SEA QUEEN DEVELOPERS, NAVI MUMBAI V. JCIT 22(3), MUMBAI

ITA 3086/MUM/2013

• Counselvise Citation: 308619914 RSA 2013
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 12-11-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 22-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GIRIJA DAYAL
• Assessee Lawyers: PRADIP N KAPASI
• Keywords: Capital asset converted into stock in trade; Capital asset; Business income; Share purchase agreement; Additional evidence; Deemed dividend
• Section: 45(2); 143(3)

Judgement Text

SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 1 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL E, BENCH MUMBAI , , BEFORE SHRI R.C.SHARMA, AM AND SHRI VIVEK VARMA, JM ITA NO.30 86/MUM/2013 ( ASSESSMENT YEAR :2009 - 10) SEA QUEEN DEVELOPERS, 107, CHADDA CRESCENT, SECTOR - 17, VASHI, NAVI MUMBAI - 400 706 VS. JCIT 22(3), MUMBAI PAN/GIR NO. : AAWFS 1477 P ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI PRADIP N. KAPASI /REVENUE BY : SHRI GIRIJA DAYAL DATE OF HEARING : 7 TH JANUARY, 2014 DATE OF PRONOUNCEMENT : 19 TH FEBRUARY , 2014 O R D E R PER R.C.SHARMA (A.M.) : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A), DATED 27 - 02 - 2013, FOR THE ASSESSMENT YEAR 2009 - 10, IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT. 2 . AS MANY AS SIX GROU NDS HAVE BEEN TAKEN BY THE ASSESSEE. THE CRUX OF THE ISSUE REVOLVES AROUND TREATMENT OF LONG TERM SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 2 2 CAPITAL GAINS ON SALE OF LAND AS OFFERED BY ASSESSEE IN ITS RETURN, WHICH WERE TREATED BY THE AO AS INCOME FROM BUSINESS, AND THE ADDITION MADE ON ACCOUNT OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE I.T. ACT. 3 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. 4 . SUCCINCTLY STATED FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE OFFERED CAPITAL GAIN IN RESPECT OF SALE OF PLOT NOS.23B & C AND PLOT NO.256/257. IN THE COMPUTATION OF INCOME THE ASSESSEE HAD DECLARED LONG TERM CAPITAL GAIN FROM SALE OF THESE PLOTS AFTER CLAIMING INDEXATION BENEFIT, HOWEVER, THE AO TREATED THE SAME AS INCOME FROM BUSINESS ON THE PLEA THAT ASSESS EE WAS ENGAGED IN THE BUSINESS OF BUILDER AND DEVELOPER, THEREFORE, THE PLOT SO SOLD CONSTITUTED ITS STOCK - IN - TRADE, PROFITS ARISING THEREFROM ARE LIABLE TO TAX AS INCOME FROM BUSINESS. 5. BEFORE THE CIT(A), THE ASSESSEE HAS FILED VARIOUS DOCUMENTS UNDER RULE 46A AND CONTENDED THAT ALL THESE DOCUMENTS GO TO THE ROOT OF THE ISSUE FOR DECIDING THE INTENTION AND NATURE OF ASSET ACQUIRED BY THE ASSESSEE, WHICH IS RELEVANT FOR DECIDING PROFIT ARISING OUT OF SALES OF SUCH ASSETS. HOWEVER, THE CIT(A) REJECTED THE ADDITIONAL EVIDENCE BY STATING THAT SOME OF THESE DOCUMENTS WERE ALREADY FILED BEFORE THE AO AND SOME OF THE DOCUMENTS WERE SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 3 3 IN PUBLIC DOMAIN. THE CIT(A) UPHELD THE CONCLUSION OF THE AO TO THE EFFECT THAT PROFIT ARISING FROM SALE OF PLOT OF LAND WAS CORREC TLY ASSESSED BY THE AO AS INCOME FROM BUSINESS. 6 . AGAINST THIS ORDER OF THE CIT(A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 7 . LEARNED AR DRAWN OUR ATTENTION TO THE AUDITED BALANCE SHEET OF EARLIER YEARS FILED BEFORE THE LOWER AUTHORITIES, WHEREIN THE ASSESSEE HAD SHOWN THE PLOT AS INVESTMENT. IT WAS FURTHER SUBMITTED THAT EVEN THOUGH THE ASSESSEE IS A BUILDER AND DEVELOPER, IT WAS MAINTAIN ING TWO DIFFERENT ACCOUNTS IN ITS BOOKS. ONE AS INVESTMENT AND THE OTHER AS TRADING ASSET. THE TRADING ASSETS ARE DIRECTLY TRANSFERRED TO THE WORK IN PROGRESS ACCOUNT. IT WAS FURTHER SUBMITTED THAT THE CBDT IN ITS CIRCULAR NO.4/2007 DATED 15.06.2007 HAS ACCEPTED THE FACT THAT THERE CAN BE TWO ASSETS I.E. INVESTMENT (CAPITAL ASSET) AND STOCK IN TRADE (TRADING ASSET ) AND THERE ARE NUMBER OF DECISIONS OF THE COURT SUCH AS CIT (CENTRAL) VS. ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY (P) LTD., 82 ITR 586 (SC) , SUPPORTING ASSESSEES CONTENTION. 7.1 OUR ATTENTION WAS ALSO INVITED TO THE DECISION IN THE CASE OF GOPAL PUROH IT VS. JCIT (29 SOT 117) , WHEREIN IT HAS BEEN HELD THAT ASSESSEE CAN HAVE TWO DIFFERENT PORTFOLIOS OF SHARES, ONE AS SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 4 4 INVESTMENT AND OTHER AS STOCK - IN - TRADE. IN RESPECT OF SHARES HELD BY THE ASSESSEE AS INVESTMENT WERE TREATED AS CAPITAL ASSET AND PROFIT AR ISING THEREFORE WERE TREATED AS ASSESSABLE UNDER THE HEAD CAPITAL GAINS. THIS DECISION WAS UPHELD BY THE JURISDICTIONAL HIGH COURT AND AN SLP FILED BEFORE THE SUPREME COURT HAS ALSO BEEN DISMISSED. 7.2 AS PER LEARNED AR, VARIOUS DOCUMENTS WERE FILED BEFO RE THE CIT(A) UNDER RULE 46A, WHICH GOES TO THE ROOT OF THE ISSUE FOR DECIDING THE NATURE OF INCOME EARNED BY THE ASSESSEE IN THE FORM OF CAPITAL GAINS, HOWEVER, THE CIT(A) HAS REJECTED THE SAME, THEREFORE, THE MATTER SHOULD BE RESTORED TO THE FILE OF THE AO, SO AS TO CONSIDER THE SAME BEFORE REACHING TO THE CONCLUSION THAT PROFIT ARISING THEREFROM ARE LIABLE TO TAX AS CAPITAL GAIN OR BUSINESS INCOME. 8 . ON THE OTHER HAND, LEARNED DR RELIED UPON THE OBSERVATIONS MADE BY THE LOWER AUTHORITIES AS WELL AS FIN DINGS RECORDED BY THEM TO THE EFFECT THAT IN SOME OF THE YEARS, THE ASSESSEE HAD USED SOME OF THE PLOTS FROM THE SAME CATEGORY OF ASSET FOR THE PURPOSE OF CONSTRUCTION OF BUILDING THEREON AND PROFIT AROSE THEREON WAS OFFERED AS BUSINESS INCOME. AS PER LEAR NED DR THERE WAS NO DIFFERENCE IN VARIOUS PLOTS HELD BY THE ASSESSEE, SOME OF WHICH SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 5 5 WERE USED BY THE ASSESSEE FOR ITS DEVELOPMENT AND CONSTRUCTION OF BUILDING THEREON, PROFIT THEREON WAS OFFERED AS BUSINESS INCOME. SO FAR AS RESTORATION OF THE MATTER IS CO NCERNED, LEARNED DR HAS NO OBJECTION IN SO FAR AS NO PREJUDICE WILL BE CAUSED TO ANY OF THE PARTIES IF THE AO APPLIES HIS MIND TO THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE UNDER RULE 46A, WHICH WERE FILED BEFORE THE CIT(A) BUT NOT PROPERLY APPRECIATED AND REJECTED BY HIM. 9 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF LOWER AUTHORITIES AND ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY THE LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS SUBMITTED BY THE LEARNED AR AND LEARNED DR DURING THE COURSE OF HEARING BEFORE US. FROM THE RECORD, WE FOUND THAT THE ASSESSEE IS A PARTNERSHIP FIRM AND ENGAGED IN THE BUSINESS OF BUILDERS AND DEVELOPERS. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS SHOWN S ALES FROM PROJECT SEA QUEEN HERITAGE OF RS.32,03,41,361/ - AND OFFERED NET PROFIT OF RS.4,32,35,542/ - . THE ASSESSEE HAS ALSO SHOWN LONG TERM CAPITAL GAIN OF RS.26,56,79,937/ - ON SALE OF PLOTS NO.256 & 257 AND PLOTS NO.23B&C AS AGAINST TOTAL SALE CONSIDERATI ON OF RS.32,55,00,000/ - . I N COMPUTATION OF INCOME ASSESSEE HAS OFFERED SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 6 6 THE PROFIT DERIVED FROM SALE OF ABOVE PLOTS AS LONG TERM CAPITAL GAIN AND OFFERED TAX @ 20% AFTER CLAIMING INDEXATION BENEFITS. 9.1 WE HAD VERIFIED AUDITED BALANCE SHEET OF THE ASSESS EE AS PLACED ON RECORD, WHEREIN WE FOUND THAT AS ON 31ST MARCH, 2004, THE ASSESSEE HAD SHOWN ADVANCE FOR PLOT AS PER SCHEDULE F AMOUNTING TO RS. 9,44,01,940/ - . WE HAD ALSO VERIFIED SCHEDULE G, WHICH CLEARLY INDICATE THE ADVANCE GIVEN FOR PLOT NO. 23B & C AND PLOT NOS. 256 & 257. AUDITED BALANCE SHEET FOR THE YEAR ENDING ON 31 ST MARCH, 2006, ALSO INDICATE SCHEDULE L WITH RESPECT TO ADVANCE GIVEN FOR PLOT NO.23 - B & C AND 256 & 257. SIMILARLY, AUDITED BALANCE SHEET FOR THE YEAR ENDING ON 31 ST MARCH, 200 7, INDICATE SCHEDULE M OF INVESTMENT MADE BY THE ASSESSEE AMOUNTING TO RS. 16,37,76,441/ - , WHICH INCLUDES THE INVESTMENT MADE FOR PLOT NO. 34 - B & 34 - C AMOUNTING TO RS. 1,71,65,350/ - AND FOR PLOT NO. 256 & 257 RS. 1,54,74,346/ - . SIMILARLY, AUDITED BALANCE SHEET FOR THE YEAR ENDING ON 31.03.2008 SHOWS INVESTMENT IN PLOTS AS PER SCHEDULE E. THUS, WHEN THE ADVANCE GIVEN FOR THE PLOTS WERE COMPLETE, THE ASSESSEE HAS DULY SHOWN THE PLOT UNDER THE HEAD INVESTMENT IN SCHEDULE E . IN THE AUDITED BALANCE SHEET FOR THE YEAR ENDING ON 31 ST MARCH, 2008, WE FOUND THAT THE ASSESSEE HAD SHOWN SEPARATELY INVESTMENT IN PLOT NOS. SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 7 7 256 & 257 AT RS. 1,75,84,458/ - AS WELL AS IN PLOT NO. 34B & 34 - C AT RS. 2,49,74,934/ - . THESE PLOTS WERE SOLD DURING THE FINANCIAL YEAR 2008 - 09 RE LEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2009 - 10, THEREFORE, THE ASSESSEE HAS OFFERED GAIN ARISING OUT OF THESE PLOTS AS CAPITAL GAIN. BY IGNORING ALL THESE MATERIAL EVIDENCES, THE LOWER AUTHORITIES HAVE TREATED THE GAIN AS BU SINESS INCOME. MERELY BECAUSE, TILL FULL PAYMENT OF PLOT WAS MADE, THE PAYMENT SO MADE WAS SHOWN UNDER THE HEAD ADVANCE CANNOT BE MADE THE BASIS FOR CHANGING THE ASSESSEES INTENTION OF INVESTMENT TO STOCK IN TRADE. AS SOON AS FULL PAYMENT WAS GIVEN, THE ASSESSEE ITSELF HAS SHOWN THE PLOTS UNDER THE HEAD INVESTMENT. THE LOWER AUTHORITIES HAVE NOT PROPERLY APPRECIATED THE AUDITED BALANCE SHEETS, WHICH WERE PLACED ON RECORD. MERELY BECAUSE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF BUILDER, THE INVE STMENT MADE FOR EARNING CAPITAL GAIN CANNOT BE TREATED AS BUSINESS INCOME, WHEN THE ASSESSEE HAS NOT USED THOSE PLOTS FOR CONSTRUCTION OF BUILDING. HAD THE ASSESSEE USED THESE PLOTS FOR CONSTRUCTION OF BUILDING THEREON, THE ASSESSING OFFICER COULD HAVE TAK EN THE SAME AS STOCK IN TRADE AND PROFIT ARISING ON THEIR SALE AS BUSINESS INCOME. HOWEVER, FACTS ARE DIFFERENT IN THE INSTANT CASE BEFORE US, WHEREIN ASSESSEE HAS SEPARATELY SHOWN INVESTMENT AND PROFIT ARISING THEREON OFFERED AS CAPITAL GAIN. IN RESPECT O F PLOTS SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 8 8 USED BY THE ASSESSEE FOR CONSTRUCTION OF BUILDING THEREON AND THEREAFTER SALE, PROFIT AROSE THEREFROM WAS TREATED BY THE ASSESSEE AS BUSINESS INCOME. FURTHERMORE, T HERE IS NO RESTRICTION IN THE INCOME - TAX ACT, 1961, FOR USE OF CAPITAL ASSETS AS STO CK - IN - TRADE. RELEVANT PROVISIONS ARE CONTAINED U/S 45(2) FOR COMPUTATION OF CAPITAL GAINS IN RESPECT OF PROFIT ARISING FROM TRANSFER BY WAY OF CONVERSION BY THE OWNERS OF CAPITAL ASSETS INTO OR ITS TREATMENT BY HIM AS STOCK - IN - TRADE OF A BUSINESS CARRIED O N BY HIM. IN THIS VIEW OF THE MATTER, MERELY BECAUSE SOME OTHER PLOTS WERE USED BY ASSESSEE IN ITS BUSINESS, CANNOT BE MADE THE REASONS FOR DECLINING THE NATURE OF OTHER PLOTS HELD AS INVESTMENT AND SOLD AFTER HOLDING THE SAME FOR MORE THAN THREE YEARS. 9. 2 FROM THE RECORD, WE FURTHER FOUND THAT THE SAID PLOTS OF LAND WERE INTENDED TO BE CAPITAL ASSETS AND HAVE BEEN SO ACQUIRED, HELD AND SHOWN AS ADVANCE INVESTMENTS IN THE AUDITED BOOKS OF ACCOUNT SINCE MANY YEARS IN THE PAST AND THE POSITION THAT SUCH P LOTS OF LAND REPRESENTED INVESTMENTS WAS ACCEPTED BY DEPARTMENT IN EARLIER ASSESSMENT YEARS. IT IS NOT THE CASE OF REVENUE AUTHORITIES THAT T HE SAID PLOTS AT THE YEAR END WERE VALUED ON THE PRINCIPLE OF COST OR MARKET VALUE, WHICHEVER IS LOWER AS APPLICA BLE TO A STOCK IN TRADE HELD BY A BUSINESSMAN. ON THE SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 9 9 CONTRARY, WE FOUND THAT PLOTS WERE VALUE AT COST ONLY. THE ASSESSEE FIRM HAD OFFERED SEPARATELY PROFIT OF BUSINESS OF DEVELOPMENT AND CONSTRUCTION OF HOUSING PROJECTS UNDER HEAD PROFITS AND GAINS FRO M BUSINESS AND PAID TAXES ON THE SAME. MERELY BECAUSE SOME OF PLOTS ACQUIRED AND USED FOR CONSTRUCTION OF BUILDING THEREON, CAN NOT BE MADE THE REASON FOR TREATING THE PLOT OF LAND ACQUIRED AND HELD AS INVESTMENT, AS STOCK - IN - TRADE. THE SALE OF SUCH PLOTS OF LAND WERE MADE IN THE YEAR 2008 AFTER HOLDING THE PLOTS AS A CAPITAL ASSET FOR MORE THAN THREE YEARS. BEFORE THE CIT(A), THE ASSESSEE HAS FILED FOLLOWING DOCUMENTS UNDER RULE 46A OF THE IT RULES TO ENABLE HIM TO BRING ON RECORD ALL THE ANNEXURES : - SL . NO PARTICULARS ANN NO. PAGE NO. GROUND NO.2 - TREATMENT OF CAPITAL GAINS (LTCG OF RS.26,56,79,937) AS BUSINESS INCOME (RS.27,85,40,608) 1. COPY OF SCHEME OF GOVERNMENT UNDER WHICH THE PURCHASE WAS MADE. 1 1 - 9 2. LEDGER A/C SHOWING THAT LAND WAS SHOWN IN THE BOOKS OF ACCOUNTS AS CAPITAL ASSET OR INVESTMENT OR FIXED ASSET FOR THE PERIOD FROM 01/04/2005 TILL 31.03.2009, AS A CONFIRMATION TOWARDS TAXES AND OTHER EXPENDITURE WERE CAPITALIZED AND NOT CLAIMED AS DEDUCTION. 2 10 - 11 3. COPY OF LEDGER ACCOUNT OF THE COMPANY FROM THE BOOKS OF ACCOUNTS OF THE PARTNERS BEFORE THE EXECUTION OF PARTNERSHIP. 