ACIT, Kanpur V. M/s. Pragati Spices Co. (P) Ltd., Kanpur

ITA 390/LKW/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 5424 (ITAT-LUCKNOW)
• Duration Of Justice: 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-09-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 07-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK MISHRA
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, A - BENCH, LUCKNOW. BEFORE SHRI H.L.KARWA, HON'BLE VICE PRESIDENT AND SHRI B.R. KAUSHIK, ACCOUNTANT MEMBER I.T.A.NO.390(LUC.)/2010 A.Y. : 2007-08 THE ACIT, RANGE IV, VS. M/S.PRAGATI SPICES CO.(P.) LTD., KANPUR. 51/53, NAYAGANJ, KANPUR. PAN AAACP8100D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VIVEK MISHRA, CIT(DR) RESPONDENT BY : SHRI RAKESH GARG, ADVOCATE O R D E R PER B.R.KAUSHIK, ACCOUNTANT MEMBER THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE DECISION OF THE LD.CIT(A) AS PER HIS ORDER 19.3.2010 RELATING TO TH E ASSESSMENT YEAR 2007- 08. GROUNDS NO.1 AND 2 OF THE APPEAL ARE REPRODUC ED BELOW : 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)-II, K ANPUR HA S E R RED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.3 , 25,00,000/- BE I NG LOAN REC EIVED BY THE ASSESSEE FROM M/S ASHOK GRIHA UDYOG K E NDRA (P . ) LTD. W I THOUT APPRECIATING THE FACT THAT THE SAID SUM IS TAXABLE A S D EEMED D I V I DEND U/S 2(22)(E) OF THE INCOME TA X A C T , 1961 . 2. TH A T THE COMMISSIONER OF INCOME T AX ( APPEAL S) - I I , KANPUR HAS ERRED IN LAW AND ON FACTS I N DELETING THE DISALLOWANCE OF I NTE R E ST OF RS . 22, 0 3,726/- PAID ON SUCH LOAN RECEIVED WHICH HAS NOT BEEN BORROWED F OR B USINESS PURPOSE S . 2 2. GROUND NOS.3 AND 4 ARE OF GENERAL NATURE AND RE QUIRE NO ADJUDICATION. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE FILE D RETURN OF INCOME AT RS.2,01,14,230 ON 30.10.2007. THE AO, AS PER HIS OR DER DATED 21.12.2009 UNDER SECTION 143(3)OF THE INCOME-TAX ACT,1961 DETE RMINED TOTAL INCOME OF RS.5,57,08,452. THE AO, INTER ALIA, MADE AN ADDITIO N OF RS.3,25,00,000 UNDER SECTION 2(22)(E) OF THE ACT AND ALSO DISALLOW ED INTEREST OF RS.2,03,726 ON THE AFORESAID LOAN OF RS.3,25,00,000. THE AO, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, OBSERVED THAT THE ASSESSEE HAD RECEIVED LOAN OF RS.3,25,00,000 FROM M/S.ASHOK GRIH UDYOG KENDRA PV T. LTD. (HEREINAFTER REFERRED TO AS AGUKPL) OUT OF WHICH RS.1,05,00,0 00 WERE REPAID DURING THE YEAR. THE ASSESSEE ALSO CLAIMED INTEREST OF RS .22,03,726 ON THIS LOAN. IT HAS ALSO BEEN ACCEPTED BY THE AO THAT THE ASSESSEE DEDUCTED TDS OF RS.4,94,516 ON THE INTEREST PAYABLE TO THE AFOREST ATED AGUKPL. THE AO, HOWEVER, OBSERVED THAT MOST OF THE SHAREHOLDERS O F AGUKPL WERE ALSO THE SHAREHOLDERS IN THE