M/s Sumer Sons (P) Ltd., Agra V. DCIT., Circle-4(1), Agra

ITA 438/AGR/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 50392 (ITAT-AGRA)
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 20-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K SHARMA
• Keywords: Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO. 438/AGRA/2010 ASSTT. YEAR : 2006-07 M/S. SUMER SONS (P) LTD., VS. D.C.I.T., CIRCLE 4(1), 23/117A, LOHAMANDI, AGRA. AGRA. (PAN : AAGCS 7154J) (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI SUSHIL MAHESHWARI, C.A. FOR RESPONDENT : SHRI A.K. SHARMA, JR. D.R. DATE OF HEARING : 20.10.2011 DATE OF PRONOUNCEMENT : 20.10.2011 ORDER PER B.C. MEENA, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE ARISING O UT OF THE ORDER DATED 30.09.2010 OF LD. CIT(A)-II, AGRA. 1. IN THIS APPEAL, THE ASSESSEE HAS ASSAILED THE IM PUGNED ORDER SUSTAINING THE ADDITION OF RS.25,92,624/- AS DEEMED DIVIDEND U/S. 2(22)(E) OF THE INCOME-TAX ACT. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COM PANY ENGAGED IN WHOLESALE TRADING OF IRON AND STEEL. ON EXAMINATION OF BOOKS OF ACCOUNT OF THE AP PELLANT-COMPANY AND THE COPY OF ACCOUNT OF M/S. V. RAM CHANDRA IRON & STEEL (P) LTD., THE OTHE R COMPANY WHICH RENDERS TRANSPORTATION SERVICES TO THE ASSESSEE-COMPANY, THE ASSESSING OFF ICER NOTICED THAT HUGE TRANSACTIONS OF EXCHANGE OF FUNDS BETWEEN THE TWO COMPANIES TOOK PL ACE AS PER THEIR NEEDS, WHEREAS IN THE CASES OF OTHER COMPANIES, WHERE THE APPELLANT-COMPANY HAD ENTERED INTO SOME TRADING TRANSACTIONS, THE 2 AMOUNT OF TRANSACTIONS WERE FOUND LIMITED TO THE TR ADING ACTIVITIES ONLY. HAVING ANALYSED THE TRANSACTIONS HELD IN THE MONTH OF APRIL & MAY, 2005 BETWEEN THESE TWO COMPANIES AND AFTER PERUSING THE COMPLETE COPY OF ACCOUNT, THE ASSESSIN G OFFICER OBSERVED THAT THE ASSESSEE HAD RECEIVED RS.94,86,738/- FROM M/S. V. RAM CHANDRA IR ON & STEEL (P) LTD. UPTO 03.10.2005, OUT OF WHICH AFTER DEDUCTING THE AMOUNT OF FREIGHT OF RS.3 ,74,293/- PAID TO THEM, THE BALANCE AMOUNT OF RS.91,12,445/- REMAINED WITH THE ASSESSEE-COMPANY W HICH WAS OBSERVED TO HAVE BEEN RECEIVED FROM M/S. V. RAM CHANDRA IRON & STEEL (P) LTD. AS L OANS AND ADVANCES FROM THE SISTER CONCERN. AN ADDITION OF RS.50 LAKHS WAS ALSO NOTICED ON THE CREDIT ENTRY APPEARING IN ASSESSEE-COMPANY ON 03.10.2005 AND A SUM OF RS.50 LAKHS WAS SHOWN TO HAVE BEEN PAID BY ASSESSEE COMPANY TO M/S. V. RAM CHANDRA IRON & STEEL (P) LTD. ON 05.10. 2005. ON THE STRENGTH OF THESE FACTS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE-COMPAN Y FACILITATED M/S. V. RAM CHANDRA IRON & STEEL (P) LTD. TO PROCURE ITS BUSINESS AND THE SAID COMPANY IN EXCHANGE OF THIS FACILITY EXTENDED FUNDS AS PER REQUIREMENT OF THE ASSESSEE-COMPANY. T HE ASSESSING OFFICER ALSO FOUND THAT TWO DIRECTORS OF THE ASSESSEE COMPANY, NAMELY SHRI SANJ EEV JAIN AND RAJEEV JAIN WERE THE COMMON SHARE HOLDERS IN BOTH THE COMPANIES. THEREFORE, THE AO CONCLUDED THAT THE PROVISIONS OF SECTION 2(22)(E) WERE CLEARLY APPLICABLE AND ACCORDINGLY MA DE ADDITION OF RS.25,92,626/- AS DEEMED DIVIDEND RESTRICTING THE SAME TO THE RESERVE SURPLU S OF M/S. V. RAMCHANDRAN STEEL PVT. LTD. THE LD. CIT(A) AFTER CONSIDERING VARIOUS SUBMISSIONS OF THE ASSESSEE AND DECISIONS CITED BY THE ASSESSEE, UPHELD THE ACTION OF THE ASSESSING OFFICE R VIDE IMPUGNED ORDER. 2. DURING THE COURSE OF HEARING, THE LD. COUNSEL FO R THE APPELLANT BEFORE US CONTENDED THAT THE AUTHORITIES BELOW WHILE TAXING THE APPELLANT-CO MPANY BY INVOKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT DID NOT CONSIDER THE FACTUAL MA TRIX OF THE CASE IN RIGHT PERSPECTIVE. THE 3 APPELLANT COMPANY IS A DEALER OF M/S. RASTHTRIYA IS PAT NIGAM LTD. AND HAS APPOINTED M/S. V. RAM CHANDRA IRON & STEEL (P) LTD. AS ITS TRANSPORTA TION AGENT. THE APPELLANT COMPANY HAS REGULAR BUSINESS TRANSACTIONS WITH THE NIGAM THROUG HOUT THE YEAR AND AS A NECESSARY CONSEQUENCE THE APPELLANT COMPANY HAS ENTERED INTO REGULAR BUSINESS TRANSACTIONS WITH ITS TRANSPORTATION AGENT, M/S. V. RAM CHANDRA IRON & ST EEL (P) LTD. THE LD. ASSESSING OFFICER HAS TRIED TO PICK AND CHOOSE THE MONEY TRANSACTIONS ENT ERED IN ONE OR TWO MONTHS BUT HAS FAILED TO CONSIDER THAT THE APPELLANT HAS A CURRENT ACCOUNT W ITH M/S. V. RAM CHANDRA IRON & STEEL (P) LTD. AND IN THE ACCOUNT BOOKS, DEBITS AND CREDITS AND RE CEIPT OF TRANSPORTATION BILLS ARE THERE THROUGHOUT THE YEAR. THE ACCOUNTS REVEAL THE M/S. V . RAM CHANDRA IRON & STEEL (P) LTD. OWED A SUM OF RS.30,33,242/- IN THE PREVIOUS YEAR ENDING O N 31.03.2005 AND SIMILARLY A SUM OF RS.29,33,816/- WAS DUE TO THE ASSESSEE BY M/S. V. R AM CHANDRA IRON & STEEL (P) LTD. AT THE END OF THE CURRENT FINANCIAL YEAR. NOT ONLY THIS, THE S AID COMPANY OWED A SUM OF RS.3,05,310 TO THE DIRECTORS. IN PRESENCE OF THESE FACTS, IT CAN HARDL Y BE PRESUMED THAT A COMPANY WHICH OWED A SUM OF APPROX. RS.32 LACS TO THE ASSESSEE-COMPANY A ND ITS DIRECTORS, WILL ADVANCE MONEY TO THE COMPANY AS LOAN. IT WAS ALSO SUBMITTED THAT THE TRA NSACTIONS, WHATSOEVER, MADE WERE THE TRADE TRANSACTIONS AND THE SAME CANNOT BE BRANDED AS THE TRANSACTION OF LOAN OR ADVANCES TO THE ASSESSEE BY M/S. V. RAM CHANDRA IRON & STEEL (P) LT D. THEREFORE, THE LD. AUTHORITIES BELOW HAVE WRONGLY ASSUMED THE BUSINESS TRANSACTIONS AS LOAN O R ADVANCES RECEIVED BY THE APPELLANT COMPANY AND THE ADDITION SO MADE AS DEEMED DIVIDEND U/S. 2(22)(E) IS NOT SUSTAINABLE IN THE EYE OF LAW. 3. IT WAS NEXT CONTENDED THAT THE ALLEGED DEEMED DI VIDEND HAS BEEN TAXED IN THE HANDS OF THE APPELLANT-COMPANY ONLY BECAUSE THERE ARE TWO COMMON SHAREHOLDERS BETWEEN THE APPELLANT 4 COMPANY AND M/S. V. RAM CHANDRA IRON & STEEL (P) LT D. HOWEVER, THE AUTHORITIES BELOW FAILED TO CONSIDER THE FACT THAT THE APPELLANT COMPANY IS NEITHER REGISTERED SHARE HOLDER NOR A BENEFICIAL SHARE HOLDER IN THE LENDING COMPANY. THEY ALSO FAIL ED TO CONSIDER THE LEGAL ASPECT OF THE CASE THAT THE DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HAN DS OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTH ER THAN A SHAREHOLDER. THE PROVISIONS OF SECTION 2 ( 22 )(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BE NEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL SHARE HOLDER THEN THE PROVISIONS OF SECTION 2( 22 )( E ) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICI AL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE PROVISIONS OF SECTION 2( 22 )( E ) WILL NOT APPLY. RELIANCE IS PLACED ON THE FOLLOWI NG DECISIONS : (I). ACIT VS.BHAUMIK COLOUR (P) LTD. 118 ITD 1 (M UM)(SPCL. BENCH) (II). NIRMALA REALTORS (P) LTD. VS. DCIT (2011) 1 2 TAXMAN 216 (AGRA) (III). ANKITECH PVT. LTD. VS. CIT, 242 CTR 129 (D EL.) (IV). CIT-II, VS. SHARMAN WOOLEN MILLS LTD. IN ITA NO.152 OF 2011 DATED 28.09.2011 (P&H HIGH COURT). (V). ITO VS. M/S. P.V. BEVERAGES PVT. LTD.(ITA NO. 895/DEL./2011(ITAT DELHI BENCHES F, NEW DELHI) (VI). DCIT VS. PATEL ALUMINIUM P. LTD. IN ITA NO. 1 598/MUM/2010 (ITAT C BENCH MUMBAI. (VII). CIT VS. AMBASSADOR TRAVELS P. LTD.(2009) 31 8 ITR 376 (DEL.) 4. THE LEARNED DR, ON THE OTHER HAND RELIED ON THE ORDERS OF THE AUTHORITIES BELOW AND SUPPORTED THE FINDINGS REACHED BY THEM IN THE IMPUG NED ORDERS. 5. WE HAVE HEARD BOTH THE SIDES AND HAVE PERUSED TH E MATERIAL AVAILABLE ON RECORD AS WELL AS THE DECISIONS RELIED UPON. IT IS NOT IN DISPUTE THA T THE APPELLANT-COMPANY IS NEITHER A REGISTERED SHARE HOLDER NOR A BENEFICIAL SHARE HOLDER OF THE L ENDING COMPANY AS CONTEMPLATED UNDER SECTION 5 2(22)(E) OF THE ACT. THEREFORE, WE ARE OF THE CONSI DERED OPINION THAT THE PROVISIONS OF SECTION 2(22)(E) ARE NOT ATTRACTABLE IN THE INSTANT CASE AS HELD BY THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (SUPRA). ONLY ON T HE BASIS OF SHARE HOLDING PATTERN, IN OUR OPINION, THE LD. AUTHORITIES BELOW HAVE ERRED IN HO LDING THAT THE ALLEGED FINANCIAL TRANSACTIONS WITH M/S. V. RAMCHANDRAN STEEL PVT. LTD WOULD FALL IN THE CATEGORY OF DEEMED DIVIDEND TAXABLE IN THE HANDS OF THE ASSESSEE-COMPANY. A PERUSAL OF THE IMPUGNED ORDER REVEALS THAT WHILE REJECTING THE PLEADINGS OF THE ASSESSEE, THE CIT(A) HAS RELIED UPON THE CIRCULAR NO. 495 DATED 22.09.1987 ISSUED BY CBDT, WHEREIN, HE OBSERVED THA T ON FULFILLMENT OF CERTAIN CONDITIONS GIVEN IN THE CIRCULAR, THE DEEMED DIVIDEND WOULD BE TAXED IN THE HANDS OF THE CONCERN, IN WHICH A SHAREHOLDER HAS SUBSTANTIAL INTEREST WHERE SUCH CON CERN HAS RECEIVED LOAN OR ADVANCE FROM A CLOSELY HELD COMPANY. THE LD. CIT(A) HAS TRIED TO C OVER THE CASE OF THE ASSESSEE WITH THIS CIRCULAR. WE DO NOT FIND SUBSTANCE IN THE FINDINGS REACHED BY THE LD. CIT(A) ON THIS COUNT. THE CIRCULAR IN QUESTION CAME INTO CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF NIKKO TECHNOLOGIES (I) (P.) LTD. [IT APPEAL NO. 4077 (MUM .) OF 2002, DATED 30-12-2005] AND WHILE CONSIDERING THIS DECISION, THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF BHAUMIK COLOUR PVT. LTD. (SUPRA) HAS HELD THAT LAW LAID DOWN IN TH E CASE OF NIKKO TECHNOLOGIES (I) (P.) LTD. (SUPRA) IS NOT CORRECT. THE RELEVANT OBSERVATION OF THE SPECIAL BENCH IS REPRODUCED AS UNDER : 39. IN THE DECISION OF THE TRIBUNAL IN THE CASE OF NIK KO TECHNO-LOGIES (I) (P.) LTD. (SUPRA) RELIANCE HAS BEEN PLACED ON CIRCULAR NO. 495, DATED 23-9-1987 WHICH STATES AS FOLLOWS : FURTHER DEEMED DIVIDEND WOULD BE TAXABLE IN THE HA NDS OF THE CONCERN, WHERE ALL THE FOLLOWING CONDITIONS ARE SATISFIED. . . . 6 WE ARE OF THE VIEW THAT CIRCULAR OF CBDT TO THE EXT ENT THAT THEY DO NOT TONE DOWN THE RIGOR OF THE PROVISIONS OF THE ACT IN THE SENSE TO THE EXTENT THEY ARE NOT BENEVOLENT ARE NOT BINDING. 40. APART FROM THE ABOVE, IT IS ALSO NOTICED THAT SECT ION 2(22)(E)(III) PROVIDES RELIEF TO A SHAREHOLDER AS FOLLOWS : DIVIDEND DOES NOT INCLUDE : (I) & (II) ** ** ** (III)ANY DIVIDEND PAID BY A COMPANY WHICH IS SET OFF BY THE COMPANY AGAINST THE WHOLE OR ANY PART OF ANY SUM PREVIOUSLY PAID BY IT AND TREATED AS A DIVIDEND WITHIN THE MEANING OF SUB-CLAUSE (E) TO THE EXTENT TO WHICH IT IS SO SET OFF. IN THE EVENT OF THE PAYMENT OF LOAN OR ADVANCE BY A COMPANY TO A CONCERN BEING TREATED AS DIVIDEND AND TAXED IN THE HANDS OF THE C ONCERN THEN, THE BENEFIT OF SET OFF CANNOT BE ALLOWED TO THE CONCERN, BECAUSE THE C ONCERN CAN NEVER RECEIVE DIVIDEND FROM THE COMPANY WHICH IS ONLY PAID TO THE SHAREHOLDER, WHO HAS SUBSTANTIAL INTEREST IN THE CONCERN. THE ABOVE PROV ISIONS ALSO, THEREFORE, CONTEMPLATE DEEMED DIVIDEND BEING TAXED IN THE HAND S OF A SHAREHOLDER ONLY. FOR THE REASONS STATED ABOVE, WE ARE OF THE VIEW THAT T HE LAW LAID DOWN IN THE CASE OF NIKKO TECHNOLOGIES (I) (P.) LTD. (SUPRA) IS NOT COR RECT. WE, THEREFORE, HOLD THAT DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE INCOM E-TAX ACT, 1961 CAN BE ASSESSED ONLY IN THE HANDS OF A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF ANY OTHER PERSON. 6. WE FURTHER FIND THAT THE LD. CIT(A) HAS HELD THA T ITAT, MUMBAI BENCH IN THE CASE OF UNISOL INFRASERVICES (P) LTD. VS. ITO DECIDED ON 11 .08.2009 IN ITA NO. 2088/MUM/2008 HAS DISTINGUISHED THE DECISION OF SPECIAL BENCH IN THE CASE OF BHAUMIK COLOUR (P) LTD. (SUPRA) AND HELD THAT AS THE SHAREHOLDERS WERE COMMON IN BOTH T HE COMPANIES AND THEY WERE REGISTERED AS WELL AS BENEFICIAL SHARE HOLDERS, THEREFORE, THE PR OVISIONS OF SECTION 2(22)(E) WERE APPLICABLE. WE, HOWEVER, FIND THAT THE SAID ORDER OF THE TRIBUN AL IN THE CASE OF UNISOL INFRASERVICES (P) LTD. (SUPRA) STOOD RECALLED AS CAN BE SEEN FROM THE FOLL OWING OBSERVATIONS OF ITAT MUMBAI BENCH C IN THE DECISION OF DCIT VS. PATEL ALLUMINIUM PV T. LTD. (ITA NO. 1598/MUM/2010) : 7 THE LEARNED D.R. TRIED TO DISTINGUISH THE JUDGEMEN T OF THE SPECIAL BENCH BY RELYING ON THE DECISION IN THE CASE OF M/S. UNISOL INFRA SERVICES PVT LTD. IN ITA NO. 2187/MUM/2008, WHICH IS MENTIONED IN THE GROUNDS OF APPEAL. THE ORDER RELIED UPON BY THE REVENUE WAS RECALLED SUBSEQUENTLY AS THAT ORDER DID NOT CONSIDER THE SPECIAL BENCH DECISION IN ITS CORRECT PERSPECTIVE AND ACCORDINGLY RELIANCE ON THE ABOVE IS NOT CORRECT. MOREOVER THE PRINCIPLES ON SHARE HOLDING DECIDED IN BHAUMIK COLOUR P. LTD. 313 ITR (AT) 146 (SB) (MUM) WAS UPHELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF UNIVERSAL MEDICARE PVT. LTD. 324 ITR 263 . CONSEQUENTLY THE ORDER OF THE CIT(A) IS UPHELD. REVENUES GROUND IS REJECTED. WE, THEREFORE, FIND THAT THE RATIO LAID DOWN IN THE DECISION OF SPECIAL BENCH IN THE CASE OF ACIT VS.BHAUMIK COLOUR (P) LTD. (SUPRA) WHICH HAS ALSO B EEN FOLLOWED AND CONSIDERED AS GOOD LAW IN THE OTHER DECISIONS CITED BY THE LD. COUNSEL FOR TH E APPELLANT (SUPRA), IS APPLICABLE TO THE PRESENT CASE, WHEREIN ON BOTH THE QUESTIONS REFERRED TO THE SPECIAL BENCH, IT HAS BEEN CONCLUDED AS UNDER: 41. IN THE LIGHT OF THE ABOVE DISCUSSION, THE QUESTION S REFERRED TO THE SPECIAL BENCH ARE ANSWERED AS FOLLOWS : ON THE FIRST QUESTION : DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HAND S OF A PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY A ND NOT IN THE HANDS OF A PERSON OTHER THAN A SHAREHOLDER. ON THE SECOND QUESTION : THE EXPRESSION SHAREHOLDER REFERRED TO IN SECT ION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AN D BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENE FICIAL SHAREHOLDER THEN THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. SIMI LARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN A LSO THE PROVISIONS OF SECTION 2(22)(E) WILL NOT APPLY. IN THE INSTANT CASE, THE APPELLANT-COMPANY IS NEITH ER A REGISTERED SHAREHOLDER NOR A BENEFICIAL SHAREHOLDER OF THE LENDING COMPANY AND THEREFORE, T HE CONCLUSION OF THE AUTHORITIES BELOW THAT 8 THE ALLEGED DEEMED DIVIDEND U/S. 2(22)(E) IS TAXABL E IN THE HANDS OF THE ASSESSEE COMPANY U/S. 56 OF THE ACT IS NOT SUSTAINABLE AT ALL. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20.10.2011. SD/- SD/- (H.S. SIDHU) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT M EMBER DATED: 20 TH OCTOBER, 2011 *AKS/- COPY OF THE ORDER FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) BY ORDER 4. CIT, CONCERNED 5. DR, ITAT, AGRA 6. GUARD FILE ASSISTANT REGISTRAR TRUE COPY