MEGHVARSHA SECURITIES P. LTD, MUMBAI V. ITO 4(3)(3), MUMBAI

ITA 320/MUM/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5872 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 28-08-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 12-01-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B P K
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'SMC' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT ITA NO. 320/MUM/2012 (ASSESSMENT YEAR: 2008-09) M/S. MEGHVARSHA SECURITIES P. LTD. INCOME TAX OFFIC ER - 4(3)(3) 16, 1ST FLOOR, B/6, KHIRANGAR AAYAKAR BHAVAN, M.K. ROAD S.V. ROAD, SANTACRUZ (W) VS. MUMBAI 400020 MUMBAI 400054 PAN - AAACM6104E APPELLANT RESPONDENT APPELLANT BY: SHRI BHUPENDRA SHAH RESPONDENT BY: B.P.K. PANDA DATE OF HEARING: 12.03.2014 DATE OF PRONOUNCEMENT: 26.03.2014 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL BY THE ASSESSEE COMPANY IS DIRECTED AGA INST THE ORDER PASSED BY THE CIT(A)-8, MUMBAI AND IT PERTAINS TO A .Y. 2008-09. 2. THOUGH SEVERAL GROUNDS WERE URGED BEFORE THE TRIBUN AL, THE PRECISE ISSUE FOR CONSIDERATION OF THIS BENCH IS WITH REGAR D TO APPLICABILITY OF SECTION 2(22)(E) OF THE ACT IN RESPECT OF THE TRANSACTIONS THAT TOOK PLACE WITH ITS SUBSIDIARY COMPANY, I.E. M/S. BANKERS SHARES AND ST OCK BROKERS PVT. LTD. 3. FACTS NECESSARY FOR DISPOSAL OF THE APPEAL ARE STAT ED IN BRIEF. THE ASSESSEE COMPANY IS MAINLY ENGAGED IN SHARE AND STO CK BROKING APART FROM TRADING IN SHARES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE COMPANY RECEIVED UNSECURE D LOAN OF ` 18,40,000/- FROM M/S. BANKERS SHARES AND STOCK BROKERS PVT. LTD . (HEREINAFTER REFERRED TO AS BSPL). THE ASSESSEE IS HOLDING 1,00,000 SHARE S OF OUT OF 1,00,200 SHARES OF BSPL. IN OTHER WORDS, 99.80 PERCENT OF IS SUED, PAID UP AND SUBSCRIBED SHARES OF BSPL ARE HELD BY THE ASSESSEE COMPANY. THE AO FURTHER NOTICED THAT BSPL HAD AN ACCUMULATED PROFIT OF ` 8,69,229/- AS ON 31.03.2008. ON THE AMOUNT RECEIVED AS UNSECURED LOA N THE ASSESSEE ITA NO. 320/MUM/2012 M/S. MEGHVARSHA SECURITIES P. LTD. 2 COMPANY PAID A SUM OF ` 1,37,813/- TOWARDS INTEREST. UNDER THESE CIRCUMSTANCES THE AO ISSUED A SHOW CAUSE NOTICE CAL LING UPON THE ASSESSEE TO EXPLAIN AS TO WHY THE ACCUMULATED PROFITS OF ` 8,69,229/- SHOULD NOT BE TREATED AS INCOME BEING DEEMED DIVIDEND UNDER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 4. IN RESPONSE THERETO THE ASSESSEE SUBMITTED THAT THE BSPL, NO DOUBT, IS A SUBSIDIARY COMPANY OF MEGHVARSHA BUT THE LOAN WAS GIVEN AS AN INTER CORPORATE LOAN AND THUS THE AMOUNT WAS ADVANCED IN THE ORDINARY