The DCIT(OSD)Range-1, Ahmedabad V. Casil Health Products Ltd., Ahmedabad

ITA 1429/AHD/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5904 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 15-03-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 09-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Deemed to accrue or arise in india; Deemed dividend

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD , , BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ./ I.T.A. NO.1429/AHD/2014 ( / ASSESSMENT YEAR : 2006-07) THE DCIT (OSD) RANGE-1 AHMEDABAD / VS. CASIL HEALTH PRODUCTS LTD. 708, SARKHEJ DHOLKA ROAD BHAT AHMEDABAD # ./ ./ PAN/GIR NO. : AACCB 7385 C ( #& / APPELLANT ) .. ( '#& / RESPONDENT ) #&( / APPELLANT BY : SHRI JAMES KURIAN, SR.DR '#& ) ( / RESPONDENT BY : SHRI S.N. SOPARKAR, AR *+ ), / DATE OF HEARING 15/03/2017 -./0 ), / DATE OF PRONOUNCEMENT 15/ 05 /2017 / O R D E R PER PRADIP KUMAR KEDIA, AM: THE CAPTIONED APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-6, AHMEDABAD [CIT(A) IN SHORT] DATED 10/03/2014 FOR THE ASSESSMENT YEAR (AY) 2006-07. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE REA D AS UNDER:- ITA NO.1429/AHD /2014 DCIT VS. CASIL HEALTH PRODUCTS LTD. ASST.YEAR 2006-07 - 2 - THE CIT(A) HAS ERRED IN LAW AND ON FACTS BY DELETIN G THE ADDITION OF RS.12.35 CRORES TOWARDS DEEMED DIVIDEND U/S.2(22 )(E) DESPITE THE FACT THAT IRM TRUST HAD SUBSTANTIAL INTEREST IN THE LENDER COMPANY [CADILA PHARMACEUTICALS LTD.] AS WELL AS TH E RECIPIENT (ASSESSEE COMPANY). SUCH A LOAN IS REQUIRED TO BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE AS PER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER TO THE EXTENT MENTIONED ABOVE SINCE THE ASSESSEE HAS F AILED TO DISCLOSE HIS TRUE INCOME/BOOK PROFIT. 3. BRIEFLY STATED, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF HOSPITAL AND ORTHOPEDI C PRODUCTS. THE ASSESSEE FILED RETURN OF INCOME FOR AY 2006-07. TH E RETURN WAS SUBJECTED TO SCRUTINY ASSESSMENT AND THEREAFTER REO PENED UNDER S.147 OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO A S 'THE ACT') ON THE GROUND THAT THE ASSESSEE HAS RECEIVED CERTAIN LOANS AND ADVANCES FROM LENDER-COMPANY WHICH IS AMENEABLE TO TAX AS DEEMED DIVIDEND INCOME IN TERMS OF SECTION 2(22)(E) OF THE ACT. IN THE CO URSE OF REASSESSMENT, THE ASSESSING OFFICER (AO) OBSERVED THAT THE ASSESSEE-C OMPANY HAS RECEIVED CERTAIN ADVANCES FROM SISTER-CONCERN M/S.CADILA PHA RMACEUTICALS LTD. THE AO OBSERVED THAT A SHAREHOLDER OF THE ASSESSEE- COMPANY HOLDING NOT LESS THAN 10% OF THE VOTING POWER IN THE LENDER-COM PANY SIMULTANEOUSLY HOLDS SUBSTANTIAL INTEREST IN THE RECIPIENT ASSESSE E-COMPANY. THE AO ALSO OBSERVED THAT ALL THE CONDITIONS OF SECTION 2( 22)(E) IS FULFILLED AND IN ITA NO.1429/AHD /2014 DCIT VS. CASIL HEALTH PRODUCTS LTD. ASST.YEAR 2006-07 - 3 - VIEW OF THE LARGE ACCUMULATED PROFITS FAR IN EXCES S OF MONEY ADVANCED TO THE ASSESSEE-COMPANY, THE LOANS/ADVANCES RECEIVED B Y THE ASSESSEE- COMPANY IS TAXABLE AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE- COMPANY. THE AO ACCORDINGLY HELD THAT LOANS/ADVAN CES GIVEN BY THE LENDER COMPANY TO THE ASSESSEECONCERN IS TAXABLE A S DEEMED DIVIDEND IN VIEW OF DEEMING FICTION CREATED UNDER S.2(22)(E) IN THE HANDS OF THE ASSESSEE-CONCERN. HE ACCORDINGLY ADDED LOANS/ADVAN CES RECEIVED DURING THE YEAR AMOUNTING TO RS.12,35,57,816/- TO THE TOTA L INCOME OF THE ASSESSEE. 