ITO., Ward-6(2), Hyderabad, Hyderabad V. M/s Shabari Constructions, Hyderabad

ITA 1645/HYD/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0351 (ITAT-HYDERABAD)
• Duration Of Justice: 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 07-04-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 27-10-2014
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Reopening of assessment; Income from undisclosed sources; Opportunity of being heard; Principle of natural justice; Source of fund; Additional evidence; Deemed dividend
• Section: 148; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 1905/HYD/2014 ASSESSMENT YEAR: 2006-07 S HABARI CONSTRUCTIONS, HYDERABAD [PAN: AAWFS8341L] VS INCOME TAX OFFICER, WARD-10(1), HYDERABAD (APPELLANT) (RESPONDENT) I.T.A. NO. 1645/HYD/2014 ASSESSMENT YEAR: 2006-07 INCOME TAX OFFICER, WARD-6(2), HYDERABAD VS SHABARI CONSTRUCTIONS, HYDERABAD [PAN: AAWFS8341L] (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI RAJAT MITRA, DR FOR ASSESSEE : S HRI P. MURALI MOHAN RAO, AR DATE OF HEARING : 07 - 0 4 - 201 5 DATE OF PRONOUNCEMENT : 17 - 04 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE APPEALS BY ASSESSEE AND REVENUE AGAINST THE DIRECTIONS OF LD. COMMISSIONER OF INCOME TAX(APPEALS)-IV, HYDE RABAD DATED 14-08- I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 2 -: 2014, WHILE GRANTING RELIEF TO ASSESSEE IN APPEAL. BOTH THE PARTIES ARE AGGRIEVED. 2. BRIEFLY STATED, ASSESSEE IS A PARTNERSHIP FIRM W ITH TWO PARTNERS SRI M. SATCHIDANANDA RAO AND SMT. M.JYOTHI WITH 50% SHA RE EACH. THE TWO PARTNERS WERE DIRECTIONS IN M/S. NAVAKETAN CONS TRUCTIONS PVT. LTD., (NCPL). DURING THE YEAR, NCPL HAD GIVEN THE FOLLOW ING LOANS TO THE ASSESSEE: S.NO. DATE AMOUNT (RS.) 1. 18 - 05 - 200 5 9,15,000 2. 20 - 05 - 2005 10,00,000 3. 17 - 10 - 2005 10,00,000 TOTAL 29,15,000 2.1 THE ASSESSING OFFICER (AO) NOTED THAT AS PER TH E BALANCE SHEET, NCPL WAS REFLECTED AS A LOAN CREDITOR TO THE APPELL ANT FOR A SUM OF RS.33,74,557/- (INCLUDING THE SUM OF RS.29,15,000/- RECEIVED DURING THE YEAR). AO FURTHER NOTED THAT THE TWO PARTNERS SRI M. SACHIDANANDA RAO AND SMT. M. JYOTHI WERE DIRECTORS OF NCPL WITH MORE THAN 10% VOTING RIGHTS THEREIN AND MORE THAN 20% SHARE IN TH E ASSESSEE-FIRM. AO DIRECTED ASSESSEE TO EXPLAIN WHY THE SUM OF RS.2 9,15,000/- SHOULD NOT BE TREATED AS DEEMED DIVIDEND IN THE HANDS OF A SSESSEE U/S. 2(22)(E) OF THE INCOME TAX ACT [ACT] AND IN THE ABSENCE OF A NY REPLY FROM THE ASSESSEE BROUGHT THE SAME TO TAX. 3. IT WAS SUBMITTED TO THE LD.CIT(A) IN APPEAL THAT ASSESSEE IS NOT SHAREHOLDER IN NCPL AND THEREFORE PROVISIONS OF SEC TION 2(22)(E) OF THE INCOME TAX ACT [ACT] ARE NOT APPLICABLE. IT RELIED ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. TP SH SOKKALAL [163 CTR 352 (MAD)]. FURTHER, IT WAS SUBMITTED THAT SUM OF RS.29,15,000/- WAS AN ADVANCE MADE FOR PURCHASE DURING THE COURSE OF BUSINESS AND SO ADVANCES MADE IN THE COURSE OF BUSINESS COULD NOT B E DEEMED AS I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 3 -: DIVIDEND U/S. 2(22)(E). IT RELIED ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. NAGEENDAS M. KAPADIA [ 75 CTR 161 (BOM)]. IT ALSO FILED THE FOLLOWING DOCUMENTS AS EVIDENCE I N SUPPORT OF THE CLAIM. I. AGREEMENT FOR PURCHASE OF LAND BY M/S. NAVKETAN CON STRUCTIONS FROM DR. M. SATCHIDANANDA RAO; II. LEDGER COPY OF M/S. SHABARI CONSTRUCTIONS IN THE BO OKS OF M/S. NAVKETAN CONSTRUCTIONS FOR THE AY.2005-06; 4. LD.CIT(A) DID NOT ADMIT THE ADDITIONAL EVIDENCE BUT ACCEPTED THE FIRST CONTENTION THAT THE AMOUNT CANNOT BE BROUGHT TO TAX AS DEEMED DIVIDEND AS ASSESSEE IS NOT A SHAREHOLDER