DCIT, CIR-I, KOLKATA, Kolkata V. M/s The Hooghly Mills Co. Ltd., Kolkata

ITA 423/KOL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1669 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2017
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 03-04-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 11-03-2014
• Court: TRIBUNAL
• Department Lawyers: NIRAJ KUMAR
• Assessee Lawyers: S JHAJHARIA
• Keywords: Earning of tax free income; Question of law; Deemed dividend
• Section: 143(3); 14A; 32

Judgement Text

ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & SHRI WASE EM AHMED, AM] I.T.A NO. 423/KOL/2014 ASSES SMENT YEAR : 2009-10 D.C.I.T., CIRCLE-1, -VS.- M/S. THE HOOGHLY M ILLS CO.LTD. KOLKATA KOLKATA [PAN : AAACT 9780 F] (APPELLANT) (RESPONDENT) FOR THE APPELLANT : SH RI NIRAJ KUMAR, CIT(DR) FOR THE RESPONDENT : SHRI S.JHAJHARIA, FCA DATE OF HEARING : 25.05.2017 DATE OF PRONOUNCEMENT : 02.06.2017. ORDER PER N.V.VASUDEVAN, JM THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 16.12.2013 OF CIT(A)-CENTRAL-I, KOLKATA, RELATING TO AY 2009-10. 2. GROUND NO.1 RAISED BY THE REVENUE READS AS FOL LOWS :- 1. THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.10,20,00,000/- MADE BY THE AO U/S 2(22)(E). 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE MANU FACTURE AND SALE OF JUTE GOODS. IN THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME TAX ACT, 1961 (ACT) THE AO NOTICED THAT THE ASSESSEE HAD DURING THE PRE VIOUS YEAR ACCEPTED THE LOANS OF RS.10,20,00,000/- FROM M/S. MEGA RESOURCES LTD. IT IS NOT IN DISPUTE THAT THE ASSESSEE HELD SHARES IN THE SHARE CAPITAL OF M/S. M EGA RESOURCES LTD., THAT CONFERRED 1.7% OF THE VOTING POWER IN M/S. MEGA RESOURCES LTD . THE AO ALSO NOTICED THAT ANOTHER SUBSIDIARY COMPANY OF THE ASSESSEE BY NAME M/S. HOOGHLY MILLS PROJECTS LTD HELD 13,90,100 EQUITY SHARES OUT OF THE TOTAL PAID EQUITY SHARES OF .1,20,00,000/- OF M/S. MEGA RESOURCES LTD. THE AO AFTER MAKING A REFE RENCE TO THE PATTERN OF SHARE ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 2 HOLDING OF THE ASSESSEE AND ITS SUBSIDIARY M/S. HOO GHLY MILLS PROJECTS LTD., IN SHARE CAPITAL OF M/S. MEGA RESOURCES LTD CONCLUDED THAT T HE ASSESSEE HELD MORE THAN 10% OF THE VOTING POWER IN M/S. MEGA RESOURCES LTD,. AN D THEREFORE THE PROVISION OF SECTION 2(22)(E) OF THE ACT WERE ATTRACTED TO THE L OAN GIVEN BY M/S. MEGA RESOURCES LTD., TO THE ASSESSEE AND THE SAME WAS LIABLE TO BE TREATED AS DEEMED DIVIDEND AND CHARGEABLE TO TAX IN THE HANDS OF THE ASSESSEE. SE CTION 2(22)( E ) OF THE ACT, LAYS DOWN AS FOLLOWS: 'SECTION 2( 22 ) 'DIVIDEND' INCLUDES ( A )TO ( D )****** ( E )ANY PAYMENT MADE BY A COMPANY, NOT BEING A COMPAN Y IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER A S REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) BY