ASSESSEE-COMPANY AND THAT THE AGUKPL ALSO HELD 40,000 SHARES OF THE ASSESSEE-COMPANY OUT OF ITS TO TAL SHARES OF 2,45,000.HE WAS, THEREFORE, OF THE OPINION THAT THE SUM OF RS.3 ,25,00,000 GIVEN BY AGUKPL AS LOAN TO THE ASSESSEE WAS LIABLE TO BE TRE ATED AS DEEMED DIVIDEND IN THE CASE OF THE ASSESSEE-COMPANY AS PER PROVISIO NS OF SECTION 2(22)(E) OF THE I.T.ACT AND THE INTEREST OF RS.22,03,726 CLAIME D ON THE AFORESAID LOAN WAS ALSO NOT TO BE ALLOWED AS A BUSINESS EXPENDITUR E. 4. THE LD. CIT(A) OBSERVED THAT THE TRANSACTION WAS BETWEEN TWO CORPORATES AND NONE OF THE SHAREHOLDERS IN BOTH T HE COMPANIES HAD EVEN 10% SHAREHOLDING IN THE LENDER COMPANY I.E. AGUKPL AND AT LEAST 20% SHAREHOLDING IN THE ASSESSEE-COMPANY. THUS, THERE W AS NO SHAREHOLDER, WHO 3 HAD SUBSTANTIAL INTEREST IN THE ASSESSEE-COMPANY AN D THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WERE NOT APPLICABLE TO THE FACTS OF THIS CASE. HE,THEREFORE, DELETED THE ADDITION OF RS.3,25,00,00 0 MADE BY THE AO IN THE CASE OF THE ASSESSEE UNDER SECTION 2(22)(E) OF THE ACT. THE LD.CIT(A) ALSO HELD THAT SINCE THE BORROWING WAS FOR THE PURPOSE OF BUSINESS, INTEREST PAID ON THE BORROWING, WAS ADMISSIBLE EXPENDITURE UNDER SECTION 36(1)(III) OF THE ACT AND IN ABSENCE OF ANYTHING CONTRARY THE INTERES T OF RS.22,03,726 ON THE AFORESTATED LOAN OF AGUKPL WAS TO BE ALLOWED AS EXP ENDITURE. HE,THEREFORE, DELETED THE ADDITION OF RS.22,03,726 ALSO. 5. THE LD.D.R. RELIED ON THE ASSESSMENT ORDER. HE I NVITED ATTENTION TO DISCUSSION AT PARS 7 TO 9 OF THE ASSESSMENT ORDER. HE SUBMITTED THAT THE LD.CIT(A) HAS TAKEN NOTE OF THE DETAILS OF SHAREHOL DING OF THE ASSESSEE AND AGUKPL AT PAGES 5 AND 6 OF HIS IMPUGNED ORDER. IT WAS FURTHER SUBMITTED THAT IT WAS VERY CLEAR FROM THE PERSON-WISE DETAIL S OF SHAREHOLDING OF THE AFORESTATED TWO COMPANIES TAKEN NOTE OF BY THE LD.C IT(A), THAT 4200 SHARES OF AGUKPL WERE HELD BY 24 SHAREHOLDERS, WHO ARE FA MILY MEMBERS OR CLOSE RELATIVES AND 3183 SHARES OUT OF TOTAL 4,200 SHARES OF AGUKPL ARE HELD BY 17 SHAREHOLDERS, WHO ARE ALSO SHAREHOLDERS OF THE ASSESSEE-COMPANY AND TOGETHER HELD 2,05,000 OF THE ASSESSEE-COMPANY. HE FURTHER SUBMITTED THAT SHRI RAM KISHORE GUPTA WAS HAVING 14.52% SHAR ES IN AGUKPL AND 10.2% IN THE ASSESSEE-COMPANY. THE LD.D.R. ALSO SU BMITTED THAT AGUKPL ITSELF HELD 40,000 SHARES OF THE ASSESSEE-COMPANY A ND THUS, CONDITIONS OF SECTION 22(22)(E) WERE FULLY SATISFIED. HE ALSO SU BMITTED THAT THE TRANSACTION WAS NOT A BUSINESS TRANSACTION AND THE DECISION IN THE CASE OF CIT VS.CREATIVE DYEING AND PRINTING PVT. LTD.,30 DTR 14 3(DEL.) DID NOT APPLY TO THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE ASSESSEE. THE 4 LD.D.R.,THEREFORE, REITERATED THAT THE CONCLUSION O F THE LD.CIT(A) IN DELETING THE ADDITION OF RS.3,25,00,000, BEING LOAN RECEIVED BY THE ASSESSEE FROM AGUKPL AND CONSIDERED AS DEEMED DIVIDEND BY THE AO AND THE ADDITION OF RS.22,03,726 DISALLOWED BY THE AO AS INTEREST CL AIMED ON THE AFORESTATED LOAN, HAVE BEEN WRONGLY DELETED BY THE LD. CIT(A) AND THE ADDITIONS MADE BY THE AO DESERVE TO BE SUSTAINED. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT WAS CLEAR FROM THE PROVISIONS OF SECTION 2(22)(E) THAT THE DEEMED DIVI DEND COULD BE CONSIDERED ONLY IN THE CASE OF A SHAREHOLDER AND THE ASSESSEE -COMPANY WAS NOT A SHAREHOLDER OF AGUKPL I.E. THE LENDER COMPANY. HE ALSO SUBMITTED THAT THE LD.CIT(A) HAS EXAMINED THE ISSUE IN DETAIL IN VIEW OF THE PROVISIONS OF SECTION 2(22)(E) OF THE I.T.ACT AND CLEARLY HELD TH AT THE PROVISIONS OF SECTION 2(22)(E) OF THE I.T.ACT WERE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE BECAUSE THE COMMON SHAREHOLDERS DID NOT HAVE SUBST ANTIAL INTEREST IN THE ASSESSEE-COMPANY OR IN AGUKPL. HE ALSO SUBMITTED TH AT THE CLAIM OF INTEREST OF RS.22,03,726 HAS BEEN RIGHTLY ALLOWED B Y THE LD.CIT(A) BECAUSE THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BU SINESS. THE LD.COUNSEL RELIED ON THE FOLLOWING DECISIONS : 1. ACIT VS.. BHAUMIK COLOUR (P.) LTD. (2009) 27 SOT 270 (MUM.)(SB), 2. DY.CIT VS. NATIONAL TRAVEL SERVICES (2009) 31 SO T 76(DEL.); 3. CIT VS. H.K.MITTAL(1996) 219 ITR 720(ALL.) 6.1 THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT SINCE THE ASSESSEE WAS NOT THE SHAREHOLDER OF THE LENDER COMPANY ON THE DA TE THE LOAN WAS ADVANCED, THE ADVANCE COULD NOT BE TAKEN AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT IN VIEW OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH 5 COURT IN THE CASE OF H.K.MITTAL (SUPRA). HE ALSO C ONTENDED THAT THE ITAT MUMBAI SPECIAL BENCH IN THE CASE OF BHAUMIK COLOUR (P.) LTD. (SUPRA) HAS ALSO HELD THAT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT APPLIED ONLY TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CO NCERN IN WHICH ITS SHAREHOLDER HAD SUBSTANTIAL INTEREST AND THUS, THE INTENTION OF THE LEGISLATURE IS TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHO LDER AND NOT IN THE HANDS OF CONCERN. HE FURTHER CONTENDED THAT THE DEEMED D IVIDEND COULD BE ASSESSED ONLY IN THE HAND OF A PERSON WHO WAS A S HAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT THE I.T.A.T.,DELHI BENCH IN THE CASE OF NATIONAL TRAVEL SERVICES (SUPRA) RELYIN G ON THE SPECIAL BENCH DECISION IN THE CASE OF BHAUMIK COLOUR (P.) LTD. HA S ALSO HELD THAT THE EXPRESSION SHAREHOLDER AS APPEARING IN SECTION 2( 22)(E) OF THE ACT MEANT A REGISTERED SHAREHOLDER OF SHARES AND THE DEEMED DIV IDEND UNDER SECTION 2(22)(E) OF THE ACT CAN BE ASSESSED ONLY IN THE HAN DS OF A PERSON, WHO IS A REGISTERED SHAREHOLDER OF THE LENDER COMPANY AND NO T IN THE HANDS OF A PERSON OTHER THAN A REGISTERED SHAREHOLDER. 7. WE HAVE CAREFULLY CONSIDERED THE ISSUE IN VIEW O F THE MATERIAL PLACED ON RECORD, RIVAL SUBMISSIONS AND THE CASE LAWS REL IED UPON BY THE LD. COUNSEL FOR THE ASSESSEE. IN OUR CONSIDERED OPINION , EVEN IF THE ASSESSEE- COMPANY AND THE LENDER COMPANY ARE HAVING COMMON SH AREHOLDERS, THE UNDISPUTED FACT REMAINS THAT THE ASSESSEE-CONMPAY I S NOT A SHAREHOLDER IN THE LENDER COMPANY. THE FACT THAT THE LENDER COMPA NY AGUKPL HELD 40,000 SHARES OF THE ASSESSEE-COMPANY, DID NOT ALTE R THE FACT THAT THE ASSESSEE-COMPANY WAS NOT A SHAREHOLDER OF THE LENDE R COMPANY AGUKPL. RESPECTFULLY FOLLOWING THE DECISION IN THE CASE OF CIT VS. H.K.MITTAL 6 (SUPRA), WE ARE OF THE CONSIDERED OPINION THAT DEEM ED DIVIDEND CANNOT BE CONSIDERED IN THE HANDS OF THE ASSESSEE BECAUSE THE ASSESSEE IS NOT A SHAREHOLDER OF THE LENDER COMPANY. THE HON'BLE JURI SDICTIONAL HIGH COURT IN THE CASE OF H.K.MITTAL (SUPRA) HAS HELD AS UNDER : THE CHIEF INGREDIENT OF SUB-CLAUSE (E) TO CLAUSE (22) OF SECTION 2 OF THE INCOME-TAX ACT IS THAT ONE SHOULD BE A SHAREHOL DER ON THE DATE THE LOAN WAS ADVANCED AND ACCORDING TO THE TRIBUNAL THA T INGREDIENT HAVING NOT BEEN ESTABLISHED, THE ADVANCE COULD NOT BE TAKEN AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. THE MUMBAI SPECIAL BENCH IN THE CASE OF ACIT VS. BH AUMIK COLOUR (P.) LTD. (SUPRA) IN PARA 26 OF THE ORDER HAS HELD AS UNDER : 26. THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SA TISFIED FOR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEND. THEY ARE: (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPA NY. (B) A PERSON MUST BE A SHAREHOLDER OF THE COMPANY BEING A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (N OT BEING SHARES 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 POWER. THIS IS BECAUSE OF TH E EXPRESSION 'SUCH SHAREHOLDER' FOUND IN THE RELEVANT PROVISION. THIS EXPRESSION ONLY REFERS TO THE SHAREHOLDER REFERRED TO IN THE EARLIER PART OF S. 2(22)(E) VIZ., A REGISTERED AND A BENEFICIAL HOLDER OF SHARES HOLDING 10 PER CENT VOTING POWER. THE HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF UNION OF INDIA VS. WAZIR SINGH AIR 1980 RAJ 252, WHILE DEALING WITH AN EXPRE SSION 'NO SUCH APPLICATION' IN THE CONTEXT OF R. 97 OF THE RA JASTHAN HIGH COURT RULES, 1952 HAS HELD AS FOLLOWS: 'GENERALLY THE WORD 'SUCH' REFERS ONLY TO PREVIOUSL Y INDICATED, CHARACTERIZED OR SPECIFIED. 'SUCH' IS AN ADJECTIVE MEANING, THE ONE PREVIOUSLY INDICATED OR REFERS ONLY TO SOMETHIN G WHICH HAS BEEN SAID BEFORE.' 7 THE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF MOH AN LAL & ANR. VS. GRAIN CHAMBERS LTD. AIR 1959 ALL 279 HAS H ELD AS FOLLOWS: 'IN FACT, IT APPEARS TO US THAT THE WORD 'SUCH' IS USED BEFORE A NOUN IN A LATTER PART OF A SENTENCE, THE PROPER CON STRUCTION IN THE ENGLISH LANGUAGE IS TO HOLD THAT THE SAME NOUN IS B EING USED AFTER THE WORD 'SUCH' WITH ALL ITS CHARACTERISTICS WHICH MIGHT HAVE BEEN INDICATED EARLIER IN THE SAME SENTENCE.' (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE M UST ALSO BE A MEMBER OR A PARTNER IN THE CONCERN HOLDING SUBSTANT IAL INTEREST IN THE CONCERN VIZ., WHEN THE CONCERN IS NOT A COMP ANY, HE MUST AT ANY TIME DURING THE PREVIOUS YEAR, BE BENEFICIAL LY ENTITLED TO NOT LESS THAN TWENTY PER CENT OF THE INCOME OF SUCH CONCERN; AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE OWNER OF SHARES, NOT BEING SHARES ENTITLED TO A FIXED RATE O F DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN P ROFITS, CARRYING NOT LESS THAN TWENTY PER CENT OF THE VOTING POWER. (D) IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYMENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. 7.1 SINCE IN THE CASE OF THE ASSESSEE, AFORESTATE D CONDITIONS ARE NOT FULFILLED, ACTION OF THE LD.CIT(A) IN DELETING THE ADDITION ON ACCOUNT OF DIVIDEND IS UPHELD. THE FIRST GROUND OF APPEAL IS, THEREFORE, REJECTED. 7.2 SO FAR AS THE SECOND GROUND OF APPEAL AGAINST DELETION OF ADDITION OF RS.22,03,726 IS CONCERNED, THE REVENUE COULD NOT PL ACE ON RECORD ANYTHING TO THE CONTRARY TO SHOW THAT THE INTEREST OFRS.22,0 3,726 PAID ON ACCOUNT OF LOAN OF AGUKPL WAS NOT FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE LD.CIT(A) HAS RIGHTLY OBSERVED THAT THE AO HAS ERR ONEOUSLY MADE THE DISALLOWANCE OF INTEREST OF RS.22,03,726 ONLY FOR T HE REASON THAT THE AMOUNT OF RS.3,25,00,000 HAD BEEN ADDED AS DEEMED DIVIDEND AND THEREFORE, INTEREST 8 ON THE AFORESTATED LOAN COULD NOT BE ALLOWED AS EX PENDITURE. AS HELD ABOVE, THE AFORESAID AMOUNT OF RS.3,25,00,000 HAD BEEN WR ONGLY CONSIDERED AS DEEMED DIVIDEND BY THE AO. THE REVENUE HAS FAILED T O PROVE THAT THE BORROWING IN QUESTION WAS NOT FOR THE PURPOSE OF BU SINESS AND THEREFORE, THE LD.CIT(A)S DECISION IN ALLOWING THE CLAIM OF INTE REST OF RS.22,03,726 IS CONSIDERED CORRECT. NO INTERFERENCE IS CALLED FOR I N THE DECISION OF THE LD. CIT(A) ON THIS ISSUE. THIS GROUND OF APPEAL OF THE DEPARTMENT IS THEREFORE, ALSO REJECTED. 8. AS A RESULT, THE APPEAL OF THE REVENUE IS DISMIS SED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 17.9.10. SD. SD. (H.L.KARWA) (B.R.KAUSHIK) VICE PRESIDENT ACCOUNTANT MEMBER SEPTEMBER 17TH ,2010. COPY TO THE : 1. APPELLANT 2. RESPONDENT 3. CIT(A) (4) CIT 5.DR. A.R.,ITAT, LUCKNOW. SRIVASTAVA.