OF NCPL. HOWEVER, LD.CIT(A) HELD THAT THE AMOUNT IS TAXABLE IN THE HANDS OF PAR TNERS. THE ORDER OF LD.CIT(A) IN PARA 6.3 AND 6.4 IS AS UNDER: '6.3 HOWEVER, IT IS ALSO SEEN THAT IN ARRIVING AT I TS DECISION IN THE CASE OF VENKAT RAMANA AUTOMOBILES, THE ITAT RELIED ON THE DECISION IN THE CASE OF CIT VS. HOTEL HILLTOP [2009] 313 IT R 116 (RAJ). IN THIS CASE THE LOAN HAD SIMILARLY BEEN GIVEN BY A COMPAN Y TO THE ASSESSEE WHICH WAS NOT A SHAREHOLDER IN THE COMPAN Y BUT WHOSE PARTNERS WERE SHAREHOLDERS WITH SUBSTANTIAL INTERE ST. WHILE HOLDING THAT THE DEEMED DIVIDEND U/S. 2(22)(E) WITH REGARD TO THE LOAN FROM THE COMPANY TO THE ASSESSEE COULD NOT BE ASSESSED IN THE HANDS OF THE ASSESSEE, THE HIGH COURT ALSO HELD THAT SUCH L OAN WOULD BE DEEMED DIVIDEND IN THE HANDS OF THE INDIVIDUALS, O N WHOSE BEHALF, OR ON WHOSE INDIVIDUAL BENEFIT, BEING SUCH SHAREHO LDER, THE AMOUNT WAS PAID BY THE COMPANY TO THE FIRM. 6.4 FOLLOWING THIS DECISION, IT CAN BE CONCLUDED T HAT THE LOAN AMOUNT SHOULD BE ASSESSED AS DEEMED DIVIDEND IN TH E HANDS OF THE SHAREHOLDER, I.E., THE TWO PARTNERS, SRI M. SATCHI DANANDA RAO AND SMT. M. JYOTHI. THE ASSESSING OFFICER IS, THEREFO RE, DIRECTED TO TAKE NECESSARY ACTION AS PER LAW AND IN ACCORDANCE WITH SEC.150 IN THIS REGARD'. I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 4 -: 5. ASSESSEE IS AGGRIEVED ON THE DIRECTION U/S. 150. IT WAS SUBMITTED THAT LD.CIT(A) EXCEEDED THE JURISDICTION IN DIRECTI NG AS ABOVE AS THOSE PERSONS ARE NOT IN DISPUTE BEFORE LD.CIT(A) AND THE Y ARE THIRD PARTIES IN WHOSE CASE THE JURISDICTION DOES NOT EXTEND AS THEY ARE ASSESSEES BEFORE ANOTHER OFFICER. ADDITIONAL GROUND WAS ALSO RAISED THAT LD.CIT(A) HAS NOT GIVEN ANY OPPORTUNITY TO EXPLAIN THE FACTS AND THE ADDITIONAL EVIDENCE IN SUPPORT OF THE FACTS WERE NOT ADMITTED. LD. COUNSE L RELIED ON THE DECISION OF HON'BLE MADHYA PRADESH HIGH COURT IN TH E CASE OF MRS. BANOO E. CAWASJI VS. CIT [10 TAXMAN 97 (MP)], NAGP UR BENCH OF HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF SHRI IN DERJIT SINGH SIAL VS. CIT [028 ITR 0121] AND CO-ORDINATE BENCH DECISION O F ITAT, MUMBAI IN THE CASE OF SHRI VIJAY KUMAR SARDA VS. DCIT IN ITA NO.3435/MUM/2012 DT. 04-10-2013 AND OTHER DECISIONS FOR THE PROPOSIT ION THAT LD.CIT(A) HAS EXCEEDED THE POWERS GRANTED UNDER THE ACT IN DI RECTING AO TO ASSESSEE THE AMOUNTS IN THIRD PERSONS HAND WITHOUT EVEN EXAMINING THE FACTS NOR GIVING AN OPPORTUNITY. 6. LD. DR HOWEVER, DEFENDED THE ACTION OF LD.CIT(A) . IT WAS ADMITTED THAT REVENUE HAS COME IN APPEAL ON THE DELETION MAD E BY CIT(A). IT WAS SUBMITTED THAT LD.CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT POST AMENDMENT TO THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, 1961 W.E.F. 01-04-1988, THE CONCERN IN WHICH THE SHARE HOLDER I S HAVING SUBSTANTIAL INTEREST IS ALSO COVERED IN THE AMBIT OF THE PROVIS IONS OF SECTION 2(22)(E) OF THE ACT AND LD.CIT(A) OUGHT TO HAVE APPRECIATED THE FACTS THAT THE AMENDMENT TO PROVISIONS OF SECTION 2(22)(E) W.E.F. 01-04-1988, SPECIFICALLY BROUGHT DOWN THE CONDITION THAT 'ANY C ONCERN IN WHICH SHAREHOLDER HOLDING NOT LESS THAN 10% OF VOTING POW ER IN THE COMPANY (IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED) IS A MEMBER OR PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST' IS LIAB LE TO TAX UNDER THE SAID PROVISIONS. I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 5 -: 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. AS FA R AS THE RELIEF GRANTED BY THE CIT(A) IN DELETING THE DEEMED DIVIDE ND, WE AGREE WITH THE FINDING THAT THE PROVISIONS OF SECTION 2(22)(E) DOE S NOT APPLY TO ASSESSEE IN REGARD TO THE SUM OF RS.29,15,000/- RECEIVED FRO M NCPL AS ASSESSEE IS NOT A SHAREHOLDER. THIS ISSUE WAS ELABORATELY C ONSIDERED IN THE CO- ORDINATE BENCH DECISION IN THE CASE OF M/S. MARGADA RSHI MARKETING (P) LTD., IN ITA NO. 689, 690 & 1234/HYD/2010 & 1849/HY D/2011 DT. 30- 09-2013, IT WAS HELD THAT: '7. HAVING HEARD THE SUBMISSIONS OF THE PARTIES AN D PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WE LL AS OTHE R MATERIALS ON RECORD, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). THE FACT THAT THE ASSESSEE IS NOT A SHAREHOLDER OF M/S USHODAYA ENTERPRISES LTD. HAS NOT BEEN CONTROVERTED BY THE DEPARTMENT. THEREFORE, AS PER THE PROVISION CONTAINED U/S 2(22 )(E) OF THE ACT THE ADVANCES CANNOT BE CONSIDERED AS DEEMED DIVIDE ND IN THE HANDS OF THE ASSESSEE. THE HONBLE DELHI HIGH COUR T IN CASE OF CIT VS. ANKITECH P. LTD. 340 ITR 14, WHILE CONSIDERING IDENTICAL ISSUE APPROVED THE DECISION OF THE ITAT, MUMBAI SPECIAL BENCH IN CASE OF BHAUMIC COLOURS (P) LTD., 313 ITR (AT) 146 AND HELD AS UNDER: 22. INSOFAR AS THE PROVISIONS OF SECTION 2(22)(E) ARE CONCERNED, WE HAVE ALREADY EXTRACTED THIS PROVISI ON AND TAKEN NOTE OF THE CONDITIONS/REQUISITES WHICH ARE TO BE ESTABLISHED FOR MAKING PROVISION APPLICA BLE. IN COMMISSIONER OF INCOME TAX VS.C.P.SARATHY MUDALIA R[1972] 83 ITR 170, THE SUPREME COURT HAD TRACED OUT THE ASSESSEE OF THIS PROVISION IN THE FOLLOWING MANNER: ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTEREST, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER 31.05.19987 BY WAY OF ADVANCE OR LOAN. FIRST LIMB A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BE NEFICIAL OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PERCENT OF THE VOTING P OWER, I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 6 -: SECOND LIMB B) OR TO MY CONCERN IN WHICH, SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) THIRD LIMB C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OR ANY SUCH SHAREHOLDER, TO T HE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMU LATED PROFITS. 23. IT IS RIGHTLY POINTED OUT BY THE BOMBAY HIGH COURT IN UNIVERSAL MEDICARE (P) LTD.(SUPRA)THAT SECTION 2( 22)(E) OF THE ACT IS NOT ARTISTICALLY WORDED. BE AS IT MAY, WE MAY REITERATE THAT AS PER THIS PROVISION, THE FOLLOWING CONDITI ONS ARE TO BE SATISFIED: (1) THE PAYER COMPANY MUST BE A CLOSELY HELD COMP ANY. (2) IT APPLIES TO ANY SUM PAID BY WAY OF LOAN OR ADVANCE DURING THE YEAR TO THE FOLLOWING PERSONS: (A) A SHAREHOLDER HOLDING AT LEAST 10 OF VOTING P OWER IN THE PAYER COMPANY. (B) A COMPANY IN WHICH SUCH SHAREHOLDER HAS AT LE AST 20% OF THE VOTING POWER. (C) A CONCERN (OTHER THAN COMPANY) IN WHICH SUCH SHAREHOLDER HAS AT LEAST 20% INTEREST. (3) THE PAYER COMPANY HAS ACCUMULATED PROFITS ON THE DATE OF ANY SUCH PAYMENT AND THE PAYMENT IS OUT OF ACCUMU LATED PROFITS. (4) THE PAYMENT OF LOAN OR ADVANCE IS NOT IN COUR SE OF ORDINARY BUSINESS ACTIVITIES. 24. THE INTENTION BEHIND ENACTING PROVISIONS OF S ECTION 2(22)(E) IS THAT CLOSELY HELD COMPANIES (I.E. COM PANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), W HICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 7 -: DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND I NCOME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COM PANIES DISTRIBUTE THEM AS LOAN OR ADVANCES TO SHAREHOLDE RS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTI AL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIV IDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREA TED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDERS. THE DEEMING PROVISIONS AS IT APPLIE S TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL INTEREST, IS BAS ED ON THE PRESUMPTION THAT THE LOANS OR ADVANCES WOULD ULTI MATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. 