Additional Commissioner of Income Tax, Special Range , Kanpur V. Shri Krishna Mohan Agarwal, Kanpur

ITA 497/LKW/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 0517 (ITAT-LUCKNOW)
• Duration Of Justice: 1 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 11-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAI KUMAR
• Keywords: Share purchase agreement; Source of fund; Deemed dividend; Assessment record; TDS
• Section: 143(3); 142(1); 2(22)(e); 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI. A. D. JAIN, VICE PRESIDENT AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA NO. 497/LKW/2018 ASSESSMENT YEAR: 2013 - 14 ADDL. CIT SPECIAL RANGE KANPUR V. SHRI KRISHNA MOHAN AG ARWAL 111/230, HARSH NAGAR KANPUR T AN /PAN : ACFPA1341M (APP ELL ANT) (RESPONDENT) APPELLANT BY: SHRI AJAI KUMAR, D.R. RESPONDENT BY: SHRI SWARAN SINGH, FCA DATE OF HEARING: 06 0 9 201 9 DATE OF PRONOUNCEMENT: 13 0 9 201 9 O R D E R PER A. D. JAIN, V.P.: THIS IS REVENUES APPEAL AGAINST THE ORDER OF THE LD. CIT(A)-I, KANPUR, DATED 30/3/2018, FOR ASSESSMENT YEAR 2013-14, TAKING THE FOLLOWING GROUNDS: 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-I, KANPUR HAS ERRED ON LAW AND FACTS BY NOT CONSIDERING THE CORRECT VOTING POWER OF SHRI K.M. AGARWAL AS REGISTERED SHAREHOLDER BOTH IN INDIVIDUAL AND KARTALMEMBER OF HUF CAPACITY. 2. THE LD. CIT(A) HAD NOT TAKEN INTO ACCOUNT THE FACT THAT AS INDIVIDUAL HE HAD VOTING POWER OF 8.82% AND AS KARTA OF HUF HIS SHARE IS 25% OF INCOME IN HUF AND HAS AT LEAST 25% VOTING RIGHTS IN THE COMPANY M/S SUMIT CHEMICALS PVT. LTD. THEREBY HAVING SUBSTANTIAL INTEREST IN THE CONCERN K.M. AGARWAL, HUF. K.M. AGARWAL HUF HAD FOUR MEMBERS SHRI K.M. AGARWAL, HIS WIFE AND TWO CHILDREN. THEREBY HIS VOTING RIGHT, IS AT LEAST 25%. IT IS HAVING 25% BENEFICIAL OWNERSHIP IN THE HUF WHO IS THE 25% OF RIGHT IN TOTAL 9.39% SHARE OF COMPANY AND HAS 2.34% OF RIGHTS IN THE SHARE OF COMPANY. ITA NO.497/LKW/2018 PAGE 2 OF 20 3. THE SHARES ARE ALWAYS REGISTERED IN THE NAME OF KARTA OF HUF AND SHARES CARRY THE VOTING RIGHTS OF SHAREHOLDERS, AS PER HIS SHARE IN A CONCERN (HUF), THEREBY IT IS NECESSARY TO CLUB THE SHARES HOLDING OF SRI K.M. AGARWAL BOTH AS AN INDIVIDUAL AND AS KARTA OF HUF. 4. THE LD. CIT (A) HAS RELIED HEAVILY ON DISTRIBUTION OF INCOME BUT HAS NOT CONSIDERED THE VOTING POWER, REQUIREMENT OF SECTION 2(22)(E) OF THE I.T. ACT, 1961 FOR THE PURPOSE. IN THE HON'BLE SC ORDER OF 04/01/2017, THE HON'BLE COURT HAS HELD THAT AS PER PARA 17 THAT ' FROM THE AUDITED ANNUAL RETURN OF THE COMPANY FILED WITH ROC THAT THE MONEY TOWARDS SHAREHOLDING IN THE COMPANY WAS GIVEN BY THE ASSESSEE/HUF. THOUGH THE SHARE CERTIFICATES WERE ISSUED IN THE NAME OF THE KARTA, BUT IN THE ANNUAL RETURNS, IT IS THE HUF WHICH WAS SHOWN AS REGISTERED AND BENEFICIAL SHAREHOLDER. IN ANY CASE, IT CANNOT BE DOUBTED THAT IT IS BENEFICIAL SHAREHOLDER. EVEN IF WE PRESUME THAT IT IS NOT REGISTERED SHARE HOLDER. AS PER THE PROVISION OF SEC. 2(22)(E) OF THE ACT ONCE THE PAYMENT IS RECEIVED BY THE HUF AND SHAREHOLDER IS A MEMBER OF THE SAID HUF AND HE HAS SUBSTANTIAL INTEREST IN HUF, THE PAYMENT MADE TO THE HUF SHALL CONSTITUTE DEEMED DIVIDEND WITHIN THE MEANING OF CLAUSE (E) OF SECTION 2(22) OF THE ACT. THIS IS THE EFFECT OF EXPLANATION 3 TO THE SAID SEC. AS NOTICED ABOVE. THEREFORE, IT IS NO GAIN SAYING THAT SINCE HUF ITSELF IS NOT THE REGISTERED SHARE HOLDER. THE PROVISION OF DEEMED DIVIDEND IS NOT ATTRACTED. ' IN VIEW OF THE ABOVE JUDGMENT, SINCE SHRI K.M. AGARWAL, THE KARTA OF THE HUF HOLDS BOTH AS REGISTERED AND BENEFICIAL OWNER AND THE HUF ITSELF THE REGISTERED SHAREHOLDER. THEREFORE, ADVANCE RECEIVED BY THE ASSESSEE FROM SCPL SHOULD BE TREATED AS DEEMED DIVIDEND UNDER SUB SECTION OF (E) OF SECTION 2(22) OF THE ACT. 2. THE BRIEF FACTS OF THE CASE ARE THAT WITH REGARD TO THE ADDITION OF RS.1,87,95,000/- UNDER SECTION 2(22)(E) OF THE ACT BY THE ASSESSING OFFICER, VIDE ORDER DATED 23/3/2016, PASSED UNDER SECTION 143(3) OF THE ACT, THE SUBMISSION OF THE ASSESSEE BEFORE THE LD. CIT(A) WERE THAT DURING THE PREVIOUS YEAR, RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL, THE ASSESSEE RECEIVED, BY WAY OF ADVANCE, SUMS AGGREGATING TO ITA NO.497/LKW/2018 PAGE 3 OF 20 RS.1,87,95,000/- FROM M/S SUMIT CHEMICALS PVT. LTD. KANPUR (SCPL); THAT SCPL, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, HAS A TOTAL PAID OF CAPITAL OF RS.2,93,63,600/- DIVIDED INTO 2,93,636 EQUITY SHARES OF RS.100/- EACH; THAT AS PER THE ANNUAL RETURN FILED BY SCPL WITH THE REGISTRAR OF COMPANIES KANPUR, SHRI K. M. AGARWAL OWNS 25,911 EQUITY SHARES, WHICH WORKS OUT TO 8.82% SHAREHOLDING; THAT SHRI K.M. AGARWAL (HUF) OWNS 28,000 EQUITY SHARES OF RS.100/- EACH, WHICH WORKS OUT TO 9.54% OF TOTAL SHAREHOLDING IN THAT COMPANY; THAT THERE HAS BEEN NO CHANGE IN THE SHAREHOLDING PATTERN IN SCPL FROM THAT OF IN THE IMMEDIATELY PRECEDING YEAR; THAT THE ASSESSING OFFICER FOLLOWED THE ASSESSMENT ORDER PASSED U/S 143(3) OF THE ACT, IN THE CASE OF THE ASSESSEE, FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND TREATED THE ADVANCE OF RS.1,87,95,000, RECEIVED BY THE ASSESSEE FROM SCPL, AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT; THAT THE APPLICABILITY OF SECTION 2(22)(E), IN THE ASSESSMENT FOR AY 2013-14, IN RESPECT OF ADVANCE OF RS.1,87,95,000/- WAS ALSO JUSTIFIED IN THE SAME MANNER AS IN THE ASSESSMENT ORDER FOR THE IMMEDIATELY PRECEDING YEAR I.E. BY CLUBBING THE SHAREHOLDING OF K.M. AGARWAL (HUF) OF 9.54% IN SCPL WITH THE SHAREHOLDING OF 8.82% OF THE ASSESSEE IN SCPL, THUS AGGREGATING TO 18.36%, WHEREBY, THE ASSESSEE'S SHAREHOLDING WAS SHOWN TO BE NOT LESS THAN 10% AS SPECIFIED U/S 2(22)(E) OF THE ACT; THAT FOR THE IMMEDIATELY PRECEDING YEAR, I.E., A.Y 2012-13, THE ADDITION U/S 2(22)(E) OF THE ACT WAS MADE ON THE VERY SAME FACTS AND JUSTIFICATION, AS IN THE INSTANT APPEAL; THAT THE ASSESSEE HAD PREFERRED AN APPEAL BEFORE THE CIT(APPEALS)-1, KANPUR AGAINST THE ASSESSMENT ORDER FOR AY 2012-13; AND THAT THE CIT(APPEALS)-I KANPUR VIDE ORDER DATED 28.11.2016, HELD THAT THE SHAREHOLDING OF K.M. AGARWAL (HUF) COULD NOT BE CLUBBED WITH THAT OF THE ASSESSEE AND THEREFORE, THE ADVANCE RECEIVED BY THE ASSESSEE FROM SCPL COULD NOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT. ITA NO.497/LKW/2018 PAGE 4 OF 20 3. THE LD. CIT(A), FOLLOWING THE ORDER OF HIS PREDECESSOR IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2012-13, DELETED THE ADDITION OF RS.1,87,95,000/- MADE UNDER SECTION 2(22)(E) OF THE ACT, OBSERVING AS UNDER:- I HAVE PERUSED THE ASSESSMENT ORDER PASSED IN RESPECT OF ASSESSMENT YEAR UNDER APPEAL. THE ADDITION OF RS.1,87,95,000/- U/S 2(22)(E) IS BASED ON IDENTICAL FACTS AS IN THE ASSESSMENT ORDER PASSED U/S 143(3) IN RESPECT OF IMMEDIATELY PRECEDING YEAR I.E. AY 2012-13 WHEREIN THE SHAREHOLDING IN THE NAME OF THE ASSESSEE AND HIS HUF WAS CLUBBED TO APPLY SECTION 2(22)(E) IN RESPECT OF IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E. AO FOLLOWED THE ASSESSMENT ORDER. IN THE APPEAL OF THE ASSESSEE AGAINST THE ASSESSMENT ORDER FOR AY 2012-13, THE CIT(APPEALS)-1 VIDE ORDER DATED 28- 11-2016 DELETED THE DISALLOWANCE OF RS,10,45,07,000/- MADE U/S. 2(22)(E). THE DECISION IN THE APPELLATE ORDER IN AFORESAID APPEAL NO. CIT(A)-1/237/JT.CIT-2/KNP/14-15 IS REPRODUCED HEREIN BELOW:- 'IN THE CASE OF THE ASSESSEE SHRI K.M. AGARWAL HOLDS, BOTH AS REGISTERED AND BENEFICIAL OWNER, SHARES AGGREGATING TO 8.82% ONLY. 'THE HUF OF K.M. AGARWAL (THROUGH K.M. AGARWAL KARTA) HOLDS SEPARATELY REGISTERED AND BENEFICIAL OWNERSHIP OF SHARES AGGREGATING TO 9.39%. 'AS THE REQUIREMENT IS THAT THE SHAREHOLDER NEEDS TO BE A BENEFICIAL SHAREHOLDER IRRESPECTIVE OF THE PERSONS IN WHOSE NAME THE SHARES ARE REGISTERED THEREFORE THE SHAREHOLDING OF HUF CANNOT BE TAKEN TO BE THAT OF THE KARTA FOR PURPOSE OF SECTION 2(22)(E) AS THE KARTA IS NOT BE BENEFICIAL OWNER THEREOF. THEREFORE FOR LOAN TAKEN BY K.M. AGARWAL IN INDIVIDUAL CAPACITY IS TO BE CONSIDERED FOR THE PURPOSES OF SECTION 2(22)(E). 'THIS IS SUPPORTED BY THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF NATIONAL TRAVEL SERVICE SUPRA ON WHICH THE AO IS RELYING HEAVILY. ITA NO.497/LKW/2018 PAGE 5 OF 20 'IN VIEW OF THE HISTORICAL BACKGROUND OF SECTION 2(22)(E) AND DECISION OF HIGHER JUDICIAL AUTHORITIES IT IS CLEAR THAT THE AO'S CONTENTION THAT FOR PURPOSE OF APPLICABILITY OF SECTION 2(22)(E) SHAREHOLDING OF INDIVIDUAL & HUF CAN BE CLUBBED IS NOT VALID AND THEREFORE THIS STAND CANNOT BE UPHELD. 'THE AO IN HER ORDER HAS CARRIED ON ELABORATE AND A DETAILED DESCRIPTION OF CALCULATING ACCUMULATED PROFITS AS WELL AS CALCULATING THE AMOUNT GIVEN AS LOAN. 'HOWEVER AS THE PRIMARY CONDITION OF 10% BENEFICIAL SHAREHOLDING OF MR. K M AGARWAL IS NOT ESTABLISHED THE REMAINING AMOUNT/PART OF THE ADDITION BECOMES AN EXERCISE IN FUTILITY BECAUSE NOTHING CAN BE ADDED U/S 2(22)(E). THEREFORE NO COMMENTS ARE OFFERED ON THE SAME. 'AS SHRI K M AGARWAL HOLDS 8.82% SHARES IN CLOSELY HELD PRIVATE COMPANY M/S SUMIT CHEMCIALS PVT. BOTH AS REGISTERED AND BENEFICIAL OWNER. HE IS NOT COVERED BY THE PROVISIONS OF SECTION 2(22)(E) ADDITION MADE IS DELETED ON THIS GROUND IS NOT SUSTAINABLE. 'RESULT:- 'ADDITION MADE IS DELETED ON THIS GROUND AS NOT SUSTAINABLE. APPEAL IS ALLOWED' THEREFORE, RESPECTFULLY FOLLOWING THE DECISION DATED 28-11- 2016, OF MY PREDECESSOR IN APPEAL NO. CIT(A)- 1/237/JT.CIT-2/KNP/14-15 IN THE CASE OF THE ASSESSEE, I DELETE THE ADDITION OF RS.1,87,95,000/- U/S 2(22)(E) OF THE ACT AND ALLOW GROUND NO. 2 OF APPEAL. 4. THE LD. D.R. HAS SUBMITTED THAT SINCE SHRI K.M. AGARWAL, THE KARTA OF THE HUF, HOLDS POSITION BOTH AS REGISTERED AND BENEFICIAL OWNER, AND THE HUF ITSELF IS THE REGISTERED SHAREHOLDER, THE ADVANCE RECEIVED BY THE ASSESSEE FROM SCPL SHOULD BE TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT. 5. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS CONTENDED THAT ON EXACTLY SIMILAR FACTS, THE ITAT, IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2012-13, I.E., THE IMMEDIATELY PRECEDING ITA NO.497/LKW/2018 PAGE 6 OF 20 ASSESSMENT YEAR, HAS UPHELD THE LD. CIT(A)S ORDER, VIDE ORDER DATED 22/8/2019. A COPY OF THIS ORDER HAS BEEN PLACED ON RECORD. IT HAS BEEN PLEADED BY THE LD. COUNSEL FOR THE ASSESSEE THAT AS SUCH, THE FACTS FOR THE TWO YEARS BEING EXACTLY THE SAME, THE SAID TRIBUNAL ORDER BE FOLLOWED AND THE APPEAL OF THE DEPARTMENT BE DISMISSED. 6. HEARD. WE FIND THAT THE ORDER OF THE LD. CIT(A) FOR ASSESSMENT YEAR 2012-13, ON EXACTLY SIMILAR FACTS, WHICH HAS BEEN FOLLOWED BY THE LD. CIT(A) WHILE DECIDING THE APPEAL OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION, HAD BEEN CHALLENGED BY THE DEPARTMENT IN ITA NO.86/LKW/2017 AND THE B BENCH OF THE LUCKNOW TRIBUNAL, WHILE DECIDING THIS APPEAL, ON AN IDENTICAL ISSUE, DELETED THE ADDITION MADE UNDER SECTION 2(22)(E) OF THE ACT, OBSERVING AS UNDER:- 5. HEARD. WE FIND THAT THE ASSESSEE IS A SHAREHOLDER IN M/S SUMIT CHEMICAL PVT. LTD., A CLOSELY HELD COMPANY. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD SHOWN TRANSACTION OF RS.1045.07 LAKHS WITH THE RELATED COMPANY, I.E., M/S SUMIT CHEMICAL PVT. LTD., IN WHICH HE WAS A SHAREHOLDER. THE ASSESSEE WAS ASKED TO EXPLAIN THE APPLICABILITY OF SECTION 2(22)(E) OF THE ACT, ON THE TRANSACTIONS ENTERED INTO BY HIM WITH THE CLOSELY HELD PRIVATE COMPANY, M/S SUMIT CHEMICALS PVT. LTD. IN RESPONSE TO THAT, THE ASSESSEE CONTENDED THAT THE VOTING RIGHTS OF THE ASSESSEE IN M/S SUMIT CHEMICALS PVT. LTD. IS ONLY 8.82% WHICH IS LESS THAN THE REQUIREMENT OF 10% OF SECTION 2(22)(E ) OF THE ACT. HOWEVER, ON A PERUSAL OF THE BALANCE SHEET FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2012-13 OF M/S SUMIT CHEMICALS PVT. LTD, IT WAS REVEALED THAT THE ASSESSEE WAS ALSO KARTA OF K.M AGARWAL, HUF, HAVING SHAREHOLDING OF 9.54% AND THE COMBINED SHAREHOLDING IN BOTH THE CAPACITIES OF SRI K.M AGARWAL WAS MORE THAN 10% WHICH QUALIFIES FOR THE REQUIREMENT OF SECTION 2(22)(2) OF THE ACT. THE ASSESSING OFFICER CLUBBED THE SHAREHOLDING OF KRISHNA MOHAN AGARWAL (INDIVIDUAL) AND K.M. AGARWAL (HUF). THE CLUBBED SHAREHOLDING EXCEEDED 10% OF THE SHARE CAPITAL OF M/S SUMIT CHEMICALS PVT. LTD. THEREAFTER, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT AND THE LOAN OF ITA NO.497/LKW/2018 PAGE 7 OF 20 RS.10,45,07,000/- GIVEN BY M/S SUMIT CHEMICALS PVT. LTD. TO THE ASSESSEE WAS TREATED AS DEEMED DIVIDEND, HOLDING (THE RELEVANT PARAS OF THE ASSESSMENT ORDER) AS FOLLOWS: 4.2 SEC 2(22) (E) OF THE I.T ACT, 1961 REQUIRES THE SHAREHOLDER TO HAVE AT LEAST 10% VOTING RIGHT FOR ESTABLISHMENT OF THE FACT THAT THE SHAREHOLDER HAS COMMAND IN THE COMPANY TO DERIVE THE INDIVIDUAL BENEFIT AND THERE IS NEXUS BETWEEN THE COMPANY AND THE SHAREHOLDER FOR INDIVIDUAL BENEFIT OF THE SHAREHOLDER WITHOUT PAYING ANY TAX BY BOTH THE PARTIES. THE PURPOSE BEING THAT PERSONS WHO MANAGE SUCH CLOSELY HELD COMPANIES ARRANGE THEIR AFFAIRS IN A MANNER THAT THEY ASSIST THE SHAREHOLDER IN AVOIDING THE TAX PAYMENT BY HAVING THE COMPANY PAY OR DISTRIBUTE, WHAT WOULD LEGITIMATELY BE DIVIDEND IN THE HANDS OF THE SHAREHOLDER I.E. MONEY IN THE FORM OF LOANS/ADVANCES. THE SECTION SAYS THAT THE SHAREHOLDER I.E. IN THIS CASE ASSESSEE SRI K.M AGARWAL SHOULD BE THE SHAREHOLDER OF NOT LESS THAN 10% OF VOTING RIGHTS .THE SECTION DOES NOT BAR TO CLUB THE INDIVIDUAL CAPACITY OF THE SHAREHOLDER WITH HIS CAPACITY AS 'KARTA IN HUF. SECTION ONLY STATES THAT THE SHAREHOLDER SHOULD HAVE 10% VOTING RIGHTS IN THE COMPANY TO BE RECEIVER OF DEEMED DIVIDEND .SRI K.M AGARWAL IS A REGISTERED AND BENEFICIAL SHAREHOLDER OF SHARES IN M/S SUMIT CHEMICALS PVT. LTD HAVING MORE THAN 10% OF VOTING RIGHTS. HOWEVER, TO GET THE VERSION OF ASSESSEE, A SHOW CAUSE DATED 30/01/2015 WAS ISSUED TO THE ASSESSEE ALONG WITH NOTICE U/S 142(1) OF THE I.T ACT, 1961. 4.3 VIDE REPLY DATED 06/02/2015 ASSESSEE SUBMITTED THE REPLY ON ABOVE ISSUE. ASSESSEE HAS REPLIED, 'AS REGARDS TO THE APPLICABILITY OF PROVISIONS OF SEC 2(22)(E)OF THE I.T ACT, IT IS SUBMITTED THAT THE ASSESSEE IS NEITHER A DIRECTOR NOR HAVING SHAREHOLDING /VOTING POWER HOLDING MORE THAN 10% OF TOTAL SHARES IN THIS COMPANY. THE ASSESSEE IS HOLDING 25911 EQUITY SHARES IN THE INCOME, REPRESENTING 8.82% SHARES.' FURTHER ASSESSEE HAS SUBMITTED, 'IN POINT NO.4 OF THE SHOW CAUSE NOTICE, YOUR HONOUR HAS ASKED TO SHOW CAUSE AS TO WHY THE SHAREHOLDING OF K M AGARWAL HUF BE NOT CLUBBED TOGETHER WITH INDIVIDUAL AS KARTA OF HUF IS REPRESENTING BEFORE THE COMPANY FOR VOTING, ACM AND ALL PRACTICAL PURPOSES IS THE SAME PERSON. ITA NO.497/LKW/2018 PAGE 8 OF 20 THE CONTENTION OF YOUR HONOUR IN THIS REGARD IS ERRONEOUS AND IS NOT SUSTAINABLE IN LAW AS KM AGARWAL HUF IS SEPARATE ENTITY AND IS ASSESSED TO TAX SEPARATELY. IT IS HUF OF KM AGARWAL AND HAVE SEPARATE SOURCES OF INCOME AND HA VE SEPARATE FUNDS IN ITS CAPITAL ACCOUNT WHICH BELONGS TO HINDU UNDIVIDED FAMILY OF THE ASSESSEE. THE INCOME OF THE HUF IS SEPARATE AND IT IS ASSESSED TO TAX SEPARATELY. M/S K. M AGARWAL HUF IS ASSESSED TO TAX VIDE PAN- AAFHK8324J. COPY