4. IN FIRST APPEAL, THE ACTION OF THE AO WAS REVERS ED BY CIT(A) INTER ALIA ON THE PREMISE THAT RECIPIENT OF THE LOAN/ADVANCE, I.E. ASSESSEE IS NOT THE SHAREHOLDER OF THE LENDER COMPANY. IT WAS OBS ERVED BY THE CIT(A) THAT DEEMED DIVIDEND UNDER S.2(22)(E) CANNOT BE TAX ED IN THE HANDS OF THE CONCERN WHO IS NOT THE SHAREHOLDER OF THE LENDER-CO MPANY NOTWITHSTANDING THE FACT THAT IT HAS RECEIVED LOANS /ADVANCES FROM THE LENDER-COMPANY. FOR THIS PROPOSITION, THE CIT(A) R ELIED UPON VARIOUS JUDICIAL PRECEDENTS. THE RELEVANT PARA OF THE ORDE R OF THE CIT(A) ARE REPRODUCED HEREUNDER: I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE A. R . OF THE APPELLANT AND THE OBSERVATIONS OF THE ASSESSING OFFICER IN TH E ASSESSMENT ORDER. APPELLANT COMPANY RECEIVED LOAN OF RS. 12.35 CRORES FROM CADILA PHARMACEUTICALS LTD. M/S IRM TRUST IS 80.2% SHARE H OLDER OF CADILA ITA NO.1429/AHD /2014 DCIT VS. CASIL HEALTH PRODUCTS LTD. ASST.YEAR 2006-07 - 4 - PHARMACEUTICALS LTD. AND 29% SHARE HOLDER OF THE AP PELLANT COMPANY. THE ACCUMULATED RESERVES OF THE LENDER COMPANY WERE OVER RS. 90 CRORES AND HENCE A.O. ADDED THE SAID LOAN RECEIVED U/S.2(2 2)(E). THE BASIC CONTENTION OF THE ID.AR IS THAT ONE OF THE PRE-REQU ISITES FOR INVOKING THE PROVISIONS OF SECTION 2(22) (E) IS THAT THE RECIPIE NT OF THE LOAN SHALL BE BOTH THE REGISTERED AND BENEFICIAL SHARE HOLDER AND SINCE THE APPELLANT FIRM IS NOT A REGISTERED SHARE HOLDER, INVOKING THE PROVISIONS OF SECTION 2(22) (E) IS NOT IN ACCORDANCE WITH LAW. IN SUPPORT OF THE ARGUMENT, THE ID.A.R. RELIED ON THE DECISION OF THE MUMBAI SPECIA L BENCH IN THE CASE OF BHAUMIK COLOURS (P) LTD. [2009] (27 SOT 270), THE D ELHI TRIBUNAL DECISION IN THE CASE OF CIT VS. NATIONAL TRAVEL SER VICES (31 SOT 76) AND DELHI HIGH COURT DECISION IN THE CASE OF CIT VS. AN KITECH (P) LTD. [2011] (199 TAXMAN 341). IN THE SAID CASE CITED AT 199 TAXMAN 341, THE DELHI HIGH COURT UPHELD THE RATIO OF THE MUMBAI SPE CIAL BENCH DECISION BY HOLDING AS UNDER.- '25. FURTHER, IT IS AN ADMITTED CASE THAT UNDER NOR MAL CIRCUMSTANCES, SUCH A LOAN FOR ADVANCE GIVEN TO THE SHAREHOLDERS OR TO A CONCERN, WOULD NOT QUALIFY AS DIVIDEND. IT HAS BEEN MADE SO BY LEGAL FICTION CREATED UNDER SECTION 2(22)(E) OF THE ACT WE HAVE TO KEEP IN MIND THAT THIS LEGAL PROVISION RELATES T O 'DIVIDEND'. THUS, BY A DEEMING PROVISION, IT IS THE DEFINITION OF DIVIDEND WHICH IS ENLARGED. LEGAL FICTION DOES NOT EXTEND TO 'SHA REHOLDER'. WHEN WE KEEP IN MIND THIS ASPECT, THE CONCLUSION WOULD B E OBVIOUS, VIZ., LOAN OR ADVANCE GIVEN UNDER THE CONDITIONS SPECIFIE D UNDER SECTION 2(22)(E) OF THE ACT WOULD ALSO BE TREATED A S DIVIDEND. THE FICTION HAS TO STOP HERE AND IS NOT TO BE EXTEND ED FURTHER FOR BROADENING THE CONCEPT OF SHAREHOLDERS BY WAY OF LE GAL FICTION. IT IS A COMMON CASE THAT ANY COMPANY IS SUPPOSED TO DI STRIBUTE