Income Tax Officer, Bangalore V. M/s Zygo Bonsai Pvt.Ltd., Bangalore

ITA 2231/BANG/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4631 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 16-12-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: RAGHAVENDRA CHAKRABORTHY
• Keywords: Share purchase agreement; Deemed dividend

Judgement Text

ITA.2231/BANG/2016 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'B', BENGALURU BEFORE SHRI. JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI. LALIET KUMAR, JUDICIAL MEMBER I.T.A NO.2231/BANG/2016 (ASSESSMENT YEAR : 2012-13) INCOME-TAX OFFICER, WARD-7(1)(4), BENGALURU .. APPELLANT V. M/S. ZYGO BONSAI P. LTD, SY NO.21, KOLLUR VILLAGE, ANTHARAHALLI POST, DODDABALLAPUR, BENGALURU 561 203 .. RESPONDENT PAN : AAACZ0447R ASSESSEE BY : SHRI. RAGHAVENDRA CHAKRABORTHY, CA REVENUE BY : SMT. PADMAMEENAKSHI, JCIT HEARD ON : 20.03.2018 PRONOUNCED ON : 12.06.2018 O R D E R PER LALIET KUMAR, JUDICIAL MEMBER : THE PRESENT APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT (A) -7, BENGALURU, DT.28.09.2016, FOR TH E ASSESSMENT YEAR 2012-13, ON THE FOLLOWING EFFECTIVE GROUND : 2. THE CIT (A) ERRED IN CONSIDERING THE FACT THAT T HE AO WAS RIGHT IN INVOKING THE PROVISIONS OF SEC 2(22 )(E) OF THE IT ACT AND ASSESSING THE SUM RECEIVED BY THE AS SESSEE COMPANY AS DEEMED DIVIDEND INCOME, WHICH WAS FURTHE R RESTRICTED TO THE ACCUMULATED PROFITS OF THE COMP ANY AND WAS ACCORDINGLY ADDED BACK TO THE INCOME OF THE ASS ESSEE COMPANY. ITA.2231/BANG/2016 PAGE - 2 02. BRIEF FACTS AS PER DR WERE THAT IN THE ASSESSE E COMPANY SHRI. HEMANT KUMAR JALAN IS HAVING 98% SHARE ALONG WITH M /S. SHREE HANUMAN JUTE MILLS P. LTD, WHO WAS HAVING 2% SHARE AND THE SAME HEMANT KUMAR JALAN IS ALSO HAVING 19.89% SHARE IN A NOTHER COMPANY BY NAME OF SHREE HANUMAN JUTE MILLS P. LTD. DURING THE YEAR UNDER CONSIDERATION, AS PER THE AUDITOR REPORT TOTAL UNSECURED LOAN OF RS.1,83,70,000/- WAS TAKEN BY THE ASSESSEE FROM M/S SHREE HANUMAN JUTE MILLS P. LTD. AS BOTH THE COMPANIES, NAMELY THE ASSESSEE AND M/S. SHREE HANUMAN JUTE MILLS P. LTD, HAD A COMMON DIRECTOR, NAMELY HEMANT KUMAR JALAN AND WAS HAVING MORE THAN 10% OF SHARE HOLDING AND VOTING RIGHT, THEREFORE T HE AO INVOKED THE PROVISION OF SECTION 2(22)(E) OF THE ACT AND TH EREFORE ADDED THE DEEMED DIVIDEND TO THE INCOME OF THE ASSESSEE . IT WAS SUBMITTED THAT THE HONBLE APEX COURT IN ITS RECENT PRONOUNCE MENT IN THE MATTER OF GOPAL & SONS (HUF) V. CIT [(2017) 77 TAXM ANN.COM 71, HAS HELD AS UNDER : 17. IT IS ALSO FOUND AS A FACT, FROM THE AUDITED ANNUA L RETURN OF THE COMPANY FILED WITH ROC THAT THE MONEY TOWARDS S HARE HOLDING IN THE COMPANY WAS GIVEN BY THE ASSESSEE/HU F. THOUGH, THE SHARE CERTIFICATES WERE ISSUED IN THE N AME OF THE KARTA, SHRI GOPAL KUMAR SANEI, BUT IN THE ANNUAL RE TURNS, IT IS THE HUF WHICH WAS SHOWN AS REGISTERED AND BENEFICIA L SHAREHOLDER. IN ANY CASE, IT CANNOT BE DOUBTED THAT IT IS THE BENEFICIAL SHAREHOLDER. EVEN IF WE PRESUME THAT IT IS NOT A REGISTERED SHAREHOLDER, AS PER THE PROVISIONS OF SE CTION 2(22)(E) OF THE ACT, ONCE THE PAYMENT IS RECEIVED B Y THE HUF AND SHAREHOLDER (MR. SANEI, KARTA, IN THIS CASE) IS A MEMBER OF THE SAID HUF AND HE HAS SUBSTANTIAL