WAY OF ADVAN CE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO HAS A SUBSTANTIAL I NTEREST IN THE COMPANY, OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR T HE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE CO MPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' ( C )THE AFORESAID CLAUSE ( E ) OF THE ACT HAS BEEN AMENDED WITH EFFECT FROM 1-4- 1988 THE AMENDED CLAUSE ( E ) OF THE ACT READS AS FOLLOWS : '( E )ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS RE PRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER 31-5-1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFIC IAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND W HETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TE N PER CENT OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A ME MBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN T HIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFITS.' EXPLANATION-3 TO SECTION 2( 22 )( E ) IS AS FOLLOWS : 'EXPLANATION-3 : FOR THE PURPOSE OF THIS CLAUSE ( A )CONCERN MEANS A HINDU UNDIVIDED FAMILY, OR A FI RM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY; ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 3 ( B )A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL IN TEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PR EVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PER CENT OF THE IN COME OF SUCH CONCERN;' SECTION 2( 32 ) DEFINES THE EXPRESSION 'PERSON WHO HAS A SUB- STA NTIAL INTEREST IN THE COMPANY', IN RELATION TO A COMPANY, MEANS A PER SON WHO IS THE BENEFICIAL OWNER OF SHARES, NOT BEING SHARES ENTITLED TO A FIX ED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS, CARRYING NOT LESS THAN TWENTY PER CENT OF THE VOTING POWER. 4. SECTION 2(22)(E) OF THE ACT HAS THE FOLLOWING T HREE LIMBS :- FIRST LIMB: - (A) TO A SHAREHOLDER, BEING A PERSON WHO IS THE BEN EFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND W HETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN P ER CENT OF THE VOTING POWER. SECOND LIMB: - (B) OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER HOL DING NOT LESS THAN 10% OF THE VOTING POWER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID C ONCERN). THIRD LIMB: - (C) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, O R FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER HOLDING NOT LESS THAN 10% O F THE VOTING POWER TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESS ES ACCUMULATED PROFITS. A PERUSAL OF THE ORDER OF THE AO SHOWS THAT THE AO HAS APPLIED THE FIRST LIMB OF SEC.2(22)( E) IN THE PRESENT CASE. 5. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A). BEFORE CIT(A) THE ASSESSEE CONTENDED THAT IT IS ONL Y SHARES HELD BY THE ASSESSEE AS A BENEFICIAL OWNER IN THE SHARE CAPITAL OF M/S. MEGA RESOURCES LTD., WHICH CONFERS VOTING POWER IN M/S. MEGA RESOURCES LTD., THAT HAS TO BE CONSIDERED AND IF DONE SO, THE VOTING POWER OF THE ASSESSEE WAS LESS THAN 10% IN M/S. MEGA RESOURCES LTD.. AND THEREFORE PROVISION OF SECTION 2(22)(E) OF THE ACT WERE ATTRACTED. THE ASSESSEE CONTENDED THAT THE SHARE HOLDING OF ITS SUBSIDIARY M/S.HOOGLY MILLS PROJECTS LTD., IN THE SHARE CAPITAL OF M/S.MEGA RESOURCES LTD., IS TO TALLY IRRELEVANT FOR APPLYING THE ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 4 PROVISIONS OF SEC.2(22) ( E) OF THE ACT. THE CIT(A ) AGREED WITH THE AFORESAID SUBMISSION OF THE ASSESSEE AND DELETED THE ADDITION MADE BY THE AO. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF CIT(A) :- 8. I HAVE PERUSED THE ASSESSMENT ORDER AND THE MATERIAL ON RECORD. I HAVE ALSO CONSIDERED THE SUBMISSIONS OF THE ASSESSEE. I FIND THAT THE FACTS IN THIS APPEAL ARE NOT IN DISPUTE. THE AO HAS NOTED IN THE ASSESSMENT ORDER THAT THE ASSESSEE COMPANY HELD 2,21,500 EQUITY SHARES OF THE LENDING COMPANY M/S MEGA RESOURCES LTD HAVING TOTAL PAID-UP EQUITY SHARES OF 1,20,00,000. THE SHARE- HOLDING OF THE ASSESSEE COMPANY THUS CONSTITUTED 1. 7% OF THE TOTAL PAID-UP EQUITY SHARES OF THE LENDING COMPANY. IN OTHER WORDS, THE ASSESSEE COMPANY WAS HOLDING LESS THAN 10% OF THE VOTING POWER AS REQUIR ED IN SECTION 2(22)(E). HOWEVER, THE AO HAS ADDED-UP THE SHARE-HOLDING OF T HE SUBSIDIARY COMPANY M/S HOOGHLY MILLS PROJECTS LTD TO MAKE-UP FOR THE SHORT AGE IN AS MUCH AS THE ASSESSEE COMPANY AND ITS SUBSIDIARY COMPANY TOGETHE R HELD MORE THAN 10% OF THE VOTING POWER. THE AO HAS GIVEN NO REASONS AS TO WHY HE HAS INCLUDED THE SHARE-HOLDING OF THE SUBSIDIARY COMPANY IN COMPUTIN G THE VOTING POWER OF THE ASSESSEE COMPANY. I FIND THAT THE AO HAS NOT EVEN D ISCUSSED THE ISSUE IN HIS ASSESSMENT ORDER. THE AO HAS' SIMPLY STATED THAT TH E ASSESSEE COMPANY AND ITS SUBSIDIARY COMPANY TOGETHER HELD MORE THAN 10% OF T HE VOTING POWER; AND THEN, INVOKED SECTION 2(22)(E) TO ASSESS THE LOAN OF RS.- 10.20 CRORES AS DIVIDEND INCOME IN THE HANDS OF THE ASSESSEE. THE LD AR HAS CONTENDED THAT SECTION 2(22)(E) WAS NOT APPLICABLE IN THE CASE OF THE ASSE SSEE COMPANY AS IT WAS HOLDING ONLY 1.7% OF THE VOTING POWER IN THE LENDING COMPAN Y M/S MEGA RESOURCES LTD. I FIND MERIT IN THE CONTENTION THAT THE AO HAS ERR ED IN LAW AS WELL AS ON FACTS IN ADDING-UP THE SHARE HOLDING OF THE SUBSIDIARY COMPA NY FOR COMPUTING THE VOTING POWER OF THE ASSESSEE. I FIND NO BASIS OR JUSTIFICA TION (IN FACT, THE AO HAS NOT GIVEN ANY IN HIS ASSESSMENT ORDER) FOR CONSIDERING THE COMBINED SHARE-HOLDING OF THE ASSESSEE COMPANY AND ITS SUBSIDIARY COMPANY TO CONCLUDE THAT THE ASSESSEE WAS HOLDING MORE THAN 10% VOTING POWER IN THE LENDI NG COMPANY. I AM OF THE OPINION THAT THE AO HAS MISCONSTRUED THE PROVISIONS OF SECTION 2(22)(E). THE REQUIREMENT OF SECTION 2(22)(E) IS THAT THE ASSESSE E SHOULD BE HOLDING NOT LESS THAN 10% VOTING POWER. THE PROVISIONS OF SECTION 2( 22)(E) IS APPLICABLE ONLY TO A PERSON WHO IS THE BENEFICIAL HOLDER OF SHARES HAVIN G NOT LESS THAN 10% OF THE VOTING POWER. BUT, IN THE PRESENT CASE, THE ASSESSE E IS NOT HOLDING SHARES IN EXCESS OF THE PRESCRIBED LIMIT; AND CONSEQUENTLY, T HE PROVISIONS OF SECTION 2(22)(E) ARE NOT APPLICABLE IN THE CASE OF THE ASSE SSEE. IN THE CASE OF BHAUMIK COLOUR (P) LTD 313 ITR (AT) 146, THE HON'BLE SPECIA L BENCH HAS HELD THAT SECTION 2(22)(E) HAS CREATED A FICTION WHEREBY THE DEFINITION OF 'DIVIDEND' HAS BEEN ENLARGED TO INCLUDE EVEN LOANS AND ADVANCES; A ND SO, THE LEGAL PROVISION HAS TO BE GIVEN A STRICT INTERPRETATION. SECONDLY, THE DEFINITION OF 'DIVIDEND' AS GIVEN IN SECTION 2(22)(E) IS AN .INCLUSIVE DEFINITION AND THE AO WAS NOT COMPETENT TO EN1ARGE THE SAME BY IMPORTING THINGS WHICH DO NOT F ORM PART OF SUCH LEGAL FICTION. IN VIEW OF THE ABOVE, THE AO WAS NOT JUSTI FIED IN INCLUDING THE SHARE- HOLDING OF THE SUBSIDIARY COMPANY ALSO FOR THE PURP OSES OF INVOKING SECTION ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 5 2(22)(E). THE AO HAS NOT DISPUTED THE FACT THAT THE ASSESSEE COMPANY WAS HAVING 1.7% SHARE-HOLDING IN THE LENDING COMPANY. AS THE A SSESSEE COMPANY WAS HOLDING LESS THAN 10% OF THE VOTING POWER IN THE LE NDING COMPANY, THE PROVISIONS OF SECTION 2(22)(E) WAS NOT ATTRACTED IN ITS CASE. I AM OF THE CONSIDERED VIEW THAT THE ACTION OF THE AO IN ASSESSING THE LOA N OF RS.10.20 CRORES AS DIVIDEND INCOME BY INVOKING SECTION 2(22)(E) IS NE ITHER SUSTAINABLE IN LAW NOR ON FACTS. GROUND NO.4 IS ALLOWED. 6. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. 7. THE LD. DR SUBMITTED THAT THE CIT(A) FAILED I N NOT CONSIDERING THE COMBINED VOTING POWER OF THE ASSESSEE AND THE ASSESSEES SUB SIDIARY M/S. HOOGHLY MILLS PROJECTS LTD IN M/S. MEGA RESOURCES LTD AND IN THI S REGARD PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F GOPAL & SONS (HUF) VS CIT 391 ITR 1(SC). WE HAVE PERUSED THE ABOVE DECISION. IN THE AFORESAID DECISION THE QUESTION THAT WAS CONSIDERED BY THE HONBLE SUPREME COURT WAS AS TO WHETHER WHEN A KARTA OF THE HUF IS A SHAREHOLDER IN THE LENDING CO MPANY AND WHEN THE LENDING COMPANY HAS GIVEN LOANS TO HUF WHETHER THE HOLDING OF SHARES BY THE KARTA HAS TO BE CONSIDERED AS HOLDING OF SHARES BY THE HUF. THE H ONBLE SUPREME COURT HELD THAT THE KARTA IS A MEMBER OF THE HUF AND THEREFORE THE SHAREHOLDING OF THE KARTA SHOULD BE HELD TO BE ON BEHALF OF THE HUF. THEREFORE THE C ONDITIONS FOR APPLICABILITY OF PROVISION OF SECTION 2(22)(E) OF THE ACT WERE ATTRA CTED. WE ARE OF THE VIEW THAT THE AFORESAID DECISION HAS NO APPLICATION TO THE