DCIT, Cir-4(2), Kolkata, Kolkata V. M/s. Rainbow Investments Ltd., Kolkata

ITA 1836/KOL/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 7931 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 11-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROBIN CHOWDHURY ADD
• Keywords: Deemed dividend; Scheme of amalgamation
• Section: 143(3); 2(22)(e)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B, BENC H KOLKATA BEFORE SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM ./ITA NO.1836/KOL/2017 ( / ASSESSMENT YEAR:2010-11) DCIT, CIRCLE-4(2), KOLKATA VS. M/S RAINBOW INVESTMENTS LTD. DUNCUN HOUSE, 4 TH FLOOR, 31, NETAJI SUBHAS ROAD, KOLKATA-700001. ./ ./PAN/GIR NO.: AAACR 3915 Q (ASSESSEE) .. (REVENUE) C.O. NO. 117/KOL/2017 (ARISING OUT OF ./ITA NO.1836/KOL/2017) ( / ASSESSMENT YEAR:2010-11) M/S RAINBOW INVESTMENTS LTD. DUNCUN HOUSE, 4 TH FLOOR, 31, NETAJI SUBHAS ROAD, KOLKATA- 700001. VS. DCIT, CIRCLE-4(2), KOLKATA ./ ./PAN/GIR NO.: AAACR 3915 Q (CROSS OBJECTOR) .. (REVENUE) APPELLANT BY : SHRI ROBIN CHOWDHURY, ADD. CIT SR DR RESPONDENT BY : SHRI AKKAL DUDHWEWALA, FCA / DATE OF HEARING : 30/04/2019 /DATE OF PRONOUNCEMENT : 19/07/2019 M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 2 22 2 / O R D E R PER DR. A. L. SAINI: THE CAPTIONED APPEAL FILED BY THE REVENUE AND TH E CROSS OBJECTION FILED BY THE ASSESSEE, PERTAINING TO ASSESSMENT YEAR 2010-11 , ARE DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEAL)-1 4, MUMBAI, WHICH IN TURN ARISES OUT OF AN ASSESSMENT ORDER PASSED BY THE AS SESSING OFFICER U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 25/03/2013. 2. GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS FOLLOWS: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS FACTS IN DELETING AN AD DITION OF RS. 2,21,95,460/- AS DEEMED DIVIDEND U/S 2(22)(A) BEING THE PROPORTIO NATE SHARE IN CAPITAL RESERVE CREATED PURSUANT TO THE ACCOUNTING ENTRIES PASSED IN THE BOOKS OF ACCOUNTS OF UNIVERSAL INDUSTRIAL FUND LTD. TO GIVE EFFECT TO THE SCHEME OF AMALGAMATION SANCTIONED BY THE CALCUTTA HIGH COURT WHEREIN M/S CELESTA PROPERTIES PVT. LTD. AND M/S HILLTOP HOLDINGS INDIA LTD. GOT AMALGAMATED IN WHOM THE ASSESSEE HELD EQUITY SHARES. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS FACTS IN DELETING AN AD DITION OF RS. 29,35,844/- AS DEEMED DIVIDEND U/S 2(22)(D) BEING THE PROPORTIO NATE SHARE IN REDUCTION IN CAPITAL OF M/S UNIVERSAL INDUSTRIAL FUND LTD. TO GIVE EFFECT TO THE SCHEME OF AMALGAMATION SANCTIONED BY THE CALCUTTA HIGH COU RT BY PASSING ACCOUNTING ENTRIES IN THEIR BOOKS OF ACCOUNTS. 3. THAT THE APPELLANT CRAVES FOR LEAVE TO ADD, DELE TE, AMEND OR MODIFY ANY GROUND BEFORE OR AT THE TIME OF APPELLATE PROCEEDIN GS. 3.THE APPEAL FILED BY THE REVENUE FOR ASSESSMENT YE AR 2010-11, IS BARRED BY LIMITATION BY 27 DAYS. THE LD DR FOR THE REVENUE HA S MOVED A PETITION REQUESTING THE BENCH TO CONDONE THE DELAY.WE HEARD THE PARTY O N THIS PRELIMINARY ISSUE. HAVING REGARD TO THE REASONS GIVEN IN THE PETITION, WE CONDONE THE DELAY AND ADMIT THE APPEAL OF REVENUE FOR HEARING. 4. FACTS OF THE CASE WHICH CAN BE STATED QUITE SHOR TLY ARE AS FOLLOWS: THE ASSESSEE COMPANY IS A NON-BANKING FINANCIAL COMPANY REGISTER ED WITH RESERVE BANK OF INDIA AND IS ENGAGED IN THE BUSINESS OF INVESTMENTS IN SHARES AND SECURITIES. THE M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 3 33 3 ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 02.1 0.2010 DECLARING TOTAL LOSS OF RS.6,022/-. THE ASSESSEE`S CASE WAS SELECTED FOR SC RUTINY AND THE ASSESSING OFFICER FRAMED THE ASSESSMENT UNDER SECTION 143(3) OF THE A CT. THE AO MADE AN ADDITION OF RS. 2,21,95,460/- AS DEEMED DIVIDEND U/S 2(22)(A ) BEING THE PROPORTIONATE SHARE IN CAPITAL RESERVE CREATED PURSUANT TO THE ACCOUNTI NG ENTRIES PASSED IN THE BOOKS OF ACCOUNTS OF UNIVERSAL INDUSTRIAL FUND LTD. TO GIVE EFFECT TO THE SCHEME OF AMALGAMATION SANCTIONED BY THE CALCUTTA HIGH COURT WHEREIN M/S CELESTA PROPERTIES PVT. LTD. AND M/S HILLTOP HOLDINGS INDIA LTD. GOT AMALGAMATED IN WHOM THE ASSESSEE HELD EQUITY SHARES. THE AO ALSO M ADE AN ADDITION OF RS. 29,35,844/- AS DEEMED DIVIDEND U/S 2(22)(D) BEING T HE PROPORTIONATE SHARE IN REDUCTION IN CAPITAL OF M/S UNIVERSAL INDUSTRIAL FU ND LTD. TO GIVE EFFECT TO THE SCHEME OF AMALGAMATION SANCTIONED BY THE CALCUTTA H IGH COURT BY PASSING ACCOUNTING ENTRIES IN THEIR BOOKS OF ACCOUNTS. THE ASSESSEE COMPANY SUBMITTED BEFORE THE AO THAT THE SHAREHOLDERS OF THE TRANSFER EE COMPANIES WERE ALLOTTED SHARES OF THE TRANSFEROR COMPANY AT THE EXCHANGE RA TIO SANCTIONED BY THE HON`BLE CALCUTTA HIGH COURT IN THE SCHEME OF AMALGAMATION. NO ASSETS OR ANY PART OF THE ASSETS WERE DISTRIBUTED BY M/S UNIVERSAL INDUSTRIAL FUND LTD TO ITS SHAREHOLDERS. ACCORDINGLY THE PROVISIONS OF SECTION 2(22) (A) ARE NOT APPLICABLE TO THE ASSESSEE COMPANY. HOWEVER, THE ASSESSING OFFICER REJECTED TH E CONTENTION OF THE ASSESSEE AND HELD AS FOLLOWS: 6.4.1. ASSESSEE'S ARGUMENTS ON THE FIRST ISSUE OF APPLICABILITY OF PROVISIONS OF SECTION 2(22)(A) IS MAINLY ON THE LINES OF KEEPING AND MAIN TAINING THE AMALGAMATION ACCOUNTS AS PER THE ACCOUNTING STANDARD 14 - 'ACCOUNTING FOR AM ALGAMATIONS' ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND ALSO THAT THE SAID ENTRIES DOES NOT ENTAIL THE RELEASE OF ASSETS TO THE SHARE HOLDERS SINCE THE EF FECT WAS GIVEN TO THE COURTS ORDER. THE CONTENTIONS OF THE ASSESSEE HAVE BEEN CAREFULLY CON SIDERED. HOWEVER, THE SAME ARE NOT ACCEPTABLE FOR THE FOLLOWING REASONS: A. THE ASSESSEE'S RECEIVED SHARES OF M/S UNIVERSAL INDUSTRIAL FUND LTD., PURSUANT TO SCHEME OF AMALGAMATION AMOUNTING TO RS.2,30,19,491/ -(14,55,746 SHARES). ' B. IT IS AN ADMITTED FACT ON RECORD THAT M/S UNIVER SAL INDUSTRIAL FUND LTD., ISSUED THESE SHARES TO THE EQUITY SHARE HOLDERS OF AMALGAMATING COMPANIES DURING THE YEAR. C. IT IS ALSO AN ADMITTED FACT THAT M/S UNIVERSAL I NDUSTRIAL FUND LTD., POSSESSES RESERVES AND SURPLUS IN FORM OF CAPITALIZED SURPLUS RECEIVED ON AMALGAMATION AMOUNTING TO RS.71,36,80.400/- AS ON 31.03.2010. D. IT IS ALSO A FACT THAT THE M/S UNIVERSAL INDUSTR IAL FUND LTD., HAS UTILIZED THE ABOVE RESERVES & SURPLUS AVAILABLE WITH THE COMPANY ARISI NG OUT OF THE AMALGAMATION SURPLUS FOR ALLOTTING THE SHARES TO THE EQUITY SHARE HOLDER S OF THE AMALGAMATING COMPANIES. THE M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 4 44 4 RESERVES AND SURPLUS HAVE BEEN UTILIZED TO THE EXTE NT OF RS.34,99,67,430/- (I.E. THE AMOUNT OF FRESH ISSUE) FOR ALLOTTING THE SHARES DURING THE YEAR. E. THE INCOME TAX ACT UNDER SECTION 2(22) PROVIDES FOR AN 'INCLUSIVE' DEFINITION OF THE DIVIDEND TO INCLUDE CERTAIN AMOUNTS DISTRIBUTED TO THE SHARE HOLDERS AS DIVIDENDS. ONE SUCH DEFINITION IS PROVIDED UNDER SUB-CLAUSE (A) OF SECTION 2(22) OF THE ACT WHICH IS REPRODUCED AS UNDER: (22) 'DIVIDEND' INCLUDES A) ANY DISTRIBUTION BY A COMPANY OF ACCUMULATED PR OFITS WHETHER CAPITALIZED OR NOT, IF SUCH DISTRIBUTION ENTAILS THE RELEASE BY TH E COMPANY TO ITS SHAREHOLDERS OF ALL OR ANY PART OF THE ASSETS OF THE COMPANY. F. THIS SECTION ENVISAGES FULFILLMENT OF FOLLOWING CONDITIONS TO TREAT ANY DISTRIBUTION TO SHARE HOLDERS OF ACCUMULATED PROFITS ENTAILING RELE ASE OF ASSETS OF THE COMPANY: I) THE COMPANY SHOULD POSSESS ACCUMULATED PROFITS W HETHER CAPITALIZED OR NOT; (II) THE COMPANY SHOULD DISTRIBUTE ITS ACCUMULATED PROFIT '; (III) THE PERSON RECEIVING THE BENEFIT BY WAY OF SU CH DISTRIBUTION SHOULD BE A SHARE HOLDER; (IV) THE DISTRIBUTION SHALL ENTAIL RELEASE OF ALL O R ANY PART OF THE ASSET OF THE COMPANY, G. NOW COMING TO THE FULFILLMENT OF THE ABOVE CONDI TIONS, THE FACTS OF THE ASSESSEE'S CASE ARE AS UNDER: (I) THE COMPANY M/S UNIVERSAL INDUSTRIAL FUND LTD., POSSESSED ACCUMULATED PROFITS WHICH ARE CAPITALIZED AMOUNTING TO RS.71,36,80,400/ - AS ON THE DATE OF ISSUE OF THE SHARES. THIS FACT IS EVIDENT FROM THE BALANCE SHEET FILED ON RECORD, (II) THE COMPANY M/S UNIVERSAL INDUSTRIAL FUND LTD. , HAS ISSUED SHARES AMOUNTING TO RS.34,99,67,430/- (3,49,96,743 NUMBER OF SHARES). T HIS ISSUE IS AS A RESULT OF AMALGAMATION AND TAKING OVER ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANIES. THE SHARES CAPITAL OF THE EXISTING SHAREHOLDERS HAS BEE N REWORKED IN THE RATIOS SPECIFIED IN THE SCHEME AND FRESH CAPITAL WAS ISSUED BY CANCELLI NG THE EXISTING SHARES. THIS ARRANGEMENT AND THE CORRESPONDING BOOK ENTRIES AS P ER THEAMALGAMATION ACCOUNTING IS NOTHING BUT DISTRIBUTION OF CAPITALIZED PROFITS. TH IS FACT IS EVIDENT FROM THE BALANCE SHEET THAT GENERAL RESERVES / CAPITAL RESERVES HAVE BEEN NETTED OFF WITH THE ASSETS AND LIABILITIES AND ONLY THE SURPLUS HAS BEEN CREDITED TO THE CAPITAL RESERVES ACCOUNT IN THE BOOKS OF M/S UNIVERSAL INDUSTRIAL FUND LTD EFFECTIV ELY REDUCING THE EQUIVALENT AMOUNT OF RS.34,99,67,430/ - AND THE ISSUED AND PAID UP SHARE CAPITAL OF THE COMPANY HAS BEEN INCREASED BY AN AMOUNT OF RS.34,99,67,430/-. THUS, THE COMPANY HAS DISTRIBUTED ITS ACCUMULATED PROFITS TO ITS SHARE HOLDERS BY WAY OF ISSUE OF THESE SHARES. (IV) ALL THE PERSONS WHO RECEIVED THE SHARES ARE THE EXISTING EQUITY SHARE HOLDERS OF THE AMALGAMATING COMPANY WHICH NOW PART OF M/S UNIVERSA L INDUSTRIAL FUND LTD. (V) ON ISSUE AND RECEIPT OF THE SHARE FROM M/S UNIV ERSAL INDUSTRIAL FUND LTD, THE SHARE HOLDER BECAME LEGALLY ENTITLED TO THE PROPORTIONATE SHARE IN ALL ASSETS OF THE COMPANY TILL THE DATE THEY OWNS SUCH SHARES. IN FACT THE VALUE O F THE ASSETS OF THE COMPANY REPRESENTS THE VALUE OF THE SHARES RECEIVED BY ASSESSEE AT ITS MARKET VALUE TO WHICH THE ASSESSEE IS LEGALLY ENTITLED TO BY VIRTUE OF ITSSHARE HOLDINGIN THE COMPANY. AS SUCH ISSUE OF SHARE TANTAMOUNT TO ENTAILMENT OF DISTRIBUTION OF COMPANI ES ASSETS TO ITS SHARE HOLDER. MOREOVER, THE PHRASEOLOGY OF THIS SECTION IS VERY C LEAR AND ONLY TO MEAN 'ENTAILMENT OF M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 5 55 5 RELEASE' AND 'NOT THE ACTUAL RELEASE' OF ASSETSOF T HE COMPANY. M/S UNIVERSAL INDUSTRIAL FUND LTD BY WAY OF RELEASE AND ISSUE OF SHARES HAS EFFECTIVELY RELEASED ITS ASSETS TO THE SHARE HOLDERS. H. IN VIEW OF THE ABOVE STATED FACTS, ALL THE INGRE DIENTS OF SECTION 2(22)(A) OF THE ACT ARE FULFILLED IN THIS CASE AND AS SUCH THE AMOUNT OF RE SERVES AND SURPLUS BEING THE ACCUMULATED PROFITS DISTRIBUTED BILLS UNIVERSAL IND USTRIAL FUND LTD BY WAY OF ISSUE OF SHARES ENTAILING THE DISTRIBUTION OF ALL OR PART OF ASSETS OF THE COMPANY AMOUNTING TO RS.71,36,80,400/- ARE SQUARELY COVERED WITHIN THE M EANING OF DIVIDEND AS DEFINED UNDER THIS SECTION. I. M/S UNIVERSAL INDUSTRIAL FUND LTD IS LIABLE TO P AY DIVIDEND DISTRIBUTION TAX ON THIS AMOUNT U/S 115O OF THE ACT., APPARENTLY HAS NOT PAI D THE SAME. THEREFORE, AN AMOUNT OF RS.71,36,80,400/- BEING THE DIVIDEND DISTRIBUTED WI THIN THE MEANING OF SECTION 2(22)(A) OF THE ACT, IS TAXABLE IN THE HANDS OF THE SHARE HOLDE RS WHO IS ENTITLED TO RECEIVE THE SAME. J. THE ASSESSEE HELD 3.11% OF SHARES IN M/S UNIVERS AL INDUSTRIAL FUND LTD., DURING THE YEAR AND ACCORDINGLY IN THE RATIO OF ITS SHARE HOLD ING, 3.11% OF RS.71,36,80,400/- WORKED OUT TO RS.2,21,95,460/- IS TAXABLE IN THE HA NDS OF ASSESSEE AS DIVIDEND U/S.2(22)(A) OF THE ACT AND TAXED ACCORDINGLY. ABOUT SECOND ISSUE OF APPLICABILITY OF PROVISIONS O F SECTION 2(22)(D) OF THE ACT, THE AO HELD AS FOLLOWS: ASSESSEE'S ARGUMENTS ON THE SECOND ISSUE OF APPLIC ABILITY OF PROVISIONS OF SECTION 2(22)(D) IS CONCERNED, ADMITTEDLY THERE IS REDUCTIO N IN VALUE OF SHARE CAPITAL WHICH IS WRITTEN OFF AGAINST THE DEBT BALANCES IN THE P&L AC COUNTAMOUNTING TO RS.9,44,00,120/-. THIS REDUCTION CLEARLY ATTRACTS THE PROVISIONS OF S ECTION 2(22)(D) OF THE ACT AND THE ASSESSEE'S SHARE ON THE SAME AT 3.11% WORKS OUT TO RS.29,35,844/- WHICH IS TAXABLE IN THE HANDS OF ASSESSEE. ACCORDINGLY AN AMOUNT OF RS .29,35,844/- IS TAXED AS DIVIDEND U/S.2(22)(D) OF THE ACT UNDER THE HEAD INCOME FROM OTHER SOURCES. 5. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WHO HAS DELETED THE ADDITION OBSERVING THE FOLLOWING: 5. AS REGARDS GROUND NOS. 3 TO 10, THE FACTS ARE T HAT THE ASSESSING OFFICER ADDED RS. 2,21,95,460/- AND RS. 29,35,844/- U/S 2(22)(D) OF THE ACT RESPECTIVELY. THIS ISSUE IS DISCUSSED IN DETAIL IN THE ASSESSMENT ORDE R AND THE SUBMISSIONS OF THE APPELLANT IS ALSO REPRODUCED IN THE ASSESSMENT ORDE R ITSELF. ACCORDINGLY, IT IS NOTED THAT THE COMPANY HAS INVESTED IN 7507 EQUITY SHARES OF CELESTA PROPERTIES PVT. LTD. FOR RS. 1,80,54,335/- AND IN 354654 EQUIT Y SHARES OF HILLTOP HOLDINGS INDIA LTD. FOR RS. 449,65,156/-. THESE TWO COMPANIE S WERE AMALGAMATED WITH M/S UNIVERSAL INDUSTRIAL FUND LTD. (UIFL) VIDE ORDER OF HONBLE CALCUTTA HIGH COURT DATED 07/09/2009 W.E.F. 01/04/2009. IN TERMS OF THE ORDER, THE ASSESSEE COMPANY WAS ALLOTTED 11 EQUITY SHARES OF M/S UIFL AGAINST 4 EQUITY SHARES OF HILLTOP HOLDING INDIA LTD. FURTHER THE COMPANY WAS ALLOTTED 64 EQUITY SHARES OF M/S UIFL AGAINST 1 EQUITY SHARES OF CELESTA PROPERTIES PVT. LTD. AS REFLECTED IN THE M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 6 66 6 AUDITED ACCOUNT. THE ASSETS AND LIABILITIES OF THE TRANSFEREE COMPANY GOT VESTED WITH M/S UIFL AND TREATMENT WAS GIVEN IN TERMS OF A CCOUNTING STANDARD 14. 5.1 AS REGARDS, ADDITION U/S 2(22)(A), IT WAS SUBMI TTED THAT THERE WAS NO DISTRIBUTION OF ALL OR ANY PART OF THE ASSETS BY M/ S UIFL TO ITS SHARE HOLDERS. THE SHARES WERE ALLOTTED IN EXCHANGE RATIO SANCTIONED B Y HON'BLE HIGH COURT AND NO ASSETS OR PART OF ASSET WERE DISTRIBUTED. AS REGARD S DISALLOWANCE U/S 2(22)(D), IT WAS SUBMITTED THAT AS PER CLAUSE 11 OF THE SCHEME S ANCTIONED BY HON 'BLE HIGH COURT, PRIOR TO ISSUE OF SHARES TO THE TRANSFEROR C OMPANIES, THE ISSUED, SUBSCRIBED AND PAID UP CAPITAL OF TRANSFEREE COMPANY I.E. UIFL STOOD REDUCED TO 11815 EQUITY SHARES OF RS 2/- EACH AGAINST THE ORIGINAL A MOUNT OF RS 10/- EACH SUCH REDUCTION TO THE EXTENT OF RS 8/- PER EQUITY SHARE ALLOTTED WAS DONE BY CANCELLING THE PAID UP EQUITY SHARES CAPITAL TO THAT EXTENT WR ITTEN OFF AGAINST THE DEBIT BALANCE (LOSS) OF THE P&L A/ C OF THE TRANSFEREE CO MPANY. THE PAID UP SHARE CAPITAL OF THE TRANSFEREE COMPANY AFTER SUCH REDUCT ION STOOD AT RS 2,36,00,030/-. THE APPELLANT SUBMITTED THAT THE REDUCTION WAS SET OFF WITH DEBIT BALANCE IN THE P&L A/C AND THUS THERE WAS NO DISTRIBUTION BY M/S U IFL OUT OF ITS ACCUMULATED PROFIT TO ITS SHARE HOLDERS TO QUALIFY IT FOR BEING TREATED AS DIVIDEND U/ S 2(22)(A) OF THE ACT. SECONDLY THE ASSESSEE COMPANY WAS NOT T HE SHARE HOLDER IN M/S UIFL ORIGINALLY AND IT BECAME SHAREHOLDER AFTER ISSUE OF SHARES IN THE EXCHANGE RATIO AS DETERMINED VIDE ORDER OF AMALGAMATION APPROVED BY H ON'BLE HIGH COURT AS ALLOTMENT OF SHARES IN TERMS OF EXCHANGE RATIO WAS DONE AFTER REDUCTION OF THE CAPITAL AS SANCTIONED BY HON'BLE HIGH COURT. THIRDL Y, IT IS SUBMITTED THAT THE DATE WHEN REDUCTION OF THE CAPITAL WAS EFFECTED BY UIFL, IT DID NOT POSSESS ANY ACCUMULATED PROFIT AND HAD SIGNIFICANT LOSSES AS SH OWN IN THE P&L A/ C. THE AO HOWEVER DID NOT AGREE WITH THE SUBMISSIONS. THE AO HELD THAT THE APPELLANT HAD RESERVES AND SURPLUS IN THE FORM OF CAPITALIZED SUR PLUS RECEIVED ON AMALGAMATION AMOUNTING TO RS 71,36,80,400/- AS ON 31/3/2010. THE AO HOWEVER HELD THAT ON RECEIPT OF SHARES FROM M/S UIFL, THE SHAREHOLDERS B ECOME LEGALLY ENTITLED TO THE PROPORTIONATE SHARES IN ALL THE ASSETS OF THE COMPA NY TILL THE DATE THEY OWN THE SHARES AND SUCH ISSUE OF SHARES IS TANTAMOUNT OF EN TAILMENT OF DISTRIBUTION OF COMPANY ASSETS TO ITS SHAREHOLDERS. THE AO THEREAFT ER COMPUTED THE DISALLOWANCE U/S 2(22)(A) OF THE ACT AT RS 2,21,95,460/- AT THE RATIO OF 3.1.1 % ( I.E. THE PERCENTAGE OF SHARES HELD BY THE ASSESSSEE IN THE M /S UIFL) OF RESERVES AND SURPLUS OF RS 71,36,80,400/-. SIMILARLY AS REGARDS SECTION 2(22)(D), THE AO CONTENDS THAT THE REDUCTION IN VALUE OF SHARE CAPIT AL WRITTEN OFF AGAINST DEBIT BALANCE IN THE P&L A/C IS RS 9,44,00,120/- AND THER EFORE DISALLOWED RS 29,35,844/- AT THE RATIO OF 3.1.1 %. 5.2 THE DETAILED SUBMISSION OF THE APPELLANT IS REP RODUCED ABOVE. AS REGARDS THE ADDITION MADE BY THE AOU/S 2(22)(A), IT IS NOTED TH AT THE APPELLANT HAS RECEIVED SHARES AS PER SCHEME OF AMALGAMATION DULY APPROVED BY HON'BLE HIGH COURT OF CALCUTTA. FURTHER THE SCHEME IS EFFECTIVE W.E.F. 1/ 4/2009. ON THAT DAY, THE APPELLANT DID NOT HAVE ANY ACCUMULATED PROFIT BUT I T HAS ONLY DEBIT BALANCE I.E. ACCUMULATED LOSS. IN THIS CONNECTION, THE APPELLANT HAS ALSO REFERRED TO THE DECISION OF LD CIT(A) IN ITS OWN CASE FOR A.Y 2009- 10 (SUPRA) WHEREIN THE LD CIT(A) IN PARA 3.3 OF THE ORDER HAS HELD THAT: THE APPELLANT HAS ARGUED THAT THE CAPITAL RESERVE OF RS. 34,62,14,529/- PRIMARILY COMPRISE OF AMALGAMATION RESERVE AND AS PER ACCOUNT ING STANDARDS 14, ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND RBI RULES / EXPLANATION TO RULE-2, SUCH CAPITAL RESERVES CANNOT BE UTILIZED FO R THE PURPOSE OF DISTRIBUTION OF M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 7 77 7 DIVIDEND TO THE SHARE HOLDERS. THUS, THE CAPITAL RE SERVE IS NOT A FREE RESERVE AVAILABLE FOR DISTRIBUTION TO SHARE HOLDERS AS DIVI DEND AND THEREFORE CANNOT BE CONSIDERED FOR PURPOSE OF DEEMED DIVIDEND U/S 2(22) (E) OF THE ACT. THE APPELLANTS ARGUMENT HAS FORCE. AS PER PROVISIONS O F SECTION 2(22)(E), THE LOAN TO THE EXTENT OF ACCUMULATED PROFITS CAN BE CONSIDERED AS DEEMED DIVIDEND. THE ACCUMULATED PROFIT MEANS WHICH HAS COME OUT OF P&L A/C OF THE COMPANY IN THE YEAR UNDER CONSIDERATION OR P & L A/C OF ANY EARLIE R YEAR WHICH WAS NOT DISTURBED AS DIVIDEND BUT WAS KEPT APART AND TRANSF ERRED TO THE RESERVED AND SURPLUS OF THE COMPANY. IN THE CASE UNDER CONSIDER ATION, THE CAPITAL RESERVES OF RS. 34, 62,14,529/- DID NOT HAVE SOURCE OF ORIGIN FROM P & L A/C . THE AMOUNT DID NOT REPRESENT THE PROFIT EARNED BY M/S OFFSHORE IND IA LTD. IN THE YEAR UNDER CONSIDERATION OR ANY EARLIER YEARS. THEREFORE IT CO ULD NOT BE TERMED AS ACCUMULATED PROFIT OF THE COMPANY. 5.3 IN THE CASE OF ACIT VS. TVS MOTORS CO. LTD REPO RTED IN (2011) 128 ITD 47, ORDER DATED 9/4/2009, THE CHENNAI ITAT HELD THAT 'A S FAR AS THE ISSUE REGARDING TAXING THE CAPITAL RESERVE IS CONCERNED, CAPITAL RE SERVE ARISES BECAUSE OF ACQUISITION OF ALL THE ASSETS AND LIABILITIES OF LA C LTD. SINCE THE FACT OF AMALGAMATION STANDS CONFIRMED, THE QUESTION OF RESE RVES ARISES ONLY BECAUSE OF TRANSFER OF AND THE SAME CANNOT BE BROUGHT INTO TAX ATION AS DEEMED DIVIDEND OR OTHERWISE IN VIEW OF THE BOARD'S CIRCULAR NO. 5-P D ATED 9/10/1967. SIMILARLY IN THE CASE OF CIT VS. URMILA RAMESH REPO RTED IN 1998 230 ITR 422, ORDER DATED 23/1/ 1998, SC HELD THAT.- 'SEC 2(22) HAS USED THE EXPRESSION 'ACCUMULATED PRO FITS', 'WHETHER CAPITALIZED OR NOT'. THIS EXPRESSION TENDS TO SHOW THAT UNDER S 2( 22) IT IS ONLY THE DISTRIBUTION OF THE ACCUMULATED PROFIT WHICH ARE DEEMED TO BE DIVID ENDS IN THE HANDS OF THE SHAREHOLDERS. BY USING THE EXPRESSION 'WHETHER CAPI TALIZED OR NOT' THE LEGISLATIVE INTENT CLEARLY IS THAT THE PROFITS WHICH ARE DEEMED TO BE DIVIDEND WOULD BE THOSE WHICH ARE CAPABLE OF BEING ACCUMULATED AND WHICH WO ULD ALSO BE CAPABLE OF BEING CAPITALIZED. THE AMOUNT SHOULD, IN OTHER WORD S, BE IN THE NATURE OF PROFITS WHICH THE COMPANY WOULD HAVE DISTRIBUTED TO ITS SHA REHOLDERS. THIS WOULD CLEARLY EXCLUDE RETURN OF PART OF A CAPITAL TO THE COMPANY, AS THE SAME CANNOT BE REGARDED AS PROFIT CAPABLE OF BEING CAPITALIZED, TH E RETURN BEING OF CAPITAL ITSELF THERE ARE CASES WHERE THIS COURT HAD TO CONSIDER TH E SITUATIONS RELATING TO DISTRIBUTION OF DIVIDEND BY COMPANIES AND IT HAS CO NSISTENTLY MAINTAINED THAT PROFITS MEANT ONLY COMMERCIAL PROFITS. WHEN, AS IN THE PRESENT CASE, THE ASSETS HAVE BEEN SOLD AT PRICE LESS THAN THE PURCHASE PRIC E, THE AMOUNTS SO RECEIVED, APART FROM BEING IN THE NATURE OF RETURN OF CAPITAL , CANNOT REPRESENT PROFITS OF THE COMPANY. THUS THE SUPREME COURT OF INDIA HAS HELD THAT IT IS A PROFIT WHICH COULD BE CONSIDERED AS WERE DISTRIBUTED TO THE SHAREHOLDE RS AS DIVIDEND. THE WORD 'PROFIT' TO BE UNDERSTOOD IN COMMERCIAL SENSE WHICH HAS COME OUT OF BUSINESS ACTIVITY OF THE COMPANY. IF ANY AMOUNT IN THE RESER VE & SURPLUS HAS NOT GENERATED AS A CONSEQUENCE OF BUSINESS ACTIVITY OF THE COMPAN Y, THE SAME COULD NOT BE CONSIDERED AS ACCUMULATED PROFITS FOR THE PURPOSE O F SEC. 2(22)(E) OF THE ACT. IN THE FACTS AND CIRCUMSTANCES, I AM IN AGREEMENT WITH THE APPELLANT THAT THE CAPITAL RESERVE OF RS 34,62,14,529/ - REPRESENTING AMALGAMA TION RESERVE OF M/ S OFFSHORE INDIA LTD. SINCE THIS AMALGAMATION RESERVE WAS NOT REPRESENTING THE ACCUMULATED PROFITS, THEREFORE THE SAME WAS NOT REQ UIRED TO BE CONSIDERED AS (ACCUMULATED PROFITS FOR THE PURPOSE OF SEC. 2(22)( E) OF THE ACT. THE AO IS M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 8 88 8 THEREFORE DIRECTED NOT TO CONSIDER CAPITAL/AMALGAMA TION RESERVE OF RS 34,62,14,529/- ACCUMULATEDPROFIT FOR THE PURPOSE OF SECTION 2(22(3) OF THE ACT. THE APPELLANT WAS ALSO HAVING STATUTORY RESERVE OF RS 12,60,000/- AS ON 31/03/2008 & RS. 66,10,000/ - AS ON 31-03-2009. THE RE WAS NO DISPUTE THAT THIS STATUTORY RESERVE WAS TRANSFERRED TO THE RESERVE & SURPLUS FROM THE P&L A/ C ONLY. IN THE FACTS AND CIRCUMSTANCES, THIS STATUTOR Y RESERVE AS REPRESENTING ACCUMULATED PROFITS OF THE COMPANY. IN. THE CASE OF CIT VS. K. SRINIVASA & OTHERS, 1963 , 50 ITR 788 MADRAS HIGH COURT HELD AT THE PROFIT TRANSFERRED TO A RESERVE D O NOT CEASE TO BE ACCUMULATED PROFITS. MERE TRANSFER OF PROFIT TO ANY RESERVE WIL L NOT TAKE WAY OF ITS CHARACTER OF ACCUMULATED PROFITS. IN THE CASE OF P.K BADIANI VS. CIT REPORTED IN 105 ITR 642, SC HELD THAT MERE TRANSFERRING THE SUM TO DEVELOPME NT REBATE RESERVE ACCOUNT BY DEBITING IT TO THE P&L A/ C, DID NOT AMOUNT TO C APITALIZATION OF PROFIT. HOWEVER, AFTER THESE DECISIONS, THE LEGAL POSITION HAS CHANG ED. THE RESERVE BANK OF INDIA ACT, SECTION 45-IC (INSERTED W.E.F 09-01-1997) PROH IBITS APPROPRIATION OF STATUTORY RESERVE EXCEPT FOR PURPOSES SPECIFIED BY R.B.I. TIL L DATE, THE RBI HAS NOT SPECIFIED DECLARATION OF DIVIDEND OUT OF SUCH STATUTORY RESER VE. IN THE FACTS AND CIRCUMSTANCES, IN MY CONSIDERED VIEW THE OPENING BA LANCE OF STATUTORY RESERVE AT RS 12,60,000/- AS ON 31-3-2008 AND THEREAFTER THE T RANSFER OF PROFIT TO THIS RESERVE ACCOUNT UPTO THE DATE OF GRANTING OF LOAN I S NOT REQUIRED TO BE CONSIDERED AS ACCUMULATED PROFITS OF THE COMPANY FOR THE PURPO SE OF SEC 2(22)(E) OF THE ACT SINCE, THE TRANSFER OF STATUTORY RESERVE IS COMPULS ORY AS PER SEC. 45-IC(I) OF REI ACT WHICH CANNOT BE UTILIZED FOR DECLARATION OF DIV IDEND. 5.4 IN THIS CASE, THE APPELLANT HAS ACCUMULATED PRO FIT SUBSEQUENT TO AMALGAMATION IN TERMS OF HONBLE HIGH COURT ORDER AMOUNTING TO RS 71,36,80,400/- AND HAD A DEBIT BALANCE OFRS 11,01,6832/- AND RS 1,08,72,965/ - AS ON 31/3/2009 AND 31/3/2010 RESPECTIVELY. THEREFORE LOOKING INTO THE FACTS OF THE CASE AND AGREEING WITH THE DECISION OF LD CIT(A) IN A.Y. 2009-10, I AM OF THE CONSIDERED OPINION THAT SINCE THERE WAS NO ACCUMULATED PROFIT AS ON AP POINTED DATED 1.4.2009, THEREFORE NO ADDITION U/S 2(22)(A) CAN BE MADE. GRO UND NOS. 3, 4, 5 IS THEREFORE ALLOWED. 6. AS REGARDS GROUND NOS. 6 TO 10, THE FACTS ARE DI SCUSSED ABOVE. THE AMALGAMATION HAS TAKEN PLACE AS PER THE SCHEME W.E. F. 1/4/2009. THE ASSETS OR LIABILITIES OF THE TRANSFEREE COMPANY HAVE BEEN TAK EN OVER BY THE TRANSFEROR COMPANY. THE REDUCTION IN CAPITAL IS DONE IN TERMS OF ACCOUNTING STANDARD AND IN TERMS OF SCHEME DULY APPROVED BY HONBLE HIGH COURT . THE APPELLANT HAD DEBIT BALANCE IN P & L A/C WHICH WAS ADJUSTED AGAINST RED UCTION IN CAPITAL. FURTHER THE ASSESSEE COMPANY WAS NOT THE SHARE HOLDER OF M/S UI FL BUT IT BECAME SHARE HOLDER ONLY POST AMALGAMATION. THEREFORE, I FIND FO RCE IN THE SUBMISSIONS OF THE APPELLANT AND THE ADDITION MADE U/S 2(22)(D) IS HER EBY DELETED. GROUND NUMBER 6 TO 10 ARE ALLOWED. 6. WE HAVE GONE THROUGH THE CONCLUSION REACHED BY T HE LD. CIT(A) IN RESPECT OF APPEAL FILED BY THE REVENUE. WE NOTE THAT THE LD. C IT(A) HAS PASSED A REASONED ORDER OF APPLICABILITY OF SECTION 2(22)(E) AND 2(22 )(D) OF THE ACT. THEREFORE IT DOES NOT REQUIRE ANY INTERFERENCE. THAT BEING SO, WE DEC LINE TO INTERFERE IN THE ORDER M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 9 99 9 PASSED BY THE LD. CIT(A), HIS ORDER ON THIS ISSUE, IS HEREBY UPHELD AND THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DISMISSED. 7. NOW WE SHALL TAKE ASSESSEES CROSS OBJECTION IN C.O. NO. 117/KOL/2017 FOR A.Y. 2010-11. 8. THE SOLITARY GRIEVANCE OF THE ASSESSEE IN HIS CR OSS OBJECTION IS THAT THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSI NG OFFICER THAT PROVISION OF SECTION 2(22)(E) OF THE ACT WAS APPLICABLE TO THE A SSESSEE AND ASSESSING THE SUM OF RS. 16 LACS RECEIVED FROM M/S OFFSHORE INDIA LTD. A S DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. 9. WHEN THIS APPEAL WAS CALLED OUT FOR HEARING, TH E LD. COUNSEL FOR THE ASSESSEE INVITED OUR ATTENTION TO THE ORDER DATED 26.09.2018 , PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN I.T.A. NOS. 3431 &3068/MUM/2 013, FOR ASSESSMENT YEAR 2009-10, WHEREBY THE ISSUE HAS BEEN DISCUSSED AND A DJUDICATED IN FAVOUR OF THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THE PRESENT ISSUE IS SQUARELY COVERED BY THE ABOVE SAID ORDER OF THE TRI BUNAL, A COPY OF WHICH IS ALSO PLACED BEFORE THE BENCH. 10. THE LD. DR RELIED UPON THE ORDERS OF THE AUTHOR ITIES BELOW. 11. WE SEE NO REASON TO TAKE ANY OTHER VIEW OF THE MATTER THEN THE VIEW SO TAKEN BY THE DIVISION BENCH OF THIS TRIBUNAL IN ASSESSEE S OWN CASE VIDE ORDER DATED 26.09.2018. IN THIS ORDER, THE TRIBUNAL HAS INTER A LIA OBSERVED AS UNDER: 5. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. THE SHEET ANCHOR ON WHI CH THE ASSESSEE HAS RAISED THE APPEAL IS THAT THE LOAN RECEIVED BY THE ASSESSEE FR OM M/S. OSIL DID NOT COME WITHIN THE MISCHIEF OF DEEMING PROVISIONS OF SEC. 2 (22)(E) OF THE ACT BECAUSE OF THE EXCEPTION PROVIDED BY CLAUSE (II) OF SEC. 2(22) O F THE ACT. THEREFORE, LET US EXAMINE THE PROVISION AND IS REPRODUCED HEREIN BELO W FOR EASY REFERENCE. CLAUSE (II) OF SEC. 2(22) PROVIDES AS FOLLOWS: DIVIDEND DOES NOT INCLUDE ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS WHERE THE LE NDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 1 11 10 00 0 SO, A BARE READING OF THE AFORESAID EXCEPTION PROVI SION MEANS THAT IF ANY ADVANCE OR LOAN IS MADE BY THE LENDER COMPANY TO A SHAREHOL DER (LIKE ASSESSEE) IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE LENDER COMPANY THEN, THE ADV ANCE OR LOAN THUS GIVEN BY SUCH COMPANY TO ITS SHAREHOLDER WILL NOT BE TREATED AS DIVIDEND. SO, NOW WE HAVE TO EXAMINE AS TO WHETHER THE BUSINESS OF LENDING CA RRIED OUT BY THE LENDER COMPANY (M/S. OSIL) CAN BE SAID CONSTITUTE ITS SUB STANTIAL BUSINESS. FOR ANSWERING THIS QUESTION WE REQUIRE TO SEE THE FACT S RELATING TO THIS ISSUE. WE NOTE THAT THE PAID UP CAPITAL OF M/S. OSIL AS ON 31.03.2 009 WAS RS.32,13,90,080/-. THE SAME WAS OPENING EQUITY CAPITAL AS ON 01.04.200 8. AS PER M/S. OSILS BALANCE SHEET AS AT 31.03.2009, RESERVES WERE RS. 37,92,23,313/-. THE CORRESPONDING FIGURE OF THE RESERVES AS ON 31.03. 2008 WAS RS.35,24,91,854/-. THE INDIVIDUAL HEAD WISE BREAK-UP OF THE AMOUNT SHO WN UNDER THE HEAD RESERVES WAS AS FOLLOWS: 31.03.2009 31.03.2 008 RS. RS. I) CAPITAL RESERVE (ON ACCOUNT OF AMALGAMATION) 34,62,14,529 34,62,14,529 II) STATUTORY RESERVE (CREATED IN TERMS OF SEC. 45IC OF RBI ACT) 66,10,000 12,60,000 III) SURPLUS OF P/L A/C. 2,63,98,784 50,17,325 37,13,90,313 35,24,91,854 6. FROM A PERUSAL OF THE AFORESAID CHART IT IS EVID ENT THAT SURPLUS IN THE P&L ACCOUNT TILL 31.03.2009 WAS ONLY RS.2,63,98,784/-. AS ON 31.03.2009, THE NET OWNED FUNDS (NOF) OF M/S. OSIL BY WAY OF SHARE CAPI TAL AND RESERVES AGGREGATED RS.70,06,13,393/-. AS ON 31.03.2009, TH E AMOUNTS ADVANCED BY M/S. OSIL BY WAY OF LOANS AND ADVANCES WERE RS.53,29,41, 480/-. IN PERCENTAGE TERMS THE LOANS AND ADVANCES GRANTED TO THIRD PARTIES CON STITUTED 76.05% OF THE NOF AND EXCEEDED MORE THAN 100% OF THE ISSUED SHARE CAP ITAL OF M/S. OSIL AS ON 31.03.2009. WE NOTE THAT SINCE MORE THAN 50% OF TH E INVESTIBLE FUNDS OF M/S. OSIL WERE DEPLOYED IN GRANTING LOANS AND ADVANCES, RESERVE BANK OF INDIA HAD GRANTED REGISTRATION TO M/S. OSIL AS A NON BANKING FINANCIAL COMPANY(NBFC). COPY OF THE NBFC REGISTRATION CERT IFICATE IS FOUND PLACED AT PAGE 36 OF THE PAPER BOOK. WE NOTE THAT BEING A RE GISTERED NBFC, GRANTING OF LOANS WAS AN ORDINARY BUSINESS OF M/S. OSIL AND SIN CE 76% OF NOF WERE UTILIZED BY M/S. OSIL FOR GRANTING LOANS AND ADVANCES IT WAS THE ASSESSEES CONTENTION THAT GRANTING OF LOANS CONSTITUTED SUBSTANTIAL BU SINESS OF M/S. OSIL. 7. WE NOTE AS PER CLAUSE (II) OF SEC. 2(22) OF THE ACT THE EXPRESSION IS SUBSTANTIAL PART OF THE BUSINESS SO, THE WORD USE D IS SUBSTANTIAL IN CONTRA DISTINCTION WITH THE WORD PRINCIPAL OR MAIN BUSI NESS. THE USE OF THE WORD SUBSTANTIAL CONNOTES THAT GRANTING OF LOANS SHOUL D NOT BE PERIPHERAL OR INSIGNIFICANT PART OF THE BUSINESS BUT IT SHOULD BE MATERIALLY SIGNIFICANT BUSINESS WHERE AT LEAST 20% OF THE INVESTIBLE FUNDS ARE DEPLOYED. SO, AS PER THE FACTS NOTED ABOVE, WE TAKE NOTE THAT SHARE CAPITAL OF THE LOAN GRANTING COMPANY WAS RS. 32.14 CRS. WHEREAS LOANS AND ADVANCES GRANT ED WERE TO THE TUNE OF RS.53.29 CR. WHICH FAR EXCEEDED THE SHARE CAPITAL O F M/S. OSIL. WE NOTE THAT THE NOF OF M/S. OSIL AS ON 31.03.2009 WAS AT RS.70.06 C R. AND, THEREFORE, FUNDS UTILIZED IN GRANTING OF LOANS CONSTITUTED TO 76.05% OF NOF. THESE FACTS AND FIGURES, THEREFORE, GOES ON TO SHOW THAT GRANTING O F LOANS WAS IN FACT A SUBSTANTIAL PART OF BUSINESS OF M/S. OSIL, THE LE NDER COMPANY. M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 1 11 11 11 1 8. WE NOTE FROM THE PERUSAL OF THE ORDERS OF THE LD . CIT(A) AND THE AO THAT THEY BOTH REJECTED THE ASSESSEES PLEA FOR UPHOLDIN G APPLICABILITY OF CLAUSE (II) OF SEC. 22 OF THE ACT ON THE GROUND THAT THE LOANS GRA NTED BY M/S. OSIL DID NOT CARRY ANY INTEREST (I.E. M/S. OSIL GAVE LOAN TO THE ASSES SEE COMPANY RS.5.16 CR. AS INTEREST FREE LOAN). EVEN THOUGH THE LD. CIT(A) IN PRINCIPLE ACCEPTED THE PROPOSITION THAT GRANTING OF LOANS WAS SUBSTANTIAL PART OF M/S. OSIL BUSINESS, YET HE CONCLUDED THAT THE LOAN IN QUESTION WAS NOT GRAN TED IN THE ORDINARY COURSE OF THE LOAN GRANTING BUSINESS BY M/S. OSIL. THEREFORE , THE LD. CIT(A) HELD THAT GRANTING OF INTEREST FREE LOAN WAS NOT IN THE ORD INARY COURSE OF M/S. OSILS BUSINESS. 9. ASSAILING THE AFORESAID VIEW OF THE LD. CIT(A)/A O THAT SINCE M/S. OSIL GAVE INTEREST FREE LOAN TO ASSESSEE COMPANY M/S. OS ILS GRANTING INTEREST FREE LOAN WAS NOT ORDINARY COURSE OF M/S. OSILS BUSINESS IS ERRONEOUS, THE LD. AR SUBMITTED THAT IT IS WELL SETTLED THAT DEEMING PROVISIONS OF LAW HAS TO BE STRICTLY CONSTRUED AND NO VIOLATION CAN BE MADE WITH THE PROVISIONS OF THE LAW. ACCORDING TO HIM, IF THE VIEW OF THE LD. CIT(A) AND AO HAS TO BE ACCEPTED, T HEN THE EXCEPTION GIVEN UNDER CLAUSE (II) OF SEC. 2(22) OF THE ACT SHOULD BE READ AS ANY ADVANCE OR LOAN MADE TO A SHARE HOLDER BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS WHERE INTEREST BEARING LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY THE LD. AR EMPHASIZED ON THE FACT THAT THE AFORESAID UN DERLINED PORTION I.E. INTEREST BEARING LENDING IS NOT FOUND IN THE ENACTED LAW WH ICH IS THE EXCEPTION CLAUSE (II) OF SEC. 2(22) OF THE ACT, SO IF THE VIEW OF LD. CIT(A) /AO HAS TO BE UPHELD THEN THE WORDS INTEREST BEARING LENDING HAS TO BE INSERTED IN THE AFORESAID MANNER WHICH IS NOT WHAT THE PARLIAMENT HAS ENACTED. WE FIND CO NSIDERABLE FORCE IN THE CONTENTION OF THE LD. AR THAT CASUS OMISSUS CANNO T BE APPLIED BY JUDICIAL INTERPRETATIONS. CASUS OMISSUS, A LATIN WORD, ME ANS THE CASE OMITTED. CASUS OMISSUS CAN IN NO CASE BE APPLIED BY A COURT OF LAW , FOR THAT IT WOULD AMOUNT TO MAKING OF THE LAW BY COURT AS HELD BY THE HONBLE S UPREME COURT IN MOULABIHUSSAIN HAJ VS. STATE OF GUJARAT (2004) 6 S CC 672. THE HONBLE SUPREME COURT IN D.R. VENKATCHALAM V DY. TRANSPORT COMMISSI ONER (1977 (2) SCC 273) OBSERVED THAT COURTS MUST AVOID THE DANGER OF A PRI ORI DETERMINATION OF THE MEANING OF A PROVISION BASED ON THEIR OWN PRECONCEI VED NOTIONS OF IDEOLOGICAL STRUCTURE OR SCHEME INTO WHICH THE PROVISION TO BE INTERPRETED IS SOMEWHAT FITTED. THE HONBLE APEX COURT HAS HELD THAT THE COURTS ARE NOT ENTITLED TO USURP LEGISLATIVE DUTY. THE HONBLE SUPREME COURT HAS HEL D WHILE INTERPRETING A PROVISION, THE COURT ONLY INTERPRETS LAW AND CANNOT LEGISLATE. IF THE PROVISION OF LAW IS MISUSED AND SUBJECTED TO THE ABUSE OF PROCESS OF LAW, IT IS FOR THE LEGISLATURE TO AMEND, MODIFY OR REPEL IT, IF DEEM NECESSARY. IN P OPULAR TRADING CO. (2000) 5SCC 515 IT WAS HELD THAT LEGISLATIVE CASUS OMISSUS CA NNOT BE APPLIED BY JUDICIAL INTERPRETATION. THE RULE IS THAT THE PARTICULAR CA SE , THUS LEFT UN-PROVIDED FOR MUST BE DISPOSED OF ACCORDING TO LAW AS IT EXISTED IN TH E STATUTE. USEFUL REFERENCE MAY ALSO BE MADE TO THE DECISION OF THIS TRIBUNAL IN TH E CASE OF COAL INDIA LTD VSJT.CIT (88 ITD 514) WHERE THIS TRIBUNAL FOLLOWING THE PRIN CIPLES OF CASUS OMISSUS AS SET OUT IN THE FOREGOING, HELD AS FOLLOWS: 10. WE MAY MENTION THAT IT IS NOT FOR THIS TRIBUNA L TO SUPPLY THE CASUS OMISSUS, EVEN IF ANY, IN THE STATUTE. A CASUS OMISSUS, WHICH BROADLY REFERS TO A MATTER WHICH HAS NOT BEEN PROVIDED IN THE STATUTE BUT SHOU LD HAVE BEEN THERE TO MAKE THE STATUTE WORKABLE, CANNOT BE SUPPLIED BY US, AS, TO DO SO WILL BE CLEARLY BEYOND THE CALL AND SCOPE OF OUR DUTY WHICH IS ONLY TO INTERPR ET THE LAW AS IT EXISTS. HONBLE M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 1 11 12 22 2 SUPREME COURT, IN THE CASE OF SMT. TARULATASHYAM V. CIT [1977] 108 ITR 345 AT PAGE 356 HAS OBSERVED : 'WE HAVE GIVEN ANXIOUS THOUGHT TO THE PERSUASIVE AR GUMENTS.... (WHICH) IF ACCEPTED, WILL CERTAINLY SOFTEN THE RIGOUR OF THIS EXTREMELY DRASTIC PROVISION AND BRING IT MORE IN CONFORMITY WITH LOGIC AND EQUITY. BUT THE LANGUA GE OF SECTIONS....IS CLEAR AND UNAMBIGUOUS. THERE IS NO SCOPE FOR IMPORTING INTO T HE STATUTE THE WORDS WHICH ARE NOT THERE. SUCH INTERPRETATION WOULD BE, NOT TO CON STRUE, BUT TO AMEND THE STATUTE. EVEN IF THERE BE A CASUS OMISSUS, THE DEFECT CAN BE REMEDIED ONLY BY LEGISLATION AND NOT BY JUDICIAL INTERPRETATION....TO US, THERE APPE ARS NO JUSTIFICATION TO DEPART FROM NORMAL RULE OF CONSTRUCTION ACCORDING TO WHICH THE INTENTION OF LEGISLATURE IS PRIMARILY TO BE GATHERED FROM THE WORDS USED IN THE STATUTE. IT WILL BE WELL TO RECALL THE WORDS OF ROWLATT J. IN CAPE BRANDY SYNDICATE V. INLAND REVENUE COMMISSIONERS [1921] 1 KB 64 (KB) AT PAGE 71, THAT : .........IN A TAXING ACT ONE HAS TO LOOK AT MERELY WHAT IS CLEARLY SAID. THERE I S NO ROOM FOR ANY INTENDMENT. THERE IS NO EQUITY ABOUT A TAX. THERE IS NO PRESUMP TION AS TO A TAX. NOTHING IS TO BE READ IN, NOTHING IS TO BE, IMPLIED. ONE CAN ONLY LO OK FAIRLY AT THE LANGUAGE USED. ONCE IT IS SHOWN THAT THE CASE OF THE ASSESSEE COME S WITHIN THE LETTER OF LAW, HE MUST BE TAXED, HOWEVER GREAT THE HARDSHIP MAY APPEA R TO THE JUDICIAL MIND TO BE.' 10. THUS, WE NOTE THAT SEC. 2(22)(E) OF THE ACT IS A DEEMING PROVISION OF THE ACT AND IT IS A SETTLED LEGAL PROPOSITION THAT ANY DEEMING PROVISIONS OF THE TAXING STATUTE MUST BE STRICTLY CONSTRUED AND, THEREFORE, SAVE AND EXCEPT THE WORDS AND PHRASE EXPRESSLY USED OR EMPLOYED BY THE LEGISLATUR E, NOTHING MORE CAN BE TAKEN INTO ACCOUNT WHILE INTERPRETING THE DEEMING PROVISI ON. THE COURT OR JUDICIAL AUTHORITY IS NOT PERMITTED TO READ INTO DEEMING PRO VISION ANY ADDITIONAL WORDS OR EXPRESSION WHICH HAVE NOT BEEN USED OR EMPLOYED BY LEGISLATURE. CASUS OMISSUS IS NOT PERMITTED. AT THE SAME TIME IT HAS TO BE KEPT IN MIND THAT THE JUDICIAL/QUASI JUDICIAL AUTHORITIES ARE ALSO NOT PERMITTED TO IGNO RE OR OVERLOOK THE EXPRESSION OR WORDS EXPRESSLY USED. THERE IS NO SCOPE FOR INTEND MENT WHILE INTERPRETING A DEEMING PROVISION OF A TAXING PROVISION PARTICULARL Y WHEN THE WORDS EMPLOYED ARE OF PRECISE MEANING. 11. IN ORDER TO ATTRACT THE EXCEPTION CLAUSE (II) OF SEC 2(22) OF THE ACT ALL THAT LOAN GRANTING COMPANY IS REQUIRED TO PROVE IS THAT GRANTING OF LOANS, CONSTITUTES SUBSTANTIAL PART OF ITS BUSINESS AND THE LOAN IS GR ANTED IN THE ORDINARY COURSE OF SUCH BUSINESS. SAVE AND EXCEPT THESE 2 CONDITIONS I T IS NOT NECESSARY OF THE LOAN GRANTING COMPANY TO FURTHER SHOW THAT THE LOAN GRAN TED CARRIED INTEREST AS WELL. CHARGING OF INTEREST IS NOT AN ADDITIONAL CONDITION ATTACHED TO GRANTING OF LOANS FOR THE PURPOSE OF DECIDING THE APPLICABILITY OF CLAUSE (II) TO SEC 2(22) OF THE ACT. IN THE CIRCUMSTANCES WE ARE OF THE OPINION THAT THE LOWER AUTHORITIES ERRED IN BRINGING IN AN ADDITIONAL CONDITION OF CHARGING INTEREST FOR DE CIDING APPLICABILITY OF CLAUSE (II) OF SEC 2(22) OF THE ACT WHICH IS NOT PERMISSIBLE IN LAW. ALL THAT THE LOWER AUTHORITIES OUGHT TO HAVE EXAMINED WAS WHETHER GRANTING OF LOAN S CONSTITUTED SIGNIFICANT OR SUBSTANTIAL PART OF OSIL'S BUSINESS AND WHETHER SUC H LOAN WAS GRANTED IN THE COURSE OF ITS MONEY LENDING BUSINESS. ONCE THE TWO CONDITIONS SPECIFICALLY MENTIONED IN CLAUSE (II) WERE FULFILLED THEN IT WAS WHOLLY IMMATERIAL WHETHER LOAN GRANTED, CARRIED ANY INTEREST OR NOT. NOWHERE CLAUS E (II) OF SEC 2(22) OF THE ACT MANDATED FOR THE AO TO VERIFY WHETHER GRANTING OF I NTEREST BEARING LOANS CONSTITUTED SUBSTANTIAL PART OF ASSESSEE'S BUSINESS . M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 1 11 13 33 3 12. WE NOTE THAT THE VERY QUESTION OF APPLICABILITY OF CLAUSE (II) OF SEC 2(22) TO AN ASSESSEE WHO SIMILARLY RECEIVED INTEREST FREE LO AN FROM ANOTHER NBFC WAS CONSIDERED BY THE CO-ORDINATE BENCH OF THIS TRIBUNA L IN ITA NO.1815/MUM/2012 IN THE CASE OF M/S. BLUE NILES HOLDINGS LTD FOR AY THE 2006-07. THE RELEVANT ORDER IS AT PAGES 108-113 OF THE PAPER BOOK. IN THE SAID CASE DURING PREVIOUS YEAR RELEVANT TO AY 2006-07 THE ASSESSEE RECEIVED INTERE ST FREE LOAN OF RS.17,50,000 /- FROM M/S. RPG CELLULAR INVESTMENTS & HOLDINGS PVT. LTD (RPG) WHICH WAS ASSESSED U/S 2(22)(E) OF THE ACT. M/S. RPG WAS REGI STERED WITH RBI AS AN NBFC. GRANTING OF LOANS WAS HOWEVER NOT THE 'PRINCIPAL' O R 'MAIN BUSINESS' OF RPG THOUGH IT CONSTITUTED SIGNIFICANT PART OF ITS BUSIN ESS. THE ADDITION U/S. 2(22)(E) WAS DELETED BY CIT(A) AGAINST WHICH THE REVENUE HAD FIL ED SECOND APPEAL. IN THE SAID DECISION, THE TRIBUNAL FOUND THAT THE NOF OF RPG WA S RS. 170.91 CRS OUT OF WHICH RS.72.48 CRS WERE INVESTED IN LOANS AND ADVANCES WH ICH IN PERCENTAGE TERMS WORKED OUT TO 42.40%. THE TRIBUNAL ACCORDINGLY UPHE LD LD. CIT(A)'S ORDER WHEREIN HE HAD HELD HAT GRANTING OF LOANS AND ADVAN CES FORMED SUBSTANTIAL PART OF RPG'S BUSINESS. IT WAS SPECIFICALLY BROUGHT TO THE ATTENTION OF THE TRIBUNAL THAT ONLY BECAUSE INTEREST WAS NOT CHARGED BY RPG ON THE LOAN GRANTED TO ASSESSEE, THE AO HAD TREATED THE LOAN OF RS.17.50 LACS AS DEEMED DIV IDEND. ON THIS FACT THE TRIBUNAL IN PARA 6 OF ITS APPELLATE ORDER HELD THAT MERELY B ECAUSE RPG DID NOT CHARGE INTEREST COULD NOT CHANGE THE COLOUR OR THE TRANSAC TION AND THEREBY TOOK IT OUTSIDE THE PURVIEW OF CLAUSE (II) OF SEC 2 (22)(E) OF THE ACT. THE TRIBUNAL ACCORDINGLY DISMISSED THE APPEAL FILED BY THE REVENUE. 13. WE NOTE THAT THE FACTS OF BLUE NILES HOLDINGS L TD IN ITA NO.1815/MUM/2012 WERE PARIMATERIA WITH THE APPELLAN T'S CASE. IN THAT CASE ALSO THE ASSESSEE RECEIVED INTEREST FREE LOANS FROM AN N BFC WHOSE PRINCIPAL BUSINESS WAS NOT GRANTING OF LOANS BUT IT WAS SUBSTANTIAL PA RT OF THE BUSINESS. IN THAT CASE ALSO THE INTEREST FREE LOAN RECEIVED FROM RPG WAS A SSESSED AS DEEMED DIVIDEND U/S 2(22)(E) PRINCIPALLY ON THE GROUND THAT GRANTING OF INTEREST FREE LOAN COULD NOT BE SAID TO BE PART OF ORDINARY COURSE OF MONEY LENDING BUSINESS OF RPG. INTERPRETATION OF SEC 2(22)(E) READ WITH CLAUSE (II) THEREOF AS MA DE BY THE AO WAS NOT UPHELD BOTH BY THE CIT(A) AND ITAT. IN APPEAL BOTH THE APPELLAT E AUTHORITIES I.E. CIT(A) AS WELL AS ITAT DID NOT AGREE WITH THE REVENUE'S CONTENTION THAT IN ORDER TO ATTRACT CLAUSE (II) OF SEC 2(22) IT IS NECESSARY FOR THE LOAN GRAN TING COMPANY TO CHARGE INTEREST. THEREFORE, ACCORDING TO US, THE LD.CIT(A) WAS UNJUS TIFIED IN REJECTING THE ASSESSEE'S PLEA THAT IN TERMS OF CLAUSE (II) OF SEC 2(22) INTE REST FREE LOAN RECEIVED ON 30.06.2008 WAS NOT CHARGEABLE AS DEEMED DIVIDEND FO R AY 2009-10. IN THAT VIEW OF THE MATTER THE APPEAL OF THE ASSESSEE DESERVES TO S UCCEED, AND WE ALLOW THE APPEAL OF THE ASSESSEE. 14. THEREFORE, IN THE LIGHT OF THE AFORESAID DISCUS SION, THE APPEAL OF THE ASSESSEE IS ALLOWED AND SINCE THE LOAN RECEIVED BY THE ASSESSEE FROM M/S. OSIL CANNOT BE TREATED AS DIVIDEND, THE ISSUE OF QUANTIF ICATION OF DIVIDEND INCOME DOES NOT ARISE. SO, REVENUE APPEAL IS INFRUCTUOUS AND SO DISMISSED. 12. AS THE ISSUE IS SQUARELY COVERED IN FAVOUR OF T HE ASSESSEE BY THE DECISION OF CO-ORDINATE BENCH IN ASSESSEES OWN CASE (SUPRA) IN I.T.A. NOS. 3431&3068/MUM/2013 FOR A.Y 2009-10, AND THERE IS NO CHANGE IN FACTS AND LAW AND THE REVENUE IS UNABLE TO PRODUCE ANY MATERIAL T O CONTROVERT THE ABOVE SAID M/S RAINBOW INVESTMENT LTD. ITA NO.1836/KOL/2017& C.O. NO. 117/KOL/2017 ASSESSMENT YEAR:2010-11 P PP PA AA AG GG GE EE E | || | 1 11 14 44 4 FINDINGS OF THE CO-ORDINATE BENCH. THEREFORE, RESPE CTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH WE ALLOW THE GROUNDS RAISED BY THE ASSESSEE . 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 19.07.2019 SD/- ( S.S.GODARA ) SD/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / DATE: 19/07/2019 ( SB, SR.PS ) COPY OF THE ORDER FORWARDED TO: 1. DCIT, CIRCLE-4(2), KOLKATA 2. M/S RAINBOW INVESTMENT LTD. 3. C.I.T(A)- 4. C.I.T.- KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. 6. GUARD FILE. TRUE COPY BY ORDER ASSIST ANT REGISTRAR ITAT, KOLKA TA BENCHES