3 12 - 13 4. POSSESSIONS LETTERS RECEIVED FROM RESPECTIVE LAND LORDS AND COPY OF COMPANYS CORRESPONDENCE IN THIS REGARD. AND COPIES OF ALLOTMENT LETTERS OF RESPE CTIVE PLOTS AND THEIR CIDCOS PLOT DEMARCATION PLAN. 4 14 - 16 GROUND NO.3 - DEEMED DIVIDEND U/S.2(22)(E) OF RS.8,03,00,941 SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 10 10 1. AMENDED TAX AUDIT REPORT AND FORM 3CD, ANN IV 1 1 - 1 2. CONFIRMATION LETTER FROM CHARTERED ACCOUNTANT 2 2 - 2 3. MEMORANDUM OF U NDERSTANDING BETWEEN SUNNY HOUSING (INDIA) PVT. LTD. AND M/S SEA QUEEN DEVELOPERS, APPELLANT FOR DEPOSIT OF RS.6,00,00,000 FOR PROCUREMENT OF PLOT. 3 3 - 5 4. BOARD RESOLUTION OF SUNNY HOUSING (INDIA) PVT. LTD., DATED 24/3/08 FOR GIVING RIGHTS TO APPELLANT FOR PROCUREMENT OF PLOT. 4 6 - 6 5. COPY OF LEDGER AS A PROOF OF REFUND OF MONEY TO SUNNY HOUSING (INDIA) PVT. LTD. 5 7 - 9 6. COPY OF SHARE CERTIFICATES OF SUNNY HOUSING INDIA PRIVATE LIMITED 6 10 - 11 7. COPIES OF ALL CORRESPONDENCES AS A PROOF FOR THE EFFO RTS MADE BY APPELLANT FOR PURCHASE OF PLOT 7 12 - 17 9.3 HOWEVER, THE CIT(A) DID NOT ACCEPT ABOVE DOCUMENT AND THE SAME WERE REJECTED BY HIM AFTER GIVING THE REASONS AS STATED BELOW : - SL.NO. TYPE OF EVIDENCE CIT(A)S REASONS AND COMMENTS FOR REJECTION OF A.E. 1. COPY OF SCHEME OF GOVERNMENT IT IS IN PUBLIC DOMAIN AND THE AO IS ALREADY IN KNOWLEDGE. THE AO WAS AWARE AND HE CONSIDERED THE SAME WHILE ARRIVING AT HIS DECISION. THEREFORE, REJECTED. 2. LEDGER ACCOUNTS OF LAND FOR DIFFERENT YEARS COPIES NOT SI GNED. NO RELEVANT, LEDGER ACCOUNTS DO NOT SUPPORT THE THEORY THAT PLOTS WERE HELD SEPARATELY AS STOCK AND INVESTMENT. THEY ARE OF NO SUPPORT. THEREFORE, REJECTED. 3. LEDGER ACCOUNT OF THE FIRM IN THE BOOKS OF PARTNERS COPIES NOT SIGNED. NOT RELEVANT, THIR D PARTY EVIDENCE. THE AO WAS AWARE AND HE CONSIDERED THE SAME WHILE ARRIVING AT HIS DECISION. THEREFORE, REJECTED. 4. POSSESSION LETTER THEY WERE IN KNOWLEDGE OF AO AND THE AGREEMENT WAS ENTERED BY CIDCO WITH THE LAND OWNERS AND HENCE OF NO RELEVANCE. THE AO WAS AWARE AND HE CONSIDERED THE SAME WHILE ARRIVING AT HIS DECISION. THEREFORE, REJECTED. 5. MOU INHOUSE PAPERS, NO DATE ON MOU, NOT REGISTERED, EVIDENCES ARE INADMISSIBLE, THEREFORE, REJECTED. 6. BOARD INHOUSE PAPERS, BOARD RESOLUTION N OT SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 11 11 RESOLUTIONS SIGNED, EVIDENCES ARE INDADMISSIBLE. THEREFORE, REJECTED. 7. SHARE CERTIFICATES NOT CERTIFIED, EVIDENCES ARE INADMISSIBLE. THEREFORE, REJECTED. 8. OTHER CORRESPONDENCE INHOUSE PAPERS NOT CERTIFIED, EVIDENCES ARE INADMISSIBLE. THEREFORE, REJECTED. 9 . 4 AFTER GOING THROUGH THE DETAILED DOCUMENTS PLACED ON RECORD BEFORE THE CIT(A) UNDER RULE 46A, WE FOUND THAT THESE DOCUMENTS GO TO THE ROOT OF THE ISSUE FOR DECIDING THE NATURE OF ASSETS HELD BY THE ASSESSEE VIS - - VIS NATURE OF INCOME EARNED BY THE ASSES SEE AS WELL AS INTENTION OF THE ASSESSEE FOR INVESTMENT IN THESE ASSETS. ON SPECIFIC QUERY BY THE BENCH, LD. AUTHORIZED REPRESENTATIVE HAD ALSO FILED TRANSLATED VERSION OF DOCUMENTS IN ENGLISH/HINDI, WHICH WERE IN MARATHI. 9.5 WHILE DECLINING ASSESSEES CLAIM OF CAPITAL GAINS BOTH THE LOWER AUTHORITIES OBSERVED THAT, WHILE IT WAS TRUE THAT ASSESSEE FOR THE YEAR ENDING 31.03.2007 AND 31.03.2008 HAD SHOWN THE HOLDING OF SAID PLOTS IN SEPARATE SCHEDULE OF INVESTMENTS NAMELY SCH M AND E RESPECTIVELY, INV ESTMENTS IN PLOTS AND ADVANCES FOR PLOTS WERE INTERCHANGEABLY USED AND MERE GIVING OF ADVANCES FOR ACQUISITION OF PLOT DO NOT GIVE ANY RIGHTS OVER THE PLOTS . THE AO FURTHER OBSERVED THAT, THE ASSESSEE WAS UNABLE TO NEGATE THE BALANCE SHEETS FILED IN EARL IER YEARS, WHEREIN THEY WERE SHOWN AS SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 12 12 STOCK AND OTHER PLOTS AND, HENCE, THE PLOTS UNDER CONSTRUCTION FALL UNDER THE SAME BASKET . 9.6 AS PER THE AO, SCHEDULE F OF BALANCE SHEET FOR A. Y. 2004 - 05 PLACED THE PLOTS ALONG WITH OTHER PLOTS WHICH ARE SEA QU EEN HERITAGE, SEA QUEEN HORIZON, PLOTS, SEA QUEEN PARADISE, NATIONAL AVENUE , PLOT NO.263 AND A PLOT AT KHARGHAR. FOR A.Y.2005 - 06. SCHEDULE G OF THE BALANCE SHEET SHOWED THE SAME TREATMENT AS ABOVE FOR A.Y.2006 - 07. SCHEDULE L NATIONAL AVENUE AND PLOT A T KHARGHAR WERE SOLD AND OFFERED AS BUSINESS INCOME. THESE PLOTS COMING FROM THE SAME BASKET COULD NOT BE GIVEN DIFFERENT TREATMENT DEFEATING THE ASSESSES CLAIM OF MAINTAINING TWO DIFFERENT PORTFOLIOS, ONE AS INVESTMENT AND OTHER AS STOCK. THE PLOTS WHI CH WERE HELD AS THE INVESTMENTS OF THE 2 INDIVIDUALS MR. M C SUNNY AND MR. B.MSHAH DID NOT AUTOMATICALLY MAKE THE PLOTS AS INVESTMENTS OF THE FIRM UNLESS TWO SEPARATE PORTFOLIOS WERE MAINTAINED. LEDGER ACCOUNT OF THE APPELLANT FIRM SHOWING THE TREATMENT OF THE PLOT AS AN ASSET IN THE BOOKS OF INDIVIDUALS BECOMING PARTNERS LATER, BEING A 3 RD PARTY HAS NO RELEVANCE. THE PERIOD OF HOLDING IS LESS THAN 3 YEARS AND HENCE COULD NOT BE CLAIMED AS LTCG. 9. 7 WITH REGARD TO THE ABOVE OBSERVATION OF THE AO, WE FOUND THAT THE ASSESSEE FIRM WAS NEVER A DEALER IN LAND AND THE ONLY SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 13 13 BUSINESS OF THE FIRM WAS TO DEVELOP THE ACQUIRED PLOT BY CONSTRUCTING A BUILDING THEREON AND SELL THE HOUSES THEREIN AND THE ASSESSEE FIRM HAS OFFERED SEPARATELY PROFIT OF BUSINESS OF DEVELOPME NT AND CONSTRUCTION OF HOUSING PROJECTS UNDER THE HEAD PROFITS AND GAINS FROM THE BUSINESS. ACQUISITION OF THE DEVELOPMENT RIGHTS WERE THE ONLY MODE OF ACQUISITION OF CIDCO PLOTS. WE FOUND THAT THE FACTUAL MISTAKES HAS BEEN COMMITTED BY THE AO WHILE RECO RDING THE FINDING TO THE EFFECT THAT THE INCOME FROM SALE OF PLOT AT KHARGHAR WAS SHOWN AS THE BUSINESS INCOME TO HIGHLIGHT A NON - EXISTING INCONSISTENCY IN APPROACH OF THE FIRM AND MAKE A CASE THAT THE PROFIT ON SALE OF OTHER PLOTS SHOULD HAVE ALSO BEEN SH OWN AS BUSINESS INCOM E. HOWEVER, THE FACT IS THAT THE PLOT AT KHARGHAR WAS NOT SOLD AND NO BUSINESS INCOME COULD EVER HAVE BEEN SHOWN. SIMILARLY IT WAS ALLEGED THAT PLOT NO. 263 WAS ALSO SOLD AND THE PROFIT THEREOF WAS SHOWN AS THE BUSINESS INCOME . HOWEV ER, FROM THE RECORD WE FOUND THAT PLOT NO. 263 WAS UNDER LITIGATION, WAS NOT EVEN ACQUIRED, THEREFORE, THERE WAS NO QUESTION OF SELLING IT AND EARNING THE PROFIT AND SHOWING THE SAME AS THE BUSINESS INCOME. EVEN THE FINDINGS OF THE AO THAT PLOTS WERE SHOWN FORM 31.03.2004 AS STOCK IN TRADE IN THE SCHEDULES ANNEXED TO THE BALANCE SHEET WAS COMPLETELY ERRONEOUS, INSOFAR