FACTS OF THE PRESENT CASE AS THE SHARE HOLDING OF THE ASSESSEE AND SHARE HOLDING BY ITS SU BSIDIARIES CANNOT BE EQUATED AS TO A CASE OF SHARES HELD BY KARTA OF A HUF IN HIS CAPACI TY AS KARTA OF HUF. THE LD. DR ALSO BROUGHT TO OUR NOTICE THAT THE HONBLE SUPREME COURT IN THE CASE OF CIT VS NAMDHARI SEEDS [2017] 79 TAXMANN.,COM 124(SC) HAS A DMITTED SLP OF THE REVENUE AND HAS FRAMED THE FOLLOWING QUESTION OF LAW FOR CO NSIDERATION: WHETHER HIGH COURT WAS JUSTIFIED IN HOLDING THAT IT IS ONLY WHEN PAYMENTS ARE MADE BY A COMPANY BY WAY OF ADVANCE OR LOAN TO A SH AREHOLDER OR PAYMENT TO A CONCERN IN WHICH SHAREHOLDER IS A MEMBER OR PARTNE R AND IN WHICH HE HAS SUBSTANTIAL INTEREST, SAID AMOUNT OF LOAN WOULD BE REGARDED AS DEEMED DIVIDEND WITHIN MEANING OF SECTION 2(22)(E). ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 6 8. IN OUR VIEW THE AFORESAID CIRCUMSTANCE VIZ., SLP BEING ADMITTED ON A QUESTION OF LAW HAS NO BEARING WHATSOEVER IN THE PRESENT CASE. IN THIS CASE THE AO HAS APPLIED THE FIRST LIMB. FOR APPLICABILITY OF THE FIRST LIMB WHA T HAS TO BE CONSIDERED IS ONLY THE VOTING POWER HELD BY THE ASSESSEE IN M/S. MEGA RESO URCES LTD AND CONTROVERSY SURROUNDING THE SECOND LIMB, WHICH IS THE SUBJECT M ATTER OF THE SLP FILED BEFORE THE HONBLE SUPREME COURT WOULD BE OF NO RELEVANCE TO T HE PRESENT CASE. 9. IN THE CASE OF ACIT VS. BHAUMIK COLOR LABS PVT. LTD., 118 ITD 1 (SB) (MUMBAI), THE SPECIAL BENCH MUMBAI HAD TO DEAL WITH THE FOLLO WING QUESTION: WHETHER THE WORDS 'SUCH SHAREHOLDER' OCCURRING IN SECTION 2( 22 )( E ) REFER TO A SHAREHOLDER WHO IS BOTH THE REGISTERED SHAREHOLDE R AND THE BENEFICIAL SHAREHOLDER ? IT WAS HELD BY THE SPECIAL BENCH AS FOLLOWS: IN VIEW OF THE JUDGMENTS OF THE SUPREME COURT IN T HE CASES OF CIT V. C.P. SARATHY MUDALIAN [1972] 83 ITR 170 AND RAMESHWARLAL SANWARLAL V. CIT [1980] 122 ITR 1/3 TAXMAN 1 (AP), IT IS CLEAR 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 T HE CONDITION UNDER THE 1922 ACT AND THE 1961 ACT REGARDING THE PAYEE BEING A SH AREHOLDER REMAINS THE SAME AND IT IS THE CONDITION THAT SUCH SHAREHOLDER SHOULD BE BENEFICIAL OWNER OF THE SHARES AND THE PERCENTAGE OF VOTING POWER THAT SUCH SHAREHOLDER SHOULD HOLD 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 U NDER THE 1922 ACT TO MEAN A REGISTERED SHAREHOLDER. THIS EXPRESSION SHAREHOL DER FOUND IN THE 1961 ACT HAS TO BE, THEREFORE, CONSTRUED AS APPLYING ONLY TO REGISTERED SHAREHOLDER. [PARA 22] IN THE 1961 ACT THE WORD SHAREHOLDER IS FOLLOWE D BY THE FOLLOWING WORDS BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHAR ES. THIS EXPRESSION USED IN SECTION 2(22)(E ) BOTH IN THE 1961 ACT AND IN THE A MENDED PROVISIONS WITH EFFECT FROM 1-4-1988 ONLY QUALIFIES THE WORD SHARE HOLDER AND DOES NOT IN ANY WAY ALTER THE POSITION THAT THE SHAREHOLDER HAS TO BE A REGISTERED SHAREHOLDER. THESE PROVISIONS ALSO DO NOT SUBSTITUTE THE AFORESA ID REQUIREMENT TO A REQUIREMENT OF MERELY HOLDING A BENEFICIAL INTEREST IN THE SHARES WITHOUT BEING A REGISTERED HOLDER OF SHARES. THE EXPRESSION BEIN G IS A PRESENT PARTICIPLE. A ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 7 PARTICIPLE IS A WORD WHICH IS PARTLY A VERB AND PAR TLY AN ADJECTIVE. IN SECTION 2(22)(E ), THE PRESENT PARTICIPLE BEING IS USED T O DESCRIBE THE NOUN SHAREHOLDER LIKE AN ADJECTIVE. THE EXPRESSION BEING A PERSON W HO 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 ). IN THE 1961 ACT, SECTION 2(22 )(E) IMPOSES A FURTHER CONDITION THAT THE SHAREHOLD ER HAS ALSO TO BE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIX ED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER. THUS, IT WAS NOT POSSIBLE TO ACCEPT THE CONTENTION OF THE REVENUE THAT UNDER THE 1961 ACT THERE WAS NO RE QUIREMENT OF A SHAREHOLDER BEING A REGISTERED HOLDER AND THAT EVEN A BENEFICIA L OWNERSHIP OF SHARES WOULD BE SUFFICIENT. 10. IN VIEW OF THE AFORESAID DECISION, WE ARE OF T HE VIEW THAT THE ASSESSEE WAS A REGISTERED AND BENEFICIAL SHAREHOLDER OF SHARES OF M/S.MEGA RESOURCES LTD., THAT CONFERRED VOTING RIGHTS OF ONLY 1.7%. IT IS ONLY T HIS SHARE HOLDING THAT HAS TO BE CONSIDERED FOR APPLYING THE FIRST LIMB OF SECTION 2 (22)( E ) OF THE ACT AND THE SHAREHOLDING OF THE ASSESSEES SUBSIDIARY M/S.HOOGH LY MILLS PROJECTS LTD., SHOULD NOT BE CONSIDERED AND IT IS IRRELEVANT. THE QUESTI ON IN THE PRESENT CASE IS NOT EVEN AS TO WHETHER THE ASSESSEE IS A BENEFICIAL SHAREHOLDER OF THE SHARES HELD BY M/S.HOOGLY MILLS PROJECTS LTD. WE THEREFORE UPHOLD THE ORDER OF CIT(A) AND DISMISS GROUND NO.1 RAISED BY THE REVENUE. 11. GROUND NO.2 RAISED BY THE REVENUE READS AS F OLLOWS :- 2. THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) IS NOT JUSTIFIED IN LAW IN DIRECTING THE A.O. TO COMPUTE T HE DISALLOWANCE UNDER RULE 8D(III) BY RESTRICTING TO THOSE INVESTMENTS THAT HA VE YIELDED TAX FREE DIVIDEND INCOME DURING THE YEAR. 12. THE ISSUE RAISED IN GROUND NO.2 IS WITH REGA RD TO DISALLOWANCE OF EXPENSES INCURRED IN EARNING EXEMPT INCOME U/S 14A OF THE AC T. THE ISSUE IS ONLY WITH REGARD TO DISALLOWANCE OF OTHER EXPENSES WHICH IS COVERED BY RULE 8D(2)(III) OF THE RULES. ACCORDING TO THE ASSESSEE ONLY OTHER EXPENSES OF RS .20,000/- CAN BE CONSIDERED AS ONE INCURRED IN EARNING DIVIDEND INCOME AND ONLY TO THAT EXTENT OTHER EXPENSES SHOULD BE DISALLOWED. THE ASSESSEE POINTED OUT THAT WHILE COMPUTING ITS TOTAL INCOME IT HAS ALREADY REDUCED EXPENSES BY RS.20,000/- IN THIS REG ARD AND THEREFORE NO FURTHER ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 8 DISALLOWANCE OF EXPENSES U/S.14A OF THE ACT SHOULD BE MADE. THE AO APPLIED THE PROVISION OF RULE 8D(2)(III) OF THE RULES AND MADE A DISALLOWANCE OF RS.11,08,667/- AS EXPENSES INCURRED IN EARNING THE DIVIDEND INCOME . THIS WAS WORKED OUT @ 0.5% OF THE AVERAGE INVESTMENTS. 13. ON APPEAL BY THE ASSESSEE THE CIT(A) DIRECTED THE AO TO CONSIDER ONLY THE INVESTMENT WHICH YIELDED DIVIDEND INCOME FOR THE PU RPOSE OF WORKING OF THE VALUE OF INVESTMENT. IN DO SO PLACED RELIANCE ON THE DECISIO N OF HONBLE TAT KOLKATA IN THE CASE OF REI AGRO LTD. IN ITA NO.1331/KOL/2011. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF CIT(A) :- 10. I HAVE PERUSED THE ASSESSMENT ORDER AND CONSI DERED THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE. I FIND SUBSTANCE IN THE ARGUMENT THAT THE AO HAS MECHANICALLY APPLIED RULE 8D IN THE PRESENT CASE. I AM ALSO REMINDED OF A RECENT ORDER DATED 19-06-2013 OF THE JURISDICTIONAL ITAT ' A' BENCH, KOLKATA IN THE CASE OF REI AGRO LTD IN ITA NO. 1331/KOL/2011 WHEREIN IT WAS HELD THAT THE DISALLOWANCE UNDER RULE 8D(III) SHOULD BE RESTRICTE D TO V2 % OF ONLY THOSE INVESTMENTS WHICH YIELDED TAX FREE INCOME DURING TH E RELEVANT PREVIOUS YEAR. IN OTHER WORDS, THE AO WHILE COMPUTING THE DISALLOWANC E UNDER RULE 8D(III) SHOULD CONSIDER ONLY THOSE INVESTMENTS THAT HAVE YIELDED T AX FREE DIVIDEND INCOME DURING THE YEAR. I FIND FROM THE ASSESSMENT ORDER T HAT THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.4,00,200/- DURING THE RELEVAN T YEAR. FOLLOWING THE ABOVE DECISION OF THE JURISDICTIONAL ITAT, THE AO IS DIRE CTED TO COMPUTE THE DISALLOWANCE UNDER RULE 8D(III) BY RESTRICTING TO T HOSE INVESTMENTS THAT HAVE YIELDED TAX FREE DIVIDEND INCOME DURING THE YEAR. G ROUND NO 5 IS DECIDED ACCORDINGLY. 14. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS FAR AS THE DISALLOWANCE U/R 8D(2)(III) IS CONCERNED, WE ARE OF THE VIEW THAT TH E CIT(A)S DIRECTION TO DIRECT THE AO TO CONSIDER, WHILE WORKING OUT THE AVERAGE VALU E OF INVESTMENTS, ONLY INVESTMENTS THAT YIELDED TAX FREE INCOME IS CORRECT AND IS LINE WITH THE DECISION OF THE ITAT, KOLKATA BENCHES IN THE CASE OF REI AGRO LTD. VS DCIT IN ITA NO.1331/KOL/2011 ORDER DATED 19.06.2013 WHICH HAS S INCE BEEN APPROVED BY THE ITA NO.423/KOL/2014 M/S. THE HOOGHLY MILLS CO.LTD. A.Y.2009-10 9 HONBLE CALCUTTA HIGH COURT. WE THEREFORE CONFIRM THE ORDER OF THE CIT(A) AND DISMISS GR.NO.2 RAISED BY THE REVENUE. 16. IN THE RESULT THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT O N 02.06.2017. SD/- SD/- [WASEEM AHMED] [ N.V.VASUDEVAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 02.06.2017. [RG PS] COPY OF THE ORDER FORWARDED TO: 1. M/S. THE HOOGHLY MILLS CO.LTD., 10, CLIVE ROW, K OLKATA-700001. 2. D.C.I.T., CIRCLE-1, KOLKATA. 3. CIT(A)-I, KOLKATA. 4. C.I.T.-ICENTRAL-I, KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY HEAD OF OFFICE/ D. D.O., ITAT, KOLKATA BENCHES