ITO, Nashik V. Health Secure Pharmaceuticals [ I ] P.Ltd, Nashik

ITA 2226/PUN/2012

• Counselvise Citation: 222624514 RSA 2012
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 08-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P WALIMBE
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 2226/PN/2012 (ASSESSMENT YEAR : 2008-09) ITO, WARD-1(3), NASHIK .. APPELLANT VS. HEALTH SECURE PHARMACEUTICALS (INDIA) PVT. LTD., 1, LANDSCAPE, DSOUZA COLONY, NASHIK. PAN NO. AACCH0104P .. RESPONDENT APPELLANT BY : SHRI S.P. WALIMBE RESPONDENT BY : NONE DATE OF HEARING : 05-12-2013 DATE OF PRONOUNCEMENT : 10-12-2013 ORDER PER R.K. PANDA, AM : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 24-08-2012 OF THE CIT(A)-I, NASHIK RELATING T O ASSESSMENT YEAR 2008-09. 2. DELETION OF RS.23,82,542/- MADE BY THE ASSESSING OFFICER U/S.2(22)(E) OF THE I.T. ACT IS THE ONLY EFFECTIVE ISSUE RAISED BY THE REVENUE IN THE GROUNDS OF APPEAL. 3. AT THE TIME OF HEARING, NONE APPEARED ON BEHALF OF THE ASSESSEE AND HENCE THE ISSUE IS DECIDED ON THE BASI S OF MATERIAL AVAILABLE ON RECORD AND AFTER HEARING THE LD. DEPAR TMENTAL REPRESENTATIVE. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A PRIVATE LIMITED COMPANY. DURING THE COURSE OF ASSESSMENT P ROCEEDINGS 2 THE ASSESSING OFFICER NOTED FROM THE BALANCE SHEET OF THE COMPANY THAT IT HAS ACCEPTED A LOAN OF RS.51,59,914/- FROM HEALTH SECURE (INDIA) PVT. LTD., THE ASSESSING OFFICER EXAMINED T HE SHAREHOLDING PATTERN OF HEALTH SECURE PHARMACEUTICALS (INDIA) PV T. LTD. AND HEALTH SECURE (INDIA) PVT. LTD. WHICH IS AS UNDER : HEALTH SECURE PHARMACEUTICALS (I) PVT. LTD. (ASSESSEE) HEALTH SECURE (INDIA) PVT. LTD. (THE LOAN CREDITOR) NAME OF THE DIRECTOR NO. AND PERCENTAGE OF SHAREHOLDING NAME OF THE DIRECTOR NO. AND PERCENTAGE OF SHAREHOLDING SHRI ANIRUDHA WANKHEDE 1250 (25%) SHRI ANIRUDHA WANKHEDE 1250 (25%) SHRI ABIJIT WANKHEDE 1250 (25%) SHRI ABIJIT WANKHEDE 1250 (25%) SHRI ARVIND WANKHEDE 1250 (25%) SHRI ARVIND WANKHEDE 1250 (25%) SMT. SARIA WANKHEDE 1250 (25%) SMT. SARIA WANKHEDE 1250 (25%) 4.1 FROM THE ABOVE, HE NOTED THAT A CLOSELY HELD C OMPANY HAS GIVEN LOAN TO A CONCERN IN WHICH ALL THE DIRECTORS HAVE SUBSTANTIAL INTEREST DURING THE PREVIOUS YEAR. THEY HELD MORE THAN 20% OF THE SHARES. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLA IN AS TO WHY THE LOAN TO THE EXTENT OF ACCUMULATED PROFIT OF THE LOA N CREDITOR SHOULD NOT BE HELD AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. 4.2 IT WAS EXPLAINED THAT THE PROVISIONS OF SECTION 2(22)(E) ARE NOT APPLICABLE TO THE FACTS OF THE CASE SINCE THE A SSESSEE COMPANY IS NOT A REGISTERED SHAREHOLDER IN THE OTHER COMPANY N OR THE OTHER COMPANY IS A SHAREHOLDER IN THE ASSESSEE COMPANY. THE FOLLOWING DECISIONS WERE ALSO BROUGHT TO THE NOTICE OF THE AS SESSING OFFICER : 1. ACIT VS. BHAUMIK COLOURS PVT. LTD. 120 TTJ 865 (ITAT, MUMBAI SPECIAL BENCH). 2. CIT VS. RAJKUMAR SINGH & CO. (2007 295 ITR 9 (ALL ) 3. BOMBAY OIL INDIA VS. DCIT (2009) 28 SOT 383 (MUMB AI) 4. RAMESHWARLAL SANWAMAL VS. CIT (1980) 122 ITR 1 (SC ) 3 IT WAS ACCORDINGLY SUBMITTED THAT THE PROVISIONS OF SECTION 2(22)(E) DOES NOT APPLY AS THE SHAREHOLDERS ARE NOT REGISTER ED SHAREHOLDERS AND THAT INTER CORPORATE DEPOSITS WOULD NOT ATTRACT THE PROVISIONS OF SECTION 2(22)(E). 4.3 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND MADE ADDITION OF RS.23,82,542/- TO THE TOTAL INCOME OF THE ASSESSEE U/S.2(22)(E) OF THE ACT. 5. IN APPEAL THE LD.CIT(A) DELETED THE ADDITION MAD E BY THE ASSESSING OFFICER BY HOLDING AS UNDER : 7. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE , THE ASSESSMENT ORDERS, THE RIVAL SUBMISSIONS AND THE POSITION OF LAW ON THIS ISSUE. FOR INVOKING SECTION 2(22)(E) OF THE ACT, TWO CONDITIONS ARE REQUIRED TO BE SATISFIED WHERE ADVANCE IS GIVEN BY A COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED TO A CON CERN. FIRSTLY, THE SHAREHOLDER SHOULD BE A PERSON WHO IS A BENEFICIAL OWNER OF THE SHARES HOLDING NOT LESS THAN 10% OF THE VOTING POWER AN D SECONDLY, SUCH SHAREHOLDER SHOULD HAVE SUBSTANTIAL INTEREST IN THE SAID CONCERN. THESE TWO CONDITIONS SHOULD BE SATISFIED CUMUL ATIVELY AND NOT ALTERNATIVELY. FURTHER, U/S 2(22)(E), IT IS NOT THE REAL INCOME BUT IS FICTIONALLY REGARDED BY LAW AS INCOME. IT IS SETTLED POSITION OF LAW THAT TO INTERPRET A FICTION THE COUR T SHOULD ASCERTAIN FOR WHAT PURPOSE THE FICTION IS CREATED AND AFTER ASCE RTAINING THAT PURPOSE, THE COURT HAS TO ASSUME ALL FACTS WHICH ARE INC IDENTAL TO THE GIVING EFFECT TO THAT FICTION. THEREFORE, NO WI DER MEANING OTHER THAN WHAT IT PURPORTS TO DO CAN BE GIVEN. FURTHER, THERE SHOULD BE SUFFICIENT MATERIAL ON RECORD TO ARRIVE AT A CONCLUSI ON THAT THERE WAS ANY BENEFIT ACCRUED TO THE CLOSELY HELD COMPANY T O WARRANT APPLICATION OF SECTION 2(22)(E). 7.1 UNDER SECTION '(22)' DIVIDEND' INCLUDES : (E) ANY PAYMENT BY A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHE R AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTH ERWISE MADE AFTER THE 31 ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNE R OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEN D WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDIN G LESS THAN TEN PERCENT OF THE VOTING POWER OR TO ANY CONCERN IN WH ICH SUCH SHAREHOLDER IS A MEMBER OF A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREINAFTER IN THIS CLAUSE REFERR ED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON B EHALF OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO T HE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PR OFITS. 4 EXPLANATION 3: FOR THE PURPOSES OF THIS CLAUSE- (A) 'CONCERN' MEANS A HINDU UNDIVIDED FAMILY OR A F IRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COM PANY; (B) A PERSON SHALL BE DEEMED TO HAVE SUBSTANTIAL INTER EST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIM E DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN. THE SCOPE OF SECTION 2(22)(E) OF THE ACT HAS BEEN EXPL AINED BY THE HON'BLE SUPREME COURT IN THE DECISION IN THE CASE OF CIT VS. MYSODET (P) LTD. (1999) (103 TAXMAN 336)/237 ITR 35 (SC). IN THIS CASE IT IS INTER ALIA HELD AS FOLLOWS:- 'A PERUSAL OF SECTION 2(22)(E) SHOWS THAT FOR THE PURP OSE OF THE ACT, ANY PAYMENT MADE BY A COMPANY OF ANY SUM OF MO NEY BY WAY OF ADVANCE OR LOAN TO ITS SHAREHOLDERS IS DEEMED TO BE A DIVIDEND. SINCE THE ACT HAS NOT PROVIDED FOR ANY OTHER DEFINIT ION OF THE WORD 'DIVIDEND' EXCEPT THE ONES ENUMERATED IN SECTION 2(2 2), IT SHOULD BE CONSTRUED THAT THIS DEFINITION WOULD BE APPLICABLE TO ALL PROVISIONS WHICH CONTAIN THE TERM 'DIVIDEND' IN THE A CT'. 7.2 THE PRESENT ISSUE IS, THEREFORE, A QUESTION OF FACT, WHICH INVOLVES A LEGAL FICTION. THE VARIOUS COURTS HAVE EXPL AINED AND LAID DOWN CERTAIN TESTS WHICH NEEDS TO BE APPLIED KEEPING I N VIEW THE FACTS OF EACH CASE. THERE IS NO DISPUTE WITH REGARD TO THE TESTS IN THE PRESENT APPEAL. AS STATED ABOVE, SEC. 2(22)(E) IS A DEEMING PROVISION WHICH CREATES A LEGAL FICTION. IT IS JUD ICIALLY SETTLED THAT A LEGAL FICTION CANNOT BE INTERPRETED TO WORK INJUSTICE AND A STATUTORY FICTION CANNOT BE EXTENDED BEYOND ITS P URPOSE. THERE IS NO DISPUTE THAT THE SUBJECT MATTER OF PAYMENT CONTEMPLATED UNDER 2(22)(E) INCLUDES AN ADVANCE, A L OAN, ANY PAYMENT ON BEHALF OF A SHAREHOLDER AND ANY PAYMENT F OR THE BENEFIT OF A SHAREHOLDER. THE BASIC PRINCIPLES THEREFO RE, GOVERNING THE SECTION HAVE BEEN CAREFULLY EXAMINED. THE CHIEF INGREDIENT IN THAT SECTION IS THAT ONE SHOULD BE A SHAREHOLDER ON THE DATE THE ADVANCE WAS MADE. IN THE PRESENT CASE, EVEN THOUGH THE ADVANCES WERE MADE OUT OF PROFITS OF THE LENDING COMPANY, BUT , THE CHIEF INGREDIENT I.E., THE REGISTERED SHAREHOLDER AND BENEF ICIAL INTEREST IS NOT EXISTING IN THE APPELLANT'S CASE. THE APPELLANT COMPANY IS NOT A REGISTERED SHAREHOLDER OF THE LENDING COMPANY, HENCE THERE IS NO ELEMENT OF SUBSTANTIAL INTEREST THEREIN. 7.3 THE HON'BLE ITAT SPL. BENCH IN THE CASE OF ACIT VS. BHAUMIK COLOR (P) LTD. (2009) 27 SOT (MUM) (SB), HAS DEALT WITH THE SIMILAR ISSUE AND HAS HELD THAT THE DEEMED DIV IDEND CAN ONLY BE TAXED IN THE HANDS OF A PERSON WHO IS NOT ONL Y A BENEFICIAL SHAREHOLDER, BUT ALSO A REGISTER SHAREHOLDER. THE SAID D ECISION OF THE SPECIAL BENCH OF THE ITAT HAS BEEN FOLLOWED BY THE JURISDICTIONAL ITAT PUNE BENCH IN ITA NO.728/PN/200 8 A.Y. 2005-06 VIDE AN ORDER DATED 31/03/2009 IN THE CASE OF M/S SHIVANANDA ELECTRONICS VS. JCIT. THE RATIO OF THE TWO DECISIONS SQUARELY APPLY TO THE IDENTICAL FACTS OF THE CASE OF T HE APPELLANT. ASSESSING OFFICER