Ramani Investments, CHENNAI V. ACIT, Salem

ITA 1362/CHNY/2014

• Counselvise Citation: 136221714 RSA 2014
• Duration Of Justice: 1 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2015
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 15-05-2014
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Assessee Lawyers: K MEENATCHI SUNDARAM
• Keywords: Deemed dividend

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , . !' , # $ % [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] ./ I.T.A.NO.1362/MDS/2014 / ASSESSMENT YEAR : 2010-11 M/S RAMANI INVESTMENTS C/O SUNDARAM & NARAYANAN CHARTERED ACCOUNTANTS 18, BALAIAH AVENUE LUZ CHURCH ROAD MYLAPORE, CHENAI 600 004 VS. THE ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE I(2) SALEM [PAN AAFDR 3031 R ] ( &' / APPELLANT) ( ()&' /RESPONDENT) / APPELLANT BY : SHRI K. MEENATCHI SUNDARAM, CA /RESPONDENT BY : SHRI N. MADHAVAN, JCIT / DATE OF HEARING : 27 - 05 - 2015 ! / DATE OF PRONOUNCEMENT : 17 - 0 7 - 2015 / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), SALEM, D ATED 27.3.2014 AND PERTAINS TO ASSESSMENT YEAR 2010-11. 2. THE ONLY GRIEVANCE OF THE ASSESSEE IS WITH REGARD TO DISALLOWANCE OF ` 37,60,511/- U/S 2(22)(E) OF THE ACT. ITA NO.1362/14 :- 2 -: 3. SHRI K. MEENATCHI SUNDARAM, LD. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE, A PARTNERSHI P FIRM, RECEIVED A LOAN OF ` 4,07,75,057/- FROM M/S RAMANI AUTOMOTIVES PVT. LTD . ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE- FIRM IS NOT A SHAREHOLDER OF M/S RAMANI AUTOMOTIVES PVT. LTD. TH E LD. REPRESENTATIVE CLARIFIED THAT THE PARTNERS OF THE ASSESSEE-FIRM ARE SHAREHOLDERS. REFERRING TO SECTION 2(22)(E) OF THE ACT, THE LD. REPRESENTATIVE SUBMITTED THAT ADDITION, IF ANY, U/ S 2(22)(E) OF THE ACT COULD BE MADE ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE ASSESSEE-FIRM. SINCE THE PARTNERSHIP FIRM IS NOT A SHAREHOLDER, ACCORDING TO THE LD. REPRESENTATIVE, T HERE CANNOT BE ANY ADDITION U/S 2(22)(E) OF THE ACT. 4. ON THE CONTRARY, SHRI N. MADHAVAN, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE-FIRM HA S THREE PARTNERS NAMELY, SHRI S.K. SENGODA GOUNDER, SHRI S. JAGADEES AN AND SHRI J. SATHISH KUMAARAN . ALL THE THREE PARTNERS OF THE ASSESSEE-FIRM HELD 100% SHARES IN M/S RAMANI AUTOMOTIVES PVT. LTD. M/ S RAMANI AUTOMOTIVES PVT. LTD. HAS RESERVES AND SURPLUS ONLY TO THE EXTENT OF ` 34,60,511/- AS ON 31.3.2010. ACCORDING TO THE LD. DR, THE LOAN TO THE EXTENT OF ` 4,07,75,507/- WAS ADVANCED BY M/S RAMANI AUTOMOTIV ES PVT. LTD. TO THE ASSESSEE FIRM FOR THE BENEFIT OF THE SHAREHOLDERS WHO ARE PARTNERS OF THE ASSESSEE-FIRM. THE LD. DR FUR THER SUBMITTED THAT ITA NO.1362/14 :- 3 -: UNDER THE COMMON LAW, THE PARTNERSHIP FIRM IS NOT A LEGAL ENTITY THEREFORE, THE PARTNERSHIP FIRM CANNOT HOLD THE SHA RES DIRECTLY. THE PARTNERSHIP FIRM HAS TO HOLD THE SHARES ONLY THROUG H ITS PARTNERS. IN THIS CASE, ACCORDING TO THE LD. DR, THE PARTNERS AR E HOLDING THE SHARES IN THEIR CAPACITY AS PARTNERS ON BEHALF OF THE ASS ESSEE-FIRM. THEREFORE, ONCE THE LOAN WAS ADVANCED TO THE PARTNE RSHIP FIRM, THE ADDITION HAS TO BE MADE U/S 2(22)(E) OF THE ACT. T HE LD. DR HAS PLACED HIS RELIANCE ON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS NATIONAL TRAVEL SERVICES, [2012] 347 ITR 305. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. AS RIG HTLY SUBMITTED BY THE LD. DR, PARTNERSHIP FIRM IS NOT A LEGAL ENTITY UNDE R THE COMMON LAW. THE PARTNERSHIP FIRM HAS TO ACT ONLY THROUGH ITS PA RTNERS. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE-FIRM HAS THREE PARTNE RS NAMELY, SHRI S.K. SENGODA GOUNDER, SHRI S. JAGADEESAN AND SHRI J. SAT HISH KUMAARAN. THESE THREE PARTNERS OF THE ASSESSEE-FIRM HELD 100 % SHARES OF M/S RAMANI AUTOMOTIVES PVT. LTD. THE PARTNERS HAVE DUA L ROLE TO PERFORM. THE PARTNERS HAVE TO PERFORM THEIR ROLE IN THEIR RE SPECTIVE INDIVIDUAL CAPACITY AND THEY ALSO HAVE TO PERFORM THEIR ROLE A S PARTNERS OF THE PARTNERSHIP FIRM. IT IS NOT KNOWN FROM THE ORDERS OF THE LOWER AUTHORITIES WHETHER THE PARTNERS OF THE ASSESSEE-F IRM HELD THE SHARES ITA NO.1362/14 :- 4 -: OF M/S RAMANI AUTOMOTIVES PVT. LTD. IN THEIR CAPACI TY AS PARTNERS OR IN THEIR INDIVIDUAL CAPACITY. IT IS ALSO NOT KNOWN WH ETHER THE PARTNERSHIP FIRM INVESTED THE FUNDS IN THE NAME OF THE PARTNERS OR NOT. SINCE THE PARTNERSHIP FIRM CANNOT HOLD SHARES AND THE PARTNER SHIP FIRM INVESTED ITS FUNDS IN M/S RAMANI AUTOMOTIVES PVT. LTD. THROU GH ITS INDIVIDUAL PARTNERS THEN FOR ALL PRACTICAL PURPOSES, THE PARTN ERSHIP FIRM HAS TO BE CONSTRUED AS SHAREHOLDER OF M/S RAMANI AUTOMOTIVES PVT. LTD. WE HAVE ALSO GONE THROUGH THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN NATIONAL TRAVEL SERVICES (SUPRA). THE HON'BLE H IGH COURT, AFTER CONSIDERING VARIOUS CASE LAWS ON THE SUBJECT, FOUND THAT IF THE CONTENTION OF THE ASSESSEE WAS ACCEPTED, IN NO CAS E A PARTNERSHIP FIRM CAN COME WITHIN THE MISCHIEF OF SECTION 2(22)( E) OF THE ACT. IN FACT, THE HON'BLE DELHI HIGH COURT HAS OBSERVED AS FOLLOWS: THIS BRINGS US TO THE MORE IMPORTANT ISSUE, VIZ. , WHETHER THE ASSESSEE -FIRM CAN BE TREATED AS A SHAREHOLDER HAVI NG PURCHASED SHARES THROUGH ITS PARTNERS IN THE COMPANY WHICH HA S PAID THE LOANS OR IS IT NECESSARY THAT A SHAREHOLDER HAS TO BE A 'REGISTERED SHAREHOLDER'. IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED, IN NO CASE A PARTNERSHIP FIRM CAN COME WITHIN THE MISCHIE F OF SECTION 2(22)(E) OF THE ACT BECAUSE OF THE REASON THAT SHARES WOULD BE PURCHASED BY THE FIRM IN THE NAME OF ITS PARTNERS A S THE FIRM IS NOT HAVING ANY SEPARATE ENTITY OF ITS OWN. WITH THE NAME OF THE PARTNER ENTERING INTO THE REGISTER OF MEMBERS OF TH E COMPANY AS SHAREHOLDER, THE SAID PARTNER SHALL BE THE 'SHAREHO LDER' IN THE RECORDS OF THE COMPANY BUT NOT THE BENEFICIAL OWNER AS 'BENEFICIAL OWNER' IS THE PARTNERSHIP FIRM. THIS WO ULD MEAN THAT THE LOAN OR ADVANCE GIVEN BY THE COMPANY WOULD NEVE R BE TREATED AS DEEMED DIVIDEND EITHER IN THE HANDS O F 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. ITA