ACIT, New Delhi V. M/s NIT Communications Pvt. Ltd., New Delhi

ITA 3351/DEL/2011

• Counselvise Citation: 335120114 RSA 2011
• Duration Of Justice: 2 year(s) 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 19-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 27-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIDHI SRIVASTAVA
• Assessee Lawyers: VIVEK JAIN S
• Keywords: Additional evidence
• Section: 37(1); 37; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NOS.3350 & 3351/DEL./2011 (ASSESSMENT YEARS : 2006-07 & 2007-08) ACIT, CIRCLE 13 (1), VS. SHRI NTT COMMUNICATIONS INDIA P.LTD., NEW DELHI. 1009 11, 10 TH FLOOR, 15 17, TOLSTOY HOUSE, TOLSTOY MARG, NEW DELHI 110 001. (PAN : AACCN1792K) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI SALIL KAPOOR & VIVEK JAIN, AD VOCATES REVENUE BY : SMT. NIDHI SRIVASTAVA, CIT DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : BOTH THESE APPEALS FILED BY THE ASSESSEE EMANATE FR OM THE ORDER OF CIT (APPEALS)-XVI, NEW DELHI BOTH DATED 25.03.2011 FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08. THE ISSUE INVOLVED IN BOTH TH E YEARS IS COMMON, THEREFORE, BOTH THESE APPEALS ARE BEING DISPOSED OF F BY THIS COMMON ORDER. 2. THE ASSESSEE COMPANY IS REGISTERED AS A PRIVATE LIMITED COMPANY WHEREIN THE TOTAL SHARES WERE 76,36,000. THE NTT C OMMUNICATIONS CORPORATION, JAPAN HOLD 76,35,999 EQUITY SHARES OF THE ASSESSEE COMPANY AND ONE EQUITY SHARE IS HELD BY THE MANAGING DIRECTOR A S THE NOMINEE OF NTT ITA NO.3350 & 3351/DEL./2011 2 COMMUNICATIONS CORPORATION, JAPAN. AS PER THE ASSE SSEE, THE MONEY FOR ALLOTMENT OF ONE EQUITY SHARE TO MD OF THE ASSESSEE COMPANY WAS PAID BY NTT COMMUNICATIONS CORPORATION, JAPAN AND THIS ONE EQUITY SHARE TO MD OF THE COMPANY WAS ALLOTTED IN THE CAPACITY OF THE NOM INEE TO MEET THE REQUIREMENT OF HAVING MINIMUM TWO SHAREHOLDERS IN T HE CASE OF A PRIVATE LIMITED COMPANY IN VIEW OF SECTION 12 OF THE COMPAN IES ACT, 1956. AS PER ASSESSEE, THIS FACT HAS BEEN CLEARLY MENTIONED IN T HE MEMORANDUM & ARTICLE OF ASSOCIATION OF THE ASSESSEE COMPANY AND THE ASSE SSING OFFICER INVOKED THE PROVISIONS OF SECTION 4 (7) OF THE COMPANIES ACT, 1 956 AND REACHED AT THE CONCLUSION THAT THE ASSESSEE COMPANY IS TO BE TREAT ED AS PUBLIC COMPANY AND THE MANAGERIAL REMUNERATION PAID IN CONTRAVENTION T O PROVISIONS OF COMPANIES ACT, 1956 WAS AN OFFENCE/PROHIBITED IN LA W, THEREFORE, NO DEDUCTION CAN BE ALLOWED U/S 37 (1) OF THE INCOME-T AX ACT, 1961. IN THE APPEAL, THE CIT (A) HAS GRANTED THE RELIEF TO THE A SSESSEE BY HOLDING THAT AFTER CLARIFICATION RECEIVED FROM THE MINISTRY OF CORPORA TE AFFAIRS AND ALSO RELYING ON THE DECISION OF HON'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. PAPILION INVESTMENTS PVT. LTD., THE RELIEF WAS GRANTED BY HO LDING AS UNDER :- 3.1 I HAVE CONSIDERED THE DISCUSSION IN THE ASSESS MENT ORDER AND THE SUBMISSIONS OF THE APPELLANT. I HAVE EXAMIN ED THE VARIOUS PAPERS FILED BY THE APPELLANT IN SUPPORT OF ITS CONTENTION THAT IT IS A PRIVATE LIMITED COMPANY AND NOT A SUBS IDIARY OF A PUBLIC COMPANY. I HAVE ALSO CONSIDERED THE PROVISIONS OF