HAS NOT SUPPORTED THE IMPUGNED ADDITION BY ANY JUDICIAL DECISION, EXCEPT SAYING THAT THE DECISION OF THE HON. ITAT IN THE CASE OF BHAUMIK COLOR (SUPRA) IS NOT ACCEPTABLE TO HIM AS THE DEPARTMENT HAS FILED AN APPEAL IN THE HIGH COURT. TH IS APPROACH OF THE ID. AO DOES NOT HELP HIS CASE. IN MY CONSIDERED VIE WS, IN ORDER 5 TO MAINTAIN CONSISTENCY IN JUDICIAL DISCIPLINE, WHEN T HE APPELLANT'S CASE IS IDENTICAL ON FACTS AND IS COVERED BY THE SPL. B ENCH OF THE HON. ITAT, THEIR ORDER DESERVES TO BE FOLLOWED AND I DO SO. FURTHER, THE ABOVE PROPOSITION OF LAW IS ALSO SUPPORTED BY THE D ECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICARE PRIVATE LIMITED (2010) 324 ITR 263. THEREFORE, IN ABSENCE OF ABOVE INGREDIENTS, THE ADVANCE MADE BY SUBS IDIARY COMPANY TO ANOTHER COMPANY IN THE SAME GROUP TO CARR Y OUT ITS BUSINESS CANNOT BE TREATED AS DEEMED DIVIDEND IN THE HA NDS OF THE APPELLANT U/S. 2(22)(E). THEREFORE, IT IS HELD THAT NO PAYMENT AS CONTEMPLATED U/S.2(22)(E) HAS BEEN MADE BY THE CLOSELY HELD COMPANY IN THE APPELLANT COMPANY. THE LOAN TAKEN B Y THE ASSESSEE IS, THEREFORE, NOT HIT BY SECTION 2(22)(E). CONSEQUE NTLY, IT IS HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN INVOKING SECTION 2(22)(E) AND MAKING THE IMPUGNED ADDITION OF RS.23,8 2,542/-, THEREFORE, THE SAME IS DELETED. THE SUBSTANTIVE GROUN D OF APPEAL IS ALLOWED. 5.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTATIV E. THE LD.CIT(A) HAS GIVEN A CATEGORICAL FINDING THAT THE ASSESSEE COMPANY IS NOT A REGISTERED SHAREHOLDER OF THE LEND ING COMPANY. ACCORDINGLY, APPLYING THE DECISION OF THE SPECIAL B ENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. BHAUMIK COLOR (P) LTD. REPORTED IN 27 SOT (MUM) (SB) AND THE DECISION OF THE HONBL E BOMBAY HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICAR E PVT. LTD. REPORTED IN 324 ITR 263 HE DELETED THE ADDITION MAD E BY THE ASSESSING OFFICER U/S.2(22)(E) OF THE I.T. ACT. 7. THE LD. DEPARTMENTAL REPRESENTATIVE COULD NOT CO NTROVERT THE FACTUAL FINDINGS GIVEN BY THE LD.CIT(A). SINCE THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BHAUMIK COLOR (P) LTD. (SUPRA) AND THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF UNIVERSAL MEDICARE PVT. LTD.(SUPRA), THEREFORE, FOLLOWING THE 6 DECISIONS CITED ABOVE AND IN ABSENCE OF ANY CONTRAR Y MATERIAL BROUGHT TO OUR NOTICE, THE ORDER OF LD.CIT(A) DELET ING THE ADDITION IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS D ISMISSED. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. PRONOUNCED IN THE OPEN COURT ON 10-12-2013. SD/- SD/- (R.S. PADVEKAR) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED : 10 TH DECEMBER, 2013 SATISH COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-I, NASHIK 4. THE CIT-I, NASHIK 5. D.R. B BENCH, PUNE 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE