M/s. ARCTIC INVESTMENT & TRADING CO. PVT. LTD., MUMBAI V. DCIT CIR. - 9(1), MUMBAI

ITA 475/MUM/2006

• Counselvise Citation: 47519914 RSA 2006
• Duration Of Justice: 5 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 31-05-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 20-01-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PARTHA SARATHI NAIK
• Assessee Lawyers: P J PARDIWALA
• Keywords: Earning of tax free income; Additional evidence; Deemed dividend
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT. ASHA VIJAYARAGH AVAN (JM) ITA NO. 475/MUM/2006 ASSESSMENT YEAR- 2002-03 M/S. ARCTIC INVESTMENT & TRADING CO. PVT. LTD., 2, RANG SHARDA, K.C. MARG, BANDRA(W), MUMBAI-400 050 PAN-AAACA 6813E VS. THE DCIT, CIRCLE 9(1), AAYAKAR BHAVAN, MUMBAI-400 020 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI P.J. PARDIWALA RESPONDENT BY: SHRI PARTHA SARATHI NAIK O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 24.11.2005 PASSED BY THE LD. CIT(A)- FOR THE ASSESS MENT YEAR 2002-03. 2. THE FIRST GROUND RAISED BY THE ASSESSEE IS AGAIN ST THE DECISION OF THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMING ACT ION OF ASSESSING OFFICER IN TREATING THE ADVANCES OF RS 35,00,000/- RECEIVED FR OM M/S RISHABH HARSH TRADING AND INVESTMENT PVT. LIMITED (RHTIPL) AS DEE MED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 3. IN THE COURSE OF ASSESSMENT, THE ASSESSING OFFIC ER FOUND FROM THE BALANCE SHEET THAT THE ASSESSEE HAS TAKEN LOAN OF RS 35,00, 000/- FROM RHTIPL. AS PER THE CONFIRMATION FILED BY THE ASSESSEE, NO INTEREST HAS BEEN PROVIDED ON THIS ITA NO. 475/M/06 2 BORROWING. THE ASSESSING OFFICER OF RHTIPL, REPORTE D THAT THE ASSESSEE IS A SUBSTANTIAL SHARE HOLDER OF RHTIPL, IN VIEW OF THES E FACTS, THE ADVANCE RECEIVED BY THE ASSESSEE OF RS 35,00,000/- FROM RHTIPL, WAS PROPOSED TO BE HELD AS A DEEMED DIVIDEND U/S 2(22) (E) AND THE ASSESSEES OB JECTIONS WERE CALLED FOR. 4. THE ASSESSEE FILED A SUBMISSION DATED 4.2.2005 W HEREIN IT WAS CONTENDED THAT RHTIPL WAS ENGAGED IN THE BUSINESS OF ADVANCIN G FUNDS AND MONEY LENDING WAS ONE OF THE OBJECTS STATED IN THE MEMORANDUM OF ASSOCIATION AND THAT THE MONEY WAS ADVANCED TO THE ASSESSEE BY WAY OF AN INT EREST BEARING ICD. THE AO REJECTED THIS EXPLANATION OF THE ASSESSEE AS FACTUA LLY INCORRECT IN SO FAR AS NO INTEREST IS PROVIDED BY THE ASSESSEE FOR THE ADVANC E RECEIVED FROM RHTIPL, FURTHER THE BALANCE SHEET OF RHTIPL., REVEALS THAT THE ASSESSEE HAS GIVEN LOANS AND ADVANCES OF RS 50.69 LAKHS. BUT THE MAJOR PART OF THESE ADVANCES IS TO THE HOLDING COMPANY. M/S BOMBAY OIL INDUSTRIES PVT. LTD ., THERE ARE NO FREQUENT TRANSACTIONS WHICH CAN SUPPORT THE CONTENTION OF TH E ASSESSEE THAT RHTIPL, IS ENGAGED IN THE BUSINESS OF FINANCE. OUT OF THE TOT AL RECEIPTS OF RS 3425 LAKHS AN AMOUNT OF RS 329.35 LAKHS IS FROM DIVIDEND ON SHARE INVESTMENTS AND ONLY RS. 13,00,000 IS BY WAY OF INTEREST. THEREFORE THE ASS ESSEES CONTENTION THAT RHTIPL M/S RISHAB HARSH TRADING AND INVESTMENT PVT. LTD., IS IN THE BUSINESS OF MONEY LENDING IS ALSO NOT ACCEPTABLE. AO HELD THAT ALL THE INGREDIENTS OF SECTION 2(22)(E) HAVING BEEN ESTABLISHED THE ADVANCE RECEI VED BY THE ASSESSEE FROM M/S RISHAB HARSH TRADING AND INVESTMENT PVT. LTD AN D HELD THE AMOUNT OF RS. 35,00,000/- RECEIVED FROM RHTIPL TO BE DEEMED DIVID END AND ADDED IT TO THE TOTAL INCOME OF THE ASSESSEE 5. IN APPELLATE PROCEEDINGS, BEFORE THE CIT(A), TH E ASSESSEE HAS FILED A WRITTEN SUBMISSION GIVING DETAILS OF THE SHARE HOLD INGS OF APPELLANT COMPANY AS WELL AS RISHAB HARSH TRADING AND INVESTMENT P. LTD. , AND ARGUED THAT NEITHER THE APPELLANT COMPANY WAS HOLDING THE SHARES OF RIS HAB HARSH TRADING AND INVESTMENT P. LTD NOR ANY PERSON HOLDING MORE THAN 10% SHARES OF RISHAB ITA NO. 475/M/06 3 HARSH TRADING AND INVESTMENT P. LTD IS HOLDING SHAR ES OF THE APPELLANT COMPANY WHICH IS A PRIMARY CONDITION FOR APPLYING SEC 2(22) (E) IT WAS ALSO SUBMITTED THAT THE AO HAS NOT EXAMINED THIS CONDITION. THEREFORE ADDITION OF RS 35 LACS IS TO BE DELETED. SINCE THIS CONTENTION WAS GOING INTO ROOT OF THE ISSUE, CIT(A) CALLED FOR A REMAND REPORT FROM AO VIDE LETTER DATED 4.7.2005 THE AO WAS SUBMITTED A REMAND REPORT VIDE LETTER DATED 13.9.2005 WHICH IS AS UNDER: 2. REGARDING THE ADDITION OF ADVANCES OF RS 35 LAK HS RECEIVED BY THE APPELLANT FROM M/S RISHAB HARSH TRADING AND INV ESTMENT P. LTD., (RHTIPL) AS DEEMED DIVIDEND UNDER SECTION 2(2 2)(E) IF THE ACT IT IS SEEN FROM OFFICE RECORD THAT THE ASSESSEE AT THE TIME OF ASSESSMENT SUBMITTED LETTER BEFORE THE ASSESSING OF FICER ACIT 9(3) AND ASSESSING OFFICER DCIT 9(1) CONTENDING THAT M/S RISHAB HARSH TRADING AND INVESTMENT P. LTD., IS IN THE BUSINESS OF FINANCE. THEREFORE THE SECTION 2(22)(E) OF THE IT ACT IS NOT APPLICABLE ON THE ASSESSEE. (COPY ENCLOSED) HOWEVER IN THE LETTER FIL ED BEFORE YOUR HONOUR THE ASSESSEE IS CLAIMING ABOUT THE SHARE HOL DING PATTERN WHICH CONTRADICTS THE PAPER SUBMITTED BY THE ASSESS EE AT THE TIME OF ASSESSMENT PROCEEDINGS (COPY OF MEMORANDUM AND ARTI CLES OF ASSOCIATION OF M/S RISHAB HARSH TRADING AND INVESTM ENT P. LTD IS ENCLOSED) THIS FACT WAS ALSO INTIMATED BY THE AO OF M/S RISHAB HARSH TRADING AND INVESTMENT P. LTD., THAT THE ASSE SSEE IS A SUBSTANTIAL SHARE HOLDER OF M/S RISHAB HARSH TRADIN G AND INVESTMENT P. LTD., AND THE SAME IS PROVED BY THE M EMORANDUM AND ARTICLES OF ASSOCIATION OF M/S RISHAB HARSH TRA DING AND INVESTMENT P. LTD., 3. THE ASSESSEES CONTENTION THAT THE MONEY WAS ADV ANCES TO THE ASSESSEE BY WAY OF AN INTEREST BEARING ICD IS ALSO FACTUALLY INCORRECT. IT IS SEEN FROM THE CONFIRMATION LETTER FILED BY THE ASSESSEE DURING ASSESSMENT PROCEEDINGS THAT NO INTEREST HAS BEEN PROVIDED OR PROVISIONED ON THIS BORROWING(COPY OF CONFIRMATI ON LETTER ENCLOSED). 4. IT IS ALSO EVIDENT FROM THE BALANCE SHEET OF M/S RISHAB HARSH TRADING AND INVESTMENT P. LTD., THAT THE ASSESSEE H AS GIVEN LOAN AND ADVANCES OF RS 50.06 LAKHS BUT THE MAJOR PART O F THESE ADVANCES IS TO BE HOLDING COMPANY M/S BOMBAY OIL IN DUSTRIES P LTD AND THERE ARE NO FREQUENT TRANSACTIONS WHICH CAN SU PPORT THE CONTENTION OF THE ASSESSEE THAT M/S RISHAB HARSH TR ADING AND INVESTMENT P. LTD IS ENGAGED IN THE BUSINESS OF FIN ANCE. HENCE THE ASSESSEES CONTENTION THAT M/S RISHAB HARSH TRADING AND ITA NO. 475/M/06 4 INVESTMENT P. LTD IS IN THE BUSINESS OF MONEY LENDI NG IS ALSO NOT SUBSTANTIATED BY FACTS. THE ADDITIONAL EVIDENCE PR ODUCED BY THE ASSESSEE MAY NOT BE ENTERTAINED AT THIS STAGE. IT IS THEREFORE PRAYED THAT THE ADDITION MADE BY THE AO IS SUSTAINED. 6. A COPY OF THE REMAND REPORT WAS PROVIDED TO TH E ASSESSEE AND HIS COUNTER COMMENTS WERE OBTAINED, THE ASSESSEE HAS SU BMITTED HIS COUNTER COMMENTS VIDE LETTER DATED AS UNDER: THE ASSESSEE HAS BEEN SUPPLIED WITH THE COPY OF T HE REMAND REPORT SUBMITTED BY THE ASSESSING OFFICER. WE HAD SUBMITTED BEFORE YOUR HONOUR THAT THE PROVIS IONS OF SEC 2(22)(E) ONLY APPLIED WHERE A COMPANY GIVES LOAN TO A PERSON WHO IS A BENEFICIAL SHAREHOLDER HOLDING NOT LES THAN 10% OF THE VOTING RIGHTS OF THE COMPANY OR TO ANY CONCERN IN WHICH SUCH SHARE HOLDER HAS A SUBSTANTIAL INTEREST I.E. HOLDING SHARES CARRYING NOT LESS THAN 20% OF THE VO TING POWER. IN THE PRESENT CASE THE ASSESSEE DID NOT HOLD ANY SHARES IN RISHAB HARSH TRADING INVESTMENT P. LTD., (RHTIPL) FURTHER ANY PE RSON HOLDING SHARES IN RHTIPL DOES NOT HOLD ANY SHARES IN THE ASSESSEE. THIS THE PRIMARY CONDITION FOR APPLYING PROVISIONS OF SECTION 2(22)( E) IS NON EXISTENT IN THE PRESENT CASE. IN SUPPORT OF THE ABOVE, WE HAD ENCLO SED COPY OF THE ANNUAL REPORT OF BOTH THE COMPANIES ALONG WITH OUR SUBMISSIONS. SINCE THE ASSESSING OFFICER DID NOT EXAMINE THE APP LICABILITY OF SECTION 2(22)(E) WE HAD REQUESTED YOUR HONOUR TO ADMIT THE ADDITIONAL EVIDENCE AND SEND IT TO THE ASSESSING OFFICER FOR COMMENTS A S THE ISSUE GO TO THE ROOT OF THE MATTER. IN THE REMAND REPORT THE ASSESSING OFFICER HAS NOT DENIED THE CONTENTS OF THE ABOVE SUBMISSIONS BUT HAS COMMENTED ON THE OTHE R SUBMISSIONS MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS RE GARDING NON APPLICABILITY OF PROVISIONS OF SECTION 2(22)(E). HE HAS MENTIONED THAT THE FACT THAT SUBSTANTIAL SH AREHOLDING IS THERE IS PROVED BY THE COPY OF THE MEMORANDUM AND ARTICLES O F ASSOCIATION OF RHTIPL. WITH RESPECT WE HAVE TO SUBMIT THAT: A THE COPY OF THE MEMORANDUM OF ASSOCIATION ONLY SH OWS THE PERSONS WHO ARE SUBSCRIBER TO MEMORANDUM OF ASSOCIATION AND NOT THE PERSONS WHO ARE SHAREHOLDERS DURING THE YEAR. PERSONS WHO ARE SHAREHOLDERS ITA NO. 475/M/06 5 DURING THE YEAR CAN ONLY BE SEEN FROM THE REGISTER OF MEMBERS AND ANNUAL RETURN FILED WITH THE REGISTRAR OF COMPANIES FOR TH E RELEVANT YEAR. B. THE QUESTION OF GOING INTO EXCEPTION WOULD RISE ONLY IF OTHERWISE THE CASE IS COVERED BY MAIN PROVISIONS OF SECTION 2(22)(E). AS WE HAVE DEMONSTRATED THAT THE BASIC CONDITION FO R APPLYING PROVISIONS OF SECTION 2(22)(E) IS NOT MET THE ADDITION MADE OU GHT TO BE DELETED. 7. THE LD.CIT(A) FELT THAT FURTHER CLARIFICATION WA S REQUIRED AND THE AO WAS ASKED TO FURTHER EXAMINE THE ISSUE AND SUBMIT FURTH ER REPORT. ACCORDINGLY THE AO HAS SUBMITTED REPORT DATED 26.11.05 WHICH IS AS UND ER: FROM THE DETAILS SUBMITTED IT IS SEEN THAT RISHAB HARSH TRADING & INVESTMENT P. LTD HAS FOLLOWING SHAREHOLDERS:- SHAREHOLDEERS % OF SHAR ES (I) AQUARIUS FAMILY TRUST 25% (II) GEMINI FAMILY TRUST 25% (III) TARUS FAMILY TRUST 25% (IV) VALENTINE FAMILY TRUST 25% AS SEEN FROM THE COPY OF INDENTURE OF TRUST DATED 2 9.5.2001 THESE FAMILY TRUSTS IN TURN HAVING FOLLOWING TRUSTEES AND BENEFICIARIES ; TRUSTEES IN THE CASE OF ACQUARIUS FAMILY TRUST AND VALENTINE FAMILY TRUST ARE: 1. MRS. HEMALATA CHARANDAS MARIWALA 2. MR. HARSH CHARANDAS MARIWALA 3. MR. KISHORE VALLABHDAS MARIWALA 4. MR. RAJENDRA KISHORE MARIWALA TRUSTEES IN THE CASE OF GEMINI FAMILY TRUST AND TAURUS FAMILY TRUST ARE: 1. MRS. HEMALATA CHARANDAS MARIWALA 2. MR. HARSG CHARANDAS MARIWALA 3. MR. KISHARE VALLABHDAS MARIWALS 4. MR. RAJENDRA KISHORE MARIWALA BENEFICIARIES IN ALL THE ABOVE TRUSTS ARE: 1.MR. HARSH CHARANDAS MARIWALA (I) MRS. HEMALATA CHARANDAS MARIWALS (II). MR. HARSH CHARANDAS MARIWALA (III) MRS. ARCHANA HARSH MARIWALA ITA NO. 475/M/06 6 (IV MR. RISHABH HARSH MARIWALA 2.MR. KISHORE VALLABHDAS MARIWALA (I) MR. KISHORE VALLABHDAS MARIWALA (II) MRS. HEMA KISHORE MARIWALA (III) MR. RAJENDRA KISHORE MARIWALA (IV)MRS. ANJALI RAJENDRA MARIWALA (V) MR. MR. RAVINDRA KISHORE MARIWALA (VI) MR.PAULA RAVINDRA MARIWALA (VII) MISS ANANDITA RAJENDRA MARIWALA (MINOR DAUGHTER OF MR RAJENDRA KISHORE MARIWALA) (VIII) MISS TARIKA RAJENDRA MARIWALA (MINOR DAUGHTER OF MR . RAJENDRA KIASHORE MARIWALA) (IX) MASTER ARNAV RAVINDRA MARIWALA (MINOR SON OF MR. RA JENDRA K MARIWALA) (X) MASTER VIBHAV RAVINDRA MARIWALA (MINOR SON OF MR. R AJENDRA K MARIWALA) IT IS SEEN THAT M/S ARCTIC INVESTMENT & TRADING P. LTD HAS FOLLOWING SHAREHOLDERS: SHAREHOLDERS % OF SHARES (I)BOMBAY OIL INDUSTRIES P. LTD 98.78% (II)ARCHANA HARSH MARIWALA 2.22% IT IS FURTHER SEEN FROM THE ANNUAL RETURN DAT ED 31.9.2002 OF M/S BOMBAY OIL INDUSTRIES PVT. LTD THAT THE SAID COMPANY HAS FOLL OWING SHAREHOLDERS: SHAREHOLDERS % OF SHARES 1. MR. HARSH CHARANDAS MARIWALA 25% 2. MR. KISHORE VALLABHDAS MARIWALA 25% 3. MR ARCHANA HARSH MARIWALA 50% HOWEVER, THE ASSESSEE HAS SUBMITTED THAT THE SHARE HOLDERS OF BOMBAY OIL INDUSTRIES P. LTD ARE THE FOLLOWING FIRMS: 1. C,V. MARIWALA & SONS 2. H.V. MARIWALA & SONS 3. K.V. MARIWALA & SONS 4. J.V. MARIWALA & SONS THE ASSESSEE CONTENDED THAT THESE FIRMS ARE UNREGIS TERED THEREFORE THE SHAREHOLDERS APPEARING IN ANNUAL RETURN OF THE COMP ANY ARE DIFFERENT. HOWEVER HIS CONTENTION IS NOT ACCEPTED AS ONE HAS TO GO BY THE ANNUAL RETURN AS PER THE COMPANY ACT AND NOT BY ASSESSEES CONTENTION DEVOID OF ANY SUBSTANTIATION. IT IS AN APPARENT CASE WHERE RISHAB HARSH TRADING & INVESTMENT P. LTD CONTROLLED BY FOUR FAMILY ITA NO. 475/M/06 7 TRUSTS AND IN TURN CONTROLLED BY THE TRUSTEES SHRI HARSH C. MARIWALA, SHRI. KISHORE VALLABHDAS MARIWALA & OTHERS HAS GIVEN SUBSTANTIAL AMOUNT OF ADVANCE TO THE ASSESSEE COMPANY NAMELY, ARCTIC INVESTMENT & TRADIN G P. LTD WHICH IN TURN IS CONTROLLED BY BOMBAY OIL INDUSTRIES P. LTD WHERE TH E VERY SAME PEOPLE ARE THE SHAREHOLDERS (TRUSTEES AND BENEFICIARIES OF THE FOU R FAMILY TRUST). THEREFORE IT IS CLEAR CASE WHERE THE ASSESSEE HAS C REATED A CORPORATE VEIL TO AVOID THE APPLICABILITY OF SECTION 2(22)(E) OF THE IT ACT 1961. THE THREE PARAMETERS FOR THE APPLICABILITY OF SECTION 2(22)(E) ARE AS UN DER: (A) OF ANY SUM BY WAY OF ADVANCE OR LOAN TO SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES HOLDING NOT LESS THA N TEN PERCENT OF THE VOTING POWER. (B) TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMB ER OR A PARTNER AND IN WHICH HE HAS SUBSTANTIAL INTEREST (C) ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF OR FOR TH E INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER. THEREFORE IN THIS ARE PARAMETER (C) IS CLEARLY APPL ICABLE AND IF THE CORPORATE VEIL IS LIFTED THE 2 ND PARAMETER IS ALSO APPLICABLE. IT IS APPROPRIATE TO REFER TO CERTAIN LAWS IN T HIS REGARD. CIT V DURGA PRASAD MORE (1972) 82 ITR 540(SC) REIT ERATED THE PRINCIPLE OF LIFTING THE VEIL IN THE FOLLOWING WORDS (PAGE 545) A LITTLE PROBING WAS SUFFICIENT IN THE PRESENT CASE TO SHOW THAT THE APP ARENT WAS NOT THE REAL. THE TAXING AUTHORITIES WERE NOT REQUIRED TO PUT ON BLIN KERS WHILE LOOKING AT THE DOCUMENTS PRODUCED BEFORE THEM. THEY WERE ENTITLED TO LOOK INTO THE SURROUNDING CIRCUMSTANCES TO FIND OUT THE REALITY OF THE RECITALS MADE IN THOSE DOCUMENTS. IN M.D. JINDAL V CIT (1987) 164 ITR 28(CAL) IT WAS HELD ON THE FACTS ESTABLISHED THAT THE ASSESSEE AND HIS WIFE CONTROLL ED THE COMPANY WITH A VIEW TO CIRCUMVENTING THE PROVISIONS OF SEC 2(22)(E ) BY AN AGREEMENT WITH THE COMPANY THE COMPANY WAS MADE A DEBTOR TO THE AS SESSEE AND HIS WIFE IN THE MATTER OF ADVANCING CERTAIN MATERIALS THE VALUE WHEREOF WAS HELD TO BE DEEMED DIVIDEND. SEC 2(22)(E) CREATES A LEGAL FICT ION. LEGAL FICTIONS ARE CREATED ONLY FOR A DEFINITE PURPOSE. THEY ARE LIMIT ED TO THE PURPOSE FOR WHICH THEY ARE CREATED AND SHOULD NOT BE EXTENDED BEYOND THEIR LEGITIMATE FIELD. BUT THE LEGAL FICTION HAS TO BE CARRIED TO ITS LOGI CAL CONCLUSION WITHIN THE FRAMEWORK OF THE PURPOSE FOR WHICH IT IS CREATED.. IN THE SAID CASE THE COURT HAD COME TO A FINDING THAT THE AGREEMENT WAS AN AR RANGED ONE AND IN SUCH CIRCUMSTANCES THE COURT WAS ENTITLED TO LIFT THE VE IL OF CORPORATE IDENTITY AND TO PAY REGARD TO THE ECONOMIC REALITIES BEHIND THE LEGAL FAADE. THE COURT HAS POWER TO DISREGARD THE CORPORATE ENTITY IF IT IS U SED FOR TAX EVASION OR TO ITA NO. 475/M/06 8 CIRCUMVENT TAX OBLIGATION O THE PERPETRATE FRAUD AS WAS HELD IN JUGGILAL KAMLAPAR V CIT (1969) 73 ITR 702(SC) AT PAGE 710. IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT THE PROV ISIONS OF SEC 2(22)(E) IS CLEARLY ATTRACTED IN THIS CASE. 8. COMMENTS OF THE ASSESSEE WERE AGAIN OBTAINED ON THIS REPORT, THE ASSESSEE HAS SUBMITTED VIDE LETTER DATED 22.11.05 A S UNDER: THE ASSESSEE HAS BEEN SUPPLIED WITH THE COPY OF FUR THER REMAND REPORT DATED 26.10.2005 SUBMITTED BY THE ASSESSING OFFICER. IN THE REMAND REPORT THE ASSESSING OFFICER HAS MADE THE FOLLOWING SUBMISSIONS OBSERVATIONS IN ORDER TO CONTEND THAT P ROVISIONS OF SEC 2(22)(E) ARE APPLICABLE. IN THIS CONNECTION WE HAVE TO SUBMIT THAT IN ORIGINAL ASSESSMENT PROCEEDINGS ADDITIONS H AS NOT BEEN MADE ON ACCOUNT OF THESE FACTORS. SHAREHOLDERS OF RISHAB HARSH TRADING AND INVESTMENT S P. LTD (RHIPTL) ARE FOUR TRUSTS. THE TRUSTEES OF THE ACQUARIUS TRUST ARE: (I) HEMALATA CHARANDAS MARIWALS (II) HARSH CHARANDAS MARIWALA (III) KISHORE VALLABHDAS MARIWALA (IV) RAJENDRA KISHORE MARIWALA THE TRUSTEES OF THE GEMINI TRUST ARE: (I) HEMALATA CHARANDAS MARIWALA (II) HARSH CHARANDAS MARIWALA (III) KISHORE VALLABHDAS MARIWALA (IV) RAJENDRA KISHORE MARIWALA BENEFICIARIES IN ALL THE TRUST ARE VARIOUS FAMILY M EMBERS AS STATED IN THE REMAND REPORT. SHAREHOLDERS OF ASSESSEE ARE (I) BOMBAY OIL INDUSTRIES LTD. (II) ARCHANA HARSH MARIWALA SHAREHOLDERS OF BOMBAY OIL INDUSTRIES LTD ARE ITA NO. 475/M/06 9 (I) HARSH C MARIWALA (II) KISHORE V MARIWALA (III) ARCHANA HARSH MARIWALA THOUGH ASSESSEE HAS SUBMITTED THAT C.V. MARIWALA & SONS H.V. MARIWALA & SONS K.V. MARIWALA & SONS AND JV. MARIWA LA & SONS ARE THE BENEFICIAL OWNERS OF THE SHARES, ONLY ANNUAL RETURN HAS BEEN SEEN. RHIPL IS CONTROLLED BY FOUR FAMILY TRUSTS. FOUR FA MILY TRUSTS ARE CONTROLLED BY SHRI HARSH MARIWALA SHRI KISHORE MARIWALA AND OTHERS. ASSESSEE IS CONTROLLED BY BOMBAY OIL INDUSTRIES WHI CH IS CONTROLLED WHERE VERY SAME PERSONS ARE THE SHAREHOL DERS (TRUSTEES AND BENEFICIARIES OF THE TRUST) THE LOAN IS COVERED BY ANY PAYMENT BY SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SHAREHO LDER IF THE CORPORATE VEIL IS LIFTED THE LOAN IS TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS MEMBER OR A PARTNER IN WH ICH HE HAS A SUBSTANTIAL INTEREST. IN THIS REGARD WE HAVE TO SUBMIT AS UNDER: PROVISIONS OF SECTION 2(22)(E) ONLY APPLIED WHERE A COMPANY GIVES LOAN TO A PERSON WHO IS A BENEFICIAL SHAREHOL DER HOLDING NOT LESS THAN 10% OF THE VOTING RIGHTS OF THE COMPANY O R TO ANY CONCERN IN WHICH SUCH SHAREHOLDER HAS A SUBSTANTIAL INTEREST I.E. HOLDING SHARES CARRYING NOT LESS THAN 20% OF THE VO TING POWER OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHAL OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER TO THE EXTENT TO W HICH THE COMPANY IS EITHER CASE POSSESSES ACCUMULATED PROFIT . IN THE PRESENT CASE, THE ASSESSEE DID NOT HOLD ANY SHARES IN RISHABH HARSH TRADING AND INVESTMENT P. LTD (RHTIPL ) FURTHER ANY PERSON HOLDING SHARES IN RHTIPL DOES NOT HOLD A NY SHARES IN THE ASSESSEE. THUS THE PRIMARY CONDITION FOR APPLY ING PROVISIONS OF SEC 2(22)(E) IS NON-EXISTENT IN THE PRESENT CASE . IN THIS CONNECTION WE ALSO INVITE YOUR HONNOURS ATTENTION I N THE CASE OF COMMISSIONER OF INCOME TAX VS H.K.MITTAL 219 ITR PA GE 420, IN WHICH IT HAS BEEN HELD THAT THE CHIEF INGREDIENT OF DIVIDEND AS DEFINED IN SEC 2(22)(E) IS THAT THE RECIPIENT SHOUL D BE A SHAREHOLDER ON THE DATE OF THE LOANS WAS ADVANCED AND IF SUCH F ACT DOES NOT STAND ESTABLISHED THE ADVANCE CANNOT TAKEN AS DEEME D DIVIDEND. ITA NO. 475/M/06 10 THEREFORE THE PROVISIONS OF SEC 2(22)(E) WOULD NOT BE APPLICABLE IN THE ASSESSEES CASE AS FAR AS CONDITI ONS OF PAYMENT TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER O R A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST IS CONCE RNED. AS FAR AS THE SECOND CONDITION IS CONCERNED WE HAVE TO SUBMIT THAT THE SHAREHOLDERS OF THE RHTIPL ARE: NAME OF THE SHAREHOLDER % OF SHARES AQUARIUS FAMILY TRUST 25 GEMINI FAMILY TRUST 25 TARUS FAMILY TRUST 25 VALENTINE FAMILY TRUST 25 IN ORDER TO ATTRACT THE PARAMETER OF SEC 2(22)(E) O F THE ACT THERE MUST BE PAYMENT BY THE CONCERN FOR THE INDIVI DUAL BENEFIT OF SHAREHOLDER. THE WORD USED BY THE LEGISLATURE IS SH AREHOLDER. SHAREHOLDER MEANS THE REGISTERED SHAREHOLDER AND NO T THE BENEFICIAL SHAREHOLDER IN THIS CASE THE ASSESSEE DO ES NOT HOLD ANY SHARES IN RHITPL AND THEREFORE AT FIRST INSTANCE IT IS NOT A SHAREHOLDER AND NEITHER ANY REGISTERED SHAREHOLDER OF RHITPL IS HOLDING SHARES IN THE ASSESSEE COMPANY. IN SUPPORT OF THE ABOVE WE WOULD LIKE TO INVITE YOU R HONOURS ATTENTION TO THE FOLLOWING DECISIONS: MADURA COATS (P) LTD IN RE 274 ITR PAGE 609 IN WHIC H IT HAS BEEN HELD THAT WHERE CHL IS THE HOLDING COMPANY AND PL. TTL AND CFL ARE US SUBSIDIARY AND CFL IS THE HOLDING COMPAN Y OF JPC WHICH HOLDS 99.9998% AND TTL HOLD 0.0002% SHARES OF THE APPLICANT COMPANY MPCL LOAN ADVANCED BY MPCL TO CF L OUT OF ITS ACCUMULATED PROFITS WILL NOT CONSTITUTE DEEMED DIVIDEND UNDER SEC 2(22)(E) TO ATTRACT THE CLAUSE (E) OF THE SEC 2 (22) OF THE ACT SHAREHOLDER MUST BE REGISTERED SHAREHOLDER. COMMISSIONER OF INCOME TAX ANDRAPRADESH VCP SARATH Y MUDALIAR IN IT HAS BEEN HELD THAT SEC 2(6A) (E) OF THE 1922 AC MUST NECESSARILY RECEIVE A STRICT CONSTRUCT ION WHEN S 2 96A(E) SPEAKS OF SHAREHOLDER IT REFERS TO THE REGISTERED SHAREHOLDER AND NOT TO THE BENEFICIAL OWNER. IT REFERS TO THE REGISTERED SHARE HOLDER AND NOT TO THE