SEC 4(7) O F THE COMPANIES ACT WHICH STATES THAT 'A PRIVATE COMPANY, BEING A ITA NO.3350 & 3351/DEL./2011 3 SUBSIDIARY OF A BODY CORPORATE INCORPORATED OUTSIDE INDIA, WHICH, IF INCORPORATED IN INDIA, WOULD BE A PUBLIC COMPANY WITHIN THE MEANING OF THIS ACT, IS DEEMED TO BE A S UBSIDIARY OF A PUBLIC COMPANY IF THE ENTIRE SHARE CAPITAL IN THAT PRIVATE COMPANY IS NOT HELD BY THAT BODY CORPORATE WHETHER ALONE OR TOGETHER WITH ONE OR MORE OTHER BODIES CORPORATE IN CORPORATED OUTSIDE INDIA'. I HAVE ALSO GONE THROUGH THE MERITS OF THE CONTENTION OF THE APPELLANT THAT HOLDING THE ENTIRE SHARE CAPITAL IS DIFFERENT FROM HOLDING THE ENTIRE SHARE CAPITAL IN THE NAME OF THE HOLDING COMPANY. I HAVE ALSO CONSIDERED THE JUDGEMENT IN THE CASE OF CIT VS PAPILION INVESTMENTS PVT. LTD, MUMBAI HIGH COURT. T HE HON'BLE COURT GAVE THE FOLLOWING FINDING IN THAT CASE:- 'AS A MATTER OF FACT, THERE CANNOT BE ANY COMPANY I N INDIA WHICH HAS LESS THAN TWO MEMBERS I.E. SHAREHOLDERS. NOW THE REQUIREMENT OF SECTION 4(7) IS THAT THE WHOLE O F THE SHARE CAPITAL OF THE SUBSIDIARY COMPANY SHOULD BE H ELD BY THE HOLDING COMPANY. THE WHOLE OF THE SHARE CAPITAL BEING HELD BY THE HOLDING COMPANY IS CERTAINLY NOT THE SA ME THING AS WHOLE OF THE SHARE CAPITAL BEING HELD IN T HE NAME OF THE HOLDING COMPANY. IN FACT, THAT SITUATION IS A LEGAL IMPOSSIBILITY IN INDIA. IN CASE ONE IS TO PROCEED O N THE BASIS THAT ENTIRE SHARE CAPITAL OF THE SUBSIDIARY S HOULD BE HELD IN THE NAME OF THE HOLDING COMPANY, THERE CANN OT BE ANY SITUATION IN WHICH SECTION 4(7) CAN APPLY. THAT IS CERTAINLY NOT AN INTERPRETATION WHICH CAN BE TERMED AS UT RES MAGIS VALEAT QUAM PEREAT, I. E. TO MAKE THE STA TUTE EFFECTIVE RATHER THAN MAKING IT REDUNDANT. AS HELD BY HON'BLE SUPREME COURT, IN THE CASE OF CIT VS. TEJA SINGH (35 ITR 408), A CONSTRUCTION WHICH RESULTS IN RENDE RING A PROVISION REDUNDANT MUST BE AVOIDED. FOR THIS REASO N ALONE, THE INTERPRETATION CANVASSED BY THE REVENUE IS TO BE REJECTED.' THE FINDINGS IN THE ABOVE CASE ARE APPLICABLE TO TH E CASE OF THE APPELLANT COMPANY. THE APPELLANT'S BELIEF THAT THE HOLDING OF THE SHARES BY NOMINEE OF THE HOLDING COMPANY SHALL BE T REATED AS SHARES HELD BY HOLDING COMPANY, IS NOT UNJUSTIFIED. ITA NO.3350 & 3351/DEL./2011 4 I HAVE ALSO GONE THROUGH THE ADDITIONAL EVIDENCES S UBMITTED BY THE APPELLANT IN THE FORM OF REVISED OPINION FROM B SR & CO, THE STATUTORY AUDITORS OF THE APPELLANT, THE REMAND REP ORTS OF AO AND ADDL CIT. AND REPLIES FILED TO THE REMAND REPORTS B Y THE APPELLANT. THE REVISED REPORT OF THE STATUTORY AUDI TORS IN THEIR CONCLUDING PARAGRAPH HAVE CATEGORICALLY STATED THAT 'BASED ON THE CLARIFICATION RECEIVED FROM THE MINISTRY OF COR PORATE AFFAIRS, THE COMPANY SHOULD BE CONSIDERED AS A PRIVATE COMPA NY WHICH IS A SUBSIDIARY OF NTT COMMUNICATIONS CORPORATION, JAPAN. IT WOULD THUS NOT BE A SUBSIDIARY OF A PUBLIC COMPANY UNDER SECTION 4. ACCORDINGLY, THE RESTRICTIONS OF THE ACT RELATING TO MANAGERIAL REMUNERATION AS STATED IN SECTION 198 WI TH SCHEDULE XLLL TO THE COMPANIES ACT, 1956 WOULD NOT APPLY TO IT FOR THE FINANCIAL YEAR ENDED 31 MARCH 2006'. I