25. FURTHER, IT IS AN ADMITTED CASE THAT UNDER NO RMAL CIRCUMSTANCES, SUCH A LOAN OR ADVANCE GIVEN TO TH E SHAREHOLDERS OR TO A CONCERN, WOULD NOT QUALIFY A S DIVIDEND. IT HAS BEEN MADE SO BY LEGAL FICTION CREATED UNDER S ECTION 2(22)(E) OF THE ACT. WE HAVE TO KEEP IN MIND THAT THIS LEGAL PROVISION RELATES TO DIVIDEND. THUS, BY A DEEMI NG PROVISION, IT IS THE DEFINITION OF DIVIDEND WHICH IS ENLARGE D. LEGAL FICTION DOES NOT EXTEND TO SHAREHOLDER. WHEN WE KEEP IN MIND THIS ASPECT, THE CONCLUSION WOULD BE OBVIOUS, VIZ., LO AN OR ADVANCE GIVEN UNDER THE CONDITIONS SPECIFIED UNDER SECTIO N 2(22)(E) OF THE ACT WOULD ALSO BE TREATED AS DIVIDEND. THE FI CTION HAS TO STOP HERE AND IS NOT TO BE EXTENDED FURTHER FOR B ROADENING THE CONCEPT OF SHAREHOLDERS BY WAY OF LEGAL FICTION. IT IS A COMMON CASE THAT ANY COMPANY IS SUPPOSED TO DISTRIBUTE T HE PROFITS IN THE FORM OF DIVIDEND TO ITS SHAREHOLDERS/MEMBERS AND SUCH DIVIDEND CANNOT BE GIVEN TO NON-MEMBERS. THE S ECOND CATEGORY SPECIFIED UNDER SECTION 2(22)(E) OF THE ACT, VIZ., A CONCERN (LIKE THE ASSESSEE HEREIN), WHICH IS GIVE N THE LOAN OR ADVANCE IS ADMITTEDLY NOT A SHAREHOLDER/MEMBER OF THE PAYER COMPANY. THEREFORE, UNDER NO CIRCUMSTANCE, IT COULD BE TREATED AS SHAREHOLDER/MEMBER RECEIVING DIVIDEND. IF THE INTENTION OF THE LEGISLATURE WAS TO TAX SUCH LOAN OR ADVANCE AS DEEMED DIVIDEND AT THE HANDS OF DEEMING SHARE HOLDER, THEN THE LEGISLATURE WOULD HAVE INSERTED DEEMING PROVISION IN RESPECT OF SHAREHOLDER AS WELL, THAT HAS NOT HAPP ENED. MOST OF THE ARGUMENTS OF THE LEARNED COUNSELS FOR THE REVENUE WOULD STAND ANSWERED, ONCE WE LOOK INTO THE MATTE R FROM THIS PERSPECTIVE. I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 8 -: 26. IN A CASE LIKE THIS, THE RECIPIENT WOULD BE A SHAREHOLDER BY WAY OF DEEMING PROVISION. IT IS NOT CORRECT ON THE PART OF THE REVENUE TO ARGUE THAT IF THIS POSITION IS TAK EN, THEN THE INCOME IS NOT TAXED AT THE HANDS OF THE RECIPIEN T. SUCH AN ARGUMENT BASED ON THE SCHEME OF THE ACT AS PROJEC TED BY THE LEARNED COUNSELS FOR THE REVENUE ON THE BASIS OF SECTIONS 4, 5, 8, 14 AND 56 OF THE ACT WOULD BE OF NO AVAI L. SIMPLE ANSWER TO THIS ARGUMENT IS THAT SUCH LOAN OR ADVA NCE, IN THE FIRST PLACE, IS NOT AN INCOME. SUCH A LOAN OR ADV ANCE HAS TO BE RETURNED BY THE RECIPIENT TO THE COMPANY, WHICH H AS GIVEN THE LOAN OR ADVANCE. 27. PRECISELY, FOR THIS VERY REASON, THE COURTS H AVE HELD THAT IF THE AMOUNTS ADVANCED ARE FOR BUSINESS TRANSACTION S BETWEEN THE PARTIES, SUCH PAYMENT WOULD NOT FALL WITHIN T HE DEEMING DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 28. INSOFAR AS RELIANCE UPON CIRCULAR NO. 49 5 DATED 22.09.1997 ISSUED BY CENTRAL BOARD OF DIRECT T AXES IS CONCERNED, WE ARE INCLINED TO AGREE WITH THE OBSE RVATIONS OF THE MUMBAI BENCH DECISION IN BHAUMIK COLOUR (P) L TD. (SUPRA) THAT SUCH OBSERVATIONS ARE NOT BINDING ON THE COU RTS. ONCE IT IS FOUND THAT SUCH LOAN OR ADVANCE CANNOT BE TREA TED AS DEEMED DIVIDEND AT THE HANDS OF SUCH A CONCERN WH ICH IS NOT A SHAREHOLDER, AND THAT ACCORDING TO US IS THE CO RRECT LEGAL POSITION, SUCH A CIRCULAR WOULD BE OF NO AVAIL. 29. NO DOUBT, THE LEGAL FICTION/DEEMED PROVISION CREATED BY THE LEGISLATURE HAS TO BE TAKEN TO MAGIGICAL CON CLUSION AS HELD IN ANDALEEB SEHGAL (SUPRA). THE REVENUE WANT S THE DEEMING PROVISION TO BE EXTENDED WHICH IS ILLOG ICAL AND ATTEMPT IS TO CREATE A REAL LEGAL FICTION, WHICH IS NOT CREATED BY THE LEGISLATURE. WE SAY AT THE COST OF REPETITIO N THAT THE DEFINITION OF SHAREHOLDER IS NOT ENLARGED BY ANY FICTION. 