OF ITR FOR A.Y 2011-12 & 2012-13 ARE ENCLOSED. M/S K.M AGARWAL HUF HAD MADE INVESTMENT IN THE SHARES OF M/S SUMIT CHEMICALS PVT LTD OUT OF FAMILY FUNDS OF HUF AND IS HOLDING 28000 SHARES OF SUMIT CHEMICALS PVT. LTD. IT IS A LONG TERM INVESTMENT OF HUF AND WAS MADE WITH A VIEW TO EARN DIVIDEND INCOME AND IN ORDER TO HAVE CAPITAL GROWTH OF FUNDS OF HINDU UNDIVIDED FAMILY. THE HINDU UNDIVIDED FAMILY OF K.M AGARWAL IS CONSISTING OF HIMSELF, HIS WIFE RAMA AGARWAL, SON SUMIT AGARWAL AND DAUGHTER MOHINI AGARWAL. THOUGH SRI K.M AGARWAL IS KARTA OF THIS HUF, HOWEVER, HE CANNOT TAKE ANY DECISION/ANY BENEFIT WITHOUT THE CONSENT OF ALL THE MEMBERS. SRI K.M AGARWAL IN CAPACITY OF KARTA IS ONLY EXECUTING THE TRANSACTIONS/REPRESENTING THE HUF BEFORE ANY AUTHORITY OR COMPANY FOR VOTING, AGM ETC. IN THE CAPACITY OF KARTA FOR AND ON BEHALF OF HINDU UNDIVIDED FAMILY AND ANY DECISIONS TAKEN BY HIM IN THE CAPACITY OF KARTA IS WHOLLY AND EXCLUSIVELY BELONGS TO HINDU UNDIVIDED FAMILY. BY ANY STRETCH OF IMAGINATION, THE DECISION TAKEN BY KARTA ON BEHALF OF ITS HUF CANNOT BE TREATED AS TAKEN BY HIM IN HIS INDIVIDUAL CAPACITY OR FOR THE BENEFIT OF K.M AGARWAL (INDIVIDUAL). ATTENTION OF YOUR HONOUR IS DRAWN TO THE FOLLOWING JUDGEMENTS WHEREIN IT WAS HELD THAT INCOME OF HUF CANNOT BE CLUBBED WITH THAT OF INDIVIDUAL OR VICE VERSA: A) IN CASE OF LACHMAN DAS BHATIA & SONS VS. COMMISSIONER OF INCOME -TAX (2007)162 TAXMAN 118(DELHI) B) D.N BHANDARKAR V CIT 158 ITR 724 KAR. (1986) C) CIT VS. OM PRAKASH (1996)217 ITR 785 (SC) D) PRATAP H. DESAI (HUF) VS. ACIT (2009)118 ITD 29(PAT) HAD IT BE THE INTENTION OF LAW, THERE WAS NO NEED OF FORMING AN HUF OR THE INCOME OF THE HUF BE CLUBBED WITH THAT OF INDIVIDUAL ITA NO.497/LKW/2018 PAGE 9 OF 20 AND TAXED ACCORDINGLY. BY PROPOSING TO CLUB THE SHAREHOLDING OF HUF WITH THAT OF INDIVIDUAL, YOUR HONOUR IS TRYING TO DO SOMETHING WHICH IS NOT PERMISSIBLE UNDER THE LAW'. 4.4 TO ASCERTAIN THE EXACT FACTS OF THE CASE, A COPY OF AUDIT REPORT ALONGWITH ANNEXURES AND ROC RETURN IN FORM 20B WERE PROCURED FROM WEBSITE AND CIRCLE-6 ASSESSMENT RECORD OF COMPANY FOR M/S SUMIT CHEMICALS PVT. LTD. FOR THE A.Y 2012-13. ALSO THE SALES TAX DETAIL OF THE COMPANY WERE PROCURED FROM THE SALES TAX SITE. THE FOLLOWING FACTS HAVE EMERGED FROM PERUSAL OF THE ABOVE DOCUMENTS- M/S SUMIT CHEMICALS PVT. LTD. WAS A CLOSELY HELD COMPANY IN WHICH THE DIRECTORS AND RELATIVES OF DIRECTORS WERE SHAREHOLDERS. THE COMPANY HAD NOT ALLOTTED SHARES TO ANY OUTSIDE MEMBERS. THERE WERE TWO HUFS K.M AGARWAL (HUF) AND RAM KUMAR AGARWAL (HUF) WHICH WERE ALSO IN THE LIST OF SHAREHOLDERS. AGAIN, THE FAMILY MEMBERS WERE ONLY ALLOTTEES OF SHARES IN BOTH THE HUFS AND WERE REGISTERED AND BENEFICIAL OWNER OF THE SHARES. AS PER THE ROC RETURN FILED IN FORM 20B BY M/S SUMIT CHEMICALS PVT. LTD ON 31/08/2012, THE COMPANY HAD INDUCTED AN OUTSIDE MEMBER SRI JAY NARAIN YADAV AS ONE OF THE DIRECTORS. HE WAS APPOINTED ON 30/11/2011. NO SHARES WERE ALLOTTED TO HIM THOUGH AND HAD NO VOTING POWER. THE PREVIOUS DIRECTOR WAS SRI K.M AGARWAL WHO WAS DIRECTOR SINCE 1988 AND HAD RESIGNED ON 30/11/2011.FORM 32 FILED WITH ROC DATED 24/01/2012 IS ON RECORD. HIS SHAREHOLDING HOWEVER, IN INDIVIDUAL CAPACITY HAD REMAINED INTACT. SHRI K.M. AGARWAL WAS DIRECTOR DURING THE FINANCIAL YEAR 2011- 12 FOR ALMOST THE WHOLE YEAR AND WAS THE KEY PERSON. THE QUESTION ARISES WHAT WAS NEED TO CHANGE THE DIRECTOR WHEN THE COMPANY HAD NO INTENTION TO ALLOT ANY SHARES TO NEW DIRECTOR SRI JAY NARAIN YADAV AND CALL FOR HIS INTERFERENCE IN THE CLOSELY HELD COMPANY WHERE ALL THE AFFAIRS ARE MANAGED BY THE SAME GROUP OF FAMILY MEMBERS. THE ONLY INTENTION WHICH HAD COME OUT FROM THIS ARRANGEMENT IS TO HIDE THE FACT THAT SRI K.M AGARWAL HAD BEEN THE KEY PERSON MANAGING THE AFFAIRS OF THE COMPANY. ITA NO.497/LKW/2018 PAGE 10 OF 20 THE ASSESSEE WAS THE KEY PERSON IN M/S SUMIT CHEMICALS PVT. LTD IS ALSO CLEAR FROM THE SALES TAX DEPARTMENT RECORD OF THE COMPANY .HERE THE REGISTERED DEALER FOR THE COMPANY IS REPORTED AS SRI K.M AGARWAL AND HE IS REFLECTED AS DIRECTOR OF THE COMPANY ALONG WITH SRI SUMIT AGARWAI.(SCANNED COPY ATTACHED). THE SHAREHOLDING PATTERN OF THIS COMPANY IS SUCH THAT THE REGISTERED SHAREHOLDERS BELONG TO SAME FAMILY I.E. GRANDFATHER, FATHER, MOTHER, DAUGHTER, SON. THE MONEY IS SIPHONED TO THE REGISTERED/BENEFICIAL SHAREHOLDER TO ESCAPE THE LIABILITY OF DIVIDEND DISTRIBUTION TAX U/S 115O OF THE I.T ACT, 1961. THE SHAREHOLDING PATTERN IS A MASK TO SHOW THE TOTAL VOTING RIGHT OF EACH INDIVIDUAL BELOW 10%. NO DIVIDENDS WERE EVER DECLARED BY THE COMPANY AS PER RECORD AND HUF OR INDIVIDUAL SHAREHOLDER HAD NOT SHOWN ANY DIVIDEND INCOME. ON THE CONTRARY, THE MONEY IS FLOATED BETWEEN THE COMPANY, ASSESSEE AND OTHER FAMILY MEMBERS IN THE FORM OF UNSECURED LOANS AND ADVANCES. IT IS PERTINENT TO MENTION THAT THE ASSESSEE COMPANY HAD TRIED TO HIDE THE FACT THAT SRI K.M AGARWAL WAS THE DIRECTOR OF M/S SUMIT CHEMICALS PVT LTD DURING THE A.Y 2012-13. THE ASSESSEE WAS THE DIRECTOR FOR LARGE PERIOD OF THE FINANCIAL YEAR BUT THE AUTHORIZED REPRESENTATIVES HAD GIVEN FALSE VERSION OF THE POSITION OF THE ASSESSEE DURING THE YEAR. PORTION OF REPLY OF ASSESSEE DATED 20/01/2015 IS REPRODUCED FOR REFERENCE, 'AS REGARD TO THE APPLICABILITY OF PROVISIONS OF SECTION 2(22)(E) OF THE I.T ACT, IT IS SUBMITTED THAT THE ASSESSEE IS NEITHER THE DIRECTOR IN THE COMPANY NOR HAVING SHAREHOLDING/VOTING POWER HOLDING MORE THAN 10% OF TOTAL SHARES IN THE COMPANY SCPL. WHEREIN IN THE AUDIT REPORT OF THE ASSESSEE THE AUDITOR HAD HIMSELF STATED HIM TO BE THE DIRECTOR OF THE COMPANY. .. IT WAS ONLY AFTER CONFRONTATION TO THE ASSESSEE OF THE RETURN FILED WITH ROC, THE ASSESSEE HAD SUBMITTED TO THE CORRECT FACTS. THE ASSESSEE TRIED TO PUT UP A CASE WHERE HE WAS A PASSIVE SHAREHOLDER DURING THE RELEVANT PERIOD. WHEREIN, ALL THE KEY AFFAIRS OF THE COMPANY WERE MANAGED BY SRI SUMIT AGARWAL AND SRI JAY NARAIN YADAV AS DIRECTORS OF THE COMPANY REGARDING THE ITA NO.497/LKW/2018 PAGE 11 OF 20 ISSUE OF CLUBBING OF SHAREHOLDING, ASSESSEE HAD RELIED UPON THE CASE LAW: REGARDING 'CLUBBING OF INCOME, WHICH HAD NO RELEVANCE WITH THE PRESENT FACTS OF THE CASE. THE ASSESSEE'S SHAREHOLDING AS INDIVIDUAL AND KARTA OF HUF NEEDS TO BE CLUBBED AS HE WAS THE DIRECTOR, REGISTERED SHAREHOLDER OF THE SHARES AND BENEFICIAL OWNER OF THE SHARES DURING THE RELEVANT PREVIOUS YEAR IN THE COMPANY. THE SECTION REQUIRES THAT THE TOTAL SHAREHOLDING OF A PARTICULAR SHAREHOLDER NEEDS TO BE SEEN IN ALL THE CAPACITIES IN THE COMPANY WHICH SHOULD NOT BE LESS THAN 10%. THE JUDGEMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. NATIONAL TRAVEL SERVICES IS IMPORTANT TO MENTION HERE. IN THIS CASE THE COURT HAS HELD THAT IT IS ACCEPTED THAT FIRM NOT BEING A LEGAL ENTITY CANNOT BECOME A SHAREHOLDER OF A COMPANY AND IN CASE LOAN HAS BEEN ADVANCED TO A FIRM WHOSE PARTNERS ARE SHAREHOLDERS, THEN IT WOULD FRUSTRATE THE PROVISIONS OF SECTION 2(22)(E), AND WILL LEAD TO ABSURD RESULTS. THEREFORE LOAN RECEIVED BY A FIRM, WHOSE PARTNERS ARE REGISTERED SHAREHOLDERS OF THE COMPANY WHICH ADVANCED THE LOAN, WOULD FALL WITHIN THE AMBIT OF SEC 2(22)(E) OF THE I.T ACT, 1961. THE REVERSE COROLLARY IS FIT IN THE CASE OF ASSESSEE. HERE THE LOAN WAS TAKEN BY THE SHAREHOLDER WHO WAS THE KARTA OF HUF WHICH WAS ALSO A SHAREHOLDER. LIKEWISE, THE COMPANIES ACT DOES NOT PROHIBIT THE MEMBERSHIP OF THE HUF BUT THE SHARES ARE ALWAYS REGISTERED IN THE NAME OF KARTA OF THE HUF. THE HUF HAS NO LEGAL CAPACITY TO BECOME MEMBER OF THE COMPANY OR TO KEEP SHARES IN ITS NAME. IT IS THE KARTA WHO KEEP THE SHARES AND IS THE REGISTERED OWNER OF SHARES. THE COMPANY HAS NEVER DECLARED ANY DIVIDEND IN THE PRESENT CASE AND IT IS NOT THE HUF BUT THE INDIVIDUAL SHAREHOLDER (KARTA OF HUF) WHO HAS BENEFITED FROM THE SHAREHOLDING OF HUF AND IS THE BENEFICIAL OWNER OF SHARES IN HUF. THEREFORE, BASED ON ABOVE FACTS, SRI K.M AGARWAL IS HELD TO BE THE SHAREHOLDER HAVING OWNERSHIP OF SHARES AND VOTING RIGHTS OF MORE THAN 10% IN THE COMPANY M/S SUMIT CHEMICALS PVT. LTD.' 6. THUS, THE ASSESSING OFFICER CLUBBED THE SHAREHOLDING OF KRISHNA MOHAN AGARWAL (INDIVIDUAL) AND K.M. AGARWAL (HUF) AND SUCH CLUBBED SHAREHOLDING EXCEEDED 10% OF SHARE CAPITAL OF M/S SUMIT CHEMICALS PVT. LTD. AND, THEREAFTER, HE INVOKED THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. ACCORDINGLY, THE LOAN OF RS.10,45,07,000/- GIVEN BY M/S SUMIT CHEMICALS PVT. LTD. TO THE RESPONDENT ASSESSEE WAS TREATED AS DEEMED DIVIDEND. ITA NO.497/LKW/2018 PAGE 12 OF 20 7. THE LD. CIT(A) HAS DELETED THE ADDITION, HOLDING THAT THE INTENTION BEHIND ENACTING THE PROVISIONS OF SECTION 2(22) (E) OF THE ACT IS THAT CLOSELY HELD COMPANIES (I.E. COMPANIES IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED), WHICH ARE CONTROLLED BY A GROUP OF MEMBERS, EVEN THOUGH THE COMPANY HAS ACCUMULATED PROFITS, WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND, BECAUSE IF SO DISTRIBUTED, THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS; THAT INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, THE COMPANIES DISTRIBUTE THEM AS LOANS OR ADVANCES TO SHAREHOLDERS OR TO THE CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST, OR MAKE ANY PAYMENT ON BEHALF OF, OR FOR THE INDIVIDUAL BENEFIT OF, SUCH SHAREHOLDER; THAT IN SUCH AN EVENT, BY THE DEEMING PROVISIONS, SUCH PAYMENT BY THE COMPANY IS TREATED AS DIVIDEND; THAT THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22) (E) OF THE ACT IS TO TAX DIVIDEND IN THE HANDS OF THE SHAREHOLDERS; AND THAT THE DEEMING PROVISION, AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN, IN WHICH ITS SHAREHOLDER, HAS SUBSTANTIAL INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOANS OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOANS OR ADVANCES. 