NO.1362/14 :- 5 -: THE OBJECT BEHIND THIS PROVISION IS SUCCINCTLY STAT ED IN CIRCULAR NO. 495 OF SEPTEMBER 22, 1987, PARTICULARLY IN THE EXPLANAT ORY NOTES TO THE FINANCE ACT, 1987, WHEN THIS PROVISION WA S AMENDED. IT READS AS UNDER ([1987) 168 ITR (ST.) 87, 91): 'WITH THE DELETION OF SECTIONS 104 TO 109 THERE WAS A LIKELIHOOD OF CLOSELY HELD COMPANIES NOT DISTRIBUTI NG THEIR PROFITS TO SHAREHOLDERS BY WAY OF DIVIDENDS BUT BY WAY OF LOANS OR ADVANCES SO THAT THESE ARE NOT TAXED IN THE HANDS OF THE SHAREHOLDERS. TO FORESTALL THIS MANIPULATION , SUB- CLAUSE (E) OF CLAUSE (22) OF SECTION 2 HAS BEEN SUITAB LY AMENDED. UNDER THE EXISTING PROVISIONS, PAYMENTS BY WAY OF LOANS OR ADVANCE TO SHAREHOLDERS HAVING SUBSTANTIAL INTEREST IN A COMPANY TO THE EXTENT TO WHICH THE COMPANY POSS ESSES ACCUMULATED PROFITS IS TREATED AS DIVIDEND. THE SHAREHOLDERS HAVING SUBSTANTIAL INTEREST ARE THOSE WHO HAVE A SHAREHOLDING CARRYING NOT LESS THAN 20 PER CENT VO TING POWER AS PER THE PROVISIONS OF CLAUSE (32) OF SECTIO N 2. THE AMENDMENT OF THE DEFINITI6N EXTENDS ITS APPLICATION T O PAYMENTS MADE (I) TO A SHAREHOLDER HOLDING NOT LES S THAN 10 PER CENT OF THE VOTING POWER, OR (II) TO A CONCERN IN WHICH THE SHAREHOLDER HAS SUB STANTIAL INTEREST. CONCERN AS PER THE NEWLY INSERTED EXPLANATION 3(A) TO SECTION 2(22) MEANS A HUF OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY. A SHAREHOLDER H AVING A SUBSTANTIAL INTEREST IN A CONCERN AS PER PART (B) O F EXPLANATION 3 IS DEEMED TO BE ONE WHO IS BENEFICIALLY ENTITLED TO NOT LESS THAN 20 PER CENT OF INCOME OF S UCH CONCERN . 6. IN VIEW OF THE ABOVE OBSERVATION OF THE HON'BLE DEL HI HIGH COURT, IT IS NECESSARY TO FIND OUT WHETHER THE PART NERS OF THE ASSESSEE-FIRM HELD THE SHARES IN THEIR INDIVIDUAL C APACITY OR IN THEIR CAPACITY AS PARTNERS OF THE PARTNERSHIP FIRM. IT I S ALSO NECESSARY TO VERIFY WHETHER THE PARTNERS INVESTED THEIR FUNDS IN DEPENDENTLY OR THE PARTNERSHIP FIRM INVESTED THE FUNDS THROUGH ITS PAR TNERS. SINCE THE ITA NO.1362/14 :- 6 -: MATERIAL ON RECORD DOES NOT DISCLOSE ANY DETAILS, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RE-E XAMINED BY THE ASSESSING OFFICER. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ENTIRE ISSUE IS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL BRI NG ON RECORD WHETHER THE INVESTMENT IN SHARES OF M/S RAMANI AUTOMOTIVES PVT. LTD. WAS MADE BY THE PARTNERSHIP FIRM OR THE INVESTMENT WAS MADE BY THE RESPECTIVE PARTNERS IN THEIR INDIVIDUAL CAPACITY. THEREAFTER, THE ASSESSING OFFICER SHALL DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER CONSIDERING THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN NATIONAL TRAVEL SERVICES (SUPRA). 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH OF JULY, 2015, AT CHENNAI. SD/- SD/- ( . !' ) (A. MOHAN ALANKAMONY) # / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED: 17 TH JULY, 2015 RD &' ()*) / COPY TO: 1 . / APPELLANT 3. +,' / CIT(A) 5. )-. / / DR 2. / RESPONDENT 4. + / CIT 6. .01 / GF