ITO, Kanpur V. M/s. Skyline Habitats Pvt. Ltd., Kanpur

ITA 511/LKW/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8160 (ITAT-LUCKNOW)
• Duration Of Justice: 2 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 07-08-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 04-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Deemed dividend
• Section: 56; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A , LUCKNOW BEFORE SHRI S UNIL KUMAR YADAV , JUDICIAL MEMBER AND SHRI B. R. JAIN , ACCOUNTANT MEMBER ITA NO S . 511 & 512/LKW/2010 ASSESSMENT YEAR S : 2006 - 07 & 2007 - 08 INCOME TAX OFFICER WARD 6(2), KAN PUR V. M/S SKYLINE HABITATS PVT. LTD. 39, FACTORY AREA, FAZALGANJ KANPUR PAN: AAJCS9214L (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI. PRAVEEN KUMAR, CIT (DR) RESPONDENT BY: SHRI. RAKESH GARG, ADVOCATE DATE OF HEARING: 07.08.2012 DATE OF PRONOUNC EMENT: 29.08.2012 O R D E R PER S UNIL KUMAR YADAV : THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST THE ORDERS OF THE LD. CIT(A) DATED 19.5.2010 ON COMMON GROUNDS EXCEPT THE QUANTUM OF ADDITION. FOR THE SAKE OF REFERENCE, WE EXTRACT THE GROUNDS OF APPEAL IN ITA NO.511/LKW/2010 AS UNDER: - 1 . THAT THE COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.80,50,000/ - MADE BY THE ASSESSING OFFICER U/S 2 (22) (E) TREATING THE SAID TRANSACTION BETWEEN THE ASSES SEE COMPANY AND M/S TREAD STONE LTD. AS COMMERCIAL/TRADE TRANSACTIONS : - 2 - : AND NOT AS THE LOAN/ADVANCES. 2 . THAT WHILE DELETING THE ADDITION OF RS,80,50, 000/ - THE COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR HAS MISINTERPRETED THE FACTS AS WELL AS LEGAL POSITIO N OF THE CASE AS MENTIONED IN THE APPELLATE ORDER. 3 . THAT THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR BEING ERRONEOUS, IN LAW AND ON FACTS DESERVES TO BE VACATED AND THAT THE ORDER OF THE ASSESSING OFFICER BE RESTORED; AND 4 . THAT THE APPELLANT CRAVES LEAVE TO MODIFY ANY OF THE GROUNDS OF APPEAL GIVEN ABOVE AND/OR ADD ANY FRESH GROUND AS AND WHEN IT IS CONSIDERED NECESSARY TO DO SO. 2 . THE BRIEF FACTS BORNE OUT FROM THE RECORD ARE THAT THE ASSESSEE - COMPANY HAS SHOWN UNSECURED LOAN OF ` 80.50 LAKHS (ASSESSMENT YEAR 2006 - 07) AND ` 1.06 CRORES (ASSESSMENT YEAR 2007 - 08) FROM M/S TREAD STONE LTD., KANPUR A CLOSELY HELD COMPANY OF THE SAME GROUP. THIS AMOUNT OF ` 80.50 LAKHS (ASSESSMENT YEAR 2006 - 07) AND ` 1.06 CRORES (ASSESSMENT YEAR 2007 - 08) HAS BEEN SHOWN TO HAVE BEEN PAID TO HARYANA URBAN DEVELOPMENT AUTHORITY (HUDA) AS ADVANCE TOWARDS LAND. THE ASSESSEE - COMPANY HAS ALSO SUBMITTED CONFIRMATION OF UNSECURED LOAN FROM M/S TREAD STONE LTD., KANPUR. IT WAS ALSO STATED THAT THE SAID PAYMENT OF ` 80.50 LA KHS (ASSESSMENT YEAR 2006 - 07) AND ` 1.06 CRORES (ASSESSMENT YEAR 2007 - 08) BY M/S TREAD STONE LTD., KANPUR ON ITS BEHALF WAS IN THE NATURE OF BOOK DEBT LIABILITY AND WAS DULY SHOWN AS UNSECURED LOAN IN THE LIABILITY SIDE AS AGAINST WHICH PAYMENT TO