COURSE OF BUSINESS. IT WAS ALSO SUBMITTED THAT BSPL WAS FORME D TO ACQUIRE BSE MEMBERSHIP CARD BUT DUE TO SEVERAL REASONS MEMBERSH IP CARD COULD NOT BE OBTAINED BUT THE MONEY COLLECTED WAS PARTLY INVESTE D IN SHARES AND THE BALANCE WAS ADVANCED AS SHORT TERM LOANS. THE BSPL SUFFERED LOSS IN SHARES BUT EARNED INTEREST ON INTER CORPORATE LOAN GIVEN T O MEGHAVARSHA. IT WAS FURTHER CONTENDED THAT ASSESSEES CASE FALL UNDER E XCEPTION (II) OF SECTION 2(22)(E) OF THE ACT SINCE THE LOAN WAS GIVEN IN THE ORDINARY COURSE OF ITS BUSINESS. THE AO QUOTED PROVISIONS OF SECTION 2(22) (E) AS WELL AS EXCEPTION (II) THERETO TO HIGHLIGHT THAT ANY LOAN ADVANCED AS A SPECIAL CASE AND NOT IN THE COURSE OF CARRYING ON THE BUSINESS, WHERE LENDI NG OF MONEY IS A SUBSTANTIAL PART OF THE BUSINESS OF THE COMPANY, IS HIT BY PROVISIONS OF SECTION 2(22). IN THE INSTANT CASE THE LOAN IS GIVE N TO THE SHAREHOLDER ADMITTEDLY HAVING MORE THAN 10% OF THE SHAREHOLDING AND THUS IT HAS A SUBSTANTIAL INTEREST. THE LOAN WAS ADVANCED ONLY TO MEET THE REQUIREMENTS OF THE HOLDING COMPANY AS UNSECURED LOAN AND NOT AS INTER CORPORATE DEPOSIT PROVES THAT IT IS NOT AN ADVANCE GIVEN IN T HE ORDINARY COURSE OF ITS LENDING ACTIVITY. HE FURTHER STRESSED UPON THE FACT THAT THE MAIN BUSINESS OF THE LENDING COMPANY IS SHARE TRADING FROM WHERE IT HAS EARNED MORE INCOME AND THUS IT CANNOT BE SAID THAT IT WAS ACTIVELY ENG AGED IN SUBSTANTIALLY LENDING MONEY ON INTEREST. MOREOVER, FOR INDULGING IN THE BUSINESS OF FINANCING, THE LENDING COMPANY SHOULD HAVE OBTAINED LICENSE FROM GOVERNMENT AUTHORITIES. HE THUS CONCLUDED THAT PROV ISIONS OF SECTION 2(22)(E) OF THE ACT COMES INTO PLAY IN THE INSTANT CASE. ITA NO. 320/MUM/2012 M/S. MEGHVARSHA SECURITIES P. LTD. 3 5. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE CIT(A) THA T IN ORDER TO PROVE THAT IT WAS SUBSTANTIALLY ENGAGED IN THE BUSINESS O F LENDING THE QUANTUM OF INTEREST RECEIVED AND THE QUANTUM OF AMOUNT LENT IS NOT THE CRITERIA AND IT WOULD BE SUFFICIENT IF IT IS SHOWN THAT THE AMOUNT WAS ADVANCED IN THE ORDINARY COURSE OF BUSINESS. THE LEARNED CIT(A) OBS ERVED THAT A PERUSAL OF THE P & L ACCOUNT OF BSPL SHOWS THAT THE MAIN BUSIN ESS OF THE ASSESSEE IS THAT OF SHARE TRADING AND NOT THAT OF MONEY LENDING , WHICH IS FURTHER STRENGTHENED BY THE FACT THAT THE INVESTMENT IN SHA RE TRADING IS MUCH MORE THAN THE LOAN GIVEN. THEREFORE, THE ASSESSEE CANNOT TAKE THE BENEFIT OF THE EXCEPTION TO SECTION 2(22)(E) OF THE ACT. REGARDING THE FURTHER CONTENTION THAT THE ASSESSEE IS IN THE BUSINESS OF GIVING INTER COR PORATE DEPOSITS THE