AS THESE P LOTS WERE NEVER SHOWN AS STOCK - IN - TRADE BUT THE PAYMENTS MADE SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 14 14 WERE SHOWN AS THE ADVANCES UNDER THE SCHEDULE OF ADVANCES AND NEVER A S THE STOCK - IN - TRADE. A WRONG FINDING HAS ALSO BEEN RECORDED BY THE AO TO THE EFFECT THAT M/S AKSHAR A CCOM M ODATION WAS A SISTER CONCERN OF THE ASSESSEE, WHEREAS IT IS NOT A SISTER CONCERN AND NOT AT ALL RELATED IN ANY MANNER TO THE ASSESSEE FIRM OR ITS PA RTNERS . WE ALSO FOUND THAT POSSESSION WAS ALLEGED TO BE RECEIVED ONLY ON EXECUTION OF THE TRI - PARTITE AGREEMENTS , WHEREAS THE FACT IS THAT POSSESSION WAS RECEIVED MUCH EARLIER THAN THE TRIPARTITE AGREEMENT. AS PER THE TREATMENT GIVEN IN THE BOOKS OF ACCOUN T VIS - - VIS THE INTENTION OF THE ASSESSEE FIRM WAS TO HOLD THE SAID PLOTS OF LAND AS INVESTMENTS IN THE CASE OF P LOT NOS. 23B AND 23C AS THEY WERE INTRODUCED AS CAPITAL. THIS PROPOSITION IS SUPPORTED BY THE DECISION OF SPECIAL BENCH IN THE CASE OF DLF UNIV ERSAL LTD 123 LTD 1 (DEL.) (SB) . 9.8 IN THIS REGARD, WE ALSO FOUND THAT THE ASSESSEE HAD NOT USED ANY BORROWED FUND FOR THE ACQUISITION OF SAID PLOTS , NOR IT HAD OBTAINED ANY APPROVAL FOR DEVELOPMENT OF THE SAID PLOTS . THE ASSESSEE HAD NEVER PUT THE SAI D PLOTS FOR CONSTRUCTI ON OF ANY BUILDINGS THEREON AND HAD MAINTAINED SEPARATE ACCOUNTS FOR ITS INVESTMENTS AND BUSINESS ACTIVITIES AND HAD SHOWN THE INVESTMENT IN PLOT OF LAND UNDER CONSIDERATION CONSISTENTLY AS INVESTMENTS . HOWEVER, BOTH THE LOWER AUTHORI TIES HAD BRUSHED ASIDE ALL THESE SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 15 15 FACTUAL ASPECTS WHICH GOES TO THE ROOT OF THE ISSUE FOR HOLDING THE PLOTS BY ASSESSEE FIRM AS INVESTMENT. 9.9 FROM THE RECORD, WE FOUND THAT F OR THE YEAR ENDING ON 1.03.2007 AND 3 1.03.2008 PLOT NO. 23B AND 23 C AND 256 AND 257 WERE SHOWN IN SEPARATE SCHEDULE OF INVESTMENTS NAMELY SCH M OF AND E RESPECTIVELY. THE SAID PLOTS UNDER CONSIDERATION IN APPEAL AT THE YEAR END WERE ALWAYS VALUED AT AT COST AND NEVER ON THE PRINCIPLE OF COST OR MARKET VALUE, WHICHEVER IS LOWER AS APPLICABLE TO A STOCK - IN - TRADE. MAINTENANCE OF SEPARATE ACCOUNTS, VALUATION THEREOF AT COST, THE MANNER OF RECORDING INVESTMENTS IN THE B ALANCE SHEETS AND COMPLIANCE OF THE TERMS OF CBDT CIRCULAR NO. 4 DT. 15.6.2007 PROVE THAT THE INTENTION OF ASSESS EE FIRM WAS TO TREAT THE SAID PLOTS OF LAND AS AN INVESTMENT AND NOT AS STOCK - IN - TRAD E. WE ALSO FOUND THAT PLOT NO. 23 B & C, MR. M.C.SUNNY AND MR. B.M.SHAH ENTERED INTO AN AGREEMENT FOR THE TRAN SFER OF THE LEASE HOLD RIGHTS OF THE SAID PLOTS WITH THE INT ENTION TO INVEST ON 16.0 1.1999 [PRIOR TO FORMATION OF THE PARTNERSHIP FIRM ] AND ON CONSTITUTION OF THE PARTNERSHIP FIRM ON 06.06.2003, THE PARTNERS M.C.SUNNYS AND MR. B.M. SHAHS CAPITAL ACCOUNTS WERE CREDITED WITH THE PAYMENTS MADE FOR ACQUISITION OF TH E SAID PLOTS THUS MAKING AN INTRODUCTION OF CAPITAL ASSETS OF THE SAID PERSONS, THUS, THE RIGHTS IN THE SAID PLOTS OF LANDS WERE INTRODUCED AS CAPITAL SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 16 16 ASSETS OF THE ASSESSEE FIRM. THE LEDGERS OF THE ASSESSEE FIRM IN BOOKS OF THE PARTNERS SHOWS THAT THE PLO TS WERE INTRODUCED AS A CAPITAL CONTRIBUTION BY THE SAID PARTNER , AND THE SAID PLOTS OF LANDS WERE INTRODUCED AS CAPITAL ASSETS AND HAVE BEEN SO HELD AND SHOWN AS INVESTMENTS IN THE BOOKS OF ACCOUNTS SINCE MANY YEARS IN THE PAST AND SUCH POSITION WERE ACCE PTED IN EARLIER YEARS. WE ALSO FOUND THAT PL OTS NO. 23B AND 23C WERE HELD FOR MORE THAN 5 YEARS. PLOTS NO. 256 AND 257 WERE HELD FOR MORE THAN 3 YEARS 5 MONTHS .HAD IT BEEN HELD AS STOCK IN TRADE, NO DEVELOPER WOULD HELD IT VACANT FOR SUCH A LONG PERIOD CL EARLY INDICAT E THAT THEY WERE HELD AS INVESTMENT WITH A MOTIVE TO EARN PROFITS . ALL THESE ASPECTS WERE NOT CONSIDERED BY LOWER AUTHORITIES WHILE REACHING TO THE CONCLUSION THAT PLOTS WERE HELD AS STOCK - IN - TRADE AND NOT AS INVESTMENT. 9.10 THERE IS NO DISPU TE TO THE FACT THAT THE ASSESSEE FIRM HAD ACQUIRED THE RIGHTS IN THE SAID PLOT OF LAND NO. 23B & C UNDER AGREEMENT OF ASSIGNMENT AND TRANSFER OF LEASE HOLD RIGHTS OF THE PLOTS ON 16.01.1999 AND PLOT NOS . 256 AND 257 UNDER AN AGREEMENT DT.15.06.2003 FROM SH RI RAHIMTULLA ABDUL HAMID MUKRI AND OTHERS, RESPECTIVELY. THESE RIGHTS WERE HELD FOR A PERIOD LONGER THAN THIRTY SIX MONTHS FOR THEM TO BE CLASSIFIED AS THE LONG - TERM ASSETS. EVEN POSSESSION WAS RECEIVED EARLIER THAN THIRTY SIX SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 17 17 MONTHS AND THE PLOTS WERE HE LD FOR A PERIOD EXCEEDING THIRTY SIX MONTHS AS IS EVIDENT FOR PLOT NO.S 23B & C FROM CIDCOS CONFIRMATION OF THE ALLOTMENT OF THE SAID PLOT AND HANDING OVER OF THE POSSESSION ON 10.12.2003 BY THE SAID TANDELS WHO SIMULTANEOUSLY HANDED OVER THE SAME TO THE ASSESSEE FIRM AND FOR PLOT NO.S 256 & 257 VIDE LETTER OF ALLOTMENT DT. 12.07.2004, AGREEMENT TO LEASE DT.15.04.2005 CONFIRMED THE LEASEHOLD RIGHTS OF THE SAID PLOTS AND THE ASSESSEE FIRM RECEIVED THE POSSESSION OF THE SAID PLOTS ON 17.03.20 05. HOWEVER, BOT H THE LOWER AUTHORITIES HAVE E RRED IN IGNORING THE VITAL FACTS AND EVIDENCES OF HOLDING OF AN ASSET AND INSTEAD RELIED ON THE DATES OF SUCH DOCUMENTS THAT WERE EXECUTED PLAINLY TO FORMALIZE T HE TRANSACTIONS THAT HAVE ALREADY TAKEN PLACE. THE ASSESSEE FIRM HAD NO ROLE TO P LAY NEITHER HAD ANY CONTROL OVER THE GOVERNMENT AUTHORITY CIDCO WHICH PRACTICED THE EXECUTION OF TRI - PARTITE DEED. PLOTS NO. 23B AND 23C WERE HELD FOR MORE THAN 5 YEARS. EVEN IF WE COUNT THE PERIOD OF HOLDING FROM THE DATE OF CONSTITUTION, IT IS MORE THAN 5 YEARS AND 1 MONTH. PLOTS NO.256 AND 257 WERE HELD FOR MORE THAN 3 YEARS 5 MONTHS. PERIOD COMMENCED FROM DATE OF ALLOTMENT OR POSSESSION, WHICH IS SUPPORTED BY THE DECISIONS OF THE COURT REPORTED IN TATA CONSULTANCY LTD. 122 ITR 594(BOM), VIMAL LALCHAND MUTHA, 187 ITR 613(BOM), 216 ITR 376(BOM), 245 ITR 747(DEL), ANILA SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 18 18 UPENDEA SHAH, 262 ITR 657(GUJ), 301 ITR 345(MAD), KASTURI ESTATES P. LTD. 62 ITR 578(MAD), DELHI APARTMENT(P) LTD. 135 ITD 441(DELHI), DELHI APARTMENT (P) LTD. 352 ITR 322(D ELHI), PREM P. THARANI 3 ITD 482(MUM), KARISHMA PARIKH, 44 TTJ 68(AHD.) SHARAD THADANI, 104 TTJ 567(LUCK), GIRISH C. BHATIJA, 113 TTJ 521 (MUM) AND JITENDRA MOHAN, 1 SOT 594(DELHI). 