HUDA WAS SHOWN AS ADVANCE FOR LAND IN ASSETS SIDE IN THE COMPANYS BALANCE SHEET . FROM THE DETAILS OF : - 3 - : SHAREHOLDERS OF BOTH THE COMPANIES, THE ASSESSING OFFICER HAS NOTICED THAT THERE ARE COMMON SHAREHOLDERS, THE DETAILS OF WHICH ARE AS UNDER: - M/S TREAD STONE LTD., KANPUR M/S SKY LANE HABITATS PVT. LTD. SHRI. KRISHNA KUMAR WADHWA 60000 SHRI. KRISHNA KUMAR WADHWA 5000 SMT. ALKA WADHWA 10440 SMT. ALKA WADHWA 5000 SMT. SAVITRI WADHWA 28920 -- -- MS. NIDHI WADHWA 1200 -- -- MS PRIYANKA WADHWA 1200 -- -- MS UDITI WADHWA 1200 -- -- SHRI. O.P. WADHWA (HUF) 30120 -- -- TOTAL 133080 3 . FROM THE ABOVE SHAREHOLDINGS, IT HAS BECOME QUITE CLEAR THAT SHRI. KRISHNA KUMAR WADHWA IS COMMON SHAREHOLDER IN M/S TREAD STONE LTD., KANPUR AND M/S SKY LANE HABITATS PVT. LTD. AND IS HOLDING MORE THAN 20% IN BOTH THE COMPANIES. AS THE TWO COMPANIES HAD A COMMON SHAREHOLDING OF MORE THAN 20%, THE ASSESSING OFFICER INVOKED PROVISIONS OF SECTION 2(22)(E) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER CALLED IN SHORT THE ACT' ) AND TREATED THE UNSECURED LOAN OF ` 80.50 LAKHS (ASSESSMENT YEAR 2006 - 07) AND ` 1.06 CRORES (ASSESSMENT YEAR 2007 - 08) BY M/S TREAD STONE LTD., KANPUR TO THE ASSESSEE - COMPANY AS DEEMED DIVIDEND AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 4 . AGGRIEVED, T HE AS SESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) ASSAILING THE ORDER OF THE ASSESSING OFFICER ON TWO COUNTS. FIRSTLY IT WAS CONTENDED THAT THE ASSESSEE - COMPANY HAS ENTERED INTO A JOINT VENTURE AGREEMENT WITH M/S TREAD STONE LTD., KANPUR AND IN TERMS OF TH E AGREEMENT, M/S TREAD STONE LTD., KANPUR AND THE ASSESSEE - COMPANY HAD AGREED TO PARTICIPATE JOINTLY AND TO PURCHASE LAND IN AUCTION AND SET UP A : - 4 - : JOINT ENTERPRISE. M/S TREAD STONE LTD., KANPUR AND THE ASSESSEE - COMPANY PARTICIPATED IN THE BID. THE BID OF THE ASSESSEE - COMPANY WAS SUCCESSFUL. AS MUTUALLY AGREED, M/S TREAD STONE LTD., KANPUR MADE PAYMENT DIRECTLY TO HUDA FOR PURCHASE OF LAND. THE PAYMENTS HAVE BEEN PAID BY ACCOUNT PAYEE BANK DRAFTS. SINCE THE BID WAS IN FAVOUR OF THE ASSESSEE - COMPANY, THE ASSESSEE - COMPANY IN ITS BOOKS DEBITED THE LAND ACCOUNT (HUDA) AND CREDITED THE ACCOUNT OF M/S TREAD STONE LTD., KANPUR. THEREFORE, SINCE THE AMOUNT WAS RECEIVED BY THE ASSESSEE DURING THE COURSE OF BUSINESS ACTIVITIES, PROVISIONS OF SECTION 2(22)(E) OF TH E ACT CANNOT BE ATTRACTED TO THIS TRANSACTION. SECONDLY , IT WAS ARGUED BEFORE THE LD. CIT(A) THAT THE IMPUGNED TRANSACTION IS WITHIN TWO COMPANIES AND ADMITTEDLY THE ASSESSEE - COMPANY IS NOT A SHAREHOLDER IN M/S TREAD STONE LTD., KANPUR. ACCORDINGLY, THE AMOUNT IN QUESTION CANNOT BE CONSIDERED AS AN AMOUNT ADVANCED TO A SHAREHOLDER. IT MAY AT THE BEST BE AN AMOUNT ADVANCED TO A CONCERN IN WHICH A COMMON SHAREHOLDER IS INTERESTED. IN SUCH A SITUATION, THE ASSESSEE - COMPANY COULD NOT BE SUBJECTED TO TAX IN RESPECT OF DEEMED DIVIDEND. IN SUPPORT OF HIS CONTENTION, RELIANCE