LEARNED CIT(A) OBSERVED THAT NO DOCUMENTARY EVIDENCE WAS PU T FORTH TO PROVE THAT THE ASSESSEE RECEIVED THE SUM IN THE FORM OF INTER CORPORATE DEPOSITS WHICH ARE GOVERNED BY SECTION 372A OF THE COMPANIES ACT. IN OTHER WORDS, TO GIVE ANY INTER CORPORATE DEPOSIT A RESOLUTION OF THE BOA RD MEETING WAS TO BE PASSED WITH THE CONSENT OF DIRECTORS PRESENT IN THE MEETING WHEREAS NO SUCH EVIDENCE WAS PRODUCED IN THE INSTANT CASE. HE THUS UPHELD THE ORDER OF THE AO. 6. FURTHER AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE BASIS ON WHICH THE AO HAS ARRIVED AT THE CONCLUSION THAT IT IS NOT THE MA IN BUSINESS OF THE BSPL IS CONTROVERTED BY FURNISHING RELEVANT DETAILS SUCH AS BALANCE SHEET, ETC. OF BSPL. HOWEVER, THE LEARNED CIT(A) HAS NOT TAKEN COG NISANCE OF THEM. BEFORE ME THE LEARNED COUNSEL FOR THE ASSESSEE PLACED A CO PY OF THE RTI APPLICATION AND THE REPLY THERETO TO SUBMIT THAT THE ASSESSEE F URNISHED THE BALANCE SHEET OF BSPL AND THE DIRECTORS REPORT OF BSPL ALO NGWITH THE WRITTEN SUBMISSIONS WHICH WERE NOT PROPERLY CONSIDERED BY T HE CIT(A). HE ALSO RELIED UPON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PARLE PLASTICS LTD. 323 ITR 63 IN SUPPORT O F HIS CONTENTION THAT SECTION 2(22) USES THE EXPRESSION SUBSTANTIAL PART WHICH DOES NOT CONVEY THE IDEA OF BEING MAJOR PART OR THE PART THAT CONST ITUTES MAJORITY OF THE WHOLE. THE HON'BLE HIGH COURT OBSERVED THAT VARIOUS FACTORS AND CIRCUMSTANCES ARE REQUIRED TO BE LOOKED INTO WHILE CONSIDERING WHETHER A ITA NO. 320/MUM/2012 M/S. MEGHVARSHA SECURITIES P. LTD. 4 PART OF THE BUSINESS OF A COMPANY IS ITS SUBSTANTIA L BUSINESS AND MERE DEPLOYMENT OF CHEQUE OR FUND COULD NOT BE TAKEN AS SOLE CRITERIA. 7. ON THE OTHER HAND, THE LEARNED D.R. SUBMITTED THAT IN ORDER TO SHOW THAT THE ASSESSEES CASE FALLS WITHIN THE EXCEPTION PROVIDED BELOW SECTION 2(22)(E) OF THE ACT IT HAS TO BE PROVED THAT THE TR ANSACTION IS IN THE ORDINARY COURSE OF BUSINESS AND SUCH ACTIVITY IS ONE OF THE SIGNIFICANT ACTIVITIES OF THE ASSESSEE COMPANY. EVEN UPON APPLICATION OF HON'BLE BOMBAY HIGH COURT JUDGEMENT THE ASSESSEE HAS TO FIRST SHOW THAT THE A SSESSEE WAS ENGAGED IN CARRYING ON THE BUSINESS OF GIVING LOANS IN THE FOR M OF INTER CORPORATE DEPOSITS. IN ORDER TO VERIFY AS TO WHAT IS THE BUSI NESS BSPL THE MEMORANDUM AND ARTICLES OF THE SAID COMPANY HAS TO BE LOOKED INTO BUT NO EVIDENCE WAS PRODUCED EVEN BEFORE THIS BENCH TO SHO W THAT ONE OF THE OBJECTS OF THE COMPANY WAS GIVING INTER CORPORATE L OANS. ASSESSEE WAS SUBSTANTIALLY INTERESTED IN SHARE BROKING AND TRADI NG IN SHARES. IT IS NOT SHOWN AS TO WHETHER BSPL HAS ADVANCED LOAN TO ANY O THER PERSON OTHER THAN THE ASSESSEE COMPANY SO AS TO SHOW THAT IT WAS ALSO ENGAGED IN THE BUSINESS OF ADVANCING LOANS. HE THUS SUBMITTED THAT GIVING SOLITARY LOAN TO ASSESSEE COMPANY CANNOT BE CONSTRUED THAT BSPL IS E NGAGED IN GRANTING LOANS AS ITS SUBSTANTIAL BUSINESS ACTIVITY. 8. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE RECORD. I HAVE ALSO CAREFULLY GONE THROUGH THE JUDG EMENT OF THE HON'BLE BOMBAY HIGH COURT WHEREIN THE EXPRESSION SUBSTANTI AL PART WAS EXPLAINED. AS RIGHTLY DISCUSSED BY THE HON'BLE BOMBAY HIGH COU RT VARIOUS FACTORS AND CIRCUMSTANCES NEED TO BE LOOKED INTO WHILE CONSIDER ING WHETHER A PART OF THE BUSINESS OF THE COMPANY IS ITS SUBSTANTIAL BUSINESS . IN THE INSTANT CASE THE LEARNED CIT(A) APPEARS TO HAVE NOT PROPERLY APPRECI ATED THE SUBMISSIONS MADE BEFORE HIM IN THE FORM OF WRITTEN SUBMISSIONS. NO DOUBT, THE LEARNED COUNSEL FOR THE ASSESSEE ADVERTED OUR ATTENTION TO PAGE 42 OF THE PAPER BOOK, I.E. BALANCE SHEET OF BSPL BUT THIS DOES NOT INDICATE THAT THE BSPL HAD, AS A MATTER OF POLICY, AS PER THE MEMORANDUM A ND ARTICLES OF ASSOCIATION OF THE COMPANY ADVANCED AMOUNTS TO ANY OTHER PERSON OTHER THAN THE ASSESSEE OR MADE INTER CORPORATE DEPOSITS WITH ANY OTHER CONCERNS ITA NO. 320/MUM/2012 M/S. MEGHVARSHA SECURITIES P. LTD. 5 AND IN FACT IT WAS NOT REFLECTED SO IN THE BOOKS. N O DOUBT, THE AO AS WELL AS THE CIT(A) CONSIDERED THE EXPRESSION SUBSTANTIAL P ART ONLY WITH REFERENCE TO THE AMOUNT OF INCOME, I.E. WHETHER MAJOR PART OF TH E INCOME IS FROM INTER CORPORATE DEPOSIT OR NOT AND DID NOT APPRECIATE THE OTHER FACTORS BUT THE FACT REMAINS THAT EVEN TO CONSIDER AN ACTIVITY AS SUBSTA NTIAL PART OF ITS BUSINESS ACTIVITY VARIOUS OTHER FACTORS ARE TO BE LOOKED INT O AS HAS BEEN EXPLAINED HEREINABOVE. IN THE INTEREST OF SUBSTANTIAL JUSTICE I, THEREFORE, SET ASIDE THE MATTER TO THE FILE OF THE CIT(A) WHO IS DIRECTED TO OBTAIN THE DETAILS OF BSPL AND ANALYSE AS TO WHETHER THE LOAN WAS GIVEN IN THE ORDINARY COURSE OF ITS BUSINESS AND WHETHER IT WAS A SUBSTANTIAL ACTIVITY OR NOT. NEEDLESS TO OBSERVE THAT THE ASSESSEE SHALL BE GIVEN A REASONAB LE OPPORTUNITY OF HEARING IN THIS MATTER. WITH THESE OBSERVATIONS THE MATTER IS HEREBY SET ASIDE TO THE FILE OF THE CIT(A). 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH MARCH, 2014. SD/- (D. MANMOHAN) VICE PRESIDENT MUMBAI, DATED: 26 TH MARCH, 2014 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 8, MUMBAI 4. THE CIT 4, MUMBAI CITY 5. THE DR, SMC BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.