HAVE ALSO GONE THROUGH THE SECOND ADDITIONAL EVID ENCE FILED BY THE APPELLANT IN THE FORM OF CLARIFICATION RECEIVED FROM THE MINISTRY OF CORPORATE AFFAIRS. CLARIFICATIONS HAVE BEEN RECEIVED IN THE CASE OF MUSASHI AUTO PARTS INDIA PVT. LTD. I N THE AFOREMENTIONED CASE, THE ENTIRE SHARE CAPITAL OF TH E COMPANY WAS HELD \ BY THE HOLDING COMPANY DIRECTLY TO THE EXTEN T OF 99.975% AND BALANCE .025% WAS HELD THROUGH TWO DIRECTORS FO R A CERTAIN PERIOD OF TIME. THE MINISTRY OF CORPORATE AFFAIRS O PINED FOR THAT PERIOD AS UNDER:- ' PROVISIONS OF SECTIONS 269, 198/309 READ WITH SCHEDULE XIII OF THE COMPANIES ACT, 1956 WERE NOT APPLICABLE TO THE COMPANY FOR THE REST OF THE PERIO D FOR WHICH THE COMPANY SOUGHT WAIVER, AS THE COMPANY WAS NOT A SUBSIDIARY OF A FOREIGN COMPANY IN TERMS OF S ECTION 4(7) OF THE ACT AS 100% SHARES ARE BEING HELD BY TH E SAID FOREIGN COMPANY.' I HAVE NOTED SIMILARITY OF THE FACTS IN THE ABOVE C ASE & IN THE CASE OF THE APPELLANT. I AM FURTHER OF THE VIEW THA T THE OPINION OF THE DIRECTOR OF MINISTRY OF CORPORATE AFFAIRS IS BI NDING ON ALL THE COMPANIES IN RESPECT OF ISSUES RELATING TO COMP ANY LAW MATTERS, THE LAST LINE OF THE CLARIFICATION BEING A S FOLLOWS 'THE LETTER IS ISSUED BY ORDER AND IN THE NAME OF THE PR ESIDENT OF INDIA.' ITA NO.3350 & 3351/DEL./2011 5 AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES OF TH E CASE I AM OF THE VIEW THAT THERE IS SUBSTANTIAL MERIT IN THE SUB MISSION OF THE APPELLANT. IT IS VERY CLEAR FROM THE EVIDENCES FILE D BY THE APPELLANT, OPINIONS OF EXPERTS, CLARIFICATIONS RECE IVED FROM MCA, REVISED OPINION OF THE AUDITORS OF THE COMPANY THAT THE APPELLANT IS A PRIVATE LIMITED COMPANY WHICH IS NOT A SUBSIDIARY OF A PUBLIC COMPANY. THE PROVISIONS OF S ECTION 198 OF THE COMPANIES ACT READ WITH SCHEDULE XIII OF THE AC T REGARDING MANAGERIAL REMUNERATION ARE NOT APPLICABLE TO THE A PPELLANT COMPANY. HENCE THE APPELLANT HAS NOT VIOLATED ANY P ROVISIONS OF COMPANY LAW REGARDING PAYMENT OF MANAGERIAL REMUNER ATION. THE MANAGERIAL REMUNERATION OF RS.37,37,859/- PAID BY THE APPELLANT TO ITS MANAGING DIRECTOR IS ADMISSIBLE U/ S 37(1) OF THE INCOME TAX ACT. ACCORDINGLY, THE ADDITION MADE BY T HE AO IS DELETED. 3. NOW, THE REVENUE IS IN APPEAL IN BOTH THE YEARS BY TAKING THE FOLLOWING GROUNDS, WHICH ARE COMMON IN BOTH THE YEARS EXCEPT THE DIFFERENCE IN THE AMOUNT :- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWAN CE (RS.37,37,859/- IN AY 2006-07 & RS.14,37,588/- IN A Y 2007- 08) MADE BY THE AO ON ACCOUNT OF MANAGERIAL REMUNE RATION BY HOLDING INADMISSIBLE U/S 37(1) OF THE ACT. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE PROVISION OF SECTION 198 OF THE COMPANIES ACT READ WITH SCHEDULE XIII OF THE ACT REGARDING MANAGERIAL REMUNERATION ARE NOT APPLICABL E TO THE APPELLANT COMPANY AND THE ASSESSEE HAS NOT VIOLATED ANY PROVISIONS OF COMPANY LAW REGARDING PAYMENT OF MANA GERIAL REMUNERATION. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN IGNORING THE OPINION OF THE AUD ITORS MADE VIDE CO;. 