9.11 FROM THE RECORD, WE FOUND THAT WITH RESPECT TO PLOT NO.23B & 23C, A L ETTER OF INTENT WAS ISSUED BY CIDCO IN OCTOBER 1998 PROPOSING TO ALLOT 2 PLOTS ON LEASE TO SHRI. RAMCHANDRA MAHADEV TANDEL . IN THE YEAR 1999, MR. M.C SUNNY & MR.B.M.SHAH [PARTNERS OF THE ASSESSEE FIRM FROM 2003] WITH INTENTION TO INVEST APPROACHED SHRI.R.M .TANDEL AND OTHERS FOR TRANSFER OF RIGHTS IN THE ALLOTMENT OF THE SAID PLOTS AND AGREED TO PAY LEASE PREMIUM TO CIDCO AS AN ADVANCE TOWARDS PURCHASE CONSIDERATION AND THE SAME BEING ACKNOWLEDGED BY CIDCO AND ENTERED INTO THE AGREEMENT OF ASSIGNMENT AND TRA NSFER OF LEASE HOLD RIGHTS OF THE PLOTS ON 16.0 1.1999 WHICH WERE ALLOTTED UNDER THE 12.5% GAOTHAN SCHEME OF THE GOVERNMENT. THE SAID SUNNY AND SHAH CONSTITUTED A PARTNERSHIP FIRM ON 06.06.2003 VIDE PARTNERSHIP DEED DT.06.06.2003 UNDER THE NAME AND STYLE O F M/S. SEA QUEEN DEVE1OPERS AND INTRODUCED THE RIGHTS IN THE SAID PLOTS ACQUIRED BY THEM UNDER THE SAID AGREEMENT AS THEIR CAPITAL CONTRIBUTION AND SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 19 19 THEIR CAPITAL ACCOUNTS BEING CREDITED IN THE BOOKS OF THE FIRM. CIDCO CONFIRMED THE ALLOTMENT OF THE SAID PL OT AND HANDED OVER THE POSSESSION ON 10.12.2003 TO THE SAID TANDELS WHO SIMULTANEOUSLY HANDED OVER THE SAME TO THE ASSESSEE FIRM. SUBSEQUENTLY, IN PURSUANCE OF ALLOTMENT AND POSSESSION, THE FORMAL LEASE DEEDS WERE EXECUTED BY THE CIDCO VIDE LEASE DEED DT.0 3.05.2007 REGISTERED WITH SUB - REGISTRAR, THANE FOR COMPLETING THE FORMALITY. VIDE TRIPARTITE DEED DT.19.07.2007; CIDCO FORMALLY TRANSFERRED THE SAID PLOTS OF LANDS IN FAVOR OF THE ASSESSEE FIRM. SUBSEQUENTLY, THESE PLOTS HELD AS LONG TERM CAPITAL ASSETS AN D SHOWN AS SUCH IN THE BALANCE SHEETS WERE TRANSFERRED UNDER AN AGREEMENT FOR ASSIGNMENT CUM SALE DT. 11.07.2008 TO M/S AKSHAR ACCOMMODATION ( ON THE CONSIDERATION OF RS. 22,00,0,000 STATED THEREIN . CAPITAL GAINS OF RS. 18,30,75,137 WAS COMPUTED AFTER DEDU CTING THE INDEXED COST OF RS. 3,69,24,863 AND SAME WAS OFFERED FOR TAXATIO N BY THE ASSESSEE FIRM 9.12 IN RESPECT OF PLOT NOS.256 & 257, WE FOUND THAT THE ASSESSEE FIRM ACQUIRED THE RIGHTS IN THE LEASEHOLD PLOTS OF LAND UNDER AN AGREEMENT DT.15.06.2003 FOR CONSIDERATION OF RS. 1,75,84,458 FROM SHRI. RAHI M TULLA ABDUL HAMID MUKRI AND OTHERS. CIDCO ISSUED AN ALLOTMENT LETTER DT.12.07.2004 AND VIDE AN AGREEMENT TO LEA S E DT.15.04.2005 CONFIRMED THE LEASEHOLD RIGHTS SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 20 20 OF THE SAID PLOTS AND THE ASSESSEE FIRM RECEIV ED THE POSSESSION OF THE SAID PLOTS ON 17.03.2005. VIDE TRIPATITE DEED DT.03.08.2005 CIDCO FORMALLY TRANSFERRED THE SAID PLOTS IN FAVOR OF THE ASSESSEE FIRM EFFECTING THE FULL TRANSFER OF THE PLOTS BY SHRI. RAHI M TULLA ABDUL HAM ID MUKRI AND OTHERS TO M/ S S EA QUEEN DEVELOPERS . THE TRANSFER OF THE SAID PLOTS WERE FURTHER FORMALIZED BY CIDCO BY TRANSFER ORDER DT. 19.09.2005. SUBSEQUENTLY, THE SAID PLOTS HELD AS LONG TERM CAPITAL ASSET AND SHOWN AS SUCH IN THE BALANCE SHEETS OF RESPECTIVE YEARS WERE TRANSFERRED U NDER AN AGREEMENT OF SALE DT. 0 1.08.2008 TO M/S RAVECHI PROPERTIES ON CONSIDERATION OF RS.10,55,00,00 AND THE CAPITAL GAINS OF RS. 8,26,04,800 AFTER DEDUCTING THE INDEXED COST OF RS. 2,28,95,200 WAS OFFERED FOR TAX ATION BY THE ASSESSEE FIRM. ALL THESE IMP ORTANT FACTUAL ASPECTS AND DOCUMENTARY EVIDENCES HAVE NOT BEEN PROPERLY APPRECIATED BY LOWER AUTHORITIES WHICH RESULTED INTO WRONG CONCLUSION OF HOLDING THAT PROFIT ARISING ON SALE OF PLOTS HELD AS INVESTMENT IS LIABLE TO TAX AS BUSINESS INCOME RATHER CAPI TAL GAINS. 9. 13 IN VIEW OF ABOVE DISCUSSION, WE SET ASIDE THE ORDERS OF LOWER AUTHORITIES AND RESTORE THE MATTER BACK TO THE FILE OF THE AO FOR EXAMINING THESE DOCUMENTS IN DETAIL AND FOR DECIDING AFRESH THE TAXABILITY OF PROFIT AROSE ON SALE OF PLOT AS CAPITAL GAINS OR AS BUSINESS INCOME IN TERMS OF OUR OBSERVATIONS MADE IN PARA 9 TO SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 21 21 9. 12. NEEDLESS TO SAY THE ASSESSEE SHOULD BE GIVEN DUE OPPORTUNITY BEFORE DECIDING THE ISSUE AND THE AO IS ALSO DIRECTED TO CONSIDER THE ADDITIONAL EVIDENCE FILED UNDER RULE 46A BEFORE DECIDING THE ISSUE. WE ORDER ACCORDINGLY. 10 . THE AO HAS ALSO TAXED THE ADVANCES RECEIVED BY THE ASSESSEE AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT AND THE ACTION OF THE AO WAS CONFIRMED BY THE CIT(A). FROM THE RECORD, WE FOUND THAT THE ADDITIONS WAS MADE BY THE AO UNDER SECTION 2(22)(E) STATING THAT THE ASSESSEE HAS AVAILED UNSECURED LOAN FROM SUNNY HOUSING (INDIA)PVT. LTD.(IN SHORT SHIL), A COMPANY IN WHICH ONE OF THE PARTNER OF ASSESSEE FIRM IS A SHAREHOLDER BY IGNORING THE FACT TH AT THE ASSESSEE FIRM WAS NOT A SHAREHOLDER OF THE SAID COMPANY. THE AO OBSERVED THAT IN THE PRESENT CASE, THE PAYER COMPANY SHIL, IS A CLOSELY HELD COMPANY AND THE SHARE HOLDER MR. M.C. SUNNY HAS MORE THAN 10% VOTING POWER IN THE COMPANY AND AT THE SAME TI ME MR. M.C. SUNNY IS HAVING MORE THAN 20% OF INTEREST IN THE ASSESSEE FIRM I.E. M/S SEA QUEEN DEVELOPERS, WHICH IS RECEIVING LOAN AND ADVANCE FROM SHIL. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE PAYER COMPANY HAS SUFFICIENT AMOUNT OF RESERVE AND SURP LUS, HENCE, ALL THE CONDITIONS FOR ATTRACTING THE PROVISIONS OF SECOND LIMB OF DEEMED DIVIDEND IS SAT ISFIED. ACCORDINGLY VIDE ORDER - SHEET NOTING DATED 23.11.2011 SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 22 22 THE AR OF THE ASSESSEE WAS SHOW CAUSED AS TO WHY THE LOAN RECEIVED BY ASSESSEE FIRM M/S SEA QUEEN DEVELOPERS FROM SHIL SHOULD NOT BE TREATED AS DEEMED DIVIDEND AND TAXED IN THE HANDS OF ASSESSEE FIRM M/S SEA QUEEN DEVELOPERS. IN REPLY THE AR OF THE ASSESSEE HAS MADE FOLLOWING SUBMISSION BEFORE THE ASSESSING OFFICER : ' THE TRANSACTIONS BETWEEN T HE COMPANY AND M/S SUNNY HOUSING (INDIA) PRIVATE LIMITED IS ONLY BUSINESS TRANSACTIONS. AND IT IS NOT IN THE NATURE OF LOAN OR IN NATURE OF ADVANCE. AGAIN, M/S SEA QUEEN DEVELOPERS IS NOT A SHARE HOLDER OF M/S SUNNY HOUSING (INDIA) PRIVATE LIMITED. WE RE QUEST YOU TO KINDLY NOTE THAT THE TRANSACTIONS WITH M/S SUNNY HOUSING (INDIA) PVT. LTD. IS MUTUAL, OPEN AND CURRENT IN NATURE, THEREFORE, NO PART OF THAT RUNNING ACCOUNT COULD BE TREATED AS LOANS OR ADVANCES AS THE ACCOUNT IS A CONTINUOUSLY MOVING ONE AND THE A BALANCES REFLECTED IN THAT RUNNING ACCOUNT ARE MOMENTARY IN NATURE AND SUBJECT TO FREQUENT CHANGES. IT IS SUBMITTED THAT THE RUNNING ACCOUNT MAINTAINED BY TWO CONCERNS EVEN IF THEY ARE RELATED CONCERNS U/S 2(22)(E) IN THE NORMAL COURSE OF BUSINESS AN D CANNOT BE TREATED AS LOANS OR ADVANCES EVEN THOUGH A NOMENCLATURE IS STATED AS LOANS AND ADVANCES. BESIDES, THE SPECIAL BENCH OF THE INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF ACIT VS. BHAUMIK COLOUR PVT. LTD., REPORTED IN 313 ITR (AT) 146 (SB) HELD THAT EVEN LOAN ACCOUNT BETWEEN TWO SISTER CONCERNS CANNOT BE TAXED IN THE HAND OF RECIPIENTS AS THE ASSESSEE COMPANY IS NOT A SHARE HOLDER OF THE OTHER COMPANY AND VICE VERSA. LIKE, WE ARE NOT THE TRIBUNAL HAVE BEEN APPROVED BY THE BOMBAY HIGH COURT IN TH E CASE OF CIT VS. UNIVERSAL MEDICARE P LTD REPORTED IN 324 ITR 263 (BOM). HENCE, THE JURISDICTIONAL HIGH COURT HAS DECIDED AN ISSUE IT BECOMES THE LAW OF THE LAND TILL IT IS REVERSED BY THE SUPREME COURT. IT IS FURTHER SUBMITTED THAT THE HON. SUPREME COU RT IN THE CASE OF NAVANITLAL JHAVERI 23 ITR 198 HELD THAT PROVISIONS OF SEE. 2(22)(E) MUST BE MADE APPLICABLE WHERE DIVIDEND DISGUISED AS A LOAN IS PAID BY A COMPANY. THE CONCEPT SHOULD NOT BE STRETCHED TOO FAR TO INVOLVE ABSURDITIES. BESIDES IT IS SUBMITT ED THAT THE HON. SUPREME COURT IN THE CASE OF CIT VS. SARATHY MUDALIAR 83 ITR 170 AND KERALA HIGH COURT IN THE CASE OF CIT VS. G NARASIMHAN (DECD) AND OTHERS REPORTED IN 236 ITR 327 (SC) WHEREIN THE SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 23 23 COURT HAS HELD THAT ANY LEGAL FICTION WILL HAVE TO BE CAR RIED TO ITS LOGICAL CONCLUSION. BESIDES IT HAS BEEN HELD IN A NUMBER OF CASES BY HIGH COURTS AND TRIBUNAL THAT PAYMENTS MADE BY A COMPANY THROUGH A RUNNING ACCOUNT IN DISCHARGE OF ITS EXISTING DEBTS OR AGAINST PURCHASE OR FOR AVAILING SERVICES SUCH PAYME NTS MADE IN THE ORDINARY COURSE OF BUSINESS CERRIED ON BY BOTH THE PARTIES COULD NOT BE TREATED AS DEEMED DIVIDEND FOR THE PURPOSE OF SEE. 2(22)(E). THE DEEMING PROVISION OF LAW CONTAINED IN SEE. 2(22)(E) APPLY IN SUCH CASES WHERE COMPANY PAY TO A SHAREHOL DER AN AMOUNT AS ADVANCE OR A LOAN AS SUCH AND NOT IN ANY OTHER CONTEXT. THE LAW DOES NOT PROHIBIT BUSINESS TRANSACTION BETWEEN RELATED CONCERNS AND THEREFORE PAYMENTS MADE IN THE ORDINARY COURSE OF BUSINESS CANNOT BE TREATED AS LOANS AND ADVANCES. THE BOM BAY HIGH COURT IN THE CASE OF CIT VS. NAGINDAS M KAPADIA REPORTED IN 177 ITR (BOM) UPHELD THE ABOVE VIEW VIZ. THAT PAYMENTS MADE BY A COMPANY IN THE COURSE OF CARRYING ON OF ITS REGULAR BUSINESS THROUGH A MUTUAL OPEN AND CURRENT, ACCOUNT TO A RELATED PARTY DO NOT COME UNDER THE PURVIEW OF SECTION 2(22)(E) OF THE ACT. IN VIEW OF ALL THE ABOVE PROPOSITIONS AND PRECEDENTS, DIRECTLY ON THE ISSUE HELD BY THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICARE P LTD., NO ADDITION CAN BE MADE IN THE HAND OF RECEIPTS AS DEEMED DIVIDEND U/S 2(22)(E) OF THE IT ACT 1961. 10. 1 IT WAS ALSO THE CONTENTION OF THE LEARNED AR THAT THE AMOUNT WAS RECEIVED BY THE ASSESSEE IN THE ORDINARY COURSE OF ITS BUSINESS BETWEEN THE ASSESSEE FIRM AND THE SAID COMPANY. IT WAS FURTHER CONTENDED THAT THE PROVISIONS OF S. 2(22)(E) DID NOT APPLY TO THE CASE OF THE ASSESSEE SINCE: I) IT WAS NOT A SHAREHOLDER OF SUNNY HOUSING (INDIA) PVT. LTD.; II) THE LOAN WAS RECEIVED BY THE ASSESSEE IN THE ORDINARY COURSE OF BUSINESS FROM SUNNY HOUSING (INDIA) PVT. LTD.; AND SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 24 24 I II ) THE SAID AMOUNT DID NOT REPRESENT ANY LOAN OR AN ADVANCE RECEIVED BY THE ASSESSEE. HOWEVER, THE AO DID NOT AGREE WITH ASSESSEES CONTENTION AND MADE ADDITION U/S.2(22)(E). BY THE IMPUGNED ORDER CIT(A) HAD CONFIRMED T HE ORDER OF AO, AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 11 . WE HAVE CONSIDERED THE OBSERVATIONS MADE BY THE LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS VIS - - VIS THE CONTENTION OF THE LEARNED AR AND LEARNED DR BEFORE US. WE HAVE ALSO DELI BERATED ON THE JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS JUDICIAL PRONOUNCEMENTS CITED AT BAR BY LD. AUTHORIZED REPRESENTATIVE AND LD. SENIOR DR IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. FROM THE RECO RD, WE FOUND THAT THE ASSESSEE PARTNERSHIP FIRM, M/S. SEE QUEEN DEVELOPERS ( IN SHORT SQD) IS COMPRISING OF 3 PARTNERS NAMELY MR. M.C. SUNNY, MR. BHUPENDRA M. SHAH' AND SEA QUEEN DEVELOPERS LTD. M/S. SUNNY HOUSING INDIA PVT. LTD. (SHIPL) IS A PRIVATE LIMIT ED COMPANY ENGAGED IN BUSINESS OF DEVELOPMENT AND CONSTRUCTION OF LAND AND BUILDING. T HE ASSESSEE FIRM DURING THE YEAR HAD RECEIVED ADVANCE FROM SUNNY HOUSING (INDIA) PVT. LTD. (SHIPL) WHICH WAS REPAID BY ASSESSEE IN THE SAID YEAR, LEAVING A CLOSING BALANC E OF RS.1,00,000/ - . FROM THE RECORD, WE FOUND THAT T HE ASSESSEE FIRM SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 25 25 (SQD) HAS NOT MADE ANY INVESTMENT WHATSOEVER IN THE SHARES OF THE SAID SHIPL, NOT EVEN THROUGH ITS PARTNERS. THE AUDITED BOOKS OF ACCOUNTS AND THE BALANCE SHEET OF THE ASSESSEE FIRM CLE ARLY INDICATE THAT THE ASSESSEE FIRM HAS NOT MADE ANY INVESTMENT IN THE SHARES OF THE SAID SHIPL, A FACT WHICH IS NOT CONTROVERTED BY THE A.O. NOR BY CIT(A). THUS, THE ASSESSEE FIRM IS NOT A SHAREHOLDER, DIRECTLY OR INDIRECTLY, OF THE SAID SHIPL. EVEN BOO KS OF ACCOUNTS OF THE SAID SHIPL DOES NOT RECOGNIZE THE ASSESSEE FIRM AS THE SHAREHOLDER NOR DOES IT SHOW THAT ANY OF ITS PARTNERS ARE HOLDING SHARES FOR AND ON BEHALF OF THE ASSESSEE FIRM SQD. A DETAILED REPLY VIDE LETTER DT. 05.12.2011 WAS FURNISHED BY A SSESSEE TO THE A.O EXPLAINING THESE FACTS AND HIGHLIGHTING THAT PROVISIONS OF S.2(22)(E) ARE NOT APPLICABLE TO THE ASSESSEE FIRM'S CASE. HOWEVER, THE AO DID NOT FIND FAVOUR WITH THIS CONTENTION AND TAXED THE AMOUNT OF ADVANCE GIVEN TO THE ASSESSEE ON THE P LEA THAT SHIPL IS A COMPANY IN WHICH ONE OF THE PARTNERS OF THE ASSESSEE FIRM IS A SHAREHOLDER, UNDER THE HEAD DEEMED DIVIDEND U/S 2(22)(E). 11.1 IT WAS ALSO ARGUED BEFORE THE LOWER AUTHORITIES THAT T HE TRANSACTIONS BETWEEN THE COMPANY, SHIPL AND ASSESS EE FIRM IS ONLY A BUSINESS TRANSACTION AND THE AMOUNT PAID BY THE SAID COMPANY TO ASSESSEE FIRM IS NOT IN NATURE OF LOAN OR ADVANCES. AN SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 26 26 UNDERSTANDING WAS MADE BETWEEN THE ASSESSEE FIRM AND THE SAID COMPANY SHIPL IN WHICH THE ASSESSEE FIRM HAD AGREED TO L OCATE AND PROCURE A PLOT FOR THE SAID COMPANY AT KHARGHAR NODE. LETTER DT. 16.12.2011 FILED BEFORE THE AO CLEARLY EXPLAINS THE NATURE OF TRANSACTION. LT WAS ALSO AGREED THAT TO ENSURE THE TIMELY PAYMENT TO PROSPECTIVE SELLER, A PARTICULAR AMOUNT OR AS MAY BE REQUIRED WILL BE KEPT BY THE ASSESSEE FIRM FOR PURCHASE OF LAND ON BEHALF OF THE SAID COMPANY. THE SAID COMPANY SHIPL HAS PASSED A BOARD RESOLUTION DT.24.03.2008 FOR GIVING RIGHTS TO THE ASSESSEE FOR PROCUREMENT OF A PLOT. SINCE THE ASSESSEE FIRM COULD NOT SUCCEED IN LOCATING SUITABLE PLOT AT KHARGHAR NODE FOR THE SAID COMPANY AND THUS THE MONEY RECEIVED FROM THE SAID COMPANY WAS RETURNED TO THEM. 11.2 AS PER OUR CONSIDERED VIEW, THE DEEMING PROVISIONS OF S. 2(22)(E) ARE APPLICABLE WHEN A COMPANY MAKES A LOAN OR AN ADVANCE TO A SHAREHOLDER . THE PROVISIONS OF S.2(22)(E) APPLY ONLY TO SHAREHOLDER OF THE COMPANY. THIS POSITION IS DULY SUPPORTED BY VARIOUS CASE LAWS HOLDING THAT THE PROVISIONS OF S.2(22)(E) HAS APPLICATION LIMITED TO THE SHAREHOLDERS OF THE COMPANY AND ITS APPLICATION DOES NOT EXTEND TO PARTNERSHIP FIRM OR OTHER ENTITIES WHEREIN SHAREHOLDERS OF THE COMPANY ARE PARTNERS OR MEMBERS . IT SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 27 27 IS ALSO A SETTLED POSITION THAT THE PROVISIONS OF S.2(22)(E) APPLY ONLY IN CASE OF A SHAREHOLDER WHO IS A BEN EFICIAL AS WELL AS A REGISTERED SHAREHOLDER. THE ASSESSEE FIRM (DOES NOT HOLD ANY SHARES OF SHIPL) AND HAS NO SHAREHOLDING IN THE CAPITAL OF THE SAID SHIPL. THIS FACT WAS BROUGHT TO THE ATTENTION OF THE SAID AO WHO CHOSE TO IGNORE A VERY VITAL FACT ESSENTI AL FOR ATTRACTING THE PROVISIONS OF SEC.2(22)(E). 11.3 THERE IS A JUDICIAL PRONOUNCEMENT BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF BHAUMIK COLOUR PVT. LTD., 313 ITR 146 (AT) , WHEREIN IT HAS BEEN HELD THAT THE PROVISION OF SECTION 2(22)(E) CAN BE AT TRACTED ONLY WHEN TWO CONDITIONS ARE SATISFIED NAMELY A PERSON RECEIVING LOAN IS REGISTERED SHAREHOLDER AND ALSO A BENEFICIAL SHAREHOLDER OF THE COMPANY FROM WHOM LOAN IS RECEIVED. PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY WHEN A PERSON IS REGISTERED S HAREHOLDER BUT NOT A BENEFICIAL SHAREHOLDER . SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE FIRST LIMB OF THE PRO - VISIONS OF SECTION 2(22)(E) WILL NOT APPLY. THE PROPOSITION OF LAW AS LAID DOWN BY THE I.T.A .T., SPECIAL BENCH IN THE CASE OF BHAUMIK COLOR LAB (SUPRA) CLEARLY LAID DOWN THE CONDITION S FOR BRINGING AN ASSESSEE WITHIN THE MISCHIEF OF SECTION 2(22)(E), ACCORDING TO WHICH BOTH THE CONDITIONS OF REGISTERED SHAREHOLDERS AS WELL AS BENEFICIAL SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 28 28 SHAREHOL DERS IS REQUIRED TO BE SATISFIED FOR BRINING A N ASSESSEE WITHIN THE PURVIEW OF SECTION 2(22)(E). IF ANY ONE OF THE CONDITIONS ARE ABSENT, AN ASSESSEE CANNOT BE BROUGHT WITHIN THE MISCHIEF OF SECTION 2(22)(E) OF THE ACT. HON'BLE MUMBAI HIGH COURT IN THE CA SE OF UNIVERSAL MEDICARE (P) LIMITED, 324 ITR 263, HAS DULY APPROVED THE PROPOSITION LAID DOWN BY I.T.A.T., SPECIAL BENCH IN THE CASE OF BHAUMIK COLOR LAB (SUPRA). 12 . IN THE PRESENT CASE BEFORE US NO SHARES WERE ISSUED BY SHIPL TO ASSESSEE FIRM, THUS, S HARES WERE NOT REGISTERED IN THE NAME OF ASSESSEE FIRM . T HE ASSESSEE FIRM WAS NOT THE SHAREHOLDER OF SHIPL, I.E. NEITHER REGISTERED HOLDER OF SHARES OF SHIPL NOR BENEFICIAL OWNER OF SHARES OF SHIPL. THEREFORE, THERE IS NO QUESTION OF APPLYING PROVISIONS OF SECTION 2(22)(E) ON ASSESSEE FIRM. 13 . IN THE CASE OF CIT VS. INDIAN TECHNOCRAFT LTD , ITA NO. 352 OF 2011 ORDER DATED 11 TH MAY, 2011 , 242 CTR 129, THE HONBLE DELHI HIGH COURT AFTER CONSIDERING THE AMENDMENT MADE BY FINANCE ACT, 1987, AS WELL AS DECISI ON S OF HON'BLE SUPREME COURT IN THE CASE OF C.P.SARATHY MUDALIAR (1972) 83 ITR 170 AND RAMESHWARLAL SANWARMAL VS. CIT (1980) 122 ITR 1 , OBSERVED AS UNDER: - SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 29 29 PAGE 155 PARA 22 : IT IS THUS CLEAR FROM THE AFORESAID PRONOUNCEMENT OF THE HONBLE SUPREME COURT THAT TO ATTRACT THE FIRST LIMB OF THE PROVISIONS OF SECTION 2 (22) (E) THE PAYMENT MUST BE TO A PERSON WHO IS A REGISTERED HOLDER OF SHARES. AS ALREADY MENTIONED THE CONDITION UNDER THE 1922 ACT AND THE 1961 ACT REGARDING THE PAYEE BEING A SHAREHOLDE R REMAINS THE SAME AND IT IS THE CONDITION UNDER THAT SUCH SHAREHOLDER SHOULD BE BENEFICIAL OWNER OF THE SHARES AND THE PERCENTAGE OF VOTING POWER THAT SUCH SHAREHOLDER SHOULD HOLD THAT HAS BEEN PRESCRIBED AS AN ADDITIONAL CONDITION UNDER THE 1961 ACT. THE WORD SHAREHOLDER ALONE EXISTED IN THE DEFINITION OF DIVIDEND IN THE 1922 ACT. THE EXPRESSION SHAREHOLDER HAS BEEN INTERPRETED UNDER THE 1922 ACT TO MEAN A REGISTERED SHAREHOLDER. THIS EXPRESSION SHAREHOLDER FOUND IN THE 1961 ACT HAS TO BE THEREFORE CONSTRUED AS APPLYING ONLY TO REGISTERED SHAREHOLDER. IT IS A PRINCIPLE OF INTERPRETATION OF STATUTES THAT WHERE ONCE CERTAIN WORDS IN AN ACT HAVE RECEIVED A JUDICIAL CONSTRUCTION IN ONE OF THE SUPERIOR COURTS, AND THE LEGISLATURE HAS REPEATED THEM IN A SUBSEQUENT STATUTE, THE LEGISLATURE MUST BE TAKEN TO HAVE USED THEM ACCORDING TO THE MEANING WHICH A COURT OF COMPETENT JURISDICTION HAS GIVEN THEM. PAGE 156 PARA 23: IN THE 1961 ACT, THE WORD SHAREHOLDER IS FOLLOWED BY THE FOLLOWING WORDS BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES. THIS EXPRESSION USED IN SECTION 2 (22)(E) , BOTH IN THE 1961 ACT AND IN THE AMENDED PROVISIONS W.E.F. 1 ST APRIL ,1968 ONLY QUALIFIES THE WORD SHAREHOLDER AND DOES NOT IN ANY WAY ALTER THE POSITION THAT T HE SHAREHOLDER HAS TO BE A REGISTERED SHAREHOLDER. THESE PROVISIONS ALSO DO NOT SUBSTITUTE THE AFORESAID REQUIREMENT TO A REQUIREMENT OF MERELY HOLDING A BENEFICIAL INTEREST IN THE SHARES WITHOUT BEING A REGISTERED HOLDER OF SHARES. THE EXPRESSION BEING IS A PRESENT PARTICIPLE. A PARTICIPLE IS A WORD WHICH IS PARTLY A VERB AND PARTLY AN ADJECTIVE. IN SECTION 2(22) (E) , THE PRESENT PARTICIPLE BEING IS USED TO DESCRIBE THE NOUN SHAREHOLDER LIKE AN ADJECTIVE. THE EXPRESSION BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES IS THEREFORE A FURTHER REQUIREMENT BEFORE A SHAREHOLDER CAN BE SAID TO FALL WITHIN THE PARAMETERS OF SECTION 2 (22) (E) OF THE ACT. IN THE 1961 ACT, SECTION HAS ALSO TO BE BENEFICIAL OWNER OF SHARES ( NOT BEING SHARES ENTITLE D TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PERCENT OF THE VOTING POWER. IT IS NOT POSSIBLE TO ACCEPT THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT UNDER THE 1961 ACT THERE IS NO REQUIREMENT OF A SHAREHOLDER BEING A REGISTERED HOLDER AND THAT EVEN A BENEFICIAL OWNERSHIP OF SHARES WOULD BE SUFFICIENT. PAGE 156 PARA 24 : SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 30 30 THE EXPRESSION SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES REFERRED TO IN T HE FIRST LIMB OF SECTION 2(22) (E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHARES HOLDER BUT NOT HE BENEFICIAL THEN THE PROVISION OF SECTION 2(22) (E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFI CIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE FIRST LIMB OF PROVISIONS OF SECTION 2 (22) (E) WILL NOT APPLY. 14 . THE ITAT BENCH B CHENNAI IN THE CASE OF ACIT VS. SMT. SURAJ KUMARI JAIN ITA NOS. 1629 & 1630/MDS/2009 VIDE ORDER DATED 29 TH JULY , 2011 AFTER CONSIDERING THE AMENDMENT IN SECTION 2(22)(E) BY FINANCE ACT ,1987 W.E.F. 01.04.1988 AND DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF T.P.S.H.SOKKALAL (1999) 236 ITR 981 AND THE DECISION OF SPECIAL BENCH IN THE CASE OF BHAUMIK COLOUR (P) LTD HELD AS UNDER: - PAGE 24 TO 26 WE CANNOT SAY ASSESSEE WAS A BENEFICIARY OF THE HOLDING. A BENEFICIAL HOLDER MEANS A PERSON WHO IS ENJOYING BENEFITS FROM THE HOLDING AND THIS ADMITTEDLY WAS NOT THE ASSESSEE IN SO FAR AS THE TRANSFERRED SHAR ES WERE CONCERNED. IN OUR OPINION, THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN BHAUMIK COLOUR (P) LTD. (SUPRA) IS VERY RELEVANT IN THIS REGARD. THE QUESTION RAISED BEFORE THE SPECIAL BENCH WAS AS UNDER: - (1) WHETHER DEEMED DIVIDEND UNDER S. 2(22)(E) OF THE I.T. ACT, 1961 CAN BE ASSESSED IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER OF THE LENDER? (2) WHETHER THE WORDS SUCH SHAREHOLDER OCCURRING IN S. 2(22)(E) REFER TO A SHAREHOLDER WHO IS BOTH REGISTERED SHAREHOLDER AND THE BENEFICIAL SHAREH OLDER? THE ANSWER GIVEN IS CLEAR FROM PARA 24 THEREOF WHICH IS REPRODUCED HEREUNDER: - 24. THE EXPRESSION SHAREHOLDER BEING A PERSON WHO IS THE SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 31 31 BENEFICIAL OWNER OF SHARES REFERRED TO IN THE FIRST LIMB OF S.2(22)(E) REFERS TO BOTH A REGISTERED SHAREHO LDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL THEN THE PROVISION OF S. 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE FIRST LIMB OF PROVISIONS OF S.2(22)(E) WILL NOT APPLY.THUS, IT IS ABSOLUTELY CLEAR THAT FOR BEING HELD LIABLE FOR DEEMED DIVIDEND, ASSESSEE HAS TO BE BOTH REGISTERED AS WELL AS BENEFICIAL SHAREHOLDER. ASSESSEE HERE WAS NOT SO. THUS, ASSESSEE GETS OUT OF THE DEEMING PR OVISION AS CONTAINED IN SECTION 2(22)(E) AT THE THRESHOLD ITSELF. IN OUR OPINION, HOW THE ASSESSEE UTILIZED THE ADVANCE RECEIVED FROM M/S PRAKASH GOLD PALACE (P) LTD. HARDLY HAS ANY RELEVANCE, ONCE APPLICABILITY OF SECTION 2(22)(E) OF THE ACT IS RULED OUT. AS FAR AS THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF T.P.S.H. SOKKALAL (SUPRA) RELIED ON BY THE LEARNED D.R. IS CONCERNED, INTERPRETATION THERE INVOLVED SECTION 2(22)(E) OF THE ACT AS IT STOOD PRIOR TO THE AMENDMENT DONE TO THE SAID SECTION BY FINANCE ACT, 1987 WITH EFFECT FROM 1.4.1988. THEIR LORDSHIP WAS CONCERNED WITH AN ASSESSMENT FOR ASSESSMENT YEAR 1973 - 74. IN FACT, IN THE DECISION OF SPECIAL BENCH IN THE CASE OF BHAUMIK COLOUR (P) LTD. (SUPRA), THE HISTORY OF THE PROVISION STAR TING FROM 1922 ACT HAS BEEN TRACED VIVIDLY AND IT WAS AFTER AN ANALYSIS THEREOF THAT THE SPECIAL BENCH HELD PRESENT PROVISIONS AFTER AMENDMENTS TO HAVE APPLICATION ONLY IF SHARES WERE HELD BOTH AS BENEFICIAL AS WELL AS REGISTERED SHAREHOLDER. 1 5 . NOW CO MING TO DECISION OF HON'BLE DELHI HIGH COURT AS RELIED ON BY THE ASSESSING OFFICER WHILE HOLDING THAT PROVISIONS OF SECTION 2(22)(E) IS ATTRACTED. A.O.'S RELIANCE ON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF NATIONAL TRAVEL SERVICES 347 ITR 305 W AS MISPLACED. THE SAID DECISION, DO NOT APPLY TO THE FACTS OF THE INSTANT CASE. IN THE SAID CASE, THE PARTNERSHIP FIRM M/S. NATIONAL TRAVEL SERVICES HAD INVESTED IN THE SHARES OF THE RELATED COMPANY OUT OF THE FIRMS FUNDS AND THE INVESTMENT IN SHARES WAS SHOWN AS AN ASSET OF THE SAID FIRM. THE SHARES WERE HELD BY THE FIRM IN THE SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 32 32 NAMES OF THE PARTNERS. IT IS IN THIS CONTEXT THAT THE DELHI HIGH COURT HAD FOUND THAT THE PROVISIONS OF S.2(22)(E) WERE APPLICABLE TO LOANS RECEIVED BY THE FIRM. HOWEVER, IN THE IN STANT CASE BEFORE US , NO INVESTMENT WAS MADE BY THE ASSESSEE FIRM IN THE SHARES OF SAID SHIPL NOR ANY SHARES WERE ISSUED TO THE ASSESSEE FIRM WHICH WERE HELD IN THE NAMES OF ITS PARTNERS. IN THE CIRCUMSTANCES THE RATIO OF THE SAID DECISION OF THE DELHI HI GH COURT IN NATIONAL TRAVEL SERVICES CASE, RELIED UPON BY THE AO DID NOT APPLY TO THE FACTS OF THE CASE OF THE ASSESSEE FIRM. THE SAID DECISION IN FACT HAS EXPLICITLY APPROVED THE RATIO OF THE DECISIONS IN THE CASES OF BHAUMIK COLOR LAB PVT LTD,27 SOT 270 (MUM.)(SB) AND UNIVERSAL MEDICARE (P.) LTD, 324 ITR 263 (BOM.) BY DISTINGUISHING THE SAME. 16 . IN VIEW OF THE ABOVE DISCUSSION, RESPECTFULLY FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT AND I.T.A.T., SPECIAL BENCH AND OTHER DECISIONS AS DISCUSSED HEREINABOVE, WE DO NOT FIND ANY MERIT IN THE ACTION OF ASSESSING OFFICER FOR APPLYING PROVISIONS OF SECTION 2(22)(E), WHEN THE ASSESSEE FIRM IS NEITHER A REGISTERED SHAREHOLDER NOR BENEFICIAL SHAREHOLDER OF SHARES OF SHIPL. ACCORDINGLY, THE ASSESSING OFFIC ER IS DIRECTED TO DELETE THE ADDITION MADE U/S 2(22)(E) OF THE INCOME - TAX ACT, 1961. SEA QUEEN DEVELOPERS I.T.A.NO. 3086/MUM/2013 A.Y.2009 - 10 33 33 1 7 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED IN PART, IN TERMS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 19 TH FEB , 2014. 19 TH FEB ,2014 SD/ - SD/ - ( ) (VIVEK VARMA) ( ) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED 19 /0 2 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, (ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//