Pallava Resorts Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1862/CHNY/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0922 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 02-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: G NARAYANASWAMY
• Keywords: Deemed dividend
• Section: 2(22)(e); 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI (BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER) .. I.T.A. NO. 1862/MDS/2010 ASSESSMENT YEAR : 2006-07 M/S PALLAVA RESORTS PVT. LTD., RAIN TREE PLACE, 5 TH FLOOR, MCNICHOLS ROAD, CHETPET, CHENNAI 600 031. PAN : AADCP7095C (APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(1), CHENNAI 600 034 (RESPONDENT) APPELLANT BY : SHRI G. NARAYANASWAMY RESPONDENT BY : SHRI SHAJI P. JACOB O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, ITS GRIEVANC E IS THAT AN ADDITION TO THE EXTENT OF ` 21,77,062/- OUT OF TOTAL ` 1,26,18,935/- MADE BY THE A.O. UNDER SECTION 2(22)(E) OF THE INCO ME-TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) WAS SUSTAINED BY THE CIT(APPEALS). 2. SHORT FACTS APROPOS ARE THAT ASSESSEE HAD RECEI VED CERTAIN ADVANCE FROM A COMPANY CALLED M/S QUESTNET ENTERPRI SES INDIA PVT. I.T.A. NO. 1862/MDS/10 2 LTD. (QEI IN SHORT) A.O. FOUND THAT THERE WERE COMM ON SHAREHOLDERS IN BOTH THE COMPANIES HAVING SUBSTANTIAL INTEREST. ACCORDING TO A.O., THE WORD SHAREHOLDER MENTIONED IN SECTION 2(22)(E ) OF THE ACT WOULD INCLUDE IN ITS MEANING NOT ONLY INDIVIDUAL BUT ALS O A CORPORATE ENTITY. FINDING THAT THERE WERE RESERVES AND SURPLUS BALANC E OF ` 1,26,18,935/- WITH M/S QEI, A.O. RELYING ON SECTION 2(22)(E) OF THE ACT MADE AN ADDITION OF THAT AMOUNT, THOUGH THE ACT UAL ADVANCE RECEIVED BY THE ASSESSEE WAS LARGER. 3. ASSESSEE MOVED IN APPEAL BEFORE THE CIT(APPEALS) AGAINST THE ABOVE TREATMENT. ACCORDING TO ASSESSEE, A SUM OF ` 14 CRORES WAS RECEIVED FROM M/S QEI FOR PURCHASE OF AGRICULTURAL LAND WHICH WAS INTENDED TO BE DEVELOPED AS A RESORT. ASSESSEE ALS O POINTED OUT THAT THE ACCUMULATED PROFITS OF M/S QEI AS ON 31.3.2005 WAS ONLY ` 21,77,062/-. ACCORDING TO THE ASSESSEE, THE TAX AS SESSED ON THE ABOVE COMPANY FOR THE IMPUGNED ASSESSMENT YEAR WAS ALSO TO BE CONSIDERED. AS ON 31.3.2006, THE POSITION WOULD CH ANGE TO A DEFICIT, IT WAS ARGUED. NEVERTHELESS, ASSESSEE DID NOT DISP UTE THAT SHAREHOLDERS HOLDING MORE THAN 10% OF SHARES IN M/S QEI WERE ALSO SHAREHOLDERS IN ASSESSEE-COMPANY. LD. CIT(APPEALS) WAS HOWEVER ALSO OF THE OPINION THAT ASSESSEE COULD BE CONSIDER ED AS RECIPIENT OF I.T.A. NO. 1862/MDS/10 3 DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. NEVERTHELESS, HE HELD THAT THE OPENING BALANCE OF ACCUMULATED PROFIT S OF M/S QUESTNET BEING ` 21,77,062/- ONLY, THE ADDITION ON THIS ACCOUNT HAD TO BE LIMITED TO SUCH AN AMOUNT. HE, THEREFORE, CONFIRME D THE ADDITION TO THE EXTENT OF ` 21,77,062/-. 4. NOW BEFORE US, THE LEARNED A.R. STRONGLY ASSAILI NG THE ORDER OF THE CIT(APPEALS), SUBMITTED THAT ASSESSEE-COMPANY W AS NOT A SHAREHOLDER IN M/S QEI. THEREFORE, ACCORDING TO HI M, DEEMING PROVISION OF SECTION 2(22)(E) OF THE ACT WAS NOT AP PLICABLE. RELIANCE WAS PLACED ON THE DECISION OF SPECIAL BENCH OF MUMB AI BENCH IN THE CASE OF ACIT V. BHAUMIK COLOUR (P.) LTD. (2009) 118 ITD 1 (MUM.). 5. PER CONTRA, THE LEARNED D.R. SUPPORTED THE ORDER OF THE CIT(APPEALS). 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. THERE IS NO DISPUTE THAT ASSESSEE BY ITSELF WAS NOT A SHAREHOLDER OF M/S QUESTNET ENTERPRISES INDIA PVT. LTD. THE A.O. HAD APPLIED THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT FOR A REA SON THAT THERE WERE COMMON SHAREHOLDERS HOLDING SUBSTANTIAL INTEREST IN BOTH ASSESSEE-COMPANY AS WELL AS M/S QUESTNET ENTERPRISE S INDIA PVT. I.T.A. NO. 1862/MDS/10 4 LTD. FROM WHICH ASSESSEE HAD RECEIVED CONSIDERABLE ADVANCES. IN THE CASE OF BHAUMIK COLOUR (P.) LTD. (SUPRA), DECID ED BY THE SPECIAL BENCH OF THIS TRIBUNAL, IT WAS HELD AS UNDER:- TO ATTRACT THE F IRST LIMB OF THE PROVISIONS OF S. 2(22)(E) THE PAYM ENT MUST BE TO A PER SON WHO IS A R EGISTERED HOLDER OF SHARES . THE CONDITION UNDER THE 1922 ACT AND THE 1961 ACT REGARDI N G THE PAYEE BEING A SHAREHOLDER REMAINS THE SAME AND I T I S THE CONDITION THAT SUCH S HAREHOLDER S HOU L D BE BENEFICIAL OWNER OF THE SHARES AND THE PERCENTAGE OF VOT I NG POWER THAT SUCH SHAREHOLDER S HOULD HOLD THAT HAS BEEN PRESCRIBED AS AN ADDITIONAL CONDITION UNDER THE 1961 ACT . IT IS A PRINCIPLE OF I NTERPRETATION OF STATUTES THAT WHERE ONCE CERTAIN W ORDS IN AN ACT HAVE RECEIVED A JUD I CIAL C ONSTRUCTION IN ONE OF THE SUPERIOR COURTS , AND THE LEGISLATURE HAS REPEATED THEM IN A SUBSEQUENT S TATUTE , THE LEGISLATURE MUST BE TAKEN TO HAVE USED THEM ACCORD I NG TO THE MEANING WHICH A CO U RT OF COMPETENT JUR I SDICTION HAS G I VEN THEM. IN THE 1961 ACT , THE WORD ' SHAREHOLDER ' IS FO L LOW E D B Y T HE FOLLOWING WORDS ' BE I NG A PERSON WHO I S THE BENEFICIAL OWNER OF SHARES '. THIS EXPRE SSI ON US E D IN S. 2(22)(E) , BOTH IN THE 1961 ACT AND IN THE AMENDED PROVISIONS W . E.F . 1ST APRIL, 1988 ONL Y QUALIFIES THE WORD ' SHAREHOLDER ' AND DOES NOT IN ANY WAY ALTER THE POSITION THAT THE SHAREHOL DER HAS TO BE A REGISTERED SHAREHOLDER. THESE PROVISIONS ALSO DO NOT SUBSTITUT E THE AFORE S AID R EQU I REMENT TO A REQUIREMENT OF MERELY HOLDING A BENEFICIAL INTERE ST IN THE SHA R ES WITHOUT BEING A REG I STERED HOLDE R OF SHARES . THE E X PRESS I ON ' SHAREHOLDER BEING A PERSON WHO IS TH E BENEF ICIAL OWNER OF SHARES ' REFERRED TO I N THE FIRST L I MB OF S . 2 ( 22 )( E) REFERS TO BOTH A REG IS TERED S HAREHO L D ER AND BENEFIC I AL SHAREHOLDER. IF A PERSON I S A REGISTERED SHAREHOLDER BUT NOT THE BENEFI C IAL THEN T HE PROV ISI ON OF S . 2( 22)(E) WILL NOT APPLY . S I M I LARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT N O T A REGISTERED SHAREHOLDER THEN ALSO THE FIRST LIMB OF PROVISIONS OF S . 2(22)(E) WILL NOT APPLY . TH E N EW CATEGORY OF PAYMENT WHICH WAS CONSIDERED AS DIVI DEND INTRODUCED BY THE F I NANCE A CT, 1 9 8 7 W.E.F. 1ST APRIL , 1988 BY THE SECOND LIMB OF S . 2(22)(E) IS PAYMENT 'TO ANY CONCERN IN WH ICH S U C H SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL I NT E R E ST '. T H E F OL L OWING CONDITIONS ARE REQU I RED TO BE SATISFIED FOR APPLICATION OF THE ABOVE CATEGO RY OF PAYMENT T O B E REGARDED AS DIVIDEND . THEY ARE : (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPA NY . ( B ) A PER S ON MUST BE SHAREHOLDER OF THE COMPANY BEING A REGIS TERED HOLDER AND BENEF I C I AL OW NER OF SHARES (N OT BE I NG SHARES ENTITLED T O A F IX ED RATE OF DIVIDEND W HETHER WITH OR WITHOU T A R I GH T TO P ART ICI PATE I N PROFITS ) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER . THI S IS B EC AU S E O F T HE EX PRESS I ON ' SUCH SHAREHOLDER ' FOUND I N THE RELEVAN T PROVISION . THIS EXPRESS I ON ONLY REFER S TO TH E S HAREHOLDER REFERRED TO IN THE EARLIER PART OF S. 2( 22)(E) , VIZ., A REGISTERED AND A BENEFICIAL HOLDER O F SH ARES HOLDING 10 PER CENT VOTING POWER . (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE MU S T ALS O BE A MEMBER OR A PARTNER IN THE CONCERN HOLD I NG SUBSTANTIAL I NTEREST I N THE CONCERN V IZ., W H EN THE CONCERN IS NO T A COMPANY , HE MUST AT A N Y T I ME DURING T HE PREV I OUS YEA R, B E BENEF ICI A LLY ENTI T LE D T O NOT L ES S THAN TWENTY PER CENT OF THE I NCOME OF SUCH CONCE R N ; A N D WHERE TH E C ONCER N IS A COM PA NY HE MUST BE THE OWNER OF SHARES , NOT BEING S HA R ES ENTITLED I.T.A. NO. 1862/MDS/10 5 TO A FI XE D RAT E OF D I V I D E ND WH ETHER WI TH OR WITHOUT A RIGHT TO PARTICIPATE I N PROFITS, CARRYING NOT LESS THAN TWENTY P E R CEN T OF T H E V OTING POWER . IN THE CASE OF THE ASSESSEE IT IS SEEN THAT CONDITIONS (B) AND (C) ARE NOT S ATI S FI ED IN A SM UCH AS NNT HELD SHARES IN UPPL AND BCPL ONLY AS A LEGAL AND RE GISTERED OWNER BU T NOT AS A BEN E FICI A L O W NER . I N TH E CASE OF THE ASSESSEE I T I S SEEN THAT THE THREE TRUSTEE S O F NNT HEL D SHARES I N UPP L A N D BCPL ON L Y AS A LEGA L AND REG I STERED OWNER . THEY HELD SHARES F OR AND O N B E HA LF OF 5 BENEFICI A RI ES OF THE TRU S T WHO ARE D I FFERENT IND I V I DUAL S. THEY W ER E THEREFORE NOT BENEFIC IAL O WNERS OF THE S HARE S . THEREFORE , THE F I RST REQUIREMENT OF HOLD I NG OF SHARES BOTH AS A LEGAL REG IS TER E D O WNER AN D BENEFICIAL OWNER OF SUCH SHARES IS NOT S ATISFIED IN THE CASE OF THE A S SESSE E . T HER E F O R E, PR OVI S IONS OF S . 2(22)(E ) WOULD NOT BE APPLICABLE AT ALL TO TH E CASE OF THE ASSES S E E.- S EA M IST PROP E R TIE S ( P ) LTD . V S. I TO (2005 ) 95 TIJ (MUMBAI ) 201 APPROVED. 7. ADMITTEDLY, THE ASSESSEE BEING NOT A REGISTERED OR BENEFICIAL SHAREHOLDER IN VIEW OF THE DECISION OF SPECIAL BENC H, DEEMING PROVISIONS OF SECTION 2(22)(E) OF THE ACT COULD NOT HAVE BEEN APPLIED. WE ARE, THEREFORE, OF THE OPINION THAT THE ADDITION MADE CANNOT STAND TEST OF LAW AS LAID DOWN BY SPECIAL BENCH IN THE CA SE OF BHAUMIK COLOUR (P.) LTD. (SUPRA), WHICH WE ARE BOUND TO FOL LOW. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 25 TH MARCH, 2011. SD/- SD/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 25 TH MARCH, 2011. KRI. COPY TO: APPELLANT/RESPONDENT/CIT(A)-V, CHENNAI-34/ CIT, CHENNAI-III, CHENNAI/D.R./GUARD FILE