INTEREST IN THE HUF, THE PAYMENT MADE TO THE HUF SHALL CONSTITUTE DEEMED DIV IDEND WITHIN THE MEANING OF CLAUSE (E) OF SECTION 2(22) O F THE ACT. THIS IS THE EFFECT OF EXPLANATION 3 TO THE SAID SEC TION, AS NOTICED ABOVE. THEREFORE, IT IS NO GAINSAYING THAT SINCE HUF ITA.2231/BANG/2016 PAGE - 3 ITSELF IS NOT THE REGISTERED SHAREHOLDER, THE PROVI SIONS OF DEEMED DIVIDEND ARE NOT ATTRACTED. FOR THIS REASON, JUDGMENT IN C.P. SARATHY MUDALIAR (SUPRA) RELIED UPON BY THE LEARNED COUNSEL FOR THE APPELLANT, WILL HAVE NO APPLICATION . THAT WAS A JUDGMENT RENDERED IN THE CONTEXT OF SECTION 2(6-A)( E) OF THE INCOME TAX ACT, 1922 WHEREIN THERE WAS NO PROVISION LIKE EXPLANATION 3. 03. ON THE BASIS OF THE ABOVE, THE LD. DR SUBMITTED THAT THE DISTINCTION BETWEEN THE MEMBER A ND THE HUF HAS BEEN OBLITERATED AND IT WAS HELD THAT THOUG H THE HUF IS NOT THE SHAREHOLDER, BUT THE KARTHA OF THE H UF IS A SHAREHOLDER, THEREFORE THE PROVISION OF SECTION 2(2 2)(E) ARE ATTRACTED AND ON THE SAME ANALOGY, IF THE COMPANY I S NOT THE SHAREHOLDER BUT ONE OF THE DIRECTOR IS HAVING THE S HARE HOLDING OF 10% WITH VOTING RIGHT, THEN THE PROVISION OF SEC TION 2(22) ARE ATTRACTED. 04. ON THE OTHER HAND, THE LD. AR HAS SUBMITTED THA T AS PER THE PROVISIONS OF SECTION 2(22)(E) AND ALSO IN TERMS OF THE PRONOUNCEMENT OF THE JURISDICTIONAL HIGH COURT IN C CIT V. SARVA EQUITY P. LTD [225 TAXMAN 172], THE DEEMED DIVIDEND IS REQUIRED TO BE TAXED IN THE HANDS OF THE PERSON WHO IS THE BENE FICIARY OF THE LOAN AND NOT IN THE NAME OF THE COMPANY I.E ASSESSE E, AS IT WAS NOT THE BENEFICIARY OF LOAN. OUR ATTENTION WAS DRAWN T O PARA 17 AND 18 OF THE SAID JUDGMENT, WHICH IS REPRODUCED HEREUNDER : 17. SECTION 2(22)(E) OF THE ACT IS DESIGNED TO STRIKE BALANCE, I.E., ADVANCE OR LOAN TO A SHAREHOLDER AND THAT THE WORD SHAREHOLDER CAN MEAN ONLY A REGISTERED SHAREHOLDER. A BENEFICIAL OWNER OF SHARES WHOSE NAME DOES NOT APPE AR IN THE REGISTER OF SHAREHOLDERS OF THE COMPANY CANNOT BE S TATED TO BE A SHAREHOLDER. HE MAY BE BENEFICIALLY ENTITLED T O THE SHARE BUT HE IS CERTAINLY NOT A SHAREHOLDER. IN OTHER WOR DS, IT IS ONLY THE PERSON WHOSE NAME IS ENTERED IN THE REGISTER OF THE SHAREHOLDERS OF THE COMPANY AS THE HOLDER OF THE SH ARES WHO CAN BE SAID TO BE A SHAREHOLDER QUA COMPANY AND NOT THE PERSON BENEFICIALLY ENTITLED TO THE SHARES. WE ARE THEREFORE, OF THE VIEW THAT IT IS ONLY WHERE A LOAN IS ADVANCED B Y THE COMPANY TO THE REGISTERED SHAREHOLDER AND THE OTHER CONDITIONS SET OUT IN SECTION 2(22)(E) OF THE ACT A RE SATISFIED, ITA.2231/BANG/2016 PAGE - 4 THAT AMOUNT OF LOAN WOULD BE LIABLE TO BE REGARDED AS DEEMED DIVIDEND WITHIN THE MEANING OF THIS SECTION. 18. WE DO NOT FIND ANY REASON TO TAKE A VIEW OTHER THA N THE ONE TAKEN BY THE DELHI AND BOMBAY HIGH COURTS IN TH E AFOREMENTIONED JUDGMENTS NOR COULD THE SENIOR COUNS EL APPEARING FOR THE REVENUE PERSUADED US TO TAKE DIFF ERING VIEW. IN THE CIRCUMSTANCES, WE FIND NO REASON TO INTERFER E WITH THE CONCURRENT FINDING OF FACTS RECORDED BY THE TWO AUT HORITIES BELOW NAMELY THE APPELLATE AUTHORITY AND THE TRIBUN AL. IN THE CIRCUMSTANCES, WE ANSWER THE QUESTION AS FORMULATED BY US IN FAVOUR OF THE RESPONDENT-ASSESSEE AND AGAINST THE R EVENUE. 05. FURTHER IT WAS POINTED OUT THAT THE HONBLE SUP REME COURT HAS DISMISSED THE SLP FILED IN CIT V. NAMDHARI SEEDS [5 8 TAXMANN.COM 19] AND THEREFORE THE LAW LAID DOWN IN SARVA EQUITY P. LTD (SUPRA) IS REQUIRED TO BE APPLIED. FURTHER IT WAS BROUGHT TO OUR NOTICE THAT EVEN IN THE CASE OF HEMANT KUMAR JA LAN FOR AY 2012-13, IMPUGNED BEFORE US, HEMANT KUMAR JALAN HAS BEEN TAXED BY THE REVENUE. COPY OF THE ORDER PASSED BY THE AO ON 16.11.2017 WAS ALSO PLACED ON RECORD. WE ARE REPRODUCING HERE UNDER THE RECORDING OF THE AO IN THE CASE OF HEMANT KUMAR JA LAN : 06. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. AT THE OUTSET WE WOULD LIKE TO POINT OUT THAT A REA SONED JUDGMENT WAS PASSED BY THE HONBLE APEX COURT IN THE MATTER OF GOPAL AND SONS (HUF) (SUPRA), THEREFORE THE ASSESSEE RELIANCE ON THE DISMISSAL ITA.2231/BANG/2016 PAGE - 5 OF SLP IN NAMDHARI SEEDS (SUPRA) IS OF NO HELP TO I T. AS THE JUDGMENT RENDERED IN THE CASE OF GOPAL AND SONS WOU LD BE BINDING ON ALL COURTS AND TRIBUNAL AND DISMISSAL OF SLP WIL L NOT GIVE RISE TO BINDING NATURE IN THE CASE OF NAMDHARI SEEDS(SUPRA) , WHEN INTER-SE APPLICABILITY IS TO BE EXAMINED. IN THE LIGHT OF T HE ABOVE, WE FIND THAT THE STAND OF THE REVENUE IS CORRECT. ACCORDIN GLY APPLYING THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE MATTER OF GOPAL & SONS (HUF) (SUPRA), WE REVERSE THE ORDER PA SSED BY THE CIT (A) AND UPHOLD THE ORDER PASSED BY THE AO. 6.1 AS WE HAVE HELD THAT THE ASSESSEE WOULD BE LIAB LE TO BE TAXED ON ACCOUNT OF DEEMED DIVIDEND, THEREFORE, AS PLEADE D BY THE LD. AR, HEMANT KUMAR JALAN, BEING THE COMMON DIRECTOR O F THE ASSESSEE COMPANY AS WELL AS M/S. SHREE HANUMAN JUTE MILLS P. LTD, SHALL BE AT LIBERTY TO TAKE APPROPRIATE STEPS IN HI S ASSESSMENT PROCEEDINGS WHERE HE HAS BEEN TAXED. IN THE CONSID ERED OPINION OF THE BENCH, THE TAX HAS TO BE CHARGED IN THE CORRECT HANDS. 07. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH DAY OF JUNE, 2018. SD/- SD/- (JASON P. BOAZ) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER BENGALURU DATED : 12TH JUNE, 2018 MCN* ITA.2231/BANG/2016 PAGE - 6 COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE. ITA.2231/BANG/2016 PAGE - 7 AS MENTIONED BY THE AR THAT THE DEEMED DIVIDEND HA S BEEN TAXED IN THE HANDS OF HEMANT KUMAR JALAN, WHO WAS THE COM MON DIRECTOR IN ASSESSEE COMPANY AS WELL AS SHREE HANUMAN JUTE M ILLS P. LTD, THEN THE CONTROVERSY WHETHER IT IS TO BE TAXED IN T HE HANDS OF THE ASSESSEE FIRM OR IN THE HANDS OF HEMANT KUMAR JALAN WOULD BECOME ACADEMIC , BESIDES BEING TAX NEUTRAL . BOTH THE ASSESSEE AS WELL AS HEMANT KUMAR JALAN ARE TAXED ON THE HIGHEST SLAB OF TAX AND THEREFORE IT WILL NOT MAKE ANY DIFFERENCE WHETH ER ASSESSEE COMPANY WITH A SHAREHOLDING OF 98% OF HEMANT KUMAR JALAN PAYS THE TAX OR HEMANT KUMAR JALAN PERSONALLY PAYS THE TAX. IN VIEW THEREOF WE DO NOT EMBARK UPON TO ADJUDICATE THE LEG AL ISSUE WHETHER IT IS TO BE TAXED IN THE HANDS OF THE ASSESSEE COMP ANY OF WHICH HAS RECEIVED INTEREST FREE ADVANCE FROM SHREE HANUMAN J UTE MILLS P. LTD, OR IT IS TO BE TAXED IN THE HANDS OF HEMANT KU MAR JALAN WHO IS A COMMON DIRECTOR IN BOTH THE COMPANIES, AND KEEP I T OPEN TO BE DECIDED IN APPROPRIATE CASE. ITA.2231/BANG/2016 PAGE - 8