Vital Industries India Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1184/CHNY/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4793 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 12-05-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MRS S VIJAYA PRABHA
• Assessee Lawyers: R SANKARANARAYANAN
• Keywords: Deemed dividend
• Section: 56; 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . , , BEFORE SHRI DUVVURU RL REDDY , JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NO. 1184/MDS/2017 / ASSESSMENT YEAR : 2012-13 M/S. VITAL INDUSTRIES INDIA PVT. LTD., NO. 26, LUZ CHURCH ROAD APPEALS -11, MYLAPORE, CHENNAI 600 034. [PAN: AANCS 5930K] VS. COMMISSIONER OF INCOME TAX, CORPORATE WARD 3(2), CHENNAI. ( / APPELLANT) ( / RESPONDENT) '( / APPELLANT BY : SHRI. R. SANKARANARAYANAN, CA +,'( / RESPONDENT BY : MRS. S. VIJAYAPRABHA, JCIT ( /DATE OF HEARING : 28.11.2017 ( /DATE OF PRONOUNCEMENT : 15.02.2018 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE FILED THIS APPEAL AGAINST THE ORDER O F COMMISSIONER OF INCOME TAX (APPEALS)-11, CHENNAI IN ITA NO. 205/15- 16 /CIT(A)-11 DATED 28.02.2017 FOR ASSESSMENT YEAR 2012-13. 2. DURING THE ASSESSMENT FOR AY 2012-13, THE AO FOUND THAT M/S. VITAL INDUSTRIES INDIA PVT. LTD., T HE ASSESSEE, RECEIVED A LOAN OF RS. :-2-: ITA NO. 1184/MDS/2017 1,57,89,726/- FROM M/S. MGM ENTERTAINMENTS PRIVATE LIMITED WITH WHOM ONE MR. MGM ANAND IS A COMMON SHAREHOLDER AND HE HAS SU BSTANTIAL INTEREST IN BOTH THE COMPANIES. I.E. 30% OF THE TOTAL SHARES IN MGM ENTERTAINMENTS PRIVATE LIMITED AND 70% OF THE SHARES IN M/S. VITAL INDUSTRIES INDIA PVT LIMITED. THE ASSESSEE'S CONTENTIONS THAT SECTION 2( 22)(E) IS APPLICABLE ONLY TO SHAREHOLDERS OF THE COMPANY, BASED ON THE SCOPE AND INTENTION OF THE LEGISLATURE PROVIDED IN THE FINANCE ACT, 1987 AND A LSO BY RELYING ON THE DECISIONS OF HON'BLE DELHI HIGH COURT IN THE CASE O F CIT VS NATIONAL TRAVEL SERVICES (2012) 347 ITR 305& THE HONBLE MADRAS HIG H COURT IN THE CASE OF CIT VS. PRINT WAVE SERVICES PRIVATE LIMITED (ITA NO 747 OF 2014) WAS REJECTED BY THE AO FOR THE REASON THAT THE DEPARTME NT IS ON APPEAL AGAINST THE DECISION OF HON'BLE MADRAS HIGH COURT BEFORE TH E HON'BLE SUPREME COURT AND HENCE THE JURISDICTIONAL HIGH COURTS DECISION HAS NOT REACHED FINALITY AND HENCE TREATED THE LOAN AS DIVIDEND U/S 2(22)(E) AN D CHARGED TO TAX U/ S 56 TO KEEP THE ISSUE ALIVE THOUGH THE TAX DEMAND RAISE D ON THIS ISSUE WAS STAYED FOLLOWING THE HON'BLE MADRAS HIGH COURT'S DE CISION. AGGRIEVED, THE ASSESSEE FILED AN APPEAL AND THE CIT (A) DISMISSED THE APPEAL. AGGRIEVED AGAINST THE ORDER OF THE CIT(A), THE ASSESSEE FILED THIS APPEAL WITH FOLLOWING GROUNDS : THE ORDER OF THE ASSESSING OFFICER AND LEARNED CIT APPEALS IS CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE CASE. THE LEARNED ASSESSING OFFICER AND CIT APPEALS OUGHT TO HAVE APPRECIATED THE FACT THAT QUESTION OF DEEMED DIVIDEND DOES NOT ARIS E IN RESPECT OF ADVANCES PAID BY MGM ENTERTAINMENTS PVT. LTD., TO THE APPELL ANT COMPANY SINCE THE :-3-: ITA NO. 1184/MDS/2017 APPELLANT COMPANY IS NOT A SHAREHOLDER IN MGM ENTER TAINMENTS PVT. LTD AND THEREFORE IS NOT THE BENEFICIAL OWNER OF ANY SHARES IN MGM ENTERTAINMENT PVT. LTD. THE LEARNED ASSESSING OFFICER AND CIT APPEALS OUGHT TO HAVE ACCEPTED THE VIEW THAT ONLY THE AMOUNT RECEIVED BY A SHAREHOLDER WHO HAS SUBSTANTIAL INTEREST IN A CLOSELY HELD COMPANY BY WAY OF ADVANCES FROM THAT COMPANY CAN BE TREATED AS 'DEEMED DIVIDEND' AND NOT A COMPANY WHICH IS NOT A SHAREHOLDER OF THE OTHER COMPANY FROM WHOM THE ADVANCES ARE RECEIVED. AS REGARDS ADVANCES RECEIVED FROM MGM ENTERTAINMENT PVT. LTD., WE WISH TO STATE THAT THIS IS PURELY IN THE NATURE OF INTER CO RPORATE LOAN PROVIDED BY MGM ENTERTAINMENT PVT. LTD., TO SUPPORT VITAL INDUSTRIE S INDIA PVT. LTD., TO MEET ITS FUNDS REQUIREMENTS FOR WORKING CAPITAL. THE ADVANCE S HAVE BEEN GIVEN BY MGM ENTERTAINMENT PVT. LTD., ARE PURELY OUT OF BUSINESS CONSIDERATIONS TO PROMOTE HOTEL BUSINESS RUN BY VITAL INDUSTRIES INDIA PVT. L TD., AT BANGALORE. THE LEARNED ASSESSING OFFICER AND CIT APPEALS HAS F AILED TO FOLLOW THE JUDGMENT OF THE HON'BLE HIGH COURT OF MADRAS DATED 10.11.2014 IN THE CASE OF CIT VS. PRINT WAVE SERVICES PVT. LTD., IN THE TAX C ASE NO.747 OF 2014. IN THE SAID CASE, THE MADRAS HIGH COURT HAS UPHELD THE ORD ERS PASSED BY CIT (APPEALS) AND ITAT CHENNAI WHO HELD THAT THE DEEMED RECEIPT OF DIVIDEND CAN ONLY BE IN THE HANDS OF A SUBSTANTIAL SHAREHOLDER A ND CONSIDERING THAT THE ASSESSEE COMPANY ITSELF IS NOT A SHAREHOLDER IN THE OTHER COMPANY NO DIVIDEND, NORMAL OR DEEMED, COULD HAVE BEEN RECEIVED, BY THE ASSESSEE COMPANY AS LONG AS THE ASSESSEE COMPANY WAS NOT A SHAREHOLDER IN TH E OTHER CONCERN. THE CASE LAWS QUOTED BY LEARNED CIT APPEALS IS NOT RELEVANT FOR THE FACTS OF THE CASE. WE REQUEST THAT BASED ON THE ABOVE SAID SUBMISSIONS THE APPEAL BE ALLOWED. 3. THE AR SUBMITTED THE SAME PLEA CANVASSED BEFORE THE CIT (A) AND EMPHASISED THAT THE ASSESSEE COMPANY DOES NOT HOLD SHARES IN M/S. MGM ENTERTAINMENTS PRIVATE LIMITED AND PLACED ITS RELIA NCE ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. PR INT WAVE SERVICES PRIVATE :-4-: ITA NO. 1184/MDS/2017 LIMITED IN ITA NO 747 OF 2014DT 10.11.2014. PER CON TRA, THE DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 4. WE HEARD THE RIVAL SUBMISSIONS . LET US EXAMINE THE RELEVANT PORTION OF THE ORDER OF THE CIT(A) AS UNDER : 4.3.2 BEFORE THE CIT(A), THE APPELLANT HAS CONTEN DED THAT THE APPELLANT COMPANY DOES NOT HOLD SHARES IN M/S. MGM ENTERTAINM ENTS PRIVATE LIMITED AND THE APPELLANT. RELIANCE WAS ALSO PLACED ON THE DECI SION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. PRINT WAVE SERVICES PR IVATE LIMITED (CITED SUPRA). 4.3.3 THE SUBMISSIONS MADE BY THE ASSESSEE HAVE BEE N CAREFULLY EXAMINED AND THE CONTENTIONS OF THE ASSESSEE CANNOT BE ACCEPTED FOR THE FOLLOWING REASONS: 1. SECTION 2(22)(E) READS AS FOLLOWS 'ANY PAYMENT B Y A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIAL LY INTERESTED} OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS O F THE COMPANY OR OTHERWISE) MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER} BEING A PERSON WHO IS THE BE NEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE O F DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER 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 REFERRED TO AS T HE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE I NDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS; FROM THE PLAIN READING OF THE SECTION, IT CAN BE UN DERSTOOD THAT DIVIDEND U/S. 2(22) INCLUDES LOAN OR ADVANCE GIVEN 'TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST'. FURTHER A COMPANY IS COVERED UNDER THE MEANING OF THE WORD 'CONCERN'. EXPLANATION 3 TO CLAUSE 22 OF SECTION 2 STATES THAT : '-FOR THE PURPOSES OF THIS CLAUSE, - :-5-: ITA NO. 1184/MDS/2017 CONCERN' MEANS A HINDU UNDIVIDED FAMILY, OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY; 2. AFTER EXAMINING THE FACTS OF THE ASSESSEE'S CASE , THE FULFILMENT OF THE CONDITIONS STIPULATED UNDER SEC.2(22)(E) IS TABULAT ED BELOW: S.NO CONDITIONS U/S. 2(22)(E) FULFILMENT OF CONDITION IN THE APPELLANTS CASE 1 PAYMENT OF LOAN OR ADVANCE TO THE EXTENT OF ACCUMULATE PROFITS BY A CLOSELY HELD COMPANY. CONDITION FULFILLED 2 COMMON SHAREHOLDER HAS SUBSTANTIAL INTEREST IN BOTH THE COMPANIES - DO - 3. THE ONLY MOOT QUESTION HERE IS WHETHER THE DIVID END IS TAXABLE IN THE HANDS OF THE SHAREHOLDER WHO HAS SUBSTANTIAL INTEREST IN BOTH THE COMPANIES OR IN THE HANDS OF THE APPELLANT COMPANY. THE HON'BLE SUPREME COURT IN THE CASE OF GOPAL AND SONS (HUF) VSCIT [2017 391 ITR 1] HELD TH AT 'EVEN IF WE PRESUME THAT IT IS NOT A REGISTERED SHAREHOLDER, AS PER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, ONCE THE PAYMENT IS RECEIVED BY THE HUP AND SHAREHOLDER (MR.SANEI, KARTA, IN THIS CASE) IS CL MEMBER OF THE SAID HUF AND HE HAS SUBETANTIAL INTEREST IN THE HUF, THE PAYMENT MADE T O THE HUF SHALL CONSTITUTE DEEMED DIVIDEND WITHIN THE MEANING OF CLAUSE (E) OF SECTION 2(22) OF THE ACT. THIS IS THE EFFECT OF EXPLANATION 3 TO THE SAID SEC TION, AS NOTICED ABOVE. THEREFORE, IT IS NO GAINSAYING THAT SINCE HUF ITSEL F IS NOT THE REGISTERED SHAREHOLDER, THE PROVISIONS OF DEEMED DIVIDEND ARE NOT , ATTRACTED.' THE ABOVE-MENTIONED JUDGEMENT OF HON'BLE SUPREME CO URT WHICH IS CLEARLY IN SUPPORT OF THE STAND TAKEN BY THE AO. THEREFORE, TH ERE IS NO PRE-CONDITION THAT THE ASSESSEE HAS TO BE A SHAREHOLDER IN ORDER TO AT TRACT PROVISIONS OF SECTION 2(22)(E). IN THE GIVEN CASE, THE APPELLANT IS THE R ECIPIENT OF THE LOAN WHICH IS TO BE TREATED AS DEEMED DIVIDEND U/ S 2(22)(C). THEREF ORE, THE SAME HAS TO BE TAXED IN THE HANDS OF THE APPELLANT COMPANY. 4. I HAVE PERUSED THE DECISION RELIED ON BY THE AO IN THE CASE OF CIT VS. NATIONAL TRAVEL SERVICES [20121347 ITR 305 (DELHI) WHICH IS DIRECTLY ON THE ISSUE UNDER CONSIDERATION IN FAVOUR OF REVENUE. I H AVE BRIEFLY MENTIONED BELOW THE SAID DECISION: :-6-: ITA NO. 1184/MDS/2017 'SECTION 2(22) OF THE INCOME-TAX ACT, 1961 - DEEMED DIVIDEND - WHETHER TO ATTRACT PROVISIONS OF SECTION 2 (22)(E), PERSON TO WHOM LOAN OR ADVANCE IS MADE SHOULD BE A SHAREHOLDER AS WELL AS BENEFICIAL OWNER - HELD, YES - WHETHER FOR PURPOSE OF SECTION 2(22)( E), A PARTNERSHIP FIRM HAVING PURCHASED SHARES THROUGH ITS PARTNERS IN COM PANY WHICH HAS PAID LOANS IS TO BE TREATED AS A SHAREHOLDER AND IT IS NOT NECESSARY THAT IT HAS TO BE 'REGISTERED SHAREHOLDER' OF COMPANY - HELD, YES [IN FAVOUR OF REVENUE] . 5. THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF M/S. PRINT WAVESERVICES PVT. LTD. (CITED SUPRA) RELIED ON BY T HE AR IS NOT APPLICABLE TO THE APPELLANT'S CASE AS FACTS AND CIRCUMSTANCES IN BOTH THE CASES ARE FUNDAMENTALLY DIFFERENT. IN THE DECISION RELIED ON, THE ASSESSEE COMPANY RECEIVED A SUM OF RS. 41,46,588/- FROM ANOTHER PRIVATE LIMITED COMPANY WH ICH WAS STATED TO BE A SISTER CONCERN AND ON THE SAME DATE THE ASSESSEE CO MPANY PAID SUM OF RS. 42,96,677/- TO AN INDIVIDUAL WHO WAS THE DIRECTOR I N BOTH THE COMPANIES AND HAVING COMMON INTEREST IN BOTH THE COMPANIES. IT IS CLEAR FROM THESE FACTS RECORDED IN THE HIGH COURT'S DECISION THAT THE ULTI MATE RECIPIENT OF LOAN AMOUNT WAS NOT THE RECIPIENT COMPANY BUT THE DIRECTOR HAVI NG SUBSTANTIAL INTEREST IN BOTH THE COMPANIES. WHEREAS IN THE APPELLANT'S CASE , THE APPELLANT ITSELF IS THE RECIPIENT OF THE LOAN AMOUNT. FURTHER, IN THE CASE RELIED ON, THE AMOUNT RECEIVED BY THE ASSESSECOMPANY WAS SHOWN AS 'TRADE ADVANCE' WHEREAS IN THE APPELLANT'S CASE IT HAS BEEN TREATED AS A 'LOAN AMO UNT'. IN VIEW OF THESE TWO DISTINGUISHABLE FACTS, I AM OF CONSIDERED OPINION T HAT THE DECISION RELIED UPON BY THE APPELLANT AS MENTIONED ABOVE IS NOT APPLICAB LE TO THE FACTS AND CIRCUMSTANCES OF THE APPELLANT'S CASE. 4.3.4 IN THE FACTS AND CIRCUMSTANCES OF THE CASE, F OR THE REASONS MENTIONED ABOVE, I DO NOT FIND ANY MERIT IN THE APPEAL OF THE ASSESSEE. THEREFORE, THE AFORESAID ADDITION OF THE AO IS UPHELD AND THE APPE LLANT'S GROUND ON THIS ISSUE IS DISMISSED. 5. IN THIS CASE, THE FACT REMAINS THAT THE ASSESSEE RECEIVED A LOAN OF RS. 1,57,89,726/- FROM M/S. MGM ENTERTAINMENTS PRIVATE WITH WHOM ONE MR. MGM ANAND IS A COMMON SHAREHOLDER AND HE HAS SUBSTA NTIAL INTEREST IN BOTH :-7-: ITA NO. 1184/MDS/2017 THE COMPANIES. I.E. 30% OF THE TOTAL SHARES IN MGM ENTERTAINMENTS PRIVATE LIMITED AND 70% OF THE SHARES IN M/S. VITAL INDUSTR IES INDIA PVT LIMITED, THE ASSESSEE. THE BASIC QUESTION THAT FALLS FOR OUR CONSIDERATION IS WHETHER THE PROVISIONS OF SECTION 2(22)(E) ARE ATTR ACTED AT ALL ? LET US RE-EXAMINE THE RELEVANT PORTION OF THE PROVISIONS A S UNDER : (22) DIVIDEND INCLUDES (A) : (B).; (C)..; (D) ; (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE)MA DEAFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO ANY CONCERN IN WHICH SUCH SHAREHOLDERHAS A SUBSTANTIAL INTEREST (HEREAFT ER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN)] TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS EXPLANATION 3 TO CLAUSE 22 OF SECTION 2 STATES THAT : '- 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 TIM E DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PER CENT OF THE INCOME OF SUCH CONCERN ;] 6. FROM THE ABOVE, IT IS SEEN THAT ANY PAYMENT MADE BY A COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED, OUT OF ITS ACCUMULATED PROFITS, TO A SHAREHOLDER OR TO ANY CONCERN IN WHICH SUCH A SHA REHOLDER IS A MEMBER OR :-8-: ITA NO. 1184/MDS/2017 PARTNER AND HAS SUBSTANTIAL INTEREST, BY WAY OF LOA N OR ADVANCE IS DEEMED DIVIDEND INCOME OF THE RECIPIENT. IN THIS CASE, UND ISPUTEDLY ASSESSEE IS THE RECIPIENT OF THE LOAN FROM M/S MGM ENTERTAINMENTS P RIVATE LIMITED . IT IS ALSO NOT DISPUTED THAT M/S. MGM ENTERTAINMENTS PRIVATE L IMITED HAS ACCUMULATED PROFITS. THE ASSESSEE IS NOT THE SHAREHOLDER OF M/S . MGM ENTERTAINMENTS PRIVATE LIMITED , BUT IT IS THE CONCERN IN WHICH TH E SHAREHOLDER OF MGM ENTERTAINMENTS PRIVATE LIMITED , MR. MGM ANAND HOL DS 70 PER CENT OF EQUITY SHARE CAPITAL. THEREFORE, THE PROVISIONS OF SECTION 2(22)(E) ARE VERY MUCH APPLICABLE. WE ARE FORTIFIED IN OUR DECISIONS FROM THE DECISION OF THE MUMBAI ITAT IN THE CASE OF EXTERMPORE SECURITIES AND INVES TMENTS (P) LTD., VS DCIT , 116 TTJ 525, MUMBAI. ON FACTS, ALL OTHER DECISIONS RELIED BY THE ASSESSEE ARE DISTINGUISHABLE. 7. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. ORDER PRONOUNCED ON THURSDAY, THE 15 TH DAY OF FEBRUARY, 2018 AT CHENNAI. SD/- ( . ' ) (DUVVURU RL REDDY) $ % /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) % /ACCOUNTANT MEMBER :-9-: ITA NO. 1184/MDS/2017 /CHENNAI, 1 /DATED: 15 TH FEBRUARY, 2018 JPV (+3454 /COPY TO: 1. ' / APPELLANT 2. +,' /RESPONDENT 3. 6 ) ( /CIT(A) 4. 6 /CIT 5. 4+ /DR 6. 9 /GF