THE PROFITS IN THE FORM OF DIVIDEND TO ITS SHAREHOLDERS /MEMBERS AND SUCH DIVIDEND CANNOT BE GIVEN TO NON-MEMBERS. THE SECOND CATEGORY SPECIFIED UNDER SECTION 2(22)(E) OF THE AC T, VIZ., A CONCERN (LIKE THE ASSESSEE HEREIN), WHICH IS GIVEN THE LOAN OR ADVANCE IS ADMITTEDLY NOT A SHAREHOLDER/MEMBER OF THE PAYER ITA NO.1429/AHD /2014 DCIT VS. CASIL HEALTH PRODUCTS LTD. ASST.YEAR 2006-07 - 5 - COMPANY. THEREFORE, UNDER NO CIRCUMSTANCE, IT COULD BE TREATED AS SHAREHOLDER/MEMBER RECEIVING DIVIDEND. IF THE IN TENTION OF THE LEGISLATURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEM ED DIVIDEND AT THE HANDS OF 'DEEMING SHAREHOLDER', THEN THE LEGISL ATURE WOULD HAVE INSERTED DEEMING PROVISION IN RESPECT OF SHARE HOLDER AS WELL, THAT HAS NOT HAPPENED. MOST OF THE ARGUMENTS OF THE LEARNED COUNSELS FOR THE REVENUE WOULD STAND ANSWERED, ONCE WE LOOK INTO THE MATTER FROM THIS PERSPECTIVE.' IT IS FURTHER SEEN THAT THE DELHI HIGH COURT REITER ATED THE SAID VIEW IN THE CASES OF C1T VS. MCC MARKETING (P) LTD. 16 TAXMAN 4 11 (DELHI) & CIT VS. NAVYUG PROMOTERS (P) LTD. 16 TAXMAN 292 (DELHI) . IN THE LIGHT OF THE ABOVE MENTIONED DECISIONS AND KEEPING IN VIEW THE F ACT THAT THE APPELLANT COMPANY IS NOT A REGISTERED SHARE HOLDER OF THE LEN DER COMPANY, INVOKING THE PROVISIONS OF SECTION 2(22) (E) IS NOT IN ACCORDANCE WITH LAW. I HAVE ALSO TAKEN NOTE OF DELHI HIGH COURT JUD GMENT DTD. 11.07.2011 IN THE CASE OF CIT VS. NATIONAL TRAVEL S ERVICES. IN THE SAID CASE, THE FIRM INVESTED MONEY IN THE SHARES OF THE LENDER COMPANY IN THE NAMES OF ITS PARTNERS. IT WAS HELD THAT SINCE A FIR M CAN NEVER BE A REGISTERED SHARE HOLDER OF A COMPANY, THOUGH THE SH ARES WERE HELD IN THE NAMES OF ITS PARTNERS, PROVISIONS OF SECTION 2(22) (E) WERE APPLICABLE IN THE HANDS OF THE FIRM. HOWEVER, THE SAID DECISION H AS NO APPLICATION TO THE FACTS OF THE INSTANT CASE, AS THE APPELLANT IS A COMPANY. IMPUGNED ADDITION IS DELETED. THIS GROUND OF APPEAL IS ALLOW ED. A.O. IS AT LIBERTY TO TAKE APPROPRIATE ACTION IN THE CASE OF M/S IRM TRUS T (IN WHOSE HANDS DEEMED DIVIDEND MAY BE ASSESSABLE) IN ACCORDANCE WI TH LAW. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL AGAINST THE ORDER OF THE CIT(A). 6. THE SHORT CONTROVERSY IN THE PRESENT CASE IS WHE THER THE ASSESSEE- COMPANY CAN BE TAXED TOWARDS THE LOANS/ADVANCES REC EIVED FROM THE ITA NO.1429/AHD /2014 DCIT VS. CASIL HEALTH PRODUCTS LTD. ASST.YEAR 2006-07 - 6 - LENDER BY VIRTUE OF DEEMING FICTION UNDER S.2(22)( E) OF THE ACT WHERE THE ASSESSEE-COMPANY ITSELF IS NOT A SHAREHOLDER OF THE LENDING COMPANY, NOTWITHSTANDING THE FACT THAT BOTH THE COMPANIES (L ENDER-COMPANY AND ASSESSEE-COMPANY) HAD COMMON SHAREHOLDERS HAVING SU BSTANTIAL INTEREST IN BOTH THE COMPANIES. 