17(E)(III) OF THE TAX AUDIT REPORT AS WEL L AS ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE IS SUBS IDIARY OF A FOREIGN COMPANY IN TERMS OF SECTION 4(7) OF THE COM PANIES ACT AND HENCE THE PAYMENT OF RS.14.37 LAKH MANAGERIAL ITA NO.3350 & 3351/DEL./2011 6 REMUNERATION IN VIOLATION TO THE PROVISIONS 198 OF COMPANIES ACT IS NOT ELIGIBLE DEDUCTION U/S 37(1) OF THE ACT. 4. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FR ESH GROUNDS OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUNDS OF APPEAL. 4. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. WE H AVE ALSO PERUSED THE PAPER BOOK SUBMITTED BEFORE US. THE FOLLOWING FACT S ARE UNDISPUTED. THE TOTAL EQUITY SHARES OF THE ASSESSEE COMPANY WERE 76 ,36,000 OUT OF WHICH 76,35,999 EQUITY SHARES WERE HELD BY NTT COMMUNICAT IONS CORPORATION, JAPAN AND ONLY ONE EQUITY SHARE WAS ALLOTTED TO THE MANAGING DIRECTOR OF THE ASSESSEE COMPANY. THE MONEY FOR ALLOTMENT OF THIS ONE EQUITY SHARE TO MD OF THE COMPANY WAS PAID BY NTT COMMUNICATIONS CORPO RATION, JAPAN. THIS SINGLE SHARE WAS ALLOTTED TO THE MD IN THE CAPACITY OF A NOMINEE OF THE ASSESSEE COMPANY TO MEET THE REQUIREMENT OF MINIMUM TWO SHAREHOLDERS IN THE CASE OF A PRIVATE LIMITED COMPANY IN VIEW OF SE CTION 12 OF THE COMPANIES ACT. THIS FACT HAS BEEN CLEARLY MENTIONED IN THE M EMORANDUM & ARTICLE OF ASSOCIATION. FURTHER, THE MINISTRY OF CORPORATE AF FAIRS HAS ALSO CLARIFIED ON THIS ISSUE. HON'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. PAPILION INVESTMENTS PVT. LTD. HAS HELD AS UNDER :- 'AS A MATTER OF FACT, THERE CANNOT BE ANY COMPANY I N INDIA WHICH HAS LESS THAN TWO MEMBERS I.E. SHAREHOLDERS. NOW THE REQUIREMENT OF SECTION 4(7) IS THAT THE WHOLE OF TH E SHARE CAPITAL OF THE SUBSIDIARY COMPANY SHOULD BE HELD BY THE HOL DING COMPANY. THE WHOLE OF THE SHARE CAPITAL BEING HELD BY THE HOLDING COMPANY IS CERTAINLY NOT THE SAME THING AS WHOLE OF THE ITA NO.3350 & 3351/DEL./2011 7 SHARE CAPITAL BEING HELD IN THE NAME OF THE HOLDING COMPANY. IN FACT, THAT SITUATION IS A LEGAL IMPOSSIBILITY IN IN DIA. IN CASE ONE IS TO PROCEED ON THE BASIS THAT ENTIRE SHARE CAPITAL O F THE SUBSIDIARY SHOULD BE HELD IN THE NAME OF THE HOLDING COMPANY, THERE CANNOT BE ANY SITUATION IN WHICH SECTION 4(7) CAN APPLY. T HAT IS CERTAINLY NOT AN INTERPRETATION WHICH CAN BE TERMED AS UT RES MAGIS VALEAT QUAM PEREAT, I. E. TO MAKE THE STATUTE EFFECTIVE RATHER THAN MAKING IT REDUNDANT. AS HELD BY HON'BLE SUPREME COURT, IN THE CASE OF CIT VS. TEJA SINGH (35 ITR 40 8), A CONSTRUCTION WHICH RESULTS IN RENDERING A PROVISION REDUNDANT MUST BE AVOIDED. FOR THIS REASON ALONE, THE INTERPR ETATION CANVASSED BY THE REVENUE IS TO BE REJECTED.' THE FACTS OF THE ASSESSEE COMPANY ARE SIMILAR TO TH AT CASE. THEREFORE, WE FIND NO FAULT IN THE ORDER OF THE CIT (A) FOR GRANTING T HE RELIEF TO THE ASSESSEE AND WE UPHOLD THE SAME AND DISMISS THE REVENUES APPEAL . 5. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 28 TH DAY OF MARCH, 2014. SD/- SD/- (I.C. SUDHIR) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 28 TH DAY OF MARCH, 2014/TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XXX, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.