BENEFICIAL OWNER. THE HUF CANNOT BE CONSIDERED AS A SHAREHOLDER EITHER U/S 2(6A) (E) OR U/S 23A OR U/S1 6(2) R.W.S. 18(5) OF THE ACT HENCE A LOAN GIVEN TO A HUF CANNOT BE CO NSIDERED AS A LOAN ADVANCED TO A SHAREHOLDER OF A COMPANY. ITA NO. 475/M/06 11 IN VIEW OF THE ABOVE THE CONDITION OF ANY PAYMENT B Y SUCH COMPANY ON BEHALF OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER WOULD ALSO NOT APPLICABLE TO THE ASSESS EES CASE. HOWEVER THE CASES MENTIONED BY THE CASE OF MD. JIND AL VS CIT (CAL) (164 ITR 28) IN WHICH THE AMOUNT ADVANCED BY THE COMPANY TO THE SHAREHOLDER FOR THE PURCHASE OF MATE RIAL WAS CONSIDERED AS DEEMED DIVIDEND. HOWEVER IN THE ASSE SSEES CASE THE FACTS ARE ENTIRELY DIFFERENT. THEREFORE THE SAI D DECISION WOULD NOT BE APPLICABLE TO THE ASSESSEE. AS WE HAVE DEMONSTRATED THAT THE BASIC CONDITION FO R APPLYING PROVISION OF SEC 2(22)(E) IS NOT MET THE A DDITION MADE OUGHT TO BE DELETED. 9. THE LD. CIT(A) REJECTED THE CONTENTION OF THE AS SESSEE HOLDING AS UNDER: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE FINDING OF THE AO AND SUBMISSIONS OF THE APPELLANT BEFORE AO AS WELL AS I N APPELLATE PROCEEDINGS I HAVE ALSO GONE THROUGH THE REMAND REPORT DATED 26 .10.2005. IT IS VERY CLEAR FROM THE AFORESAID REMAND REPORT THAT IT IS N APPARENT CASE WHERE RISHAB HARSH TRADING AND INVESTMENT P.LTD IS CONTRO LLED BY FOUR FAMILY TRUSTS AND IN TURN CONTROLLED BY THE TRUSTEES SHRI HARSH C. MARIWALA SHRI KISHORE V MARIWALA AND OTHERS WHO HAVE GIVEN SUBSTA NTIAL AMOUNT OF ADVANCE TO THE APPELLANT COMPANY I.E. ARCTIC INVEST MENT AND TRADING P. LTD WHICH IN TURN IS CONTROLLED BY BOMBAY OIL INDUS TRIES P.LTD THERE THE SAME PEOPLE ARE THE SHARE HOLDERS (TRUSTEES AND BEN EFICIARIES OF FOUR FAMILY TRUST) THEREFORE HIS IS A CLEAR CASE WHERE T HE ASSESSEE HAS CREATED A COPORATE VEIL TO AVOID THE APPLICABILITY OF SEC 2 (22)(E) OF IT ACT 1961. THE AO HAS RIGHTLY RELIED ON THE DECISION OF CIT VS DURGA PRASAD MORE 82 ITR 540(SC) THE DECISION OF AO ALSO GETS SUPPORT FR OM THE FOLLOWING DECISIONS OF SUPREME COURT 157ITR 77 IN THE CASE WO RKMEN VS ASSOCIATED RUBBER INDUSTRY LTD 154 ITR 148 MC DOWELL AND CO.LT D VS CTO AND 214 ITR 801 SUMATI DAYAL VS CIT ACCORDING TO THESE DECI SIONS THE AO IS SUPPOSED TO FIND OUT AS TO WHAT IT THE REALITY BEHI ND THE CURTAIN AS DISCUSSED ABOVE. IT IS PROVED BY THE FACTS BROUGHT ON RECORD BY AO THAT THE ASSESSEE HAS CREATED A COOPERATE VEIL TO AVOID THE APPLICATION OF SEC 2(22)(E) THEREFORE I FIND NO FORCE IN THE ARGUMENTS OF THE APPELLANT THUS GROUND NO 1 IS DISMISSED. 10. AGGRIEVED, THE ASSESSEE IS ON APPEAL BEFORE US. ITA NO. 475/M/06 12 11. THE ASSESSEE HAS RECEIVED A SUM OF RS.35 LAKHS FROM RISHAB HARSH TRADING AND INVESTMENTS P LTD (RHTIPL). THE ISSUE IS WHETHER SUCH AN AMOUNT WOULD CONSTITUTE DEEMED DIVIDEND IN THE HANDS OF TH E ASSESSEE UNDER SECTION 2(22)(E). SECTION 2(22)(E) READS AS UNDER:- (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER A S REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) (MADE AFTER THE 31 ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, B EING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES EN TITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS) HOLDING NOT LESS THAN TEN PERCENT OF THE VOTING POWER, OR T O ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WH ICH HE HAS A SUBSTANTIAL INTEREST (HEREINAFTER IN THIS CLAUSE RE FERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHA LF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFIT S; 12. THEREFORE, THE MAIN REQUIREMENT IS THAT THE LOA N OR ADVANCES SHOULD BE GIVEN TO SHAREHOLDER WHO HOLDS NOT LESS THAN 10% OF THE SHARES IN THE COMPANY. 13. FROM THE FACTS ON RECORD, IT WOULD APPEAR THAT SHAREHOLDERS OF RHIPTL CONSISTS OF FOUR TRUSTEES.. THOSE ARE FAMILY TRUST IN WHICH VARIOUS MEMBERS OF THE FAMILY ARE EITHER THE TRUSTEE OR BENEFICIARY IN THE ASSESSEE COMPANY. SHARES ARE HELD BY M/S.BOMBAY OIL INDUSTRIES P LTD OF 97.7 8% AND MRS.ARCHANA HARSH MARIWALA 50% SHAREHOLDERS IN BOMBAY OIL INDUSTRIES LTD.IN THE CIRCUMSTANCES, THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS NOT A S HAREHOLDER IN RHTIPL AND THE AMOUNT GIVEN BY RHTIPL TO THE ASSESSEE COMPANY WOULD NOT SATISFY THE REQUIREMENT OF SECTION 2(22)(E) AND HENCE CANNOT BE CONSIDERED AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. 14. FROM THE ABOVE IT CAN BE SEEN THAT THE ASSESSEE COMPANY IS NOT A REGISTERED SHAREHOLDERS OF RHTIPL. FROM THE PLAIN R EADING OF THE SECTION 2(22)(E), THE AMOUNT GIVEN BY RHTIPL TO THE ASSESSE E WHO IS NOT THE ITA NO. 475/M/06 13 SHAREHOLDER WOULD NOT FALL WITHIN THE AMBIT OF DEEM ED DIVIDEND UNDER SECTION 2(22)(E). BUT THE ARGUMENT OF THE DEPARTMENT IS TH AT THESE COMPANIES AND THE TRUST ARE CONTROLLED BY AND FOR THE BENEFIT OF THE FAMILY MEMBERS. THEREFORE CORPORATE VEIL HAS TO BE RAISED AND SEEN WHO ARE TH E ULTIMATE SHAREHOLDERS AND THE PROVISIONS OF SECTION 2(22)(E) SHOULD BE APPLIE D BASED ON THE BENEFICIAL SHAREHOLDING. 15. SHAREHOLDING IN SECTION 2(22)(E) MEANS ONLY A R EGISTERED SHAREHOLDER AND NOT THE BENEFICIAL SHAREHOLDER. IN THE CASE OF ACIT VS BHAUMIK COLOUR (P) LTD., IN ITA NO. 5030/M/2004 THE SPECIAL BENCH HAS DISCUS SED AS FOLLOWS: IN THE CASE OF CIT VS. C.P. SARATHY MUDALIAR (SUPR A), PROVISIONS OF S. 2(6A)(E) OF THE ACT, 1922, WHICH WAS SYNONYMOUS TO S. 2(22)(E) OF THE IT ACT, 1961 CAME UP FOR CONSIDERATION. IN THE SAID CASE, MEMBERS OF HUF ACQUIRED SHARES IN A COMPANY WITH THE FUND OF THE F AMILY. LOANS WERE GRANTED TO HUF AND THE QUESTION WAS WHETHER THE LOA NS COULD BE TREATED AS DIVIDEND INCOME OF THE FAMILY FALLING WITHIN S. 2(6A)(E) OF THE ACT, 1922. THE APEX COURT HELD THAT ONLY LOANS ADVANCED TO SHAREHOLDERS COULD BE DEEMED TO BE DIVIDENDS UNDER S. 2(6A)(E) OF THE ACT; THE HUF COULD NOT BE CONSIDERED TO BE A SHAREHOLDER UNDER S. 2( 6A)(E) OF THE ACT AND HENCE, LOANS GIVEN TO THE HUF WILL NOT BE CONSIDERE D AS LOANS ADVANCED TO 'SHAREHOLDER' OF THE COMPANY AND COULD NOT, THEREFO RE, BE DEEMED TO BE ITS INCOME. THE APEX COURT FURTHER HELD THAT WHEN T HE ACT SPEAKS OF SHAREHOLDER IT REFERS TO THE REGISTERED SHAREHOLDER . THE AFORESAID DECISION OF THE APEX COURT IN THE CAS E OF C.P. SARATHY MUDALIAR (SUPRA) HAS BEEN FOLLOWED BY THE APEX COUR T IN THE CASE OF RAMESHWARLAL SANWARMAL VS. CIT (SUPRA). IN THIS CAS E, THE COMPANY ADVANCED THE LOANS TO THE ASSESSEE HUF WHO WAS THE BENEFICIAL OWNERS OF THE SHARES IN THE COMPANY, BUT THE SHARES WERE REGI STERED IN THE NAME OF THE INDIVIDUAL KARTA, WHO HELD THE SHARES FOR AND O N BEHALF OF THE HUF. ON THE ABOVE FACTS, THE QUESTION BEFORE THE SUPREME CO URT WAS WHETHER THE LOANS ADVANCED TO THE HUFBENEFICIAL OWNER OF THE S HARESWOULD BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF THE HUF. T HE SUPREME COURT HELD THAT THE HUF BEING ONLY THE BENEFICIAL SHAREHO LDER AND NOT A REGISTERED SHAREHOLDER WOULD NOT FALL WITHIN THE PU RVIEW OF S. 2 (6A)(E) OF THE 1922 ACT. THE APEX COURT OBSERVED AS FOLLOWS : ITA NO. 475/M/06 14 '........ WHAT S. 2(6A)(E) IS DESIGNED TO STRIKE AT IS ADVANCE OR LOAN TO A SHAREHOLDER AND THE WORD SHAREHOLDER CAN M EAN ONLY A REGISTERED SHAREHOLDER. IT IS DIFFICULT TO SEE HOW A BENEFICIAL OWNER OF SHARES WHOSE NAME DOES NOT APPEAR IN THE REGISTE R OF SHAREHOLDERS OF THE COMPANY CAN BE SAID TO BE A SH AREHOLDER. HE MAY BE BENEFICIALLY ENTITLED TO THE SHARE BUT HE IS CERTAINLY NOT A SHAREHOLDER. IT IS ONLY THE PERSON WHOSE NAME IS ENTERED IN THE REGISTER OF THE SHAREHOLDERS OF THE COMPANY AS THE HOLDER OF THE SHARES WHO CAN BE SAID TO BE A SHAREHOLDER QUA THE COMPANY AND NOT THE PERSON BENEFICIALLY ENTITLED TO THE SHARES. IT IS THE FORMER WHO IS A SHAREHOLDER WITHIN THE MATRIX AND SCHEME OF THE COMPANY LAW AND NOT THE LATTER. WE ARE, THEREFORE, OF THE VIEW THAT IT IS ONLY WHERE A LOAN IS ADVANCED BY THE COMPANY TO A REGISTERED SHAREHOLDER AND THE OTHER CONDITIONS SET OUT IN S. 2(6A)(E) ARE SATISFIED THAT THE AMOUNT OF THE LOAN WOULD BE LIAB LE TO BE REGARDED AS DEEMED DIVIDEND WITHIN THE MEANING OF S. 2(6A) (E).' IT IS THUS CLEAR FROM THE AFORESAID PRONOUNCEMENT OF THE HONBLE SUPREME COURT THAT TO ATTRACT THE FIRST LIMB OF THE PROVISIONS OF S. 2(22)(E) THE PAYMENT MUST BE TO A PERSON WHO IS A REGISTERED HOLDER OF SHARES. AS ALREADY MENTIONED THE CONDITION UNDER THE 1922 ACT AND THE 1961 ACT REGARDING THE PAYEE BEING A SHAREHOLDER REMAINS THE SAME AND IT IS THE CONDITION THAT SUCH SHAREHOLDER SHOULD BE BENEFICIA L OWNER OF THE SHARES AND THE PERCENTAGE OF VOTING POWER THAT SUCH SHAREH OLDER SHOULD HOLD THAT HAS BEEN PRESCRIBED AS AN ADDITIONAL CONDITION UNDER THE 1961 ACT. THE WORD 'SHAREHOLDER' ALONE EXISTED IN THE DEFINIT ION OF DIVIDEND IN THE 1922 ACT. THE EXPRESSION 'SHAREHOLDER' HAS BEEN INT ERPRETED UNDER THE 1922 ACT TO MEAN A REGISTERED SHAREHOLDER. THIS EXP RESSION 'SHAREHOLDER' FOUND IN THE 1961 ACT HAS TO BE THEREFORE CONSTRUED AS APPLYING ONLY TO REGISTERED SHAREHOLDER. IT IS A PRINCIPLE OF INTERP RETATION OF STATUTES THAT WHERE ONCE CERTAIN WORDS IN AN ACT HAVE RECEIVED A JUDICIAL CONSTRUCTION IN ONE OF THE SUPERIOR COURTS, AND THE LEGISLATURE HAS REPEATED THEM IN A SUBSEQUENT STATUTE, THE LEGISLATURE MUST BE TAKEN T O HAVE USED THEM ACCORDING TO THE MEANING WHICH A COURT OF COMPETENT JURISDICTION HAS GIVEN THEM. IN THE 1961 ACT, THE WORD 'SHAREHOLDER' IS FOLLOWED BY THE FOLLOWING WORDS 'BEING A PERSON WHO IS THE BENEFICI AL OWNER OF SHARES'. THIS EXPRESSION USED IN S. 2(22)(E), BOTH IN THE 19 61 ACT AND IN THE AMENDED PROVISIONS W.E.F. 1ST APRIL, 1988 ONLY QUAL IFIES THE WORD 'SHAREHOLDER' AND DOES NOT IN ANY WAY ALTER THE POS ITION THAT THE SHAREHOLDER HAS TO BE A REGISTERED SHAREHOLDER. THE SE PROVISIONS ALSO DO NOT SUBSTITUTE THE AFORESAID REQUIREMENT TO A REQUI REMENT OF MERELY HOLDING A BENEFICIAL INTEREST IN THE SHARES WITHOUT BEING A REGISTERED ITA NO. 475/M/06 15 HOLDER OF SHARES. THE EXPRESSION 'BEING' IS A PRESE NT PARTICIPLE. A PARTICIPLE IS A WORD WHICH IS PARTLY A VERB AND PAR TLY AN ADJECTIVE. IN S. 2 (22)(E), THE PRESENT PARTICIPLE 'BEING' IS USED TO DESCRIBED THE NOUN SHAREHOLDER LIKE AN ADJECTIVE. THE EXPRESSION 'BE ING A PERSON WHO IS THE BENEFICIAL OWNER OF SHARES' IS THEREFORE A FURTHER REQUIREMENT BEFORE A SHAREHOLDER CAN BE SAID TO FALL WITHIN THE PARAMETE RS OF S. 2(22)(E) OF THE ACT. IN THE 1961 ACT, S. 2(22)(E) IMPOSES A FURTHER CONDITION THAT THE SHAREHOLDER HAS ALSO TO BE BENEFICIAL OWNER OF SHAR ES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH O R WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN P ER CENT OF THE VOTING POWER. IT IS NOT POSSIBLE TO ACCEPT THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT UNDER THE 1961 ACT THERE IS NO REQUIREMENT OF A SHAREHOLDER BEING A REGISTERED HOL DER AND THAT EVEN A BENEFICIAL OWNERSHIP OF SHARES WOULD BE SUFFICIENT. THE EXPRESSION 'SHAREHOLDER BEING A PERSON WHO IS T HE BENEFICIAL OWNER OF SHARES' REFERRED TO IN THE FIRST LIMB OF S . 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AND BENEFICIAL SHAREHOLDER. IF A PERSON IS A REGISTERED SHAREHOLDER BUT NOT THE BENEFICIAL THEN THE PROVISION OF S. 2(22)(E) WILL NOT APPLY. SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHOLDER THEN ALSO THE FIRST LI MB OF PROVISIONS OF S. 2(22)(E) WILL NOT APPLY. 16. FURTHER IN THE CASE OF BHAUMIK COLOUR (SUPRA), IT HAS BEEN HELD AS FOLLOWS: THE NEW CATEGORY OF PAYMENT WHICH WAS CONSIDERED AS DIVIDEND INTRODUCED BY THE FINANCE ACT, 1987 WITH EFFECT FR OM 1.4.1988 BY THE SECOND LIMB OF SECTION 2(22) (E) IS PAYMENT TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST . THE FOLLOWING CONDITIONS ARE REQUIRED TO BE SATISF IED FOR APPLICATION OF THE ABOVE CATEGORY OF PAYMENT TO BE REGARDED AS DIVIDEN D: (A) THERE MUST BE A PAYMENT TO A CONCERN BY A COMPANY. (B) A PERSON MUST BE SHAREHOLDER OF THE COMPANY BEING A REGISTERED HOLDER AND BENEFICIAL OWNER OF SHARES (NOT BEING SHARES EN TITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTIC IPATE IN PROFITS) HOLDING NOT LESS THAN TEN PERCENT OF THE VOTING POWER. THI S IS BECAUSE OF THE EXPRESSION SUCH SHAREHOLDER FOUND IN THE RELEVANT PROVISION. THIS EXPRESSION ONLY REFERS TO THE SHAREHOLDER REFERRED TO IN THE EARLIER PART OF SECTION 2922) (E) VIZ., A REGISTERED AND A BENEFICI AL HOLDER OF SHARES HOLDING 10 PERCENT VOTING POWER. ITA NO. 475/M/06 16 (C) THE VERY SAME PERSON REFERRED TO IN (B) ABOVE MUST ALSO BE A MEMBER OR A PARTNER IN THE CONCERN HOLDING SUBSTANTIAL INTERE ST IN THE CONCERN VIZ., WHEN THE CONCERN IS NOT A COMPANY, HE MUST AT ANY T IME DURING THE PREVIOUS YEAR BE BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN, AND WHERE THE CONCERN IS A COMPANY HE MUST BE THE OWNER OF SHARES NOT BEING SHARES ENTITL ED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICI PATE IN PROFITS CARRYING NOT LESS THAN TWENTY PERCENT OF THE VOTING POWER. IF THE ABOVE CONDITIONS ARE SATISFIED THEN THE PAYM ENT BY THE COMPANY TO THE CONCERN WILL BE DIVIDEND. 17. IN THE INSTANT CASE THE ASSESSEE IS NOT A REGIS TERED SHAREHOLDER NOR CAN BE CONSIDERED AS A AN IMMEDIATE BENEFICIAL SHAREHOLDER . 18. THEREFORE, WE ACCEPT THE CONTENTION OF THE ASSE SSEE AND DELETED RS.35 LAKHS IN THE HANDS OF THE COMPANY RECEIVED BY RHPTI L AS DEEMED DIVIDEND UNDER SECTION 2(22)(E). 19. IN THIS VIEW OF OUR DECISION ABOVE, WE ARE NOT GOING INTO THE ISSUE WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE IS IN T HE CASE OF ICD AND HENCE CANNOT BE CONSIDERED AS LOAN OR ADVANCES FALLING WI THIN THE PROVISIONS OF SECTION 2(22)(E). 20. THE NEXT GROUND RAISED BY THE ASSESSEE READS AS FOLLOWS: THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF A O IN DISALLOWING ADHOC SUM OF RS. 1,02,603/- U/S. 14A OF THE I.T. AC T, 1961 ON THE GROUND THAT IT IS EXPENDITURE FOR EARNING INCOME NOT CHARG EABLE TO TAX. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE SAID DISAL LOWANCE OUGHT TO BE DELETED. THE ASSESSEE IS HAVING TOTAL RECEIPTS OF RS 57,46,9 70/- OUT OF WHICH RS 31,55,520/- ARE BY WAY OF DIVIDEND AND RS 25,91,450/- IS BY WAY OF INTEREST. THE TOTAL EXPENDITURE DEBIT ED TO THE P& L ACCOUNT IS RS 2,05,205/- THE ASSESSEE WAS ASKED TO EXPLAIN WHY ITA NO. 475/M/06 17 THE EXPENDITURE INCURRED ON EARNING THE DIVIDEND IN COME SHOULD NOT BE DISALLOWED U/S 144A. THE ASSESSEE FILED AN EXPLANATION VIDE LETTER DATED 20.12.2004 WHEREIN IT WAS CONTENDED THAT NO EXPENDITURE WAS DI SALLOWABLE AS SEC 14A DOES NOT COVER A CASE WHERE EXPENDITURE IS INCURRED IN RESPECT OF AN INDIVISIBLE BUSINESS WHICH LEADS BOTH TAX AND EXEMPT INCOME. THE EXPLANATION OF THE ASSESSEE IS NOT ACCEPTABLE A S THE EFFORTS OF THE ASSESSEE AS A PRUDENT BUSINESSMAN WOULD BE TO E ARN THE MAXIMUM AMOUNT WHETHER OR NOT IT IS EXEMPT. THE CO MPUTATION OF THE TAXABLE INCOME WOULD BE SECONDARY ISSUE. TH EREFORE THE EXPENDITURE INCURRED BY THE ASSESSEE WOULD BE FOR E ARNING THE WHOLE OF THE INCOME. THE PRINCIPLE OF APPORTIONMENT WOULD HAVE TO BE APPLIED TO ASCERTAIN THE EXPENDITURE INCURRED ON EARNING THE EXEMPT INCOME EVEN IF THE SOURCE IS INDIVISIBLE. TH EREFORE 50% OF THE EXPENDITURE I.E RS 102,603/- IS HELD TO BE EXPE NDITURE INCURRED ON EARNING