6.1 AS OBSERVED BY THE HONBLE SUPREME COURT IN THE CASE OF GOPAL AND SONS (HUF) VS. CIT (SUPREME COURT) IN CIVIL APP EAL NO. 12274 OF 2016 ARISING OUT OF SLP (C) NO. 22059 OF 2015, SECT ION 2(22)(E) OF THE ACT CREATES A FICTION THEREBY BRINGING ANY AMOUNT PAID OTHERWISE THAN AS A DIVIDEND INTO THE NET OF DIVIDEND UNDER CERTAIN C IRCUMSTANCES. IT GIVES AN ARTIFICIAL DEFINITION OF DIVIDEND. IT DOES NO T TAKE INTO ACCOUNT THAT DIVIDEND WHICH IS ACTUALLY DECLARED OR RECEIVED. T HE DIVIDEND TAKEN NOTE OF BY THIS PROVISION IS A DEEMED DIVIDEND AND NOT A REAL DIVIDEND. LOANS OR ADVANCES GIVEN BY COMPANY TO ITS SHAREHOLDER IS ACTUALLY NOT A DIVIDEND. IN FACT, SUCH A LOAN TO A SHAREHOLDER HA S TO BE RETURNED BY THE SHAREHOLDER TO THE COMPANY. IT DOES NOT BECOME INC OME OF THE SHAREHOLDER. NOTWITHSTANDING THE SAME, FOR CERTAIN PURPOSE, THE LEGISLATURE DEEMED SUCH A LOAN/ADVANCE AS OF DIVI DEND AND MADE IT TAXABLE AT THE HANDS OF THE SAID SHAREHOLDER. IT I S THEREFORE OSTENSIBLE THAT SUCH A PROVISION WHICH IS A DEEMING PROVISION AND FICTIONALLY CREATES CERTAIN KIND OF RECEIPTS AS DIVIDENDS IS TO BE GIVE N STRICT INTERPRETATION. IT ITA NO.1429/AHD /2014 DCIT VS. CASIL HEALTH PRODUCTS LTD. ASST.YEAR 2006-07 - 7 - FOLLOWS THAT UNLESS ALL THE CONDITIONS CONTAINED IN THE SAID PROVISION ARE FULFILLED THE RECEIPT CANNOT BE DEEMED AS DIVIDEND. 6.2. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE-CO MPANY IS NOT A SHAREHOLDER PER SE IN THE LENDER COMPANY OF THE ACT. WE NOTE THAT THE CIT(A) HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE ON THE GROUND THAT THE DEEMED INCOME CAN BE TAXED ONLY IN THE HANDS OF SHA REHOLDER OF THE LENDING COMPANY NOTWITHSTANDING THE FACT THAT BOTH THE LENDER-COMPANY AS WELL AS THE ASSESSEE-COMPANY HAS COMMON SHAREHOL DER HAVING SUBSTANTIAL INTEREST IN BOTH THE COMPANIES. FOR TH IS PROPOSITION, THE CIT(A) RELIED UPON CERTAIN JUDICIAL PRECEDENTS AS N OTED IN THE OPERATIVE PARA QUOTED ABOVE. 6.3. WE FIND THAT THE LEGAL FICTION IN SECTION 2(22 )(E) ENLARGES THE DEFINITION OF DIVIDEND BUT DOES NOT EXTEND TO OR BR OADEN THE CONCEPT OF A SHAREHOLDER. AS THE ASSESSEE IS NOT A SHAREHOLDE R OF THE LENDER- COMPANY, THE RECEIPT IS NOT SUSCEPTIBLE TO TAX UNDE R S.2(22)(E) IN ITS HANDS IN VIEW OF LONG LINE OF JUDICIAL PRECEDENTS INCLUDI NG BAUMIK COLOUR PVT.LTD. 313 ITR 146 (BOM)[SB] APPROVED IN UNIVERSA L OF MEDICARE 324 363 (BOM) AND CIT VS. IMPACT CONTAINERS (P) LTD. (2 014) 367 ITR 346 (BOM). IN VIEW OF THE JUDICIAL PRECEDENTS GOVERNI NG THE ISSUE, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF THE CIT(A ). ITA NO.1429/AHD /2014 DCIT VS. CASIL HEALTH PRODUCTS LTD. ASST.YEAR 2006-07 - 8 - 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 15/ 05 /2017 SD/- SD/- ( ) ( ) ( MAHAVIR PRASAD ) ( PRADIP KUMAR KEDIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 15/ 05 /2017 4..*,.*../ T.C. NAIR, SR. PS !'#$#! / COPY OF THE ORDER FORWARDED TO : 1. #& / THE APPELLANT 2. '#& / THE RESPONDENT. 3. 567, 8, / CONCERNED CIT 4. 8, ( ) / THE CIT(A)-6, AHMEDABAD 5. 9:;,*67 , 67 0 , 5 / DR, ITAT, AHMEDABAD 6. ;<+ / GUARD FILE. / BY ORDER, '9,, //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION .. 8.5.17 (DICTATION-PAD 10- P AGES ATTACHED AT THE END OF THIS APPEAL-FILE) 2. DATE ON WHICH THE T8.5.17YPED DRAFT IS PLACED BEFOR E THE DICTATING MEMBER 8.5.17 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.16.5.17 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 16.5.17 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER