DCIT, New Delhi V. M/s. Sindhu Realtors Pvt. Ltd., New Delhi

ITA 2768/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98100 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 04-11-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 06-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B R R KUMAR SENIOR
• Assessee Lawyers: SANAT KAPOOR S
• Keywords: Share purchase agreement; Bad and doubtful debts; Deemed dividend
• Section: 142(1); 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G : NEW DELHI) BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.2768/DEL./2012 (ASSESSMENT YEAR : 2008-09) DCIT, CIRCLE 8 (1), VS. M/S. SINDHU REALTORS PVT . LTD., NEW DELHI. C 102, LGF SURYA NAGAR, NEW MULTAN NAGAR, NEW DELHI 110 056. (PAN : AAICS0537M) ITA NO.2706/DEL./2012 (ASSESSMENT YEAR : 2008-09) M/S. SINDHU REALTORS PVT. LTD., VS. DCIT, CIRCLE 8 (1), C 102, LGF SURYA NAGAR, NEW DELHI. NEW MULTAN NAGAR, NEW DELHI 110 056. (PAN : AAICS0537M) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI SALIL KAPOOR & SANAT KAPOOR, ADVOCATES REVENUE BY : SHRI B.R.R. KUMAR, SENIOR DR DATE OF HEARING : 09.11.2015 DATE OF PRONOUNCEMENT : 11.12.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : ITA NO.2706 & 2768/DEL./2012 2 THESE CROSS APPEALS, AT THE INSTANCE OF THE REVENUE AND ASSESSEE, ARE FILED AGAINST THE ORDER OF THE CIT (APPEALS)-XI, NE W DELHI DATED 14.03.2012 FOR THE ASSESSMENT YEAR 2008-09. 2. FIRST WE TAKE UP THE REVENUES APPEAL BEING ITA NO.2768/DEL/2012. 3. THE SOLITARY GROUND TAKEN BY THE REVENUE IS AGAI NST THE DELETION OF ADDITION OF RS.1,03,12,934/- MADE BY THE AO UNDER S ECTION 2(22)(E) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER THE ACT). 4. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION. DURING THE YEAR UNDER CONSIDERATION, THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.35,26,578/- WAS FILED ON 30.09.2008. THE CASE W AS PROCESSED U/S 143 (1) OF THE ACT AND SUBSEQUENTLY, THE SAME WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF HEARING, THE AO NOTICED CERTAIN FACTS AND BASED ON THAT, A SHOW CAUSE NOTICE ALONG WITH QUESTIONNAIRE U/S 142(1) DA TED 08.07.2010 WAS ISSUED. THE ASSESSEE FILED THE REPLY TO THE SAID NOTICE. A FTER CONSIDERING THE REPLY OF THE ASSESSEE, THE AO FOUND CERTAIN CLAIMS OF THE AS SESSEE NOT TENABLE. 4.1 OUT OF THE THOSE CERTAIN CLAIMS, ONE OF THE ISS UES IS AGAINST THE ADDITION OF RS.1,03,12,934/- UNDER SECTION 2(22)(E) OF THE ACT, WHICH IS THE DISPUTE IN THE PRESENT APPEAL. THE FACTS RELATING TO THIS ISS UE ARE AS FOLLOWS. 4.2 THE AO VIDE SHOW CAUSE NOTICE DATED 09.12.2010 ASKED THE ASSESSEE TO EXPLAIN AS TO WHY LOAN OF RS.1,03,12,934/- TAKEN FR OM M/S. SINDHU TRADE LINKS LTD. (HEREINAFTER STLL) BE NOT TREATED AS D EEMED DIVIDEND IN VIEW OF ITA NO.2706 & 2768/DEL./2012 3 THE FACTS THAT DIRECTORS OF THE ASSESSEE COMPANY AR E SUBSTANTIALLY INTERESTED IN THE SAID COMPANIES AND ALSO SOME OF THE SHAREHOLDER S ARE COMMON IN BOTH THE COMPANIES. IN RESPONSE, THE ASSESSEE FURNISHED THE FACTS STATING THAT SECTION 2(22)(E) IS NOT APPLICABLE TO THE ASSESSEE COMPANY, WHICH ARE REPRODUCED HEREUNDER :- (I) M/S STLL IS A NBFC REGISTERED WITH RBI (PROOF OF BE ING NBFC IS ENCLOSED HEREWITH). SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 IS NOT APPLICABLE TO LOAN OR ADVANCE GIVEN BY A COMPANY HA VING PRIMARY BUSINESS AS LENDING BUSINESS . (II) M/S. STLL IS A LISTED COMPANY ON DELHI STOCK EXCHAN GE AND JAIPUR STOCK EXCHANGE. PROOF OF BEING LISTED IS ENCLOSED HEREWIT H. SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 IS APPLICABLE ONLY IN RESPECT OF CLOSELY HELD COMPANIES. (III) M/S SINDHU REALTOR PVT. LTD. IS NOT HOLDING MORE TH AN 10% SHARES IN M/S STLL. (COPY OF SHAREHOLDING OF M/S SINDHU TRADE LIN KS LTD. IS ENCLOSED HEREWITH). HENCE SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 IS NOT APPLICABLE. (IV) THERE IS NO SINGLE SHAREHOLDER HOLDING MORE THAN 10 % IN M/S STLL, HENCE QUESTION THAT A SHAREHOLDER HOLDING MORE THAN 10% I N M/S STLL, HOLDING MORE THAN 20% IN ASSESSEE COMPANY DOES NOT ARISE. H ENCE THE SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 IS NOT APPLICA BLE. THE ASSESSEE, THEREFORE, SUBMITTED BEFORE THE AO TH AT IN VIEW OF THE ABOVE, PROVISIONS OF SECTION 2(22)(E) OF THE INCOME TAX AC T, 1961 SHALL NOT BE INVOKED. FURTHER, AS REGARDS THE ASSESSEES SUBMIS SION THAT STLL IS A PUBLIC LIMITED COMPANY AND IS IN THE CATEGORY OF NBFC, THE AO OBSERVED THAT IT HAS NO MERIT ON THE ISSUE BECAUSE OF THE FOLLOWING REAS ONS:- (I) 'SINDHU TRADE LINKS LTD.' (STLL) IS A LIMITED COMP ANY ONLY BECAUSE ITS PAID UP SHARE CAPITAL BASE IS MORE THAN RS. 5 CRORE S BUT IT IS NOT A WIDELY HELD PUBLIC LIMITED COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, AS ENVISAGED IN THE SECTION 2(22)( E) OF THE IT ACT 1961. PROVISIONS OF SECTION 2(22)( E) OF THE ACT IS BEING REPRODUCED FO R BETTER UNDERSTANDING: - ITA NO.2706 & 2768/DEL./2012 4 '(22) 'DIVIDEND' INCLUDES- E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WH ETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY 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 O WNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVID END 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 WHIC H SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFE RRED TO AS THE SAID CONCERN)] OR ANY PAYMENT BY ANY SUCH COMPANY ON BEH ALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PR OFITS; (II) ALTHOUGH THE STLL HAS CLAIMED THAT THE EQUIT Y SHARES OF THE COMPANY IS LISTED ON DELHI STOCK EXCHANGE AND JAIPUR STOCK EXC HANGE, BUT IN PARA 13 OF THE DIRECTORS REPORT ITSELF, IT HAS ALSO BEEN M ENTIONED THAT 'THESE SHARES WERE NOT TRADED DURING THE YEAR UNDER REVIEW. (III) AS PER PARA 5 OF THE DIRECTOR'S REPORT, 'THE COMPANY HAS NOT INVITED OR EXCEPTED ANY PUBLIC DEPOSIT WITHIN THE MEANING OF S ECTION 58A & 58AA OF THE COMPANY ACT,1956 AND SECTION 45-I(BB) OF THE RE SERVE BANK OF INDIA ACT 1934 DURING THE YEAR UNDER REVIEW. THE COMPANY DOES NOT HOLD ANY PUBLIC DEPOSIT AS ON DATE AND WILL NOT ACCEPT THE S AME IN FUTURE WITHOUT THE PRIOR APPROVAL OF RESERVE BANK OF INDIA IN WRITING. (IV) THE AR VIDE LETTER DATED 13-12-2010 HAS FURNI SHED SHARE HOLDING PATTERN OF STLL AS ON 31-03-2008. IT IS SEEN FROM THERE THAT T HOUGH THE AR SUBMITTED THAT THE STLL IS A PUBLIC LIMITED COMPANY, BUT HAS FAILED TO SUBSTANTIATE THAT IT IS A PUBLIC LIMITED COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED. AS PER THE SHARE HOLDING PATTERN FILED BY THE AR IT IS FOUND THAT THERE WERE IN TOTAL 279 SHARE HOLDERS OF THE STLL A S ON 31.03.2008. THERE ARE 5 DIRECTORS CUM SHARE HOLDERS/DIRECTORS OF THE STLL WHO ARE ALSO PARTNER OR SUBSTANTIAL SHARE HOLDERS OR DIRECTORS IN VARIOU S COMPANIES/FIRMS INCLUDING THE ASSESSEE COMPANY. THESE DIRECTORS/SHA RE HOLDERS ARE - 1. SHRI RUDRA SEN SINDHU 2. SHRI ABHIMANYU SINDHU 3. SHRI VIR SEN SINDHU 4. SHRI DEV SUMAN SINDHU 5. SHRI VRIT PAL SINDHU AS REGARDS THE ASSERTION OF THE AR THAT THE COMPANY STLL IS A PUBLIC LIMITED COMPANY, IT IS BEING DEMONSTRATED HEREWITH THAT THI S IS NOT 'A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED' BECAUSE - ITA NO.2706 & 2768/DEL./2012 5 THIS IS A COMPANY IN WHICH SHARES HAVE NOT BEEN TRA DED BY THE PUBLIC AT LARGE; A. ALTHOUGH THE AR HAS CLAIMED THAT THE STLL IS A L ISTED COMPANY AT DELHI STOCK EXCHANGE AND JAIPUR STOCK EXCHANGE BUT ONCE A GAIN IT MAY BE POINTED OUT HERE AGAINST THE STLL THAT THE ONUS WAS ON THE ASSESSEE COMPANY/AR THAT THE STLL CONTINUES TO BE LISTED AT THE STOCK EXCHANGES AND IT WAS NOT DELISTED OR NOT SUSPENDED - IT IS SO BECAUSE THE AUDITOR / DIRECTORS THEMSELVES HAVE STATED IN THE ANNEXURES/N OTES THAT THERE WAS NO TRADING IN THE SHARES OF THE COMPANY ON STOCK EXCHA NGES. B. EVEN THOUGH AS ON 31-03-2008, THERE WERE 42,50,0 00 NUMBER OF SHARES OF THIS COMPANY AND EVEN THOUGH, THERE WERE 279 SHARE HOLDERS OF THIS COMPANY, BUT MAJOR QUANTITY OF SHARES WERE HELD BY MR. SINDHU AND HIS FAMILY MEMBERS / ASSOCIATES. THE AO OBSERVED THAT OUT OF FIVE DIRECTORS, SINDHU AND HIS FAMILY MEMBERS ITSELF CONTROLS NEARLY 59% SHAREHOLDINGS OF THE STL L AND IN THIS SITUATION, IT COULD NOT BE ACCEPTED THAT THE STLL WAS A PUBLIC CO MPANY WHERE PUBLIC WAS SUBSTANTIALLY INTERESTED. HE FURTHER OBSERVED THAT THE PERCENTAGE OF SHARES OF OTHER DIRECTORS AND THEIR FAMILY MEMBERS WOULD AGAI N GO ON TO PROVE THAT IT WAS NOT A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED, RATHER IT WAS A COMPANY WHICH WAS CLOSELY HELD BY THE PROMOTER MR. SINDHU AND HIS FAMILY MEMBERS AND THEREFORE THE SAVING CLAUSE (II) OF SEC TION 2(22) OF THE ACT WOULD NOT BE APPLICABLE AND COME TO THE RESCUE OF THE ASS ESSEE COMPANY INSOFAR AS INVOKING SECTION 2(22) (E) WAS CONCERNED. ACCORDIN G TO THE AO, THE ONUS WAS ON THE ASSESSEE TO PROVE THAT STLL WAS A WIDELY HELD PUBLIC LIMITED COMPANY IN WHICH THE PUBLIC WERE SUBSTANTIALLY INTE RESTED AND THE ONUS WAS ALSO ON THE ASSESSEE COMPANY THAT THE SHARES OF THE STLL WERE WIDELY TRADED AND ITS SHARES WERE AVAILABLE IN THE OPEN MARKET FO R PURCHASE AND SALE BY ANY ITA NO.2706 & 2768/DEL./2012 6 COMMON MAN/PERSON AND HELD THAT THE ASSESSEE FAILED TO DISCHARGE ITS ONUS AND THE AO COUNTERED THE SUBMISSIONS OF THE ASSESSE E THAT THE STLL WAS AN NBFC AND THEREFORE THE DEEMING PROVISION OF SECTION 2(22)( E) WOULD NOT BE APPLICABLE BY GIVING THE FOLLOWING REASONS:- THE INCOME TAX ACT PROVIDES CERTAIN EXCEPTIONS WIT H THE RESPECT TO THE PROVISION OF DEEMED DIVIDEND. THIS HAS BEEN LAID DO WN IN SAVING CLAUSE (II) SECTION 2(22) OF THE IT ACT, WHICH BE REPRODUC ED HEREWITH - 'BUT 'DIVIDEND' DOES NOT INCLUDE- (II) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER [OR THE SAID CONCERN] BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, W HERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY. BUT SO FAR AS THIS ASSESSEE IS CONCERNED, IT HAS FA ILED TO SUBSTANTIATE THAT THE TRANSACTIONS BY THE STLL IN THE FORM OF ADVANCES OR LOANS WERE IN THE ORDINARY COURSE OF ITS BUSINESS. THE ONUS WAS CAS T ON THE ASSESSEE COMPANY TO SUBSTANTIATE THAT THE LOANS AND ADVANCES RECEIVED BY IT FROM THE GROUP COMPANY OR ASSOCIATES COMPANY (STLL), IN WHICH COMMON DIRECTORS ARE BENEFICIAL SHARE HOLDERS, WERE IN THE ORDINARY COURSE OF BUSINESS I.E. ADVANCING OF LOANS & ADVANCES ON INTE REST OF THE PAYER COMPANY. SAME IS THE CASE OF PHDL. THE ASSESSEE HAS FAILED T O PROVE THAT THE ADVANCES WERE GIVEN IN THE NORMAL COURSE OF BUSINES S. ACCORDINGLY, RELYING ON VARIOUS AUTHORITIES AND FAC TUAL MATRIX, THE AO HELD THAT THE ADVANCES/LOANS RECEIVED BY THE ASSESSEE WE RE LIABLE TO BE TAXED IN THE HANDS OF THE ASSESSEE AS DEEMED DIVIDEND AS PER SEC TION 2(22)(E) R.W.S. 56 AND SECTION 115O OF THE ACT AND RS.1,03,12,934/- WAS AD DED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 4.4 AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE T HE LD. CIT (A) WHO DELETED THE ADDITION BY OBSERVING AS UNDER :- ITA NO.2706 & 2768/DEL./2012 7 GROUND NO.4, 5, 6 & 7 : ADDITION OF RS.1.03 CRORE U/S 2(22)(E) OF THE INCOME TAX ACT, 1961 BEING INTER CORPORATE DEPOSIT RECEIVED FROM COMPANY HOLDING NBFC CERTIFICATE. THE AO MADE THE ABOVE ADDITION ON ACCOUNT OF LOANS RECEIVED FROM TWO COMPANIES, HOLDING THEM TO BE ASSOCIATED C OMPANIES AS WELL AS COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INT ERESTED. THE AO HAS HELD THAT EVEN THOUGH THE COMPANIES WERE LISTED COM PANIES THEY WERE NOT ONES IN WHICH THE PUBLIC WERE SUBSTANTIALLY SINCE T HE SHARES WERE NOT TRADED ON THE STOCK EXCHANGE AND/OR THE NUMBER OF S HAREHOLDERS ARE LIMITED. THE AO SEEKS TO LIFT THE 'CORPORATE VEIL' TO UNCOVER THE MECHANICS OF THIS TRANSACTION. THE MAJOR PART OF THE ASSESSME NT ORDER DEALS WITH THIS ADDITION, HOWEVER AFTER A CAREFUL PERUSAL, REPRODUC ING THE SAME WAS NOT FOUND CALLED FOR SINCE THE MATERIAL ISSUE IS WHETHE R SECTION 2(22)(E) OF THE ACT IS APPLICABLE IN THIS CASE. B. THE APPELLANT HAS SUBMITTED EXTENSIVE ARGUMENTS ON THIS ISSUE. AGAIN, THE CRUCIAL ISSUE IS FOUND TO BE WHETHER THE LENDER COMPANIES ARE ONES IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTEREST ED. SECTION 2(22)(E): NOT APPLICABLE TO WIDELY HELD COM PANIES: SECTION 2(22)(E) USES THE WORDS: ANY PAYMENT BY A C OMPANY ''NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTER ESTED' MEANING THEREBY THAT SECTION IS APPLICABLE ONLY TO COMPANIES WHICH ARE COMMONLY KNOWN AS CLOSELY HELD COMPANIES. SECTION 2(18) OF THE ACT READS AS UNDER: '(18) 'COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALL Y INTERESTED'-A COMPANY IS SAID TO BE A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED- (B) IF IT IS A COMPANY WHICH IS NOT A PRIVATE COMP ANY AS DEFINED IN THE COMPANIES ACT, 1956 (1 OF 1956), AND THE CONDITIONS SPECIFIED EITHER IN ITEM (A) OR IN ITEM (B) ARE FULFILLED, NAMELY:- SHARES IN THE COMPANY (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A FURTHER RIGHT TO PARTICIPATE IN PROFITS) WERE, AS ON THE LAST DAY OF THE RELEVANT P REVIOUS YEAR, LISTED IN A RECOGNIZED STOCK EXCHANGE IN INDIA IN ACCORDAN CE WITH THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956), AND ANY RULES MADE THERE UNDER; IT WAS VEHEMENTLY ARGUED THAT THESE CONDITIONS ARE FULFILLED BY THE LENDER COMPANIES AND HENCE THEY ARE COMPANIES IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, AND HENCE THE DEEMING PRO VISIONS OF SECTION 2(22)(E) OF THE ACT CANNOT APPLY TO THE LOANS IN QU ESTION. ITA NO.2706 & 2768/DEL./2012 8 C. THE ISSUE HAS BEEN CAREFULLY PERUSED, AND THE A O'S ACTION IN NOT CONSIDERING THE LENDER COMPANIES AS THOSE IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED IS FOUND INCORRECT. IN FAC T WHAT IS RELEVANT TO THIS ISSUE IS QUOTED IN THE ASSESSMENT ORDER ITSELF AS, 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 MERELY AT WHAT IS CLEARLY SAID. THE RE IS NO ROOM FOR ANY INTENDMENT. THERE IS NO EQUITY ABOUT A TAX. THERE I S NO PRESUMPTION AS TO A TAX. NOTHING IS TO BE READ IN, NOTHING IS TO BE I MPLIED. ONE CAN ONLY LOOK FAIRLY AT THE LANGUAGE USED' . EVEN WHILE QUOTING THIS IN THE ASSESSMENT ORDER THE AO SEEKS TO GO BEYOND THE INTENTION OF TH E ACT. ESPECIALLY IN DEEMING PROVISIONS. THE INTERPRETATION CANNOT BE ST RETCHED TO THE DISADVANTAGE OF ASSESSEES. IN THIS CASE THE AO WAS NOT REQUIRED TO GO BEYOND THE DEFINITION IN SECTION 2(18) OF THE ACT. EVEN THE PLETHORA OF CASE LAWS QUOTED BY THE AO ARE FOUND WANTING ON RELEVANC E TO THE PRESENT ISSUE. THE ADDITION OF RS.2.70 CRORES (FIGURES WRON GLY TYPED - THE EXACT FIGURE IS RS.1.03 CRORES ) ON ACCOUNT OF DEEMED DIVIDEND IS THEREFORE DELETED. THIS GROUND IS RULED IN FAVOUR OF THE APPE LLANT. 5. THE REVENUE, BEING AGGRIEVED, IS IN APPEAL BEFOR E US ON THE AFORESAID ISSUE. 6. LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFI CER AND SUBMITTED THAT LOAN OF RS.1.03 CRORES TAKEN FROM M/S. SINDHU TRADE LINKS LTD. (STLL) WAS RIGHTLY TREATED AS DEEMED DIVIDEND IN VIEW OF THE F ACTS THAT DIRECTORS OF THE ASSESSEE COMPANY ARE SUBSTANTIALLY INTERESTED IN TH E SAID COMPANY AND ALSO SOME OF THE SHAREHOLDERS ARE COMMON IN BOTH THE COM PANIES. HE FURTHER SUBMITTED THAT OUT OF FIVE DIRECTORS, SINDHU AND HI S FAMILY MEMBERS ITSELF CONTROLS NEARLY 59% SHAREHOLDINGS OF THE STLL AND I N THIS SCENARIO, IT COULD NOT BE ACCEPTED THAT THE STLL WAS A PUBLIC COMPANY WHERE PUBLIC WAS SUBSTANTIALLY INTERESTED. HE FURTHER SUBMITTED THA T THE PERCENTAGE OF SHARES OF OTHER DIRECTORS AND THEIR FAMILY MEMBERS WOULD AGAI N GO ON TO PROVE THAT IT WAS NOT A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTED, RATHER IT WAS A ITA NO.2706 & 2768/DEL./2012 9 COMPANY WHICH WAS CLOSELY HELD BY THE PROMOTER MR. SINDHU AND HIS FAMILY MEMBERS AND THEREFORE THE SAVING CLAUSE (II) OF SEC TION 2(22) OF THE ACT WOULD NOT BE APPLICABLE AND COME TO RESCUE OF THE ASSESSE E COMPANY INSOFAR AS INVOKING SECTION 2(22) (E) WAS CONCERNED. THE LD. DR SUBMITTED THAT THE ASSESSEE FAILED TO PROVE THE ONUS THAT STLL WAS A W IDELY HELD PUBLIC LIMITED COMPANY IN WHICH THE PUBLIC WERE SUBSTANTIALLY INTE RESTED AND THAT THE SHARES OF THE STLL WERE WIDELY TRADED AND ITS SHARES WERE AVAILABLE IN THE OPEN MARKET FOR PURCHASE AND SALE BY ANY COMMON MAN/PERS ON. HE ALSO SUBMITTED THAT THE ASSESSEE HAS FAILED TO PROVE THAT THE STLL WAS AN NBFC, THEREFORE, THE DEEMING PROVISION OF SECTION 2(22)( E) WOULD BE APPLICABLE. HE, THEREFORE, SUBMITTED THAT THE LOANS ARE NOTHING BUT DEEMED DIVIDEND AND IS LIABLE TO BE TAXED IN THE HANDS OF THE ASSESSEE AND IN THIS REGARD, HE MADE REFERENCE TO THE VARIOUS JUDICIAL PRONOUNCEMENTS RE LIED UPON BY THE AO. 7. LD. AR FOR THE ASSESSEE REITERATED THE SUBMISSIO NS MADE BEFORE THE LD. CIT (A) AND FOR THE SAKE OF CLARITY, THE SAME ARE R EPRODUCED HEREUNDER :- GROUND III AMOUNT INVOLVED IS RS.1,03,12,934/- THE APPELLANT COMPANY HAS RECEIVED INTER CORPORATE DEPOSITS OF RS.1.03 CRORE FROM M/S SINDHU TRADE LINKS LTD (STLL) DURING THE YEAR UNDER ASSESSMENT. THE APPELLANT COMPANY WAS SHOW CAUSED VIDE NOTICE D ATED 09.12.2010 DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS FOLL OW: 'IT IS SEEN FROM THE DETAILS FILED THAT THE ASSESSE E COMPANY HAS TAKEN LOAN OF RS.1,03,12,934/- FROM SINDHU TRADE LINKS. IT IS ALSO NOTICED THAT DIRECTORS OF THE ASSESSEE COMPANY ARE SUBSTANTIALLY INTERESTED IN BOTH THE ABOVE NAMED COMPANY. IT IS ALSO NOTICED THAT SOME S HARE HOLDERS ARE ITA NO.2706 & 2768/DEL./2012 10 COMMON TO BOTH THE COMPANIES. IN VIEW OF THESE FACT S, YOU ARE BEING SHOW CAUSED AS TO WHY NOT PROVISION OF SECTION 2(22)(E) OF THE ACT BE INVOKED' IT WAS SUBMITTED VIDE LETTER DATED 13.12.2010 (COPY ENCLOSED) THAT STLL IS A NBFC CERTIFICATE HOLDING COMPANY AND ALSO STOC K EXCHANGE LISTED COMPANY. PROOF OF BEING NBFC AND LISTED COMPANIES W AS SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IT WAS ALSO PLEADED WHILE SUBMITTING THE SHAREHOLDI NG CHARTS OF STLL THAT APPELLANT COMPANY IS NOT HOLDING SHARES EXCEEDING 1 0% OF M/S SINDHU TRADE LINKS LTD'S TOTAL SHAREHOLDING. ALSO NONE OF THE SHAREHOLDER HOLDING MORE THAN 10% IN STLL IS HOLDING 20% SHARES IN THE APPELLANT COMPANY. HENCE PROVISIONS OF SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 ARE NOT APPLICABLE. HOWEVER THE LD. AO CHOSE TO TREAT THE ICD RECEIVED AS DEEMED DIVIDEND IN THE HANDS OF APPELLANT COMPANY. MY KIND ATTENTION HAS BEEN DRAWN TO SECTION 2(22)(E ) OF THE INCOME TAX ACT, 1961 WHICH IS REPRODUCED AS UNDER :- 2. (22) 'DIVIDEND' INCLUDES- ... (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) [ MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREH OLDER, BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SH ARES ENTITLED 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 PO WER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFE RRED TO AS THE SAID CONCERN)] OR ANY PAYMENT BY ANY SUCH COMPANY ON BEH ALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFIT S; .... BUT DIVIDEND' DOES NOT INCLUDE - (II) ANY ADVANCE OR LOAN MADE TO A SHAREHOLDER [OR THE SAID CONCERN] BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY; THE ASSESSEE COMPANY SUBMITTED THE INTERPRETATION O F THE SECTION POINT WISE VIS A VIS OBSERVATION OF THE LD. AO AS FOLLOWS : 1. SECTION 2(22)(E): SHAREHOLDING CONDITIONS NOT APPLI CABLE SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 IS ATT RACTED WHEN A SHAREHOLDER HAVING SHARES NOT LESS THAN 10% RECEIVE ANY ADVANCE OR LOAN ITA NO.2706 & 2768/DEL./2012 11 FROM SUCH COMPANY OR ANY CONCERN RECEIVE ANY ADVANC E OR LOAN FROM SUCH COMPANY IN WHICH A SHAREHOLDER HOLDING MORE THAN 10 %, ALSO HOLDS SUBSTANTIAL INTEREST I.E. 20% SHAREHOLDING IN THE C ONCERN WHO RECEIVED THE LOAN. FROM THE BALANCE SHEET AS ON 31.03.2008 - INVESTMEN T SCHEDULE OF THE ASSESSEE COMPANY (COPY ENCLOSED) AND SHAREHOLDING C HARTS OF STLL AND PHDL, IT IS CLEAR THAT THE ASSESSEE COMPANY IS NOT HOLDING ANY SHARES IN THESE COMPANIES AND HENCE IN NO WAY THE AMOUNTS CAN BE TAXED IN THE HANDS OF ASSESSEE COMPANY. FURTHER NOTE FROM SHAREHOLDING CHARTS OF STLL THAT THERE IS NO SHAREHOLDER HOLDING 10% IN THESE COMPANIES, WHO IS FURTHER HOLDING 20% IN THE ASSESSEE COMPANY. HENCE SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 IS NOT APPLICABLE SINCE SHAREHOLDING CONDITION, MANDATORY FOR APPLICA BILITY OF SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 ARE NOT SATISF IED. 2. SECTION 2(22)(E) APPLICABLE IN THE HANDS OF SHAREHO LDER: NEITHER THE APPELLANT COMPANY IS SHAREHOLDER IN THE SE COMPANIES NOR THERE IS A SHAREHOLDER HOLDING 10% IN THESE COMPANI ES, IS HOLDING 20% IN THE APPELLANT COMPANY. HENCE ADDITION MADE IN THE H ANDS OF APPELLANT COMPANY, SHOULD NOT HAVE BEEN MADE. 3. SECTION 2(22)(E): NOT APPLICABLE TO WIDELY HELD COM PANIES: SECTION 2(22)( E) USES THE WORDS : ANY PAYMENT BY A COMPANY 'NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTER ESTED' MEANING THEREBY THAT SECTION IS APPLICABLE ONLY TO COMPANIES WHICH ARE COMMONLY KNOWN AS CLOSELY HELD COMPANIES. SECTION 2(18) OF THE ACT READS AS UNDER: '(18) 'COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALL Y INTERESTED''-A COMPANY IS SAID TO BE A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED- (B) IF IT IS A COMPANY WHICH IS NOT A PRIVATE COMPA NY AS DEFINED IN THE COMPANIES ACT, 1956 (1 OF 1956), AND THE CONDIT IONS SPECIFIED EITHER IN ITEM (A) OR IN ITEM (B) ARE FULFILLED, NAMELY:- (A) SHARES IN THE COMPANY (NOT BEING SHARES ENTITLE D TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A FURTHER RIGHT TO PARTICIPATE IN PROFITS) WERE, AS ON THE LAST DAY OF THE RELEVANT P REVIOUS YEAR, LISTED IN A RECOGNIZED STOCK EXCHANGE IN INDIA IN ACCORDAN CE WITH THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956), AND ANY RULES MADE THEREUNDER; ITA NO.2706 & 2768/DEL./2012 12 IT WAS SUBMITTED BEFORE THE LD. AO THAT STLL IS PUB LIC LIMITED COMPANY THROUGH FOLLOWING EVIDENCES WHICH HAVE BEEN DISCUSS ED BY LD. AO AT PAGE NO. 10 TO 13 IN THE ASSESSMENT ORDER: (A) LISTING EVIDENCES OF BEING LISTED ON DELHI STOC K EXCHANGE AND JAIPUR STOCK EXCHANGE. (B) SHAREHOLDING PATTERN AS ON 31.03.008 OF THE ASS ESSEE COMPANY STAND TAKEN BY THE LD. AO : A. THE LD. AO HAS OBSERVED ON PAGE 10 - PARA (II) & (III) THAT FOR STLL, IN THE DIRECTOR REPORT, IT HAS BEEN STATED TH AT SHARES WERE NOT TRADED DURING THE YEAR AND ALSO FURTHER STATED THAT COMPAN Y HAS NOT ACCEPTED THE PUBLIC DEPOSITS. B. THE LD. AO OBSERVED AT PAGE 11 THAT STLL HAS CLA IMED THAT IT IS A LISTED COMPANY BUT NO EVIDENCE HAS BEEN PROVIDED RE GARDING THAT IT CONTINUES TO BE LISTED AT STOCK EXCHANGES AND HAS N OT BEEN SUSPENDED OR DE-LISTED. C. THE LD. AO OBSERVED AT PAGE 13 THAT NEARLY 59% S HAREHOLDING IS CONTROLLED BY ITS DIRECTORS, FAMILY MEMBERS. HENCE WITH ABOVE ALLEGATIONS, THE LD. AO REMARKED T HAT THE STLL IS NOT A COMPANY IN WHICH 'PUBLIC IS A SUBSTANTIALLY INTERES TED'. SUBMISSION BEFORE YOUR GOOD SELF AGAINST LD. AO OB SERVATION : THE ASSESSEE COMPANY REPLIED TO THE OBSERVATIONS MA DE BY THE LD. AO POINT WISE : A. TRADING OF SHARES AND ACCEPTANCE OF PUBLIC DEPOSIT ARE NO PARAMETERS TO CHECK WHETHER A COMPANY IS A WIDELY H ELD COMPANY OR NOT. IT IS THE SECTION 2(18) DEFINITION WHICH SHOULD PRE VAILS WHILE ASSESSING WHETHER A COMPANY IS A COMPANY, IN WHICH PUBLIC IS SUBSTANTIALLY INTERESTED OR NOT. B. THE ALLEGATION OF THE LD. AO THAT THE APPELLANT COM PANY HAS FAILED TO EVIDENCE THAT STLL AND PHDL CONTINUES TO BE LISTED AT STOCK EXCHANGES AND HAS NOT BEEN SUSPENDED OR DE-LISTED, IS NOT COR RECT. AS AN EVIDENCE OF BEING LISTED ON DELHI STOCK EXCHA NGES, THE APPELLANT COMPANY SUBMITTED THE ANNUAL LISTING FEE BILLS RAIS ED BY THE RESPECTIVE STOCK EXCHANGES ON THE STLL. PROOF OF PAYMENT OF LI STING FEE FOR BOTH THE STOCK EXCHANGES WERE SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIDE LETTER DATE 15.12.2010. HAD THE ST LL WAS BEEN ITA NO.2706 & 2768/DEL./2012 13 SUSPENDED OR DELISTED, STOCK EXCHANGES WOULD NOT HA VE RAISED THE ANNUAL LISTING FEE BILLS. FURTHER AS PER INFORMATION AVAILABLE IN PUBLIC DOMA IN ON DELHI STOCK EXCHANGE WEBSITE AT HTTP://WWW.DSEINDIA.ORG.IN/SITE PAGES/LIST COMPANIES.PHP IT CAN BE SEEN THAT STLL IS A LISTED COMPANY ON DELHI STOCK EXCHANGE. SINCE THE LIST INVOLVE 2830 COMPANI ES, THE ASSESSEE COMPANY SUBMITTED RELEVANT EXTRACT SHOWING EVIDENCE IN REGARD TO STLL ONLY. FURTHER SUBMITTED THAT THERE WAS NO ADVERSE MATERIA L ON RECORD OR BROUGHT ON RECORD BY THE LD. AO TO SUPPORT HER CONTENTIONS REGARDING STLL. HENCE THE ALLEGATIONS MADE BY THE LD. AO IS BASELES S, ARBITRARY AND MADE IN A RECKLESS MANNER. C. CONTROLLING 59% SHAREHOLDING IN A COMPANY BY PRO MOTER GROUP DOES NOT MEAN THAT THE COMPANY IS A CLOSELY H ELD COMPANY. IF IT IS SO THEN ALMOST 95% OF THE NSE OR BSE LISTE D COMPANIES WOULD BE TREATED AS CLOSELY HELD COMPANIES. FOR YOU R READY REFERENCE, SHAREHOLDING PATTERN OF NSE/BSE LISTED R EPUTED COMPANIES FOR DLF LTD., TATA CONSULTANCY SERVICES L IMITED, RELIANCE LIMITED AS ON 31.03.2008 HAVE BEEN PLACED ON RECORD. THE SAME IS AVAILABLE IN PUBLIC DOMAIN ON THE WEBSI TES OF NSE AND BSE. THE ASSESSEE COMPANY SUBMITTED THAT FROM THE SHAREH OLDING PATTERN OF THESE COMPANIES, IT CAN BE SEEN THAT PROMOTER SHARE HOLDING FOR THESE COMPANIES IS MUCH MORE THAT WHAT IS FOR THE ASSESSE E COMPANY. SOMEWHERE IT IS HOVERING AROUND 88%. STILL THEY ARE REGARDED AS LISTED AND WIDELY HELD COMPANIES. SO THE SAME PARAMETER SHALL BE USED FOR ASSESSEE COMPANY ALSO . FURTHER AS PER SECURITIES CONTRACT (REGULATION) RUL ES, 1957, RULE 19(2)(B) PROVIDES FOLLOWING WITH RESPECT TO PUBLIC SHAREHOLD ING FOR A LISTED COMPANY: 'REQUIREMENTS WITH RESPECT TO THE LISTING OF SECURI TIES ON A RECOGNIZED STOCK EXCHANGE. 19. (2) APART FROM COMPLYING WITH SUCH OTHER TERMS AND CONDITIONS AS MAY BE LAID DOWN BY A RECOGNIZED STOCK EXCHANGE, AN APP LICANT COMPANY SHALL SATISFY THE STOCK EXCHANGE THAT: [(B) AT LEAST 10 PER CENT OF EACH CLASS OR KIND OF SECURITIES ISSUED BY A COMPANY WAS OFFERED TO THE PUBLIC FOR S UBSCRIPTION THROUGH ADVERTISEMENT IN NEWSPAPERS FOR A PERIOD NOT LESS T HAN TWO DAYS AND THAT APPLICATIONS RECEIVED IN PURSUANCE OF SUCH OFFER WE RE ALLOTTED SUBJECT TO THE FOLLOWING CONDITIONS: ITA NO.2706 & 2768/DEL./2012 14 (A) MINIMUM 20 LAKH SECURITIES (EXCLUDING RESERVATI ONS, FIRM ALLOTMENT AND PROMOTERS CONTRIBUTION) WAS OFFERED T O THE PUBLIC; PROVIDED THAT IF A COMPANY DOES NOT FULFIL THE COND ITIONS, IT SHALL OFFER AT LEAST 25 PER CENT OF EACH CLASS OR KIND OF SECURITI ES TO THE PUBLIC FOR SUBSCRIPTION THROUGH ADVERTISEMENT IN NEWSPAPERS FO R A PERIOD NOT LESS THAN TWO DAYS AND THAT APPLICATIONS RECEIVED IN PUR SUANCE OF SUCH OFFER WERE ALLOTTED' SINCE THE ASSESSEE COMPANY IS IN COMPLIANCE OF THIS RULE, ALLEGATION THAT CONTROLLING 59% OF THE SHAREHOLDING IN THE ASSESSEE COMPANY WOULD TAKE AWAY THE BENEFIT OF LISTING, IS PURELY BASELESS. 4. SECTION 2(22)(E): NOT APPLICABLE ON INTER CORPORATE DEPOSITS PROVISIONS OF SECTION 2(22)(E) OF THE INCOME TAX AC T, 1961 ARE NOT APPLICABLE TO INTER CORPORATE DEPOSITS. THEY ARE AP PLICABLE TO PAYMENTS BY WAY OF ADVANCE OR LOANS ONLY. RELIANCE IN THIS R EGARD HAS BEEN PLACED ON BOMBAY OIL INDUSTRIES LTD. VS DCIT (2009) 28 SOT 383 (ITAT MUM) (COPY PLACED ON RECORD) WHEREIN THE HON'BLE ITAT MU MBAI HAS HELD THAT SINCE THERE IS A CLEAR DISTINCTION BETWEEN THE WORD S ADVANCE OR LOAN AND INTER CORPORATE DEPOSITS AND HENCE DEEMING PROVISIO NS OF SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 CANNOT BE APPL IED TO INTER CORPORATE DEPOSITS. 5. SECTION 2(22)(E): NOT APPLICABLE TO LOAN OR ADVANCE BY NON BANKING FINANCE COMPANIES SECTION 2(22) OF THE INCOME TAX ACT, 1961 HAS AN EX CLUSION CLAUSE THAT DIVIDEND DOES NOT INCLUDE WHERE ADVANCE OR LOAN HAS BEEN GIVEN TO SHAREHOLDER BY A COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS, WHERE THE LENDING OF MONEY IS A SUBSTANTIAL PART OF THE BUSIN ESS OF THE COMPANY. THE ASSESSEE COMPANY SUBMITTED THAT THE APPELLANT C OMPANY IS NOT A SHAREHOLDER IN THE STLL, FURTHER NOTE THAT THE STLL IS A NON BANKING FINANCE COMPANY AND REGISTERED WITH RESERVE BANK OF INDIA SINCE 1998 IN CATEGORY OF LOAN INVESTMENT COMPANY AND ENGAGED IN ACTIVITIES OF SHARES SALE, FINANCIAL ACTIVITIES, LOAN SYNDICATION ACTIVITIES AND HYPOTHECATION ACTIVITIES. PROOF OF BEING NBFC COMPA NIES WAS SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIDE LE TTER DATED 13.12.2010. FURTHER THE PROFIT AND LOSS ACCOUNT OF THE STLL AS ON 31.03.2008 (COPIES OF BALANCE SHEET AND PROFIT AND LOSS ARE EN CLOSED HEREWITH) SHOWS THAT STLL HAS EARNED FOLLOWING INCOME OUT OF NBFC ACTIVITIES: PARTICULARS SINDHU TRADE LINKS LTD. INTEREST INCOME 32,532,082.00 LOAN SYNDICATION CHARGES 7,129,302.23 HYPOTHECATION CHARGES 1,562,631.81 ITA NO.2706 & 2768/DEL./2012 15 BAD DEBTS RECOVERED 1,613,303.00 MISC. RECEIPTS IN NATURE OF PROCESSING FEE ETC. 1,647,815.06 TOTAL 44,485,134.10 THE ABOVE DETAILS SHOWS THAT STLL IS PERUSING NBFC ACTIVITIES AND INTER CORPORATE DEPOSIT HAS ALSO BEEN ADVANCED IN THE ORD INARY COURSE OF ACTIVITIES.' 8. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD. THE ONLY DISPUTE IS WHETHER THE LENDER COMPANIES WHICH HAS MADE DEPOSITS (INTER- CORPORATE DEPOSITS (ICD)) WILL FALL UNDER THE DEEMI NG PROVISION UNDER SECTION 2(22)(E) OF THE ACT OR NOT. WE FIND THAT S ECTION 2(22)(E) EXCLUDES PUBLIC COMPANY NOT BEING A COMPANY IN WHICH THE PU BLIC ARE SUBSTANTIALLY INTERESTED. SECTION 2(22)(18) OF THE ACT DEFINES COMPANIES IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED. AS PER THE SA ID DEFINITION, A COMPANY IS SAID TO BE A COMPANY IN WHICH THE PUBLIC ARE SUBSTA NTIALLY INTERESTED, IF IT IS A COMPANY WHICH IS NOT A PRIVATE COMPANY AS DEFINED I N THE COMPANIES ACT, 1956 (1 OF 1956) AND THE CONDITIONS SPECIFIED EITHE R IN ITEM A OR IN ITEM (B) ARE FULFILLED, NAMELY :- (A) SHARES IN THE COMPANY (NOT BEING SHARES ENTITL ED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A FURTHER RIGHT TO PARTICIPATE IN PROFITS) WERE, AS ON THE LAST DAY OF THE RELEVANT PREVIOUS Y EAR, LISTED IN A RECOGNIZED STOCK EXCHANGE IN INDIA IN ACCORDANCE WI TH THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956), AND ANY RULES MADE THEREUNDER. WE FIND THAT THE ASSESSEE BEFORE THE AO AND THE LD. CIT (A) HAS SUBMITTED THAT BOTH THESE COMPANIES ARE PUBLIC LIMITED COMPAN IES AND THEY HAVE PRODUCED EVIDENCES TO SUBSTANTIATE THAT THE STLL IS A LISTED COMPANY AT DELHI ITA NO.2706 & 2768/DEL./2012 16 STOCK EXCHANGE AND JAIPUR STOCK EXCHANGE AND ALSO T HE SHAREHOLDING PATTERN AS ON 31.03.2008. AND THAT SECTION 2(22)(E) IS NOT APPLICABLE TO LOANS OR ADVANCES BY NON BANKING FINANCE COMPANIES (NBFC). IN ORDER TO SUBSTANTIATE THAT STLL IS NBFC, IT WAS SUBMITTED TH AT THEY ARE REGISTERED WITH RESERVE BANK OF INDIA SINCE 1998 IN CATEGORY OF LOA N INVESTMENT COMPANY AND ENGAGED INTO THE ACTIVITIES OF SHARES SALE, FIN ANCING ACTIVITIES, LOAN SYNDICATION ACTIVITIES AND HYPOTHECATION ACTIVITIES . IT IS A WELL SETTLED PRINCIPLE OF LAW THAT DEEMING PROVISION HAS TO BE I NTERPRETED STRICTLY AND IT CANNOT BE STRETCHED TO MORE THAN THAT FOR WHICH THE DEEMING PROVISION CAN BE LITERALLY INTERPRETED. NOTHING CAN BE ADDED OR IMP LIED WHILE INTERPRETING A DEEMING PROVISION. ONE CAN ONLY LOOK AT THE LANGUA GE USED. THEREFORE, WE CONCUR WITH THE LD. CIT (A) THAT THE LENDER COMPANY I.E. M/S. STLL IS A PUBLIC LIMITED COMPANY AND SO THE LOAN/ADVANCE/ICD GIVEN TO THE ASSESSEE DOES NOT FALL IN THE KEN OF SECTION 2(22)(E) AND MO REOVER, THE LENDER COMPANY IS A NBFC WHICH IS ALSO EXCLUDED FROM THE SAID DEEM ING PROVISION, THEREFORE, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL A ND WE UPHOLD THE LD. CIT (A)S ORDER AND DISMISS THIS GROUND. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 10. NOW, WE TAKE UP THE ASSESSEES APPEAL BEING ITA NO.2706/DEL/2012. THE EFFECTIVE GROUND TAKEN BY THE ASSESSEE IS AGAIN ST CONFIRMING THE DISALLOWANCE OF TOTAL INTEREST DEBITED TO PROFIT & LOSS ACCOUNT OF ITA NO.2706 & 2768/DEL./2012 17 RS.16,15,903/- IN VIEW OF THE FACT THAT THE ASSESSE E HAS GIVEN SHARE APPLICATION MONEY OF RS.9.86 CRORES WHICH IS NOT EARNING ANY IN TEREST INCOME AND THE ASSESSEE HAS NO SURPLUS FUNDS WITHOUT APPRECIATING THAT THE ASSESSEE COMPANY IS AVAILABLE WITH INTEREST FREE SHARE HOLDER FUNDS OF RS.34.46 CRORES. 11. THE AO OBSERVED THAT AS PER THE SCHEDULE 'E' OF THE BALANCE SHEET WHICH REFERS FOR CURRENT ASSETS, LOANS AND ADVANCES , THE ASSESSEE HAD SHOWN AN AMOUNT OF RS.14,03,24,434/-. ACCORDING TO THE A O, A PERUSAL OF THE BIFURCATION OF THIS AMOUNT SHOWED THAT THE ASSESSEE HAD GIVEN ADVANCE OF RS.9,86,87,800/- IN THE GARB OF SHARE APPLICATION M ONEY TO VARIOUS ENTITIES. HE ASKED THE ASSESSEE TO PROVIDE DETAILS OF THE SAME A ND TO CONFIRM WHETHER SHARES HAD BEEN ALLOTTED IN ITS NAME OR NOT AND HE FURTHER SHOW CAUSED AS TO IN THE CASE OF NON ALLOTMENT OF SUCH SHARES WHY NOT AN APPROPRIATE RATE OF INTEREST BE CHARGED THEREUPON IN VIEW OF THE FACTS THAT IT IS BEARING AN INTEREST BURDEN OF RS.16,15,903/- APART FROM BANK CHARGES OF RS.47,906/-. HE FURTHER OBSERVED THAT THE ASSESSEE HAD MADE A VEILED ATTEMP T TO SHOW THAT IT WAS NOT BEARING ANY INTEREST BURDEN DUE TO AMOUNT PAID AS S HARE APPLICATION MONEY. AFTER OBSERVING THE ASSESSEES CONTENTION AND THE D ETAILS FURNISHED, THE AO FOUND THAT THE ASSESSEE HAD GIVEN LOANS AND ADVANCE S OF RS.14,03,24,434/- AND OUT OF WHICH, AN AMOUNT OF RS.9,86,87,800/-HAD BEEN EXPRESSLY SHOWN AS LOANS AND ADVANCES IN THE BALANCE SHEET ALTHOUGH IN THE LATTER DETAILS THE ASSESSEE HAD SHOWN IT IN THE GARB OF SHARE APPLICAT ION MONEY BUT IT HAD FAILED ITA NO.2706 & 2768/DEL./2012 18 TO DISCHARGE ITS ONUS THAT THESE ADVANCES WERE IN T HE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE COMPANY. THE AO OBSERVED T HAT SINCE THE ASSESSEE WAS NOT IN THE BUSINESS OF FINANCE AND IT WAS ALSO NOT A NBFC COMPANY IT COULD NOT BE SAID THAT IT HAD ADVANCED THIS MUCH HU GE AMOUNT IN THE ORDINARY COURSE OF BUSINESS. HE FURTHER OPINED THAT THE ASS ESSEE WAS IN THE BUSINESS OF CIVIL CONSTRUCTION WHERE MONEY WAS VERY MUCH REQUIR ED AND FURTHER, THE ASSESSEE HAD NOT PROVED THAT THE MONEY WHICH IT ADV ANCED IN THE FORM OF/IN THE GARB OF SHARE APPLICATION MONEY WERE ACTUALLY A LLOTTED TO THE ASSESSEE. HE HELD THAT THE ASSESSEE HAD FAILED TO SUBSTANTIATE A S TO WHETHER THE MONEY ADVANCED IN THE GARB OF SHARE APPLICATION MONEY WOU LD GIVE ANY INCOME TO THE ASSESSEE IN THE ORDINARY COURSE OF BUSINESS OR NOT. HE FURTHER OBSERVED THAT THIS TRANSACTION WAS DIRECTLY IN THE NATURE OF LOANS AND ADVANCES AND THE APPELLANT COMPANY HAD NOT SHOWN ANY RETURN OF INCOM E/INTEREST ON THIS AMOUNT. FURTHER, AS PER THE P & L ACCOUNT, THE ASSE SSEE HAD DEBITED AN AMOUNT OF RS.16,15,903/- AS INTEREST ON LOANS AND R S.47,906/- AS BANK CHARGES. THE AO, HOWEVER, OBSERVED THAT KEEPING IN LINE WITH THE VARIOUS HON'BLE COURTS, INTEREST COULD BE DISALLOWED FROM T HE PROFIT & LOSS ACCOUNT TO THE EXTENT OF QUANTUM OF FUND DIVERTED BY THE ASSES SEE TO OTHER PERSONS AND WHERE NO INTEREST WAS CHARGED OR INTEREST WAS CHARG ED AT LOWER RATE INTEREST. ACCORDINGLY, THE AO WAS OF THE OPINION THAT INTERES T WAS DISALLOWABLE FOR DIVERSION OF FUND OF RS.9,86,87,800/- AND IF THE SA ME WAS CALCULATED AT THE ITA NO.2706 & 2768/DEL./2012 19 RATE OF 18% PER ANNUM THAT WOULD COME TO RS.1,77,63 ,804/-. BUT, THE AO OPINED THAT SINCE THE ASSESSEE WAS BEARING INTERES T BURDEN OF RS.16,15,903/- ONLY, THE DISALLOWANCE COULD NOT BE MADE MORE THAN THAT. HE ALSO DECLINED THE SUBMISSION OF THE ASSESSEE THAT IT WAS NOT BEAR ING ANY INTEREST BURDEN DUE TO THE AMOUNT PAID AS SHARE APPLICATION MONEY BECAU SE THE FACT REMAINED THAT THE APPELLANT HAD BORROWED INTEREST BEARING LOANS A ND HAD DEBITED RS.16,15,903/- IN THE P & L ACCOUNT. ACCORDINGLY, THE AO ORDERED TO DISALLOW THE INTEREST DEBITED TO THE P & L ACCOUNT AND MADE AN ADDITION OF RS.16,15,903/- TO THE INCOME OF THE ASSESSEE. 12. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE T HE LD. CIT (A) WHO CONFIRMED THE ACTION OF THE AO ON THIS ISSUE. 13. LD. AR REITERATED THE SUBMISSIONS MADE BEFORE T HE LD. CIT (A) AND THE RELEVANT SUBMISSIONS MADE ARE REPRODUCED BELOW FOR THE SAKE OF CLARITY :- THE ASSESSEE COMPANY SUBMITTED THAT THE LD. AO HAS MADE FOLLOWING ALLEGATIONS: ALLEGATION NO.1: THE ASSESSEE COMPANY HAS FAILED TO DISCHARGE ITS ON US THAT ADVANCES WERE IN ORDINARY COURSE OF BUSINESS OF THE ASSESSEE COMP ANY. (PAGE 3 OF THE ASSESSMENT ORDER) REPLY TO ALLEGATION: BEING PRIVATE LIMITED COMPANY, THERE IS NO BAR ON T O IT THAT IT CANNOT GIVE ADVANCES IN THE FORM OF SHARE APPLICATION MONEY OR ADVANCES TO OTHER PARTIES TO PURSUE TO STRATEGIC GOALS BY MAKING INVE STMENTS IN OTHER COMPANIES. ALLEGATION NO. 2 ITA NO.2706 & 2768/DEL./2012 20 THE ASSESSEE COMPANY HAS FAILED TO SUBSTANTIATE AS TO WHETHER THE MONEY ADVANCED IN THE GARB OF SHARE APPLICATION MONEY WIL L GIVE ANY INCOME TO ASSESSEE COMPANY IN THE ORDINARY COURSE OF BUSINESS . THE ASSESSEE COMPANY HAS NOT SHOWN ANY RETURN ON INCOME/INTEREST ON THESE AMOUNTS.(PAGE 3 OF THE ASSESSMENT ORDER). REPLY TO ALLEGATION: THE INVESTMENT ARE GENERALLY MADE TO GAIN IN STRATE GIC MANNER IN LONG TERM, OUT OF WHICH CAPITAL GAIN WILL ACCRUE AND WIL L BE TAXED AT PREVAILING RATES OF THAT PARTICULAR TIME. INVESTMENTS ARE NOT LIKE ADVANCES WHICH WILL START EARNING INTEREST FROM THE DAY ONE. EACH AND E VERY FINANCIAL PRODUCT HAS ITS OWN STANDING IN TERMS OF RETURN ON IT. ALL OVER THE WORLD, PEOPLE MAKE INVESTMENTS IN EQUITIES (BE IT QUOTED ONE OR U NQUOTED SHARE) TO GAIN IN LONGER TERM OR TO EARN DIVIDENDS. ALSO THEY ARE CONSIDERED AS THE BEST FINANCIAL VEHICLE FOR EARNING OF PEOPLE WHO HA S LONG TERM HORIZON FOR MAKING INVESTMENTS. THOUGH IN THE CASE OF APPELLANT COMPANY, NO ALLOTME NT WAS MADE BUT THIS IS PURELY NORMAL. EVEN IN THE CASE OF IPDS, PEOPLE DO GET BACK THEIR MONEY BACK DUE TO NON ALLOTMENT OF SHARES. ALSO THERE IS NO BINDING PROVISION IN SEBI OR COMPA NIES ACTS FOR NON LISTED COMPANIES TO PAY INTEREST IF NO SHARE ALLOTM ENT HAS BEEN MADE IN REASONABLE TIME. MERELY THE FACT THAT NO INCOME HAS ACCRUED, IS THAT MEAN THAT TRANSACTION WAS FOR NON BUSINESS PURPOSES? HENCE THE ALLEGATIONS OF LD. AD ARE PURELY BASELESS AND ARBITRARY THAT MONEY INVESTED WAS NOT IN ORDINARY COURSE OF BUSINE SS AND HAS NOT EARNED INCOME FOR THE YEAR. ALLEGATION NO. 3 THE OTHER ALLEGATION MADE BY THE LD. AD IS OF DIVER SION OF FUNDS MADE HENCE HE HAS DISALLOWED INTEREST @ 18% OF RS.9,86,8 7,800/-, THOUGH RESTRICTED TO RS. 16,15,903/-. REPLY TO THE ALLEGATION: AS PER ABOVE SUBMISSION WHICH WERE SUBMITTED BEFORE THE LD. AO IN THE COURSE OF ASSESSMENT PROCEEDINGS ALSO, IT IS PRETTY CLEAR THAT APPELLANT COMPANY HAS SUFFICIENT FREE FUNDS AND IT IS FREE TO USE THEM AT HIS OWN DISCRETION ACCORDING TO NEEDS. IT IS NOT OPEN TO THE LD. AO TO ASSESS WHAT THE NEE D OF THE APPELLANT COMPANY IS? IT IS A DECISION WHICH IS NORMALLY ENTR USTED BY THE SHAREHOLDERS OF THE COMPANY TO ITS FAITHFUL MANAGEM ENT WHO TAKE THE DECISIONS DEPENDING UPON THE FINANCIAL NEEDS, ASPIR ATIONS, GOALS OR OBJECTS ITA NO.2706 & 2768/DEL./2012 21 SET FOR THE COMPANY. NOBODY CAN DICTATE TERMS TO A APPELLANT AS TO HOW TO CONDUCT THE AFFAIRS. ALLEGATION NO.4 ANOTHER ALLEGATION MADE BY THE LD. AD WAS THAT SINC E THE ASSESSEE COMPANY HAS BORROWED INTEREST BEARING LOANS AND HAS DEBITED INTEREST AMOUNT OF RS.16,15,903/- TO PROFIT AND LOSS ACCOUNT , THIS FACT IN ITSELF IS A TESTIMONY THAT THE ASSESSEE COMPANY HAD NO SURPLUS FUND IN SO FAR AS TO ADVANCE NON INTEREST BEARING FUNDS TO OTHER COMPANI ES. REPLY TO THE ALLEGATION: THE SHAREHOLDER FUND POSITION AS FURNISHED ABOVE EV IDENCE THE FACT THAT APPELLANT COMPANY WAS AVAILABLE WITH MORE THAN SUFF ICIENT FREE FUNDS FOR USE AT ITS OWN DISCRETION. RELIANCE IS PLACED ON CIT VS HOTEL SAVERA (1999) 23 9 ITR 795 (MAD), WHEREIN THE HON'BLE MADRAS HIGH COURT HAS HELD THAT ONCE IT IS ESTABLISHED THAT THE ASSESSEE COMPANY IS HAVING SUFFICIENT FREE FUNDS, PRESUMPTION WOULD ALWAYS BE MADE THAT ADVANCES TO THIRD PARTIES HAVE BEEN MADE OUT OF OWN FREE FUNDS. FURTHER ASSESSEE COMPANY SUBMITTED THAT WHERE THERE ARE BOTH BORROWED FUNDS AS ALSO INTEREST FREE FUNDS, DISCRETION LIES IN THE. HANDS OF THE ASSESSEE FOR UTILISATION OF THOSE FUNDS. RELIANCE F OR THAT PURPOSE WAS PLACED ON THE JUDGMENT OF THE CALCUTTA HIGH COURT I N THE CASE OF WOOLCOMBERS OF INDIA LTD. VS. COMMISSIONER OF INCOM E-TAX (CENTRAL), CALCUTTA, 134 ITR 219. IT WAS FURTHER SUBMITTED THA T THE VIEW TAKEN BY THE CALCUTTA HIGH COURT HAD FOUND APPROVAL BY THE SUPRE ME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. VS. COMMISSIONER OF INCOME-TAX 224 ITR 627 (S.C.) FURTHER RELIANCE IN THIS REGARD IS PLACED ON CIT VS RELIANCE UTILITIES AND POWER LTD., ITA NO. 1398/2008 (MUMBAI HIGH COURT) P RONOUNCED ON 09.01.2009. (COPY OF JUDGMENT PLACED ON RECORD) HENCE THE ASSESSEE COMPANY PLEADED DISALLOWANCE MAD E OF INTEREST SHALL BE DELETED SINCE THE APPELLANT COMPANY HAS UTILIZED BORROWED MONEY FOR THE PURPOSES OF EARNING INCOME AND INTEREST FREE FU NDS OF RS. 34.46 CRORE MEANS THEY ARE IN ABUNDANCE CONSIDERING THE AMOUNT OF SHARE APPLICATION MONEY OF RS. 9,86,87,800/- PAID BY THE APPELLANT CO MPANY. IN VIEW OF THESE SUBMISSIONS, LD. AR PLEADED THAT T HE ORDERS OF THE AUTHORITIES BELOW BE SET ASIDE ON THIS ISSUED AND THE APPEAL OF THE ASSESSEE BE ALLOWED. 14. ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. ITA NO.2706 & 2768/DEL./2012 22 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. WE FIND THAT THE AO HAS DISALLOWED THE INTEREST DEBITED TO PROFI T & LOSS ACCOUNT OF RS.16,15,903/- FOR THE REASON THAT THE ASSESSEE COM PANY HAS GIVEN ADVANCE/SHARE APPLICATION MONEY OF RS.9.86 CRORES W HICH IS NOT YIELDING ANY INTEREST INCOME AND MADE A FINDING ALSO THAT THE AS SESSEE COMPANY HAS NO SURPLUS FUND SINCE IT HAS ALSO BORROWED FUNDS WHICH IS BEARING AN INTEREST BURDEN OF RS.16,15,903/- APART FROM BANK CHARGES OF RS.47,906/-. SO, ACCORDING TO THE AO, SINCE SHARE CERTIFICATES HAVE NOT BEEN ALLOTTED TO THE ASSESSEE COMPANY, THE MONEY HAS BEEN ADVANCED IN TH E GARB OF SHARE APPLICATION MONEY AND WILL NOT YIELD ANY INCOME TO THE ASSESSEE IN THE ORDINARY COURSE OF BUSINESS AND SINCE THE COMPANY F AILED TO SHOW THAT IT HAS YIELDED ANY INTEREST ON THIS AMOUNT, HE WAS OF THE OPINION THAT 18% OF THOSE DIVERGENT FUND OF RS.9,86,87,800/- NEED TO YIELD IN TEREST @ 18% PER ANNUM WHICH WORKS OUT TO RS.1,77,63,804/-. HOWEVER, SINCE THE ASSESSEE IS BEARING INTEREST BURDEN OF RS.16,15,903/- ONLY HE MADE THE DISALLOWANCE ONLY TO THAT EXTENT. HE ALSO NOTED THAT THE FACT THAT THE ASSES SEE HAD TAKEN INTEREST BEARING LOANS SHOWS THAT ASSESSEE DOES NOT HAVE ANY SURPLUS FUNDS. DURING THE APPELLATE PROCEEDINGS, THE ASSESSEES CLAIM THAT IT HAD SUFFICIENT SURPLUS FUND WHICH IS TO THE TUNE OF RS.34.46 CRORES AND THE AMO UNT OF SHARE APPLICATION MONEY/ADVANCES PAID IS ONLY RS.9.86 CRORES THAT WOR KS OUT TO 28.63% OF THE TOTAL SHAREHOLDER FUNDS HAS NOT BEEN TAKEN INTO CON SIDERATION BY THE LD. CIT ITA NO.2706 & 2768/DEL./2012 23 (A) WHO HAS CONFIRMED THE DISALLOWANCE BY MERELY ST ATING THAT TILL DATE, THE SHARES HAVE NOT BEEN ALLOWED TO THE ASSESSEE COMPAN Y WHERE THE SHARE APPLICATION MONEY HAS BEEN INVESTED AS CLAIMED BY T HE ASSESSEE. ACCORDING TO THE LD. CIT (A), THE ASSESSEE HAS NOT TAKEN ANY STEPS TO GET BACK THIS AMOUNT WHICH HAS BEEN INVESTED IN AYS 2007-08 AND 2 008-09 AND HELD THAT IT WAS A BLATANT DIVERSION OF FUNDS UNDER THE GUISE OF SHARE APPLICATION MONEY. BEFORE US, THE LD. AR TOOK OUR ATTENTION TO THE FOL LOWING FACTS WHICH ARE REVEALED BY PERUSAL OF BALANCE SHEET AS ON 31.03.20 08 WHICH IS AS BELOW :- FOLLOWING IS THE SHAREHOLDERS FUND POSITION OF THE APPELLANT COMPANY AS ON 31.03.2008 : PAID UP SHARE CAPITAL : 26,200,000/- SHARE PREMIUM : 23,400,000/- PROFIT AND LOSS ACCOUNT : 62,84,839/- SHARE APPLICATION MONEY : 288,800,000/- TOTAL SHAREHOLDER FUND AVAILABLE WITHOUT INTEREST BURDEN : 344,684,839/- A PERUSAL OF THE ABOVE REVEALS THAT THE ASSESSEE CO MPANY HAD SUFFICIENT FUNDS TO THE TUNE OF MORE THAN RS.34.46 CRORES WHEREAS TH E SHARE APPLICATION MONEY INVESTED AS ON 31.03.2008 ONLY AT RS.9.28 CRORES WH ICH IS ONLY 28.63% OF THE TOTAL SHAREHOLDER FUNDS. THUS, WE NOTE THAT THE AS SESSEE COMPANY HAS SUFFICIENT FREE FUNDS FOR MAKING ADVANCES / INVESTM ENT OUT OF ITS OWN SHARE HOLDER FUNDS WITHOUT INCURRING ANY INTEREST BURDEN . OUR ATTENTION WAS BROUGHT TO THE JUDGMENT OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF CIT ITA NO.2706 & 2768/DEL./2012 24 VS. RELIANCE UTILITIES & POWER LTD. 313 ITR 340, WHEREIN THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF EAST INDIA PHA RMACEUTICAL WORKS LTD. VS. CIT 224 ITR 627 AND HONBLE CALCUTTA HIGH COU RT IN WOOLCOMBERS OF INDIA LTD. VS. CIT 134 ITR 219 (CAL.) RELIED ON, HELD AS UNDER :- 10. IF THERE BE INTEREST FREE FUNDS AVAILABLE TO A N ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAIL ABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTI CAL WORKS (SUPRA) HAD THE OCCASION TO CONSIDER THE DECISION O F THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (SUPRA) WHE RE A SIMILAR ISSUE HAD ARISEN.. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUS INESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO C LAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUME NT HAD CONSIDERABLE FORCE, BUT CONSIDERING THE FACT THAT T HE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS CASE (SUPRA) THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOUL D BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUS INESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HI GH COURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUND S AVAILABLE BOTH INTEREST FREE AND OVER DRAFT AND/OR LOANS TAKEN, TH EN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF THE INTEREST FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INV ESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERING TH E FINDING OF FACT BOTH BY THE CIT (APPEALS) AND TRIBUNAL. ITA NO.2706 & 2768/DEL./2012 25 WE FIND THAT THE ASSESSEE COMPANY HAD SUFFICIENT FR EE FUNDS AND THAT THE ASSESSEE HAD STATED BEFORE THE AO THAT THE BORROWED FUNDS HAVE BEEN USED FOR BUSINESS PURPOSES ONLY AND NOT FOR THE INVESTMENT, COULD NOT BE CONTROVERTED BY BOTH THE AUTHORITIES BELOW. THE AO ERRED IN CON CLUDING THAT SINCE THE ASSESSEE COMPANY IS INCURRING INTEREST EXPENDITURE SO NO SURPLUS FUND IS AVAILABLE TO THE ASSESSEE COMPANY IS ERRONEOUS ON T HE FACT THAT THE TOTAL SHAREHOLDER FUND WITHOUT INTEREST BURDEN IS TO THE TUNE OF RS.34.46 CRORES AND, THEREFORE, AS PER THE LAW LAID DOWN BY THE HONBLE APEX COURT AS NOTED ABOVE, WE HAVE NO HESITATION TO DELETE THE DISALLOW ANCE OF RS.16,15,903/-. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 11 TH DAY OF DECEMBER, 2015. SD/- SD/- (G.D. AGRAWAL) (A.T. VARKEY) VICE PRESIDENT JUDICIAL MEMBER DATED THE 11 TH DAY OF DECEMBER, 2015 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XI, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.