THE EXEMPT DIVIDEND INCOME AND IS ACCORD INGLY DISALLOWED U/S 14A. 21. IN APPELLATE PROCEEDINGS, THE ASSESSEE HAS SUBM ITTED IN ITS LETTER DATED 29.6.2005 AS UNDER: THE SECOND GROUND OF APPEAL IS AGAINST ADHOC DISALL OWANCE OF RS 102,603/- UNDER SEC 14A ON THE GROUND THAT IT IS EX PENDITURE FOR EARNING INCOME NOT CHARGEABLE TO TAX. THE ASSESSING OFFICER HAS DISALLOWED 50% OF THE EXPENSES INCURRED BY THE APPELLANT CONSIDERING THE SAME AS AMOUNT SPE NT FOR EARNING EXEMPT INCOME. THE ASSESSING OFFICER HAS NOT ESTABL ISHED ANY NEXUS BETWEEN THE DIVIDEND INCOME AND THE AMOUNT SPENT FO R EARNING SUCH INCOME. THE EXPENSES INCURRED BY THE COMPANY DURING T HE YEAR ARE AS FOLLOWS: EXPENSES AMOUNT INTEREST 75, 077 PROFESSIONAL CHARGES 27,550 AUDITORS REMUNERATION 22,265 PRINTING& STATIONERY 6,750 BANK & DEMAT CHARGES 73,563 -- ------------- ITA NO. 475/M/06 18 2,05,205 --- ----------------- INTEREST OF RS 75,077/- DURING THE YEAR THE ASSESSEE HAS NOT MADE ANY N EW INVESTMENTS EXCEPT INVESTMENT IN MUTUAL FUND OF RS 18.50 LACS O N WHICH DIVIDEND INCOME OF RS 160220 HAS BEEN EARNED. THUS THE INTE REST EXPENSE FOR THE CURRENT YEAR PERTAINS MAINLY TOWARDS LOANS ADVANCED. WITHOUT PREJUDICE TO THE ABOVE MADRAS HIGH COUR T IN THE CASE OF CIT VS HOTEL SAVERA (239 ITR 795) HAS HELD THAT WHE RE THE MONEY IS GIVEN OUT OF MIXED FUNDS IT HAS TO BE HELD THAT MON EY ADVANCED TO THE EXTENT OF CAPITAL AND RESERVE IS TO BE CONSIDER ED AS OUT OF OWN FUNDS . APPELLANT HAS HUGE ACCUMULATED PROFIT OF RS 96 LACS IN THE FORM OF RESERVES. THEREFORE IN VIEW OF THE ABOVE THE DISALLOWAN CE OF RS 75077/- OUGHT TO BE DELETED. PROFESSIONAL CHARGES OF RS 27,550/- PROFESSIONAL FEES ARE PAID FOR THE ADVISORY SE RVICES IN RELATION O INCOME TAX AND TECHNICAL MATTERS AND FOR THE INSTAL LATION OF THE COMPUTER SOFTWARE. THEREFORE THESE EXPENSES ARE NOT INCURRED FOR EARNING OF THE DIVIDEND INCOME. AUDITORS REMUNERATION OF RS 22,265/- EVERY COMPANY IS STATUTORILY REQUIRED TO GET ITS ACC OUNT AUDITED. THESE EXPENSES ARE NOT INCURRED FOR EARNING ANY INC OME BUT FOR THE PURPOSE COMPLYING WITH THE STATUTORY REQUIREMENTS. PRINTING AND STATIONERY OF RS 6750/- IN CASE OF DIVIDEND INCOME ONLY DIVIDEND WARRANTS ARE TO BE DEPOSITED INTO THE BANK AND THAT DOES NOT REQUIRE A NY SPECIFIC PRINTING AND STATIONERY. THUS THESE EXPENSES ARE NO T INCURRED FOR THE EARNING OF DIVIDEND INCOME. BANK CHARGES AND DEMAT CHARGES OF RS 73563/- ITA NO. 475/M/06 19 BANK CHARGES AND DEMAT CHARGES ARE PAID IN CONNE CTION WITH PURCHASE AND SALES OF SHARES AND SECURITIES. THUS T HESE EXPENSES ARE NOT INCURRED FOR THE EARNING OF DIVIDEND INCOME . IN VIEW OF THE ABOVE THE ADDITION MADE ON ADHOC BAS IS U/S 14A OF RS 102603/- OUGHT TO BE DELETED. 22. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE FINDINGS OF THE AO AND SUBMISSIONS OF THE APPELLANT BEFORE AO AS WE LL AS IN APPELLATE PROCEEDINGS. THE TOTAL RECEIPTS OF THE COMPANY ARE RS 57,46,970/- AND TOTAL DIVIDEND RECEIVED IS RS 31,55,520/- SO ALMOST 50% OF THE RECEIPTS IS DIVIDEND INCOME WHICH IS EXEMPT FROM TAX U/S 10(33) OF THE INCOME TAX ACT. THOUGH THE APPELLANT HAS DENIED THAT THE AFORE SAID EXPENSES ARE NOT INCURRED FOR EARNING DIVIDEND INCOME BUT THE FACT C ANNOT BE DENIED THAT SOME EXPENDITURE WAS NECESSARY TO BE INCURRED FOR E ARNING THE DIVIDEND INCOME. THEREFORE THE AO HAS RIGHTLY DISALLOWED 50% OF THE TOTAL EXPENDITURE U/S 14A OF IT ACT. NO INTERFERENCE IS CALLED FOR IN THE ORDER OF THE AO. THUS THIS GROUND OF APPEAL IS DISMISSED. 23. AGGRIEVED THE ASSESSEE IS ON APPEAL AGAINST DIS ALLOWANCE OF RS.1,02,603/- UNDER SECTION 14A. THE JURISDICTIONAL HIGH COURT I N THE CASE OF GODREJ AND BOYCE (328 ITR 81) HAS HELD THAT PROVISIONS OF RULE 8D IS NOT APPLICABLE FOR THE ASSESSMENT YEAR PRIOR TO ASSESSMENT YEAR 2008-09. F URTHER, THE ASSESSEE HAS EXPLAINED WHY VARIOUS EXPENSES AGGREGATING TO RS.2, 05,205/- CANNOT BE CONSIDERED AS HAVING BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPTED INCOME. THE ASSESSING OFFICER HAS DISALLOWED 50% OF THE SAME ON AN ADHOC BASIS. THE LD.CIT(A) HAS NOT GIVEN ANY FINDING AS T O HOW THESE EXPENSES CAN BE CONSIDERED AS HAVING BEEN INCURRED FOR EARNING THE EXEMPT INCOME. 24. IN THE CIRCUMSTANCES, WE ARE SET ASIDE THE ISSU E TO THE FILE OF THE ASSESSING OFFICER FOR REDOING THE SAME IN ACCORDANC E WITH LAW AND AS PER THE ITA NO. 475/M/06 20 DIRECTION CONTAINED IN THE DECISION OF THE JURISDIC TIONAL HIGH COURT IN THE CASE OF GODREJ AND BOYCE (328 ITR 81). 25. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 30 TH DAY OF JUNE, 2011 SD/- SD/- (R.S. SYAL) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI, DATED 30 TH JUNE, 2011 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR B BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 475/M/06 21 DATE INITIALS 1 DRAFT DICTATED ON: 21 .0 6 .2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 23 .0 6 .2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK: DATE ON WHICH FILE GOES TO AR _________ ______ 10. DATE OF DISPATCH OF ORDER: _________ ______