30. BEFORE WE PART WITH, SOME COMMENTS ARE TO BE NECESSARILY MADE BY US. AS POINTED OUT ABOVE, IT IS NOT IN DI SPUTE THAT THE CONDITIONS STIPULATED IN SECTION 2(22)(E) OF THE ACT TREATING THE LOAN AND ADVANCE AS DEEMED DIVIDEND ARE ESTABLISH ED IN THESE CASES. THEREFORE, IT WOULD ALWAYS BE OPE N TO THE REVENUE TO TAKE CORRECTIVE MEASURE BY TREATING TH IS DIVIDEND INCOME AT THE HANDS OF THE SHAREHOLDERS AND TA X THEM ACCORDINGLY. AS OTHERWISE, IT WOULD AMOUNT TO ESC APEMENT OF INCOME AT THE HANDS OF THOSE SHAREHOLDERS. I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 9 -: 8. THE SAME VIEW HAS ALSO BEEN EXPRESSED BY THE HO NBLE DELHI HIGH COURT AGAIN IN CASE OF CIT VS. NAVYUG PROMOTE RS P. LTD. (203 TAXMAN 618) AND HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. UNIVERSAL MEDICARE (P) LTD., (324 ITR 263). 9. THE ITAT, HYDERABAD BENCH IN CASE OF MARC MANUF ACTURERS PVT. LTD. VS. ACIT IN ITA NO. 555/HYD/2008 DT. 31/08/20 09 WHILE CONSIDERING IDENTICAL ISSUE OF ADVANCEMENT OF LOAN TO ONE COMPANY, WHICH IS NOT A SHAREHOLDER OF THE LENDER COMPANY F OLLOWING THE DECISION OF ITAT MUMBAI SPECIAL BENCH IN CASE OF B HAUMIK COLOUR P. LTD. (SUPRA) AND OTHER DECISIONS HELD AS UNDER: 5. IT CAN BE SEEN FROM THE CIRCULAR THAT THE PRO VISIONS OF AMENDED SECTION 2(22)(E) ARE TO BE APPLIED ON LY TO THE PAYMENTS MADE TO THE SHAREHOLDERS AND NOT TO ANY OTHER PERSON OR CONCERN OTHER THAN THE SHAREHOLDERS. TH E ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. H.K. MITTAL REP ORTED IN 219 ITR 420 HELD THAT THE CHIEF INGREDIENT OF DIVIDEN D AS DEFINED IN SUB CLAUSE (E) OF CLAUSE (22) OF SECTION 2 OF THE I T ACT IS THAT THE RECIPIENT SHOULD A SHAREHOLDER ON THE DAY THE LOAN WAS ADVANCED. IF THAT FACT IS NOT ESTABLISHED, THERE CANNOT BE A DEEMED DIVIDEND. THEREFORE, THE PROVISIONS OF SEC . 2(22)(E) CANNOT BE APPLIED TO MARC AS IT IS NOT A SHAREHOL DER IN MTAR TECHNOLOGIES PVT. LTD. (HEREINAFTER CALLED AS MTA R). IN THIS REGARD, THE ASSESSEE RELIES ON THE DECLSLON OF THE ITAT MUMBAI BENCH 'G' IN THE CASE OF SEAMIST PROPERTIE S PVT. LTD. VS. ITO REPORTED IN (2005) 1 SOT PAGE 142. THE AS SESSEE FURTHER SUBMITS THAT THE PROVISIONS OF SEC. 2(22) (E) MENTION AS UNDER: 'ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY S UM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE CO MPANY 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 BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTI TLED TO A FIXED RATE OF 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 SHAREHOLDE R IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTA NTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BE HALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLD ER, TO THE- I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 10 -: EXTENT TO WHICH THE COMPANY IN EITHER CASE PO SSESSES ACCUMULATED PROFITS' 6. THE INTENTION OF THE LEGISLATURE IS CLARIFIED IN CIRCULAR ISSUED BY THE CBIT AS AT THE TIME OF AMENDMENT OF CLAUSE (E) OF SUB SECTION (22) OF SEC. 2 IS FURTHER FORTIFIED BY TH E FACT THAT FOR DEDUCTION OF TAX AT SOURCE. SEC. 194 PROVIDE THAT SUCH DEDUCTION OF TAX HAS TO BE MADE IN THE CASE OF TH E PAYMENTS OF THE NATURE MENTIONED IN CLAUSES (A), (B), (C), (D) AND (E) OF SUB SECTION (22) OF SECTION 2 ONLY IN A CASE WH ERE SUCH PAYMENTS WERE MADE TO A SHAREHOLDER. SECTION 199 ALSO INDICATES THAT ADJUSTMENT OF TOS WOULD BE PROVIDE D IN THE ASSESSMENT OF SHAREHOLDER ONLY. THE VERY FACT THAT THE PROVISION FOR DEDUCTION OF TAX AT SOURCE AND ADJU STMENT OF TAX IS ONLY IN RESPECT OF THE PAYMENTS TO THE' SHAREH OLDER WOULD CLEARLY INDICATE THAT EVEN AFTER THE AMENDMENT, T HE EFFECT OF CLAUSE (E) OF SUB SECTION (22) OF SEC. 2 WOULD AP PLY ONLY WHEN THE PAYMENT IS MADE TO SHAREHOLDER. WHEREVER, THE TAX IS TO BE DEDUCTED AT SOURCE FROM A DIVIDEND OR DEEMED D IVIDEND AND THE CONSEQUENTIAL EFFECT OF GIVING EFFECT TO SUCH DEDUCTION OF TAX AT SOURCE, ETC., REFERENCE WAS MADE O NLY TO THE PAYMENTS TO THE SHAREHOLDER. THIS WOULD INDICATE CLEARLY THAT CLAUSE (E) WOULD APPLY ONLY IN CASE OF PAYMENT S TO THE SHAREHOLDER AND NOT TO OTHERS. THEREFORE, CONSIDERED IN THE LIGHT OF THE RATIOS L AID DOWN AS AFORESAID THE ADVANCES CANNOT BE TREATED AS DEEMED DIVIDEND COMING WITHIN THE AMBIT OF SECTION 2(22)(E) OF THE ACT. 8. RESPECTFULLY FOLLOWING THE SAME, AS THE FACT THA T ASSESSEE IS NOT A SHAREHOLDER IN NCPL WAS NOT CONTROVERTED BY THE REV ENUE, WE UPHOLD THE ORDER OF LD.CIT(A) TO THAT EXTENT AND DISMISS T HE REVENUE APPEAL. 9. COMING TO THE GRIEVANCE OF ASSESSEE, WE AGREE WI TH THE CONTENTIONS OF ASSESSEE. IN THE CASE OF MRS. BANOO E. CAWASJI VS. CIT (SUPRA), HON'BLE M.P. HIGH COURT HAS HELD AS UNDER: 'IT IS WELL SETTLED LAW THAT THE COMMISSIONER (APPE ALS) CANNOT, WHILE DECIDING AN APPEAL PREFERRED BY AN ASSESSEE, PASS ORDER WITH REGARD TO THE ASSESSMENTS MADE BY THE ITO IN THE C ASE OF OTHERS. THEREFORE, IN THE INSTANT CASE, WHILE DECIDING THE QUESTION WHETHER I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 11 -: THE REOPENING OF ASSESSMENT BY THE ITO IN THE ASSE SSEE'S CASE WAS JUSTIFIED, THE COMMISSIONER (APPEALS) WAS NOT COMP ETENT TO ISSUE DIRECTION TO CANCEL THE ASSESSMENTS MADE IN THE CA SE OF DECEASED'. 9.1. FURTHER, CO-ORDINATE BENCH IN THE CASE OF SHRI VIJAY KUMAR SARDA VS. DCIT (SUPRA), ALSO CONSIDERED THE SAME ISSUE AN D HELD AS UNDER: '8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE RECORD. UNDER SECTION 251 OF THE INCOME TAX ACT THE FIRST APPELLATE AUTHORITY HAS THE POWERS TO CON FIRM, REDUCE, ENHANCE OR ANNUAL THE ASSESSMENT. HE CAN ALSO INITI ATE PENALTY PROCEEDINGS AND IN ANY OTHER CASE HE MAY PASS SUCH ORDERS IN THE APPEAL AS HE THINKS FIT. THE EXPRESSION 'MAY PA SS SUCH ORDERS IN THE APPEAL' WAS SUBJECT MATTER OF CONSIDE RATION BY VARIOUS COURTS. WHILE DECIDING THE APPEAL THE APPELLATE AUTHORITY MAY GIVE APPROPRIATE DIRECTIONS TO' THE AO EITHER IN REGARD TO THE ASSESSEE IN APPEAL BEFORE HIM OR OTHE RWISE. HOWEVER, THESE DIRECTIONS CANNOT TRAVEL OUTSIDE THE ASSESSMENT YEAR TO WHICH THE APPEAL RELATES. IN THE SAME WAY T HE DIRECTIONS CANNOT RELATE TO A THIRD PERSON, WHOSE APPEAL IS NO T PENDING BEFORE HIM. THE POLICY OF LAW IS THAT THERE MUST BE A POINT OF FINALITY IN ALL LEGAL PROCEEDINGS, THAT STALE ISSUE S SHOULD NOT BE REACTIVATED BEYOND A, PARTICULAR STAGE, AS OBSERVED BY THE HON'BLE APEX COURT IN THE CASE OF PARASHURAM POTTER Y WORKERS CO. LTD. 106 ITR 1 AT PAGE 10. IN THE INSTANT CASE NO ADDITION WAS MADE IN THE HANDS OF SMT .. KALPANA VIJAY SARDA THOUGH SHE HAS FILED THE RETURN BY SPECIFYING THAT SHE HAS PURCHASED THE PROPERTY. AT THE SAME TIME IT IS NOT IN DISPUTE THAT THE AO HAS TAKEN A CONSISTENT STAND THAT A SUM OF ~16,51,0 00/- WAS PAID FOR PURCHASE OF THE SAID PROPERTY BUT CONSCIOU SLY TOOK A VIEW THAT SHE HAS NO WHEREWITHAL TO MAKE SUCH PAYME NT AND HENCE NO ADDITION CAN BE MADE UNDER SECTION 69A OF THE ACT. THIS FINDING HAS BECOME FINAL AND THIS WAS NOT IN D ISPUTE BEFORE THE APPELLATE AUTHORITY. IN THE APPEAL FILED BY THE ASSESSEE'S HUSBAND THE ONLY ISSUE WAS AS TO WHETHER HE PAID A SUM OF RS.16,51,000/- TO THE TENANT ON BEHALF OF HIS WIFE AND IT IS NOT THE CASE OF EITHER THE AO OR THE ASSESSEE THAT THE PAYMENT WAS MADE BY ASSESSEE'S WIFE. SUCH BEING THE CASE, AN IS SUE WHICH IS NOT BEFORE THE FIRST APPELLATE AUTHORITY CANNOT BE SUBJECT MATTER OF CONSIDERATION WHILE DISPOSING OF AN APPEA L, IN EXERCISE OF THE POWERS VESTED IN THE FIRST APPELLATE AUTHORI TY UNDER SECTION 251 OF THE INCOME TAX ACT. IN THE CASE OF A .S. PARIKH VS. INCOME TAX OFFICER 203 ITR 186 THE HON'BLE GUJARAT HIGH COURT HAD CONSIDERED IDENTICAL ISSUE WITH REGARD TO EXTEN SION OF TIME I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 12 -: LIMIT BY VIRTUE OF PROVISIONS OF SECTION 150(1) OF THE INCOME TAX ACT AND IN THAT REGARD THE COURT OBSERVED THAT IN O RDER TO ISSUE SUCH DIRECTIONS, WHICH WOULD AMOUNT TO ENHANCING TH E ASSESSMENT OF A THIRD PARTY, SUCH PERSON MUST HAVE BEEN PUT ON NOTICE, AS OTHERWISE, IT IS NOT PERMISSIBLE TO GIVE SUCH DIRECTION. THE FIRST INGREDIENT IS THAT THERE MUST BE A FINDIN G THAT THE INCOME EXCLUDED FROM THE TOTAL INCOME OF ONE PERSON IS THE INCOME OF ANOTHER PERSON. THE SECOND INGREDIENT IS THAT THE ORDER MUST BE ONE WHICH HAS COME TO BE PASSED AFTER THE OTHER PERSON WAS GIVEN AN OPPORTUNITY OF BEING HEARD. THE PERSON CONCERNED MUST BE PUT ON NOTICE THAT THE CONSEQUENC E OF THE INCOME BEING HELD AS HER INCOME IS LIKELY TO ADVERSELY AFFECT HER TAX LIABILITY. 9. IN THE INSTANT CASE THE LEARNED CIT(A) HAS NOT C ALLED FOR ANY RECORD EITHER FROM THE AO OR FROM THE AFFECTED PARTIES BEFORE COMING TO THE CONCLUSION AS TO WHY THE ALLEGED PAYM ENT WAS MADE FROM THE UNDISCLOSED SOURCES OF INCOME, MORE P ARTICULARLY WHEN THE AO WAS FIRMLY OF THE OPINION THAT SHE WOUL D NOT HAVE BEEN IN A POSITION TO PAY SUCH HUGE AMOUNT SINCE SH E HAD NO OTHER INCOME TO MAKE SUCH PAYMENT. THE EXPRESSION ' MAY BE DEEMED TO BE THE INCOME' UNDER SECTION 69A OF THE A CT IMPLIES THAT EVEN AFTER COMING TO THE CONCLUSION THAT A SUM OF RS.16,51,000/- WOULD HAVE BEEN PAID FOR SURRENDER O F TENANCY RIGHTS IT IS NOT AUTOMATIC THAT SUCH ADDITION SHOUL D BE MADE UNDER SECTION 69A OF THE ACT UNLESS IT IS SHOWN THA T SHE WAS CAPABLE OF HAVING SO MUCH OF INCOME IN THE YEAR UND ER CONSIDERATION. THE FIRST APPELLATE AUTHORITY HAS NO T MADE ANY COMMENT IN THAT REGARD AND, IN FACT, HAS NOT GIVEN ANY OPPORTUNITY TO SMT. KALPANA VIJAY SARDA, WHICH SHOW S THE FALLACY IN THE DIRECTION GIVEN BY HIM. 10. IN THE CASE OF MRS. BANOO E. COWASJI 138 ITR 68 6 THE HORI'BLE INDORE BENCH OF THE MADHYA PRADESH HIGH COURT OBSER VED THAT THERE WAS NO PROVISION OF LAW UNDER WHICH THE CIT(A) , WHILE DECIDING AN APPEAL PREFERRED BY THE ASSESSEE, CAN P ASS ORDERS WITH REGARD TO ASSESSMENTS MADE BY THE AO IN THE CA SE OF A THIRD PARTY. 11. IN THE CASE OF PEICO ELECTRONICS AND ELECTRICAL S LTD. 210 ITR 991 THE HONBLE CALCUTTA HIGH COURT OBSERVED THAT TH OUGH THE POWERS OF THE FIRST APPELLATE AUTHORITY ARE CO-TERM INUS WITH THAT OF THE AA AND HAS POWERS TO ENHANCE THE ASSESSMENT BUT THAT I S CONFINED TO THE ASSESSEE AND A FINDING OR DIRECTION , WHILE DISPOSING OF THE APPEAL, MUST BE A FINDING NECESSARY FOR GIVING I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 13 -: RELIEF IN RESPECT OF THE ASSESSMENT YEAR IN QUESTIO N. IN OTHER WORDS, THE CONCLUSION REACHED BY THE AO IN THE CASE OF A THIRD PARTY SHOULD NOT BE DISTURBED WITHOUT GIVING SUCH A SSESSEE AN OPPORTUNITY OF BEING HEARD AND WHEN IT IS NOT A NEC ESSARY FINDING OR DIRECTION IN THE CASE OF THE ASSESSEE WHOSE APPE AL IS PENDING AND THE ISSUE THEREIN IS SUBJECT MATTER OF DISPUTE BEFORE THE CIT(A). 12. IN THE CASE OF CIT VS. BANWARI LAL & SONS P. LT D., 257 ITR 518 AT PAGE 522 THE HONBLE DELHI HIGH COURT APPROVED THE FINDI NGS OF THE APPELLATE TRIBUNAL BY OBSERVING AS UNDER: 'BEFORE CLOSING, WE WOULD LIKE TO SAY A WORD ABOUT THE DIRECTION OF THE LEARNED APPELLATE ASSISTANT COMMISSIONER TO THE INC OME-TAX TO BRING THE AMOUNT IN QUESTION TO TAX UNDER THE HEAD 'INCOME FROM PROPERTY' IN THE RESPECTIVE ASSESSMENT YEARS TO WHI CH THE INCOME . RELATES. THIS DIRECTION OF THE LEANED APPELLATE ASS ISTANT COMMISSIONER HAS TO BE CONSTRUED IN THE LIGHT F THE DECISION OF THE SUPREME COURT IN THE CASE OF RAJINDER NATH U. ERR [1979J 120 ITR 14. IT WAS NOT A NECESSARY FOR THE DISPOSAL OF THE ASSE SSEE'S APPEAL FOR THIS YEAR TO GIVE SUCH A DIRECTION AND, THEREFORE, THE SAME COULD NOT BE TREATED AS A DIRECTION GIVEN BY THE LEARNED APPELLATE ASSISTANT COMMISSIONER AS CONTEMPLATED IN SECTION 153(3)(II). ' IT DESERVES TO BE NOTICED THAT THE EXPRESSION 'IN C ONSEQUENCE OF OR TO EFFECT TO ANY FINDING OR DIRECT ION CONTAINED IN AN ORDER UNDER SECTION 2 ..... ' IS AKIN TO THE EXPRESSION USED IN SECTION 150(1) I.E. 'ANY FINDING DIRECTION CONTAINED IN AN ORDER PASSED BY ANY AUTHORITY IN ANY PROCEEDING UNDER THIS ACT BY WAY O F AN APPEAL'. IN OTHER WORDS, IN ORDER TO EXTEND THE TIME LIMIT U NDER SECTION 148 OF THE ACT, BY TAKING AID OF SECTION 150 OR 153, OF THE ACT, THE FIRST APPELLATE AUTHORITY HAS TO TAKE INTO CONSIDERATION THE FACT THAT THE FINDING OR DIRECTION SHOULD BE RELEVANT FOR THE SUB JECT MATTER OF DISPUTE AND, WHEN IT AFFECTS A THIRD PARTY, PRINCIP LES OF NATURAL JUSTICE DEMANDS THAT SUCH THIRD PARTY SHC.ULD HAVE BEEN GIVEN AN OPPORTUNITY AS OTHERWISE SUCH DIRECTION DESERVES TO BE SET ASIDE AS INVALID. 13. SIMILAR VIEW WAS TAKEN BY THE ITAT HYDERABAD BE NCH M THE CASE OF PENNAR ELECTRONICS P. LTD. 308 ITR (AT) 192 . AT PAGE 203 THE ITA' HYDERABAD BENCHES HAD TAKEN SUPPORT OF THE VIEW TAKEN BY THE HORI'BLE PATNA HIGH COURT IN THE CASE OF GAURI SHANKAR CHOUDHARY 234 ITR 865 TO OBSERVE THAT RESORT TO SUB -SECTION (1) OF SECTION 150 OF THE ACT CAN BE TAKE] ONLY IN CASES W HERE IT BECOMES I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 14 -: NECESSARY TO MAKE ASSESSMENT OR REASSESSMENT OR REC OMPUTATION AND SUCH DIRECTION MUST RELATE TO THE ASSESSEE IN QUESTION AND NOT ANY DIRECTION OR ASSESSMENT MADE IN APPEAL REFERENC E OR REVISION OR ANY OTHER ASSESSEE OR ANY PROCEEDINGS IN WHICH T HE ASSESSEE IN QUESTION IS NOT A PARTY. THUS, ON A CONSPECTUS O F THE MATTER, WE ARE OF THE FIRM VIEW THAT THE DIRECTION GIVEN BY TH E FIRST APPELLATE AUTHORITY UNDER SECTION 150(1) IS NOT IN ACCORDANCE WITH LAW. WE ORDER ACCORDINGLY'. 10. SINCE, CO-ORDINATE BENCH CONSIDERED THE EXISTIN G LAW ON THE ISSUE ELABORATELY, RESPECTFULLY FOLLOWING THE SAME, WE HO LD THAT THE DIRECTIONS GIVEN BY LD.CIT(A) IN PARA 6.3 AND 6.4 ARE NOT WARR ANTED AND SO THE TWO PARAS ARE DELETED FROM THE ORDER. WE MAKE IT CLEAR THAT DIRECTIONS GIVEN ARE NOT BINDING ON THE AO, BUT HE IS FREE TO TAKE I NDEPENDENT STEPS IF REQUIRED ON FACTS AND PERMITTED AS PER THE PROVISIO NS OF LAW. WITH THESE OBSERVATIONS, ASSESSEE'S GROUNDS ARE ALLOWED. 11. IN THE RESULT, REVENUE'S APPEAL IS DISMISSED AN D ASSESSEE'S APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 17 TH APRIL, 2015 SD/- SD/- (ASHA VIJAYARAGHAVAN) (B. RAMA KOTAIAH) JUDICIAL MEMBER ACC OUNTANT MEMBER HYDERABAD, DATED 17 TH APRIL, 2015 TNMM I.T.A. NOS. 1905 & 1645/HYD/2014 SHABARI CONSTRUCTIONS :- 15 -: COPY TO : 1. SHABARI CONSTRUC TIONS, C/O. P. MURALI & CO., CHARTERED ACCOUNTANTS, 6-3-655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD. 2. ITO, WARD-10(1), HYDERABAD 3. ITO, WARD-6(2), HYDERABAD 4. CIT(APPEALS)-IV, HYDERABAD 5. CIT-III, HYDERABAD 6. D.R. ITAT, HYDERABAD