8 98+3 /COPY TO: 1. -. /APPELLANT 2. /0-. /RESPONDENT 3. ' :3 () /CIT(A)-14, CHENNAI 4. PRINCIPAL CIT-10, CHENNAI 5. 8; /3 /DR 6. * < /GF.