WAS PLACED UPON THE JUDGMENT OF HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V. HOTEL HILL TOP, 21 CTR (RAJ.) 527 AND THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. BHAUMIK COLORS (P) LTD., 5030 (MUM) 2004, IN WHICH IT HAS BEEN HELD 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 LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATURE IS, THEREFORE, TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHAREHOLDER AND NOT IN THE HANDS OF THE CONCERN . : - 5 - : 5 . THE LD. CIT(A) DID NOT ADJUDICATE THE ISSUE WITH REGARD TO THE NATURE OF TRANSACTION UNDERTAKEN BETWEEN THE ASSESSEE - COMPANY AND M/S TREAD STONE LTD., KANPUR. HE , RELYING UPON THE JUDGMENT OF HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V. HOTEL HILL TOP (SUPRA) AND THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. BHAUMIK COLORS (P) LTD. (SUPRA) , HELD THAT SINCE THE IMPUGNED TRANSACTION IS BETWEEN TWO CLOSELY HELD COMPANIES, NO ADDITION ON ACCOUNT OF DEEMED DIVIDEND UNDER SECTION 2(22)(E) OF THE ACT IN THE HANDS OF THE ASSESSEE - COMPANY IS CALLED FOR AND ACCORDINGLY DELETED THE ADDITION . THE RELEVANT OBSERVATIONS OF THE LD. CIT(A) IN THIS REGARD ( IN ASSESSMENT YEAR 2006 - 07) ARE EXTRACTED HEREUNDER : - 6. WITHOUT PREJUDICE T O THE AF ORESAID ARGUM ENTS, THE LD.AR HAS ALSO ARGUED THAT THE IMPUGNED TRANSACTION IS BETWEEN TWO COMPANIES. IT IS ADMITTED FACT THAT THE APPELLANT COMPANY IS NOT A SHAREHOLDER IN TSL . ACCORDINGLY, THE AMOUNT IN QUESTION CANNOT BE CONSIDERED AS AN AMOUNT ADVANCED TO A SHAREHOLDER. IT MAY AT BEST BE AN AMOUNT ADVANCED TO A CONCERN IN WHICH A COMMON SHAREHOLDER IS INTERESTED. IN SUCH SITUATIONS, IT WAS ARGUED THAT THE APPELLANT COMPANY COULD NOT BE SUBJECTED TO TAX IN RESPECT OF 'DEEMED DIVIDEND'. 6.1 IN THIS REGARD, MY ATTENTION WAS DRAWN TO THE DECISION OF THE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS HOTEL HILL TOP (21) CTR (RAJ)(527), WHICH HAS HELD: 'OBVIOUSLY, INCOME FROM DIVIDEND IS TAXABLE AS INCOME FROM OTHER SOURCES UNDER SECTION 56 AND IN THE VERY N ATURE OF THINGS, THE INCOME HAS TO BE OF THE PERSON EARNING THE INCOME. THE ASSESSEE : - 6 - : IN THE PRESENT CASE IS NOT SHOWN TO BE ONE OF THE PERSONS, BEING SHAREHOLDER. OF COURSE, THE 2 INDIVIDUALS BEING 'R' & 'D', ARE THE COMMO N PERSONS, HOLDING MORE THAN REQUI SITE AMOUNT OF SHAREHOLDING AND ARE HAVING REQUISITE INTEREST IN THE FIRM, BUT THEN, THEREBY DEEMED DIVIDEND WOULD NOT BE DEEMED DIVIDEND IN THE HANDS OF THE FIRM, RATHER IT WOULD OBVIOUSLY BE DEEMED DIVIDEND IN THE HANDS OF THE INDIVIDUALS, ON WHOSE BEHAL F, OR ON WHOSE INDIVIDUAL BENEFIT, BEING SUCH SHAREHOLDERS, THE AMOUNT IS PA I D BY THE COMPANY TO THE CONCERN.' 6.2 SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE TRIBUNAL (SB) IN THE CASE OF AC IT V/S BHAUMIK COLORS (P) LTD. 5030 (MUM) 2004, WHEREIN IT WAS CATEGORICALLY HELD: 'THE INTENTION BEHIND ENACTING PROVISIONS OF SECTION 2(22)(E) ARE 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 A CCUMULATED PROFITS WOULD NOT DISTRIBUTE SUCH PROFIT AS DIVIDEND BECAUSE IF SO DISTRIBUTED THE DIVIDEND INCOME WOULD BECOME TAXABLE IN THE HANDS OF THE SHAREHOLDERS. INSTEAD OF DISTRIBUTING ACCUMULATED PROFITS AS DIVIDEND, COMPANIES DISTRIBUTE THEM AS LOAN OF ADVANCES TO SHAREHOLDERS OR TO CONCERN IN WHICH SUCH SHAREHOLDERS HAVE SUBSTANTIAL INTEREST OR MAKE ANY PAYMENT ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF SUCH SHAREHOLDER. IN SUCH AN EVENT, BY THE DEEMING PROVISIONS SUCH PAYMENT BY THE COMPANY IS TR EATED AS DIVIDEND. THE INTENTION BEHIND THE PROVISIONS OF SECTION 2(22)(E) IS TO TAX DIVIDEND IN THE HANDS OF SHAREHOLDER. THE DEEMING PROVISIONS AS IT APPLIES TO THE CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANT IAL : - 7 - : INTEREST, IS BASED ON THE PRESUMPTION THAT THE LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAILABLE TO THE SHAREHOLDERS OF THE COMPANY GIVING THE LOAN OR ADVANCE. THE INTENTION OF THE LEGISLATURE IS, THEREFORE, TO TAX DIVIDEND ONLY IN THE HANDS OF THE S HAREHOLDER AND NOT IN THE HANDS OF THE CONCERN, [PARA 35].' 7. I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS ADVANCED BY THE LEARNED COUNSEL. WITHOUT DELVING INTO THE ISSUE OF WHETHER THE IMPUGNED ADVANCE IS IN THE NATURE OF BUSINESS TRANSACTION OR NOT OR WHETHER PROVISIONS OF SECTION 2(22)(E) OF THE ACT APPLY OR NOT APPLY TO SUCH BUSINESS TRANSACTIONS, THE FACT REMAINS THAT THE IMPUGNED TRANSACTION IS BETWEEN TWO CLOSELY HELD COMPANIES. FURTHER NONE OF THE COMPANY IS A SHAREHOLDER IN EITHER OF T H E COMPANY. HENCE WITHOUT GOING INTO THE OTHER ASPECTS OF THE MATTER / SUBMISSIONS ADVANCED BY THE LEARNED COUNSEL, I AM OF THE CONSIDERED OPINION THAT THE CASE OF THE APPELLANT IS FULLY COVERED BY THE DECISION O F HON'BLE RAJASTHAN HIGH COURT IN THE CASE O F CIT VS HOTEL HILL TOP AND ALSO BY THE DECISION OF BHAUMIK COLOR (P) LTD. (SUPRA). RESPECTFULLY FOLLOWING THE ABOVE REFERRED DECISIONS, NO ADDITION ON ACCOUNT OF DEEMED DIVIDE N D U/S. 2(22)(E) IN THE HANDS OF THE APPELLANT COMPANY IS CAL LED FOR. THE ADDITI ON OF RS.80, 50,000/ - MADE BY AO IS, THEREFORE, DELETED. 6 . AGGRIEVED, THE REVENUE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL WITH THE SUBMISSION THAT SINCE THERE IS A COMMON SHAREHOLDING IN BOTH THE COMPANIES, PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE ATTRACTED AND UNSECURED LOAN GIVEN TO THE ASSESSEE - COMPANY H AS RIGHTLY BEEN TREATED TO BE DEEMED DIVIDEND BY THE ASSESSING OFFICER. THE LD. CIT (DR), SHRI. PRAVEEN KUMAR HAS PLACED RELIANCE UPON THE JUDGMENT OF HON'BLE : - 8 - : DELHI HIGH COURT IN THE CASE OF CIT V. NATIONAL TRAVEL SERVICES [2011] 202 TAXMAN 327 IN SUPPORT OF HIS CONTENTION THAT EVEN IF THE LOAN WAS ADVANCED TO THE PARTNERSHI P FIRM, OF WHICH ONE OF THE PARTNERS WAS HOLDING SUBSTANTIAL INTEREST IN THE COMPANY WHICH ADVANCED LOAN TO THE PARTNERSHIP F IRM, PROVISIONS OF SECTION 2 (22) (E) OF THE ACT CAN BE ATTRACTED FOR TREATING UNSECURED LOAN AS DEEMED DIVIDEND. 7 . THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS SUBMITTED THAT THE IMPUGNED ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF HON'BLE RA JASTHAN HIGH COURT IN THE CASE OF CIT V. HOTEL HILL TOP (SUPRA), ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. BHAUMIK COLORS (P) LTD. (SUPRA) AND ALSO BY THE ORDER OF THE LUCKNOW BENCH OF THE TRIBUNAL IN THE CASE OF ITO 6(1), KANPUR V. M/S MUSTANG LEATHER PVT. LTD., KANPUR IN ITA NOS. 283 & 329/LKW/2010 , IN WHICH IT HAS BEEN CATEGORICALLY HELD THAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF THE PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF THE BORRO WING CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER HAVING SUBSTANTIAL INTEREST. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO INVITED OUR ATTENTION TO THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. NATIONAL TRAVEL SERVICES (SUPRA) WITH THE SUB MISSION THAT THE JUDGMENT WAS RENDERED WITH REFERENCE TO PARTNERSHIP FIRM AND IT WAS CATEGORICALLY HELD IN THAT JUDGMENT THAT IN THE PARTNERSHIP FIRM SHARES ARE ALWAYS TO BE OBTAINED BY ITS PARTNERS AND NOT BY THE PARTNERSHIP FIRM. WHATEVER BENEFIT IS GIV EN TO THE PARTNERSHIP FIRM , IT IS BEING AVAILED BY THE PARTNERS ONLY. THEREFORE, THIS JUDGMENT IS DISTINGUISHABLE ON FACTS AND CANNOT APPLY TO THE CONTROVERSY INVOLVED IN THE PRESENT CASE. 8 . HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF R ECORD, WE FIND THAT THOUGH THE REVENUE HA D RAISED A GROUND WITH RESPECT TO THE NATURE OF TRANSACTION THROUGH GROUND NO.1, BUT THE LD. CIT(A) HAS : - 9 - : NOT ADJUDICATED TH E SAME AND HE HAS RESTED HIS FINDINGS ONLY ON THE BASIS OF APPLICATION OF PROVISIONS OF SECTI ON 2(22)(E) OF THE ACT WITH RESPECT TO THE TRANSACTION BETWEEN TWO COMPANIES. SINCE THE LD. CIT(A) HAS NOT GIVEN A NY FINDING IN RESPECT OF THE NATURE OF TRANSACTION WHETHER IT IS COMMERCIAL/TRADE TRANSACTION OR LOAN OR ADVANCE, WE REFRAIN OURSELVES FROM E XPRESSING ANY VIEW IN THIS REGARD. MOREOVER, THIS GROUND DOES NOT ARISE OUT OF THE ORDER OF THE LD. CIT(A). WE ACCORDINGLY REJECT THE SAME. 9 . SO FAR AS THE OTHER GROUND RELATING TO APPLICATION OF PROVISIONS OF SECTION 2(22)(E) OF THE ACT WITH RESPECT TO TH E TRANSACTION BETWEEN TWO COMPANIES ARE CONCERNED, WE FIND THAT HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V. HOTEL HILL TOP (SUPRA) AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. BHAUMIK COLORS (P) LTD. (SUPRA) HAVE CATEGORICALLY HELD T HAT DEEMED DIVIDEND CAN BE ASSESSED ONLY IN THE HANDS OF THE PERSON WHO IS A SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF THE BORROWING CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER HAVING SUBSTANTIAL INTEREST. 10 . WE HAVE ALSO EXAMINED THE JUDGME NT OF HON'BLE DELHI HIGH COURT CIT V. NATIONAL TRAVEL SERVICES (SUPRA) IN WHICH THEIR LORDSHIPS HAVE EXAMINED THE SCOPE OF PROVISIONS OF SECTION 2(22)(E) OF THE ACT AND HELD THAT FOR THE PURPOSE OF SECTION 2(22)(E) OF THE ACT, PARTNERSHIP FIRM IS TO BE TRE ATED AS SHAREHOLDER AND IT IS NOT NECESSARY THAT IT IS A REGISTERED SHAREHOLDER. THE RELEVANT OBSERVATIONS OF HON'BLE DELHI HIGH COURT ARE EXTRACTED HEREUNDER: - THE EXPRESSION 'BEING A PERSON AS A BENEFICIAL OWNER OF SHARES' QUALIFIES THE WORD 'SHAREHOL DER'. THUS, TO ATTRACT THE PROVISIONS OF SECTION 2(22)(E), THE PERSON TO WHOM THE LOAN OR : - 10 - : ADVANCE IS MADE SHOULD BE A SHAREHOLDER AS WELL AS BENEFICIAL OWNER. [PARA 18] THIS BRINGS TO THE MORE IMPORTANT ISSUE, VIZ., WHETHER THE ASSESSEE - FIRM CAN BE TREATE D 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 C AN COME WITHIN THE MISCHIEF OF SECTION 2(22)(E) 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 O F 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 WOU LD NEVER BE TREATED AS DEEMED DIVIDEND EITHER IN THE HANDS OF THE PARTNERS OR IN THE HANDS OF THE PARTNERSHIP FIRM. IN THIS WAY, THE VERY PURPOSE FOR WHICH THIS PROVISION WAS ENACTED WOULD GET DEFEATED. [PARA 19] IT IS A VERY WELL - ESTABLISHED PRINCIPLE OF CONSTRUCTION THAT WHERE THE PLAIN LITERAL INTERPRETATION OF A STATUTORY PROVISION PRODUCES MANIFESTLY ABSURD AND UNJUST RESULTS WHICH COULD NEVER HAVE BEEN INTENDED BY THE LEGISLATURE, THE COURT MUST MODIFY THE LANGUAGE USED BY THE LEGISLATURE OR EVEN DO S OME VIOLENCE TO IT, SO AS TO ACHIEVE OBVIOUS INTENTION OF THE LEGISLATURE. [PARA 20] : - 11 - : NO DOUBT, WHEN SECTION 2(22)(E) ENACTS A DEEMING PROVISION, IT HAS TO BE STRICTLY CONSTRUED. AT THE SAME TIME, IT IS ALSO TRITE THAT SUCH A DEEMING PROVISION HAS TO BE TAK EN TO ITS LOGICAL CONCLUSION. IF THE PARTNERSHIP FIRM WHICH HAS PURCHASED THE SHARES IS NOT TREATED AS SHAREHOLDER MERELY BECAUSE THE SHARES WERE PURCHASED IN THE NAME OF THE PARTNERS, THAT TOO BECAUSE OF THE LEGAL COMPULSION THAT SHARES COULD NOT BE ALLOT TED TO THE SAID PARTNERSHIP FIRM WHICH IS A NON - LEGAL ENTITY, IT WOULD BE IMPOSSIBLE FOR SUCH A CONDITION TO BE FULFILLED. THAT IS NOT THE PURPOSE OF LAW. THE PARTNERSHIP FIRM IS SYNONYM OF THE PARTNERS. AS PER THE CIRCULAR ISSUED BY THE SEBI DATED 13 - 3 - 19 75 INTERPRETING SECTION 187(C) OF THE COMPANIES ACT, 1956 A PARTNERSHIP FIRM IS NOT A PERSON CAPABLE OF BEING A MEMBER WITHIN THE MEANING OF SECTION 47 OF THE COMPANIES ACT. IT IS FURTHER EXPLAINED THAT SINCE A PARTNERSHIP FIRM IS NOT A LEGAL ENTITY BY ITS ELF BUT ONLY A COMPENDIOUS WAY OF DESCRIBING THE PARTNERS CONSTITUTING THE FIRM, IT IS NECESSARY THAT THE NAMES OF ALL THE MEMBERS OF THE PARTNERSHIP FIRM SHOULD BE ENTERED IN THE REGISTER OF MEMBERS. OBVIOUSLY THEN, WITH THE PURCHASE OF SHARES BY THE FIRM IN THE NAME OF ITS PARTNERS, IT IS THE FIRM WHICH IS TO BE TREATED AS SHAREHOLDER FOR THE PURPOSES OF SECTION 2(22)(E). [PARA 21] IT WOULD BE DIFFICULT TO ACCEPT THE CONTENTION OF THE ASSESSEE PREDICATED ON THE PROVISION OF THE COMPANIES ACT AS WHEREVER A PARTNERSHIP FIRM WANTS TO COME OUT OF THE RIGOURS OF SECTION 2(22)(E), IT CAN EASILY DO SO BY NOT ENTERING THE NAMES OF ALL THE MEMBERS OF THE PARTNERSHIP FIRM IN THE REGISTER OF MEMBERS. IN THE INSTANT CASE ITSELF, IT COULD BE SEEN THAT 'N' HOLDS 44.58 P ER CENT OF SHAREHOLDING IN A COMPANY AS A PARTNER : - 12 - : OF THE ASSESSEE - FIRM. ON THE OTHER HAND, THE SAID N HAS 35 PER CENT OF THE PROFIT SHARING RATIO IN THE ASSESSEE - FIRM. IN OTHER WORDS, HE HAS SUBSTANTIAL INTEREST IN THE ASSESSEE FIRM TOO. THUS, HE IS A PERS ON WHO NOT ONLY HAS SUBSTANTIAL INTEREST BUT ALSO HOLDS SUFFICIENT INFLUENCE. SINCE THE PARTNERSHIP FIRM IS THE BENEFICIAL OWNER AND IT HAS TO PERFORCE PURCHASE THE SHARES IN THE NAME OF THE PARTNERS, IT IS VERY EASY FOR A PERSON LIKE HIM TO ENSURE THAT ON LY THE NAMES OF PARTNERS IN WHOSE NAME SHARES ARE PURCHASED IS ENTERED IN THE RECORDS OF THE COMPANY AND THE NAMES OF ALL THE PARTNERS ARE NOT RECORDED SO THAT PROVISIONS OF SECTION 187C OF THE COMPANIES ACT ARE NOT FULFILLED. LIKEWISE, IT CAN ALSO BE ENSU RED THAT FOR THE PURPOSE OF SECTION 41(3), THE NAME OF THE PARTNERSHIP FIRM IS NOT SPECIFICALLY ENTERED AS BENEFICIAL OWNER IN THE RECORDS OF THE DEPOSITORY TO MAKE PARTNERSHIP FIRM AS DEEMED MEMBER OF THE CONCERN COMPANY WITHIN THE MEANING OF SECTION 41(3 ). SUCH A SITUATION CANNOT BE COUNTENANCED. [PARA 22] THEREFORE, FOR THE PURPOSE OF SECTION 2(22)(E), PARTNERSHIP FIRM IS TO BE TREATED AS THE SHAREHOLDER AND IT IS NOT NECESSARY THAT IT HAS TO BE 'REGISTERED SHAREHOLDER'. [PARA 23] 11 . THROUGH THIS JUDGMENT , IT HAS BEEN MADE CLEAR THAT THE COMPAN IES, WHETHER IT IS PRIVATE OR LIMITED COMPANY , ARE THE JURISTIC ENTITIES AND THE SHARE CAN BE PURCHASED IN THEIR OWN NAME AND THE PARTNERSHIP FIRM IS ALWAYS BEING REPRESENTED THROUGH ITS PARTNERS AND NOT A JURISTIC E NTITY ITSELF AND THE SHARES ARE PURCHASED IN THE NAME OF PARTNERS AND NOT IN THE NAME OF PARTNERSHIP FIRM . THE AFORESAID JUDGMENT HAS BEEN RENDERED WITH REFERENCE TO PARTNERSHIP FIRM AND THEIR LORDSHIPS HAVE : - 13 - : CATEGORICALLY HELD THAT FOR THE PURPOSE OF SECT ION 2(22)(E) OF THE ACT , PARTNERSHIP FIRM IS TO BE TREATED AS SHAREHOLDER , AS THE BENEFIT ACCRUED TO THE PARTNERSHIP FIRM IS ALWAYS BEING ENJOYED BY THE PARTNERS . THEREFORE, THIS JUDGMENT CANNOT BE APPLIED TO THE CONTROVERSY INVOLVED IN THE PRESENT CASE A S IN THE INSTANT CASE THE TRANSACTION WAS UNDERTAKEN BETWEEN TWO COMPANIES. SINCE THE IMPUGNED ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V. HOTEL HILL TOP (SUPRA) AND THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. BHAUMIK COLORS (P) LTD. (SUPRA), WE, FOLLOWING THE AFORESAID JUDGM ENT/ORDER HOLD THAT PROVISIONS OF SECTION 2(22)(E) OF THE ACT CANNOT BE INVOKED IN THE PRESENT C ASE . MOREOVER, THE LD. CIT(A) HAS ADJUDICATED THE ISSUE F OLL OWING THE AFORESAID JUDGMENT OF HON'BLE RAJASTHAN HIGH COURT AND THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. BHAUMIK COLORS (P) LTD. (SUPRA), THEREFORE, WE FIND NO INFIRMITY THEREIN. ACCORDINGLY, WE CONFIRM THE SAME. 12 . IN THE RESUL T, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.8.2012 AS PER SEPARATE ORDER S D/ - [B. R. JAIN ] [ S UNIL KUMAR Y ADAV ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 29.8.2012 JJ: 2308 COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT 5 . DR ASSISTANT REGISTRAR CONTD .14 : - 14 - : I.T.A. NO S . 511 & 512 /LKW/1 0 (ASSESSMENT YEAR S 2006 - 07 & 2007 - 08) IN THE CASE OF INCOME TAX OFFICER, WARD6(2), KANPUR VS. M/S SKYLINE HABITATS PVT. LTD. KANPUR. PER B. R. JAIN, ACCOUNTANT MEMBER: ADMITTEDLY, THE PECULIAR FACTS OF THIS CASE ARE THAT THE APPELLANT CONCERN M/S SKYLINE HABITATS PVT. LTD. HAS RECEIVED UNSECURED LOAN OF ` 80.50 LAKHS IN ASSESSMENT YEAR 2006 - 2007 AND ` 1.06 CRORES IN ASSESSMENT YEAR 2007 - 2008 FROM M/S TREAD STONE LTD., KANPUR, A CLOSELY HELD COMPANY OF THE SAME GROU P. SHRI KRISHNA KUMAR WADHWA AND SMT. ALKA WADHWA, ARE THE MEMBERS AND COMMON SHARE HOLDERS IN BOTH THESE COMPANIES AND HAVE A SUBSTANTIAL INTEREST AS SHARE HOLDER HOLDING MORE THAN 20% SHARES AS WELL AS VOTING POWER IN BOTH THESE COMPANIES. M/S TREAD S TONE LTD., KANPUR ALSO HAS SUFFICIENT ACCUMULATED PROFITS IN BOTH THE YEARS UNDER APPEAL . TH ESE FACT S ARE UNDISPUTED BY THE PARTIES. EXPLANATION (3) FOR THE PURPOSE OF SECTION 2(22)(E) OF THE ACT READS AS UNDER: [EXPLANATION 3 - FOR THE PURPOSE OF THIS CLAUSE, - ( A ) CONCERN MEANS A HINDU UNDIVIDED FAMILY, OR A FIRM OR AN ASSOCIATION OF PERSONS OR A BODY OF INDIVIDUALS OR A COMPANY; ( B ) A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A CONCERN, OTHER THAN A COMPANY, IF HE IS, AT ANY TIME DURING THE PR EVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PERCENT OF THE INCOME OF SUCH CONCERN;] 2. THE PAYMENT BY M/S TREAD STONE LTD. TO M/S SKYLINE HABITATS PVT. LTD. , A CONCERN WITHIN THE MEANING OF SECTION 2(22)(E) OF THE ACT AND HAVING REGARD T O THE PECULIAR FACTS OF THIS CASE , IT IS FOUND THAT THE BENEFIT OF AMOUNT OF LOAN OF ` 80.50 LACS IN ASSESSMENT YEAR 2006 - 2007 AND ` 1.06 CRORES IN ASSESSMENT YEAR 2007 - : - 15 - : 2008 TO THE SAID CONCERN, HAS GONE TO AFORE SAID TWO SHAREHOLDERS NAMELY SHRI KRISHNA KUM AR WADHWA AND SMT. ALKA WADHWA WITHIN THE MEANING OF SECTION 2(22)( E ) OF THE ACT . THE APPELLANT, HOWEVER, IS NOT SHOWN TO BE A SHAREHOLDER OF M/S TREAD STONE LTD. THAT BEING SO AND IN THE LIGHT OF JUDGMENT RENDERED BY HON'BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. HOTEL HILL TOP 21 CTR (RAJ.) 527 (SUPRA) AND SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. BHAUMIK COLORS (P) LTD. 5030 (MUM) 2004 (SUPRA), THE CONCLUSION REACHED BY LEARNED CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. 3. IN THE RES ULT, APPEAL BY REVENUE STANDS DISMISSED. (ORDER PRONOUNCED IN THE OPEN COURT ON 29.8.2012 ) SD/ - ( B. R. JAIN ) ACCOUNTANT MEMBER D ATED : 29.8.2012