8. THE LD. CIT(A) DISCUSSED THE FOLLOWING CASE LAWS: (1) ACIT VS. BHAUMIK COLOUR (P) LTD., 119 ITD 1 (MUM.) (SB). (2) CIT VS. KRUPESHBHAI N PATEL, 34 TAXMANN.COM 245 (GUJRAT). (3) CIT VS. NAVIBHAI N PATEL, 35 TAXMANN.COM 354 (GUJRAT). (4) CIT VS. C. P. SARATHY MUDALIAR, ORDER DATED 12/10/1971 OF HONBLE APEX COURT. (5) CIT VS. C.P. SARATHY MUDALIAR, 83 ITR 170 (SC). (6) RAMESHWARLAL SANWARMAL VS. CIT, 122 ITR 1 (SC). (7) CIT VS. HOTEL HILLTOP, 313 ITR 116 (RAJ.) FROM THE ABOVE DECISIONS, THE LD. CIT(A) CONCLUDED THAT SECTION 2(22)(E) OF THE ACT IS A DEEMING SECTION; THAT IT CREATES THE FICTION OF TREATING LOANS TO SHAREHOLDERS AS DEEMED DIVIDEND; THAT TO BE COVERED IN ITS AMBIT, THE SHAREHOLDER HAS TO BE REGISTERED AS A SHAREHOLDER; THAT HE/SHE HAS TO HAVE A 10% VOTING RIGHT; THAT HE/SHE HAS TO BE A BENEFICIAL OWNER OF THE SHARES; THAT HAVING ITA NO.497/LKW/2018 PAGE 13 OF 20 REGISTERED OWNERSHIP OR BENEFICIAL OWNERSHIP SEPARATELY EXCLUDES ONE FROM THE PROVISIONS; THAT SINCE AN HUF ACQUIRES SHARES THROUGH ITS KARTA, AN HUF IS NOT A REGISTERED SHAREHOLDER; AND THAT THE MEMBERS OF THE HUF ARE BENEFICIAL SHAREHOLDERS, BUT NOT REGISTERED SHAREHOLDERS. 9. THE LD. CIT(A) FURTHER OBSERVED, AS BELOW: LET US EXAMINE THE SHAREHOLDING OF K.K. AAARWAL IN INDIVIDUAL CAPACITY AS WELL AS KARTA OF K.M. AGARWAL, HUF AS UNDER THE SHAREHOLDING OF ASSESSEE, KM AGARWAL AND KM AGARWAL HUF, IN M/S SUMIT CHEMICALS PVT. LTD. (SCPL), ON 31/03/2011 & 31/03/2012 IS AS FOLLOWS: 31/03/2011 31/03/2012 (NO. OF EQUITY SHARES OF RS.100/- EACH) % OF SHAREHOL DING NO. OF EQUITY SHARES OF RS.100/- EACH) % OF SHAREHOL DING KM AGARWAL 25,911 8. 82% 25,911 8 .82% KM AGARWAL HUF 28000 9.54% 28000 9.54% 18.36 18.36 THUS IN THE LIGHT OF THE DISCUSSION SUPRA THE SHAREHOLDING OF K.M AGARWAL AND K.M. AGARWAL (HUF), IN M/S SUMIT CHEMICALS PVT. LTD. (SCPL) CANNOT BE TAKEN TOGETHER. INDIVIDUALLY THE SHAREHOLDING IS BELOW 10% IN BOTH CASES. 10. THE LD. CIT(A) CALLED FOR A REMAND FROM THE ASSESSING OFFICER. THIS REMAND REPORT HAS BEEN REPRODUCED BY THE LD. CIT(A) IN HIS ORDER (IMPUGNED, PAGES 11 TO 12), AS FOLLOWS:- THE AO WAS CALLED BY ME TO DISCUSS THE ISSUE THE SHAREHOLDING OF K.M. AGARWAL INDIVIDUAL AND K.M. AGARWAL AS KARTA OF HUF ON 10.10.2016 AND SUBSEQUENTLY REMAND REPORT DATED 18.01.2016 WAS RECEIVED ON THE SAME ISSUE WHETHER THE SHARE OF KARTA OF HUF AND INDIVIDUAL CAN BE CLUBBED TOGETHER FOR THE PURPOSES OF SECTION 2(22)(E) AS UNDER:- ITA NO.497/LKW/2018 PAGE 14 OF 20 'HOWEVER, I WOULD LIKE TO RELY ON SOME ADDITIONAL FACTS AND CASE LAWS IN THIS REGARD. A BOOK NAMED 'A STEP AHEAD' IS PUBLISHED BY THE COMMITTEE OF DEPARTMENTAL OFFICERS HEADED BY CCIT(CCA), GUJRAT IN GUJRAT REGION ON CONTROVERSIAL ISSUES IN ASSESSMENT. THE INTERPRETATION OF SECTION 2(22)(E) WITH REGARD TO CLUBBING OF SHAREHOLDING RIGHTS WAS TAKEN FROM THERE. MOREOVER, DELHI HIGH COURT IN THE CASE OF NATIONAL TRAVELS SERVICES (SUPRA) ELABORATELY ANALYZED THIS ISSUE AND CONCLUDED THAT IN CASE IT IS ACCEPTED THAT FIRM NOT BEING A LEGAL ENTITY CANNOT BECOME A SHAREHOLDER OF A COMPANY AND IN CASE LOAN HAS BEEN ADVANCED TO A FIRM WHOSE PARTNERS ARE SHAREHOLDERS, THEN IT WOULD FRUSTRATE THE PROVISIONS OF SECTION 2(22)(E), AND WILL LEAD TO ABSURD RESULTS. THEREFORE, LOAN RECEIVED BY A FIRM, WHOSE PARTNERS ARE REGISTERED SHAREHOLDERS OF THE COMPANY WHICH ADVANCED THE LOAN, WOULD FALL WITHIN THE AMBIT OF SECTION 2(22)(E). LIKEWISE, AS PER COMPANY LAW HUF IS REPRESENTED BY ITS KARTA. THE LOAN TAKEN BY KARTA FROM COMPANY WOULD FALL IN AMBIT OF DEEMED DIVIDEND. THE COMPANIES ACT DOES NOT PROHIBIT MEMBERSHIP OF HINDU UNDIVIDED FAMILY. IN CASE OF HUF, THE SHARES ARE REGISTERED IN THE NAME OF A AS KARTA OF HUF. THE ASSESSEE WAS ASKED TO PROVIDE THE REGISTER OF MEMBERS AND SHAREHOLDERS MAINTAINED AS PER COMPANIES ACT. BUT, ASSESSEE HAD NOT PROVIDED ANY DETAIL. THE HUF CONSISTS OF ASSESSEE AND HIS FAMILY MEMBERS AND OTHER SHAREHOLDERS ALONGWITH THE HUF ARE SAME FAMILY MEMBERS. THE CASE OF ASSESSEE IS THE EXAMPLE OF COLORABLE DEVICE WHERE ASSESSEE HAD TRIED TO SPLIT THE SHAREHOLDING TO AVOID THE CONSEQUENCES OF 10% OR 20% SHAREHOLDING WITH EACH OF THE SHAREHOLDERS. THE COPY OF ARTICLE WRITTEN BY SRI 'RAJNEESH S.VOHRA, JCIT, TDS(AHMEDABAD) ON UNDERSTANDING OF DEEMED DIVIDEND IN THE DEPARTMENTAL PUBLICATION 'A STEP AHEAD' IS ATTACHED FOR READY REFERENCE'. 11. FURTHER, THE LD. CIT(A) REFERRED TO AND RELIED ON CIT VS. NATIONAL TRAVEL SERVICE, 347 ITR 305 (DELHI), AND IN ACCORDANCE THEREWITH, IT WAS HELD AS FOLLOWS: IN THE CASE OF THE ASSESSE SHRI K.M. AGARWAL HOLDS, BOTH AS REGISTERED AND BENEFICIAL OWNER, SHARES AGGREGATING TO 8.82% ONLY. ITA NO.497/LKW/2018 PAGE 15 OF 20 THE HUF OF K.M. AGARWAL (THROUGH K.M. AGGARWAL KARTA) HOLDS SEPARATELY REGISTERED AND BENEFICIAL OWNERSHIP OF SHARES AGGREGATING TO 9.39%. AS THE REQUIREMENT IS THAT THE SHAREHOLDER NEEDS TO BE A BENEFICIAL SHAREHOLDER IRRESPECTIVE OF THE PERSON IN WHOSE NAME THE SHARES ARE REGISTERED THEREFORE THE SHAREHOLDING OF HUF CANNOT BE TAKEN TO BE THAT OF THE KARTA FOR PURPOSE OF SECTION 2(22)(E) AS THE KARTA IS NOT THE BENEFICIAL OWNER THEREOF. THEREFORE FOR LOAN TAKEN BY K.M AGARWAL IN INDIVIDUAL CAPACITY IS TO BE CONSIDERED FOR THE PURPOSES OF SECTION 2(22) (E). THIS IS SUPPORTED BY THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF NATIONAL TRAVEL SERVICE SUPRA ON WHICH THE AO IS RELYING HEAVILY. IN VIEW OF THE HISTORICAL BACKGROUND OF SECTION 2(22)(E) AND DECISION OF HIGHER JUDICIAL AUTHORITIES IT IS CLEAR THAT THE ASSESSING OFFICERS CONTENTION THAT FOR PURPOSES OF APPLICABILITY OF SECTION 2(22)(E) SHAREHOLDING OF INDIVIDUAL & HUF CAN BE CLUBBED IS NOT VALID AND THEREFORE THIS STAND CANNOT BE UPHELD. THE ASSESSING OFFICER IN HER ORDER HAS CARRIED AN ELABORATE AND A DETAILED DESCRIPTION OF CALCULATING ACCUMULATED PROFITS AS WELL AS CALCULATING THE AMOUNT GIVEN AS LOAN. HOWEVER AS THE PRIMARY CONDITION OF 10% BENEFICIAL SHAREHOLDING OF MR. K.M AGGARWAL IS NOT ESTABLISHED THE REMAINING AMOUNT/ PART OF THE ADDITION BECOMES AN EXERCISE IN FUTILITY BECAUSE NOTHING CAN BE ADDED UNDER SECTION 2(22)(E). THEREFORE NO COMMENTS ARE OFFERED ON THE SAME. AS SHRI K.M. AGARWAL HOLDS 8.82% SHARES IN CLOSELY HELD PRIVATE COMPANY M/S SUMIT CHEMICALS PVT. LTD., BOTH AS REGISTERED AND BENEFICIAL OWNER, HE IS NOT COVERED BY THE PROVISIONS OF SECTION 2(22)(E). ADDITION MADE IS DELETED ON THIS GROUND AS NOT SUSTAINABLE. RESULT: ADDITION MADE IS DELETED ON THIS GROUND AS NOT SUSTAINABLE. APPEAL IS ALLOWED. 12. HAVING CONSIDERED THE RIVAL CONTENTIONS IN THE LIGHT OF THE MATERIAL PLACED ON RECORD, WE FIND NO ERROR WHATSOEVER IN THE ITA NO.497/LKW/2018 PAGE 16 OF 20 ORDER UNDER APPEAL. IN CIT VS. NATIONAL TRAVEL SERVICE (SUPRA), AS NOTED BY THE LD. CIT(A), THE CONCERNED PARTNERSHIP FIRM CONSISTED OF THREE PARTNERS, NAMELY, MR. NARESH GOYAL, MR SURINDER GOYAL AND M/S JET ENTERPRISES PRIVATE LIMITED. THE THREE PARTNERS HAD PROFIT SHARING RATIO OF 35%, 15% AND 50%, RESPECTIVELY. NTS WAS A SHAREHOLDER OF M/S. JETAIR PRIVATE LIMITED (JETAIR), HOLDING ABOUT 48 PERCENT SHARES. HOWEVER, THE SHARES WERE PURCHASED IN THE NAMES OF TWO PARTNERS, NAMELY MR. NARESH GOYAL AND MR. SURINDER GOYAL. THUS, THE FIRM WAS THE BENEFICIAL OWNER OF 48 PERCENT STAKE IN JETAIR, WHEREAS THE PARTNERS WERE THE REGISTERED SHAREHOLDERS. NTS HAD TAKEN A LOAN OF INR 28.52 CRORES FROM JETAIR. 13. THE ISSUE BEFORE THE HON'BLE HIGH COURT IN THE CASE OF CIT VS. NATIONAL TRAVEL SERVICE (SUPRA), THEREFORE, WAS WHETHER THE LOAN TAKEN FROM M/S JET ENTERPRISES PVT. LTD. WOULD BE TAXABLE AS DEEMED DIVIDEND IN THE HANDS OF MTS INSPITE OF THE FACT THAT MTS WAS NOT A SHAREHOLDER OF M/S JET ENTERPRISES PVT. LTD. AS PER ITS REGISTER OF MEMBERS. THE HON'BLE HIGH COURT HELD, AS FOLLOWS: ACCORDING TO US THE OUTCOME OF THIS APPEAL DEPENDS ON THE FOLLOWING TWO QUESTIONS: (1) TO ATTRACT THE FIRST LIMB OF SECTION 2(22)(E) OF THE ACT, IS IT NECESSARY THAT THE PERSON WHO HAS RECEIVED THE ADVANCE OR LOAN IS A SHAREHOLDER AND ALSO BENEFICIAL OWNER. TO PUT IT OTHERWISE, WHETHER BOTH THE CONDITIONS ARE REQUIRED TO BE SATISFIED WILL DEPEND UPON THE INTERPRETATION TO BE GIVEN TO THE WORDS BEING A PERSON WHO IS A BENEFICIAL OWNER OF SHARES....' WHICH WAS INSERTED BY AMENDMENT IN THE AFORESAID PROVISION CARRIED OUT BY THE FINANCE ACT, 1987 W.E.F. 1ST APRIL, 1988. (2) WHETHER THE ASSESSEE WHO IS A PARTNERSHIP FIRM CAN BE TREATED AS 'SHAREHOLDER' BECAUSE OF THE REASON THAT IT HAS PURCHASED THE SHARES IN THE NAME OF THE TWO PARTNERS. IN SO FAR AS FIRST QUESTION FORMULATED ABOVE IS CONCERNED, ANSWER TO THAT CAN BE FOUND IN RAMESHWARLAL SANWARMAL VS. CIT, 122 ITR 1 (SC), WHICH FOLLOWED THE JUDGMENT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. C.P. SARATHY MUDALIAR PAGE 22 OF 28 [1972] 83 ITR 170. ITA NO.497/LKW/2018 PAGE 17 OF 20 THAT WAS A CASE WHERE THE ASSESSEE WAS HUF WHICH HAD OBTAINED CERTAIN LOANS OF A COMPANY WHOSE SHARES IT BENEFICIALLY OWNED. HOWEVER, THESE SHARES STOOD IN THE NAME OF S.M. SHARIA (KARTA) OF THE SAID HUF IN THE REGISTER OF SHAREHOLDERS OF THE COMPANY. THE LOANS WERE ADVANCED BY THE COMPANY TO THREE CONCERNS WHICH WERE OWNED BY THE ASSESSEE/HUF. THE COURT HELD THAT CONDITIONS STIPULATED IN SECTION 2 (6A) (E) OF THE INCOME TAX ACT, 1922 (WHICH IS AKIN TO SECTION 2 (22)(E) OF THE PRESENT MISCHIEF OF THIS SECTION AS THE HUF WAS NOT THE SHAREHOLDER EVEN WHEN IT WAS BENEFICIAL OWNER OF THE SHARES. IT IS DEAR THERE FROM THAT BOTH THE CONDITIONS HAVE TO BE SATISFIED. THIS VIEW HAS BEEN FOLLOWED BY THE RAJASTHAN HIGH COURT IN THE CASE OF HARISH CHAND GOLECHA VS. CIT, 132 LTR 30 WHILE DEALING WITH THE PRESENT PROVISION CONTAINED IN THE INCOME TAX ACT, 1961. THE EXPRESSION BEING A PERSON AS A BENEFICIAL OWNER OF SHARES, QUALIFIES THE WORD 'SHAREHOLDER. THUS TO ATTRACT THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, THE PERSON TO WHOM THE LOAN OR ADVANCE IS MADE SHOULD BE A SHAREHOLDER AS WELL AS BENEFICIAL OWNER. THIS BRINGS US TO THE MORE IMPORTANT ISSUE VIZ. WHETHER THE 'ASSESSEE FIRM' CAN BE TREATED AS A SHAREHOLDER HAVING PURCHASED SHARES THROUGH ITS PARTNERS IN THE COMPANY WHICH HAS PAID THE LOANS OR IS IT NECESSARY THAT A SHAREHOLDER HAS TO BE A 'REGISTERED SHAREHOLDER'. IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED, IN NO CASE A PARTNERSHIP FIRM CAN COME WITHIN THE MISCHIEF OF SECTION 2(22)(E) OF THE ACT BECAUSE OF THE REASON THAT SHARES WOULD BE PURCHASED BY THE FIRM IN THE NAME OF ITS PARTNERS AS THE FIRM IS NOT HAVING ANY SEPARATE ENTITY OF ITS OWN. WITH THE NAME OF THE PARTNER ENTERING INTO THE REGISTER OF MEMBERS OF THE COMPANY AS SHAREHOLDER, THE SAID PARTNER SHALL BE THE SHAREHOLDER IN THE RECORDS OF THE COMPANY BUT NOT THE BENEFICIAL OWNER AS BENEFICIAL OWNER IS THE PARTNERSHIP FIRM. THIS WOULD MEAN THAT THE LOAN OR ADVANCE GIVEN BY THE COMPANY WOULD NEVER BE TREATED AS DEEMED DIVIDEND EITHER IN THE HANDS OF THE PARTNERS OR IN THE HANDS OF PARTNERSHIP FIRM. ITA NO.497/LKW/2018 PAGE 18 OF 20 IN THIS WAY THE VERY PURPOSE FOR WHICH THIS PROVISION WAS ENACTED WOULD GET DEFEATED. WE ARE, THEREFORE, OF THE OPINION THAT FOR THE PURPOSE OF SECTION 2(22)(E) OF THE ACT, PARTNERSHIP FIRM IS TO BE TREATED AS THE SHAREHOLDER AND IT IS NOT NECESSARY THAT IS HAS TO BE 'REGISTERED SHAREHOLDER'. 14. IN THIS REGARD, THE LD. CIT(A) HAS HELD AS FOLLOWS: IN THE CASE OF THE ASSESSE SHRI K.M. AGARWAL HOLDS, BOTH AS REGISTERED AND BENEFICIAL OWNER, SHARES AGGREGATING TO 8.82% ONLY. THE HUF OF K.M. AGARWAL (THROUGH K.M. AGGARWAL KARTA) HOLDS SEPARATELY REGISTERED AND BENEFICIAL OWNERSHIP OF SHARES AGGREGATING TO 9.39%. AS THE REQUIREMENT IS THAT THE SHAREHOLDER NEEDS TO BE A BENEFICIAL SHAREHOLDER IRRESPECTIVE OF THE PERSON IN WHOSE NAME THE SHARES ARE REGISTERED THEREFORE THE SHAREHOLDING OF HUF CANNOT BE TAKEN TO BE THAT OF THE KARTA FOR PURPOSE OF SECTION 2(22)(E) AS THE KARTA IS NOT THE BENEFICIAL OWNER THEREOF. THEREFORE FOR LOAN TAKEN BY K.M AGARWAL IN INDIVIDUAL CAPACITY IS TO BE CONSIDERED FOR THE PURPOSES OF SECTION 2(22) (E). THIS IS SUPPORTED BY THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF NATIONAL TRAVEL SERVICE SUPRA ON WHICH THE AO IS RELYING HEAVILY. IN VIEW OF THE HISTORICAL BACKGROUND OF SECTION 2(22)(E) AND DECISION OF HIGHER JUDICIAL AUTHORITIES IT IS CLEAR THAT THE ASSESSING OFFICERS CONTENTION THAT FOR PURPOSES OF APPLICABILITY OF SECTION 2(22) (E) SHAREHOLDING OF INDIVIDUAL & HUF CAN BE CLUBBED IS NOT VALID AND THEREFORE THIS STAND CANNOT BE UPHELD. THE ASSESSING OFFICER IN HER ORDER HAS CARRIED AN ELABORATE AND A DETAILED DESCRIPTION OF CALCULATING ACCUMULATED PROFITS AS WELL AS CALCULATING THE AMOUNT GIVEN AS LOAN. HOWEVER AS THE PRIMARY CONDITION OF 10% BENEFICIAL SHAREHOLDING OF MR. K.M AGGARWAL IS NOT ESTABLISHED THE REMAINING AMOUNT/ PART OF THE ADDITION BECOMES AN EXERCISE IN FUTILITY BECAUSE NOTHING CAN BE ADDED UNDER SECTION 2(22)(E). THEREFORE NO COMMENTS ARE OFFERED ON THE SAME. ITA NO.497/LKW/2018 PAGE 19 OF 20 AS SHRI K.M. AGARWAL HOLDS 8.82% SHARES IN CLOSELY HELD PRIVATE COMPANY M/S SUMIT CHEMICALS PVT. LTD., BOTH AS REGISTERED AND BENEFICIAL OWNER, HE IS NOT COVERED BY THE PROVISIONS OF SECTION 2(22)(E). ADDITION MADE IS DELETED ON THIS GROUND AS NOT SUSTAINABLE. RESULT: ADDITION MADE IS DELETED ON THIS GROUND AS NOT SUSTAINABLE. APPEAL IS ALLOWED. 15. NO DECISION CONTRARY TO CIT VS. NATIONAL TRAVEL SERVICE (SUPRA) HAS BEEN CITED BEFORE US. THERE IS ALSO NO CONTRA DECISION TO THE FOLLOWING DECISIONS, AS RELIED UPON BY THE ASSESSEE: (1) ORDER OF ITAT INDORE BENCH IN THE CASE OF MANISH KARWA VS. ACIT [2014] 45 TAXMANN.COM 351. (2) ORDER OF AHMEDABAD BENCH OF ITAT IN THE CASE OF JCIT VS. KUNAL ORGANICS (P) LIMITED [2007] 164 TAXMAN 169 (AHMEDABAD). (3) JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. ANKITECH (P) LIMITED [2011] 11 TAXRAANN.COM 100 (DELHI). (4) JUDGMENT OF THE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF CIT DELHI VS. MADHUR HOUSING AND DEVELOPMENT COMPANY APPROVING THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF ANKITECH PRIVATE LIMITED (SUPRA) [2018] 401 ITR 152 (SC). 16. IN VIEW OF THE ABOVE, FINDING NO ERROR THEREIN, THE DECISION OF THE LD. CIT(A) ON THIS ISSUE IS CONFIRMED, REJECTING GROUND NOS. 1 TO 5. 7. THUS, WHETHER THE ADVANCE RECEIVED BY THE ASSESSEE FROM SCPL SHOULD BE TREATED AS DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT, OR NOT, HAS BEEN CONSIDERED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE, ON FACTS EXACTLY SIMILAR, MUTATIS MUTANDIS, TO THOSE PRESENT FOR THE YEAR UNDER CONSIDERATION, FOR ASSESSMENT YEAR 2012-13 AND THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, VIDE ORDER DATED 22/8/2019. FOLLOWING THIS VIEW TAKEN BY THE B BENCH OF THE LUCKNOW TRIBUNAL IN THE ASSESSEES OWN CASE (SUPRA), WE CONFIRM THE ORDER OF THE LD. CIT(A), DELETING THE ADDITION MADE UNDER SECTION ITA NO.497/LKW/2018 PAGE 20 OF 20 2(22)(E) OF THE ACT. ACCORDINGLY, ALL THE GROUNDS TAKEN BY THE DEPARTMENT IN ITS APPEAL ARE REJECTED. 8. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13/09/2019. SD/ - SD/ - [ T. S. KAPOOR ] [ A. D. JAIN ] ACCOUNTANT MEMBER VICE PRESIDENT DATED:13